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RNS Number:2100R Colt Telecom Group PLC 23 October 2003 23 October 2003 COLT TELECOM GROUP PLC ANNOUNCES RESULTS FOR THE THREE AND NINE MONTHS ENDED 30 SEPTEMBER 2003 THIRD QUARTER HIGHLIGHTS * Turnover up 14% to #295 million compared with Q3 2002 * Constant currency turnover growth of 6% over Q3 2002 * Corporate customer turnover up 19% to #177 million * Wholesale customer turnover up 7% to #118 million * Gross margin before depreciation and exceptional items improved from 31.0% to 34.5% * EBITDA (1) up 123% to #43 million * Capital expenditure of #33 million * Positive free cash flow of #9.1 million * Strong liquidity position with cash and liquid resources of #934 million * Three new accolades for excellent customer service * Staff levels including temporary and contract workers reduced by 126 during the quarter to 4,353 Commenting on the results for the quarter COLT Telecom Group Chairman Barry Bateman said: "We have continued to make progress during the seasonally weaker third quarter. Our success in what remains a difficult market, combined with the strength of the Euro, has resulted in revenue growth of 14% over the third quarter of last year. "COLT was free cash flow positive during the quarter primarily due to improvements in working capital and the timing of cash interest payments. This quarter's performance further reinforces our confidence of reaching sustainable positive free cash flow during 2005. Capital expenditure in the quarter was #33 million and we now expect capital expenditure for the year to be less than the #170 million to #200 million range previously indicated. "A strong cash position is an important competitive advantage in today's market and with cash and liquid resources of #934 million COLT is well positioned to continue to grow successfully and meet its customers' needs for high quality advanced services." Steve Akin, COLT's President and Chief Executive Officer added: "As we celebrate the tenth anniversary of providing service to our first customer, COLT is recognised as being one of Europe's best in class telecommunications service companies. Our reputation for first class customer service, our extensive product range, the benefits of our extensive pan-European network coverage and our underlying financial strength are all reflected in our third quarter performance. "We continue to improve our position as a preferred supplier to the European corporate market with revenues from corporate customers growing by 19% compared with the third quarter of 2002. "Improved revenue mix at both the customer and product level has contributed to the improvement in gross margin before depreciation to 34.5% from 31.0 % in the third quarter last year with EBITDA up 123% to #43 million. "COLT has built its reputation on first class customer service. This continues to be recognised by our customers when for the third consecutive year COLT won the prestigious World Communication Award for Customer Care. Once again we have been named as the number one fixed telephony and internet services company in Switzerland by Bilanz magazine, a leading Swiss business publication. We have also been recognised by EA Games, the leading interactive software company, as offering the best performing hosting infrastructure for its online games in the UK. "Among our more significant corporate customer wins during the quarter was AGA Gas. COLT is providing AGA with a 50 site IPVPN in Sweden, Denmark, Norway and Finland. In the UK COLT is providing voice and data communications services into Swiss Re's new headquarters at 30 St. Mary Axe in London. Other important new customers include the Belgian postal service, the Portugese national railway, the Portugese public television network and in the Netherlands, Tenovis, the communications facilities company. "As well as winning new customers we are growing business with existing customers and COLT is now the majority supplier of IPVPN services to SWIFT in Europe, serving over 60% of its sites across 13 countries. "We continue to tightly manage operating costs. SG&A costs now represent 19.9% of revenues compared with 23.5% in the third quarter of 2002. As part of the reorganisation of our business over the past year we have reduced the number of Network Operating Centres from ten to two, with one used as a back up site. To date we have also reduced our real estate requirements by 465,000 square feet as part of our longer term plan to reduce real estate requirements from a peak of 4.25 million square feet to 2.9 million square feet. We remain on track to achieve our previously announced work force reduction target of 1,400 staff with staff numbers, including temporary and contract staff, of 4,353 at the end of the third quarter. We