LONDON, April 24, 2003 (PRIMEZONE) -- COLT Telecom Group plc (Nasdaq:COLT) (LSE:CTM):
HIGHLIGHTS
- Turnover up 10% to GBP271.7 million compared to Q1 2002
- Increase in turnover driven in part by the weakness of the British
pound relative to the Euro.
- Retail turnover up 20.7% to GBP162.8 million
- Gross margin before depreciation and exceptional items improved
from 28.7% to 33.6%
- EBITDA (1) up 247% to GBP34.0 million
- Cash consumption reduced from GBP110.7 million to GBP12.4 million,
excluding bond purchases
- Strong liquidity position with cash and liquid resources of
GBP954.0 million
- Directly connected network and eBusiness customers up 23% to
16,316
- Staff levels including temporary and contract workers reduced by
231 during quarter
Commenting on the results COLT Telecom Group Chairman Barry Bateman said:
"The operating environment remains challenging but nonetheless we have made an encouraging start to the year with further improvements in turnover, gross margins and EBITDA.
"We have also continued to demonstrate our ability to improve cash flow with cash consumption reducing from GBP110.7 million in the first quarter of 2002 to GBP12.4 million in the first quarter of this year, excluding bond purchases. We remain on track to achieve our objective of becoming free cash flow positive during 2005.
"Cash is an important competitive advantage in today's market and with GBP954.0 million of cash and liquid resources combined with our reputation for first class service our customers see COLT as one of the long term successes of the European telecom sector."
Steve Akin, COLT's President and Chief Executive Officer added:
"Our performance for the quarter reflected further progress on the achievement of our key priorities of profitable revenue growth and tight management of operating costs and capital expenditure.
"Revenues grew by 10% to GBP271.7 million with retail revenues improving by 20.7%. At the same time non-switched services accounted for 40.6% of revenues compared with 38.0% in the first quarter of 2002.
"As well as giving increased emphasis to growing same-customer-sales we also continued to win new customers and amongst the more significant new contract wins was Oracle, the world's largest enterprise software company, which has chosen COLT as one of its preferred pan-European suppliers. We also achieved an important win in Portugal with Banco Investimento Global Services (BIG). Other new customers included ST Microelectronics, the semiconductor company. In the governmental sector we continued to make progress with a new contract with Rome University for whom COLT will provide services up to 1 Gbps connecting 9 buildings. Also in Rome, we have won new contracts with the Ministries of Culture and Environment. In France, both local and central government contracts have been won with Les Hospices Civils de Lyon, Communaute Urbaine de Lyon and Ministere des Affaires Sociales.
"The improvement in gross margin before depreciation and exceptional items reflects the improvement in revenue mix as well as the actions we have taken to tightly manage operating costs. SG&A costs before exceptional items were reduced from GBP61.0 million in the first quarter of 2002 to GBP57.2 million in the first quarter of 2003. We have reduced staff numbers by a further 231 during the quarter, including temporary/contract workers, bringing the total to 4,624. We remain on course to reduce staff numbers to approximately 4,300 before the end of the year.
"The major construction phase of our network infrastructure was completed at the beginning of 2002 and we are now concentrating capital investment on winning new business. There was a further reduction in capital expenditure to GBP41.6 million compared with GBP139.1 million in the first quarter last year.
"While there are no signs of any improvement in the operating environment generally, we expect to make further progress during the second quarter and the year as a whole."
KEY FINANCIAL DATA Three months ended
31 March
2002 2003
GBP m GBP m
Turnover 246.8 271.7
Interconnect and network costs (176.1) (180.5)
before exceptional items
Gross profit before 70.7 91.2
depreciation and exceptional
items
Gross profit before 28.7 % 33.6%
depreciation and exceptional
items %
Network depreciation (50.6) (48.4)
Exceptional interconnect and (5.7) --
network costs
Gross profit 14.4 42.8
Loss for the period (before (73.9) (40.9)
exceptional items)
Loss for the period (after (47.8) (40.6)
exceptional items)
EBITDA (1) 9.8 34.0
OPERATING STATISTICS
Growth Growth
Q1 02 Q4 02 Q1 03 Q1 02- Q4 02-
Q1 03 Q1 03
Customers (at end of period)
North Region 3,436 4,282 4,555 33% 6%
Central Region 4,771 5,255 5,579 17% 6%
South Region 3,386 4,381 4,596 36% 5%
eBusiness 1,628 1,605 1,586 -3% -1%
13,221 15,523 16,316 23% 5%
Buildings Connected (at end of period)
North Region 2,474 2,730 2,775 12% 2%
Central Region 3,532 3,784 3,774 7% --
South Region 2,200 2,724 2,867 30% 5%
8,206 9,238 9,416 15% 2%
Switched Minutes (million) (for period)
North Region 1,562 1,354 1,444 -8% 7%
Central Region 2,979 2,682 2,717 -9% 1%
South Region 786 967 931 18% -4%