will continue to look at ways to further improve our operating efficiency." KEY FINANCIAL DATA Three months Nine months ended ended 30 September 30 September ------------------------------------------- 2002 2003 2002 2003 # m # m # m # m ------------------------------------------- Turnover 259.0 295.4 764.1 860.1 Interconnect and network costs before (178.8) (193.3) (537.9) (569.3) exceptional items ------------------------------------------- Gross profit before depreciation and exceptional items 80.2 102.1 226.2 290.8 Gross profit before depreciation and exceptional items % 31.0% 34.5% 29.6% 33.8% Network depreciation (57.5) (54.0) (161.3) (154.0) Exceptional cost of sales (520.6) -- (526.3) -- ------------------------------------------- Gross profit (loss) (497.9) 48.1 (461.4) 136.8 =========================================== Loss for the period (before (61.8) (35.7) (191.3) (111.1) exceptional items) =========================================== Loss for the period (after (609.3) (35.7) (673.0) (103.6) exceptional items) =========================================== EBITDA (1) 19.4 43.3 43.9 115.2 ------------------------------------------- OPERATING STATISTICS Q3 02 Q3 03 Growth ------------------------------------------ Customers (at end of period) North Region 4,115 5,334 30% Central Region 5,173 6,466 25% South Region 4,877 5,605 15% ------------------------------------------ 14,165 17,405 23% Customers (at end of period) Corporate 13,413 16,532 23% Wholesale 752 873 16% ------------------------------------------ 14,165 17,405 23% Switched Minutes (million) (for period) North Region 1,234 1,519 23% Central Region 2,506 2,969 18% South Region 852 1,010 19% ------------------------------------------ 4,592 5,498 20% Private Wire VGEs (000) (at end of period) North Region 7,724 10,125 31% Central Region 8,248 10,621 29% South Region 2,769 4,432 60% ------------------------------------------ 18,741 25,178 34% Headcount (at end of period) North Region 1,552 1,282 -17% Central Region 1,699 1,461 -14% South Region 1,214 1,114 -8% Group/other 504 315 -38% ------------------------------------------ 4,969 4,172 -16% 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. Headcount excludes temporary and contract workers. In previous quarters corporate customers were categorised as retail. FINANCIAL REVIEW Turnover Turnover increased from #259.0 million and #764.1 million for the three and nine months ended 30 September 2002 to #295.4 million and #860.1 million for the three and nine months ended 30 September 2003, increases of #36.4 million and #96.0 million or 14.0% and 12.6% respectively. Turnover also benefited from the weakness of the British pound relative to the Euro; at constant exchange rates growth over the three and nine months ended 30 September 2002 was 6% and 5% respectively. 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 corporate customers increased from #148.7 million and #428.4 million for the three and nine months ended 30 September 2002 to #177.2 million and #511.3 million for the three and nine months ended 30 September 2003, increases of 19%. Turnover from corporate customers represented 60% of total turnover in the three and nine months ended 30 September 2003 compared with 57% and 56% in the comparable periods of 2002. Switched turnover from corporate customers for the three and nine months ended 30 September 2003 was #85.4 million and #248.8 million, increases of 12% and 14% respectively. Non-switched and other turnover from corporate customers for the three and nine months ended 30 September 2003 was #91.7 million and #262.5 million, increases of 27% and 25%, respectively. Turnover from wholesale customers increased from #110.3 million and #335.7 million for the three and nine months ended 30 September 2002 to #118.2 million and #348.7 million for the three and nine months ended 30 September 2003, increases of 7% and 4% respectively and represented 40% of total turnover compared with 43% and 44% in the comparable periods of 2002. Switched turnover from wholesale customers for the three and nine months ended 30 September 2003 was #91.5 million and #265.9 million, increases of 13% and 7% respectively. Non-switched and other turnover from wholesale customers for the three and nine months ended 30 September 2003 was #26.7 million and #82.8 million, decreases of 9% and 4% respectively. For the three and nine months ended 30 September 2003 5.5 billion and 15.8 billion switched minutes were carried compared with 4.6 billion and 15.0 billion in the equivalent periods of 2002. Average switched revenue per minute decreased by 6% for the three months and increased by 4% for the nine months ended September 2003 compared to the equivalent periods in 2002 as a result of changes in mix. At 30 September 2003 COLT had 25.2 million voice grade equivalent private wires in service, an increase of 34% compared to 30 September 2002. Growth in non-switched services reflected the growth in demand for local, national and international bandwidth services, partially offset by circuit cancellations. The growth in non-switched services also reflects the growing success COLT is achieving in the provision of IPVPN services. Cost of Sales Cost of sales, before exceptional items, increased from #236.4 million and #699.2 million for the three and nine months ended 30 September 2002 to #247.3 million and #723.3 million for the three and nine months ended 30 September 2003, increases of #10.9 million and #24.1 million or 5% and 3% respectively. Interconnection and network costs, before exceptional items, increased from #178.8 million and #537.9 million for the three and nine months ended 30 September 2002 to #193.3 million and #569.3 million for the three and nine months ended 30 September 2003 as a result of the overall increase in business partially offset by ongoing cost containment measures. Network depreciation decreased from #57.5 million and #161.2 million for the three and nine months ended 30 September 2002 to #54.0 million and #154.0 million for the three and nine months ended 30 September 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. For the nine months ended 30 September 2002, an exceptional charge of #18.3 million was recognised for severance provisions related to the staff reduction programmes announced in February and September 2002 and an impairment charge of #508.0 million was recognised to ensure that the asset base remained aligned with the realities of the market place. There were no exceptional charges for the three and nine months ended 30 September 2003. Operating Expenses Operating expenses, before exceptional items, decreased from #73.7 million and #223.0 million for the three and nine months ended 30 September 2002 to #68.5 million and #204.8 million for the comparable periods in 2003. Selling, general and administrative (SG&A) expenses, before exceptional items, decreased from #60.8 million and #182.3 million for the three and nine months ended 30 September 2002 to #58.8 million and #175.6 million for the three and nine months ended 30 September 2003 reflecting ongoing cost containment measures. SG&A before exceptional items as a proportion of turnover in the three months ended 30 September 2003 was 19.9% compared with 23.5% in the equivalent period of 2002. Other depreciation and amortisation decreased from #12.9 million and #40.7 million for the three and nine months ended 30 September 2002 to #9.8 million and #29.2 million in the comparable periods in 2003 reflecting the effect of the impairment provisions recorded in September 2002 and other assets being fully depreciated, partially offset by increased investment in customer service and support systems. For the nine months ended 30 September 2002, an exceptional charge of #18.9 million was recognised for severance provisions related to the staff reduction programmes announced in February and September 2002 and an impairment charge of #43.0 million was recognised to ensure that the asset base remained aligned with the realities of the market place. There were no exceptional charges for the three and nine months ended 30 September 2003. Interest Receivable, Interest Payable and Similar Charges Interest receivable decreased from #9.2 million and #29.7 million for the three and nine months ended 30 September 2002 to #6.0 million and #20.2 million for the three and nine months ended 30 September 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 #22.5 million and #72.7 million for the three and nine months ended 30 September 2002 to #22.1 million and #67.3 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 nine months ended 30 September 2003 included: #8.6 million and #25.8 million respectively of interest and accretion on convertible debt; #12.9 million and #39.4 respectively of interest and accretion on non-convertible debt; and #0.6 million and #2.1 million respectively of interest and unwinding of discounts on provisions. Interest payable and similar charges for the three months ended 30 September 2003 comprised #16.3 million and #5.8 million of interest and accretion respectively. Gain on Purchase of Debt There were no purchases of debt in the three months ended 30 September 2003. Gains arising on the purchase of debt during the nine months ended 30 September 2003 amounted to #7.6 million. Gains arising on the purchase of debt for the three and nine months ended September 2002 were #28.5 million and #101.7 million respectively. Exchange Gain (Loss) For the three and nine months ended 30 September 2003 there were exchange gains of #0.9 million and #4.1 million compared with exchange gains of #2.5 million and #9.8 million in the equivalent periods in 2002. These gains 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 nine months ended 30 September 2002 and 2003, COLT generated losses on ordinary activities of #609.3 million and #673.0 million and #35.7 million and #103.6 million, respectively and therefore did not incur a tax obligation. Financial Needs and Resources The costs associated with the construction and expansion of COLT's networks, including development, installation and operating expenses have resulted in cumulative negative cash flows. COLT does not expect to achieve sustainable positive free cash flow until some time during 2005. Net cash inflow from operating activities was #55.1 million and #112.4 million for the three and nine months ended 30 September 2002 and #45.3 million and #113.0 million for the three and nine months ended 30 September 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 #89.3 million and #351.1 million in the three and nine months ended 30 September 2002 to #36.1 million and #129.6 million for the three and nine months ended 30 September 2003. Free cash flow, 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 #34.2 million and #238.7 million in the three and nine months ended 30 September 2002 to an inflow of #9.1 million and an outflow of #16.6 million in the three and nine months ended 30 September 2003 respectively. The decrease in net cash outflow was primarily a result of reduced purchases of tangible fixed assets, which decreased from #89.9 million and #339.7 million for the three and nine months ended 30 September 2002 to #32.9 million and #108.3 million for the equivalent periods in 2003. Net cash from financing improved from an outflow of #28.3 million and #97.2 million in the three and nine months ended 30 September 2002 to an inflow of #0.5 million and an outflow of #23.3 million for the three and nine months ended 30 September 2003. The improvement was primarily a result of reduced bond purchases, which decreased from #28.3 million and #97.3 million for the three and nine months ended 30 September 2002 to nil and #23.8 million for the equivalent periods in 2003. COLT had balances of cash and investments in liquid resources at 30 September 2003 of #934.4 million compared with #934.9 million at 31 December 2002. Consolidated Profit and Loss Account Three months ended 30 September ------------------------------------------------------------------------------------------ 2002 2002 2002 2003 2003 2003 2003 Before After Before After After Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional Items Items Items Items Items Items Items #'000 #'000 #'000 #'000 #'000 #'000 $'000 ------------------------------------------------------------------------------------------ Turnover 259,032 -- 259,032 295,368 -- 295,368 490,902 Cost of sales Interconnect and (178,824) (12,640) (191,464) (193,322) -- (193,322) (321,301) network Network (57,511) (508,000) (565,511) (53,977) -- (53,977) (89,709) depreciation ------------------------------------------------------------------------------------------ (236,355) (520,640) (756,975) (247,299) -- (247,299) (411,010) ------------------------------------------------------------------------------------------ Gross profit 22,697 (520,640) (497,943) 48,069 -- 48,069 79,892 (loss) Operating expenses Selling, general (60,818) (12,360) (73,178) (58,790) -- (58,790) (97,709) and administrative Other (12,889) (43,000) (55,889) (9,756) -- (9,756) (16,215) depreciation and amortisation ------------------------------------------------------------------------------------------ (73,707) (55,360) (129,067) (68,546) -- (68,546) (113,924) ------------------------------------------------------------------------------------------ Operating loss (51,010) (576,000) (627,010) (20,477) -- (20,477) (34,032) Other income (expense) Interest 9,182 -- 9,182 6,010 -- 6,010 9,988 receivable Gain on purchase -- 28,516 28,516 -- -- -- -- of debt Interest payable (22,460) -- (22,460) (22,139) -- (22,139) (36,795) and similar charges Exchange gain 2,459 -- 2,459 880 -- 880 1,462 (loss) ------------------------------------------------------------------------------------------ (10,819) 28,516 17,697 (15,249) -- (15,249) (25,345) ------------------------------------------------------------------------------------------ Profit (loss) on (61,829) (547,484) (609,313) (35,726) -- (35,726) (59,377) ordinary activities before taxation Taxation -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------ Loss for (61,829) (547,484) (609,313) (35,726) -- (35,726) (59,377) period ========================================================================================== Basic and #(0.04) #(0.36) #(0.40) #(0.02) -- #(0.02) $(0.04) 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 Nine months ended 30 September ---------------------------------------------------------------------------------------------- 2002 2002 2002 2003 2003 2003 2003 Before After Before After After Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional Items Items Items Items Items Items Items #'000 #'000 #'000 #'000 #'000 #'000 $'000 ---------------------------------------------------------------------------------------------- Turnover 764,082 -- 764,082 860,055 -- 860,055 1,429,411 Cost of sales Interconnect and (537,916) (18,320) (556,236) (569,265) -- (569,265) (946,119) network Network (161,244) (508,000) (669,244) (154,039) -- (154,039) (256,012) depreciation ---------------------------------------------------------------------------------------------- (699,160) (526,320) (1,225,480) (723,304) -- (723,304) (1,202,131) ---------------------------------------------------------------------------------------------- Gross profit 64,922 (526,320) (461,398) 136,751 -- 136,751 227,280 (loss) Operating expenses Selling, general (182,280) (18,934) (201,214) (175,589) -- (175,589) (291,829) and administrative Other (40,743) (43,000) (83,743) (29,247) -- (29,247) (48,608) depreciation and amortisation ---------------------------------------------------------------------------------------------- (223,023) (61,934) (284,957) (204,836) -- (204,836) (340,437) ---------------------------------------------------------------------------------------------- Operating loss (158,101) (588,254) (746,355) (68,085) -- (68,085) (113,157) Other income (expense) Interest 29,744 -- 29,744 20,186 -- 20,186 33,549 receivable Gain on purchase -- 101,668 101,668 -- 7,589 7,589 12,613 of debt Interest payable (72,706) -- (72,706) (67,307) -- (67,307) (111,864) and similar charges Exchange gain 9,758 4,844 14,602 4,058 -- 4,058 6,744 (loss) ---------------------------------------------------------------------------------------------- (33,204) 106,512 73,308 (43,063) 7,589 (35,474) (58,958) ---------------------------------------------------------------------------------------------- Profit (loss) on (191,305) (481,742) (673,047) (111,148) 7,589 (103,559) (172,115) ordinary activities before taxation Taxation -- -- -- -- -- -- -- ---------------------------------------------------------------------------------------------- Loss for (191,305) (481,742) (673,047) (111,148) 7,589 (103,559) (172,115) period ============================================================================================== Basic and #(0.13) #(0.32) #(0.45) #(0.07) #0.00 #(0.07) $(0.11) 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 September Nine months ended 30 September ------------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ------------------------------------------------------------------------- Loss for the (609,313) (35,726) (59,377) (673,047) (103,559) (172,115) period Exchange (25,892) 3,473 5,773 26,280 28,968 48,145 differences ------------------------------------------------------------------------- Total (635,205) (32,253) (53,604) (646,767) (74,591) (123,970) recognised losses ========================================================================= Consolidated Reconciliation of Changes in Equity Shareholders' Funds Three months ended 30 September Nine months ended 30 September ------------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ------------------------------------------------------------------------- Loss for (609,313) (35,726) (59,377) (673,047) (103,559) (172,115) period Issue of 60 610 1,014 170 612 1,017 share capital Shares to be (71) (117) (194) (296) (229) (381) issued Charges -- -- -- 14 -- -- related to share schemes Exchange (25,892) 3,473 5,773 26,280 28,968 48,145 difference ------------------------------------------------------------------------- Net changes (635,216) (31,760) (52,784) (646,879) (74,208) (123,334) in equity shareholders' funds ------------------------------------------------------------------------- Opening 1,612,696 912,562 1,516,677 1,624,359 955,010 1,587,227 equity shareholders' funds ------------------------------------------------------------------------- Closing 977,480 880,802 1,463,893 977,480 880,802 1,463,893 equity shareholders' funds ------------------------------------------------------------------------- Consolidated Balance Sheet At 31 December 2002 At 30 September 2003 #'000 #'000 $'000 ------------------------------------------ Fixed assets Intangible fixed assets (net) 10,639 9,866 16,397 Tangible fixed assets (cost) 2,695,499 2,909,095 4,834,916 Accumulated depreciation (1,316,690) (1,542,621) (2,563,836) ------------------------------------------ Tangible fixed assets (net) 1,378,809 1,366,474 2,271,080 Investments in own shares 206 204 339 ------------------------------------------ Total fixed assets 1,389,654 1,376,544 2,287,816 Current assets Trade debtors 189,788 200,183 332,704 Prepaid expenses and other debtors 74,606 62,870 104,490 Investments in liquid resources 889,590 880,199 1,462,891 Cash at bank and in hand 45,292 54,205 90,089 ------------------------------------------ Total current assets 1,199,276 1,197,457 1,990,174 ------------------------------------------ Total assets 2,588,930 2,574,001 4,277,990 ========================================== Capital and reserves Called up share capital 37,688 37,711 62,676 Share premium 2,314,335 2,314,792 3,847,184 Merger reserve 27,227 27,359 45,471 Shares to be issued 454 225 374 Profit and loss account (1,424,694) (1,499,285) (2,491,812) ------------------------------------------ Equity shareholders' funds 955,010 880,802 1,463,893 Provisions for liabilities and 87,368 71,581 118,968 charges Creditors Amounts falling due within one 352,653 367,678 611,081 year Amounts falling due after more than one year Convertible debt 639,829 689,792 1,146,434 Non-convertible debt 554,070 564,148 937,614 ------------------------------------------ Total amounts falling due after more 1,193,899 1,253,940 2,084,048 than one year ------------------------------------------ Total creditors 1,546,552 1,621,618 2,695,129 ------------------------------------------ Total liabilities, capital and 2,588,930 2,574,001 4,277,990 reserves ------------------------------------------ Consolidated Cash Flow Statement Three months ended 30 September Nine months ended 30 September ---------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ---------------------------------------------------------------------- Net cash inflow 55,084 45,264 75,228 112,381 112,951 187,725 from operating activities Returns on investments and servicing of finance Interest 9,486 6,023 10,010 30,674 20,277 33,700 received Interest paid, (8,900) (9,251) (15,375) (46,872) (41,546) (69,049) finance costs and similar charges Gain on -- -- -- 4,844 -- -- cancellation of forward foreign currency contracts ---------------------------------------------------------------------- Net cash inflow 586 (3,228) (5,365) (11,354) (21,269) (35,349) (outflow) from returns on investments and servicing of finance Capital expenditure and financial investment Purchase of (89,905) (32,909) (54,695) (339,722) (108,300) (179,995) tangible fixed assets ---------------------------------------------------------------------- Net cash (89,905) (32,909) (54,695) (339,722) (108,300) (179,995) outflow from capital expenditure and financial investment Management of 78,152 3,816 6,343 337,741 46,659 77,547 liquid resources Financing Issue of -- 473 786 110 474 788 ordinary shares Issue (18,782) -- -- (64,328) (14,166) (23,544) (purchase) of non-convertible debt ---------------------------------------------------------------------- Issue (9,563) -- -- (32,949) (9,606) (15,965) (purchase) of convertible debt ---------------------------------------------------------------------- Net cash inflow (28,345) 473 786 (97,167) (23,298) (38,721) (outflow) from financing ---------------------------------------------------------------------- Increase 15,572 13,416 22,297 1,879 6,743 11,207 (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 nine months ended 30 September 2002 and 2003 and at 31 December 2002 and 30 September 2003. The financial statements for the three and nine months ended 30 September 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 nine months ended 30 September 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 September 2003 and for the periods then ended at the rate of $1.6620 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. Wholesale turnover includes services to other telecommunications carriers, resellers and internet service providers (ISPs). Corporate turnover includes services to corporate and government accounts. For the three months ended 30 September 2002 and 2003, turnover by region was as follows: Three months ended 30 September 2002 ---------------------------------------------------------------------- Corporate Wholesale North Central South Region Region Region Total #'000 #'000 #'000 #'000 #'000 #'000 ---------------------------------------------------------------------- Switched 76,270 80,892 47,679 71,284 38,199 157,162 Non-Switched 72,375 29,284 36,320 36,527 28,812 101,659 Other 97 114 12 95 104 211 ---------------------------------------------------------------------- Total 148,742 110,290 84,011 107,906 67,115 259,032 ====================================================================== Three months ended 30 September 2003 ---------------------------------------------------------------------- North Central South Corporate Wholesale Region Region Region Total #'000 #'000 #'000 #'000 #'000 #'000 ---------------------------------------------------------------------- Switched 85,428 91,469 52,271 82,566 42,060 176,897 Non-Switched 91,202 26,695 41,720 41,594 34,583 117,897 Other 533 41 -- 574 -- 574 ---------------------------------------------------------------------- Total 177,163 118,205 93,991 124,734 76,643 295,368 ====================================================================== For the nine months ended 30 September 2002 and 2003, turnover by region was as follows: Nine months ended 30 September 2002 ---------------------------------------------------------------------- North Central South Corporate Wholesale Region Region Region Total #'000 #'000 #'000 #'000 #'000 #'000 ---------------------------------------------------------------------- Switched 218,996 249,310 138,533 216,332 113,441 468,306 Non-Switched 208,464 85,781 104,594 105,331 84,320 294,245 Other 915 616 57 1,168 306 1,531 ---------------------------------------------------------------------- Total 428,375 335,707 243,184 322,831 198,067 764,082 ====================================================================== Nine months ended 30 September 2003 ---------------------------------------------------------------------- North Central South Corporate Wholesale Region Region Region Total #'000 #'000 #'000 #'000 #'000 #'000 ---------------------------------------------------------------------- Switched 248,796 265,904 155,527 238,255 120,918 514,700 Non-Switched 261,609 82,483 123,944 120,181 99,967 344,092 Other 909 354 79 905 279 1,263 ---------------------------------------------------------------------- Total 511,314 348,741 279,550 359,341 221,164 860,055 ====================================================================== Notes to Financial Statements 3. Profit (loss) per share Three months ended 30 September Nine months ended 30 September ------------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ------------------------------------------------------------------------- Profit (609,313) (35,726) (59,377) (673,047) (103,559) (172,115) (loss) for period ========================================================================= Weighted 1,507,226 1,508,037 1,508,037 1,507,138 1,507,463 1,507,463 average of ordinary shares ('000) Basic #(0.40) #(0.02) $(0.04) #(0.45) #(0.07) $(0.11) and diluted profit (loss) per share ------------------------------------------------------------------------- 4a. Net cash inflow from operating activities Three months ended 30 September Nine months ended 30 September ---------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ---------------------------------------------------------------------- Operating (627,010) (20,477) (34,032) (746,355) (68,085) (113,157) loss Depreciation, 621,400 63,733 105,924 752,987 183,286 304,620 amortisation of fixed assets Exchange (442) (19) (32) 520 123 205 differences Decrease 14,485 11,206 18,624 48,860 15,020 24,964 (increase) in debtors Increase 26,471 (935) (1,554) 29,977 3,325 5,526 (decrease) in creditors Movement in 20,180 (8,244) (13,702) 26,392 (20,718) (34,433) provision for liabilities and charges---------------------------------------------------------------------- Net cash 55,084 45,264 75,228 112,381 112,951 187,725 inflow from operating activities ====================================================================== 4b. EBITDA reconciliation Three months ended 30 September Nine months ended 30 September ---------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ---------------------------------------------------------------------- Net cash 55,084 45,264 75,228 112,381 112,951 187,725 inflow from operating activities Adjusted for: Exchange 442 19 32 (520) (123) (205) differences Movement in (14,485) (11,206) (18,624) (48,860) (15,020) (24,964) debtors Movement in (26,471) 935 1,554 (29,977) (3,325) (5,526) creditors ---------------------------------------------------------------------- Total working (40,956) (10,271) (17,070) (78,837) (18,345) (30,490) capital adjustments Movement in (20,180) 8,244 13,702 (26,392) 20,718 34,433 provision for liabilities and charges Add back Exceptional 12,640 -- -- 18,320 -- -- interconnect and Network charges Exceptional 12,360 -- -- 18,934 -- -- selling and Administrative charges ---------------------------------------------------------------------- EBITDA before 19,390 43,256 71,892 43,886 115,201 191,463 exceptional items ====================================================================== Notes to Financial Statements 5. Changes in cash and investments in liquid resources Three months ended 30 September Nine months ended 30 September ----------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ----------------------------------------------------------------------- Beginning of 1,058,150 920,519 1,529,903 1,304,477 934,882 1,553,774 period Net increase (78,152) (3,816) (6,343) (337,741) (46,659) (77,547) (decrease) in investments in liquid resources before exchange differences Effects of (15,761) 4,715 7,837 14,153 37,268 61,939 exchange differences in investments in liquid resources Net increase 15,572 13,416 22,297 1,879 6,743 11,207 (decrease) in cash before exchange differences Effects of (1,715) (430) (714) (4,674) 2,170 3,607 exchange differences in cash ----------------------------------------------------------------------- End of 978,094 934,404 1,552,980 978,094 934,404 1,552,980 period ======================================================================= 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 September Nine months ended 30 September ---------------------------------------------------------------------------- 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 ---------------------------------------------------------------------------- Loss for (609,313) (35,726) (59,377) (673,047) (103,559) (172,115) period Adjustments: Deferred (356) (292) (485) (1,617) (815) (1,355) compensation (i), (ii) Amortisation 384 544 904 873 1,612 2,679 of intangibles (iii) Capitalised 1,147 (715) (1,188) 4,726 (2,268) (3,769) interest, net of depreciation (iv) Profit on 262 262 435 784 783 1,301 sale of IRUs (v) Warrants (154) 140 233 (1,377) 127 211 (vi) Installation (4,043) 773 1,285 680 2,044 3,397 revenue (vii) Direct costs 4,043 (1,401) (2,329) (680) (2,672) (4,441) attributable to installation revenue (vii) Impairment 107,200 (2,805) (4,662) 107,200 (8,416) (13,987) (viii) ---------------------------------------------------------------------------- Loss for (500,830) (39,220) (65,184) (562,458) (113,164) (188,079) period under US GAAP ============================================================================ Weighted 1,507,226 1,508,037 1,508,037 1,507,138 1,507,463 1,507,463 average number of ordinary shares ('000) ============================================================================ Basic and #(0.33) #(0.03) $(0.04) #(0.37) #(0.08) $(0.12) 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. Notes to Financial Statements 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 nine months ended 30 September 2002 was #0.2 million and #1.0 million respectively and for the three and nine months ended 30 September 2003 nil 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 expires 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 nine months ended 30 September 2002 was #0.2 million and #0.6 million respectively and for the three and nine months ended 30 September 2003 #0.3 million and #0.5 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 (viii), 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 #0.4 million and #0.9 million for the three and nine months ended 30 September 2002 respectively and #0.5 million and #1.6 million for the three and nine months ended 30 September 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 nine months ended 30 September 2002 and 2003, customer installation revenues together with attributable direct costs 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 September 2003, the cumulative increase in net losses under SAB 101 was #0.6 million, representing cumulative deferred installation revenues of #55.6 million and costs of #55.0 million. (viii) 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 nine months ended 30 September 2003 depreciation in the amount of #2.8 million and #8.4 million respectively was recorded in respect of the assets which had not been impaired for U.S. GAAP purposes. b. Effects of conforming to U.S. GAAP - impact on net equity ---------------------- At 30 September 2003 ---------------------- #'000 $'000 Equity shareholders' funds for the Company 880,802 1,463,893 U.S. GAAP adjustments: Adjustment for deferred compensation (10,569) (17,565) Unearned compensation (1,708) (2,839) Additional paid in share capital 12,277 20,404 Own shares held in trust (i) (206) (342) Amortisation of intangibles 5,512 9,161 Warrants 979 1,627 Impairment 95,974 159,509 Deferred profit on IRUs (17,984) (29,889) Capitalised interest, net of depreciation 38,692 64,305 Deferred profit on installations (628) (1,044) ---------------------- Approximate equity shareholders' funds under U.S. GAAP 1,003,141 1,667,220 ====================== (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 September 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 nine months ended 30 September 2003 would have been #43.2 million ($71.9 million) and #126.2 million ($209.8 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 QRTZGMZGNZVGFZM
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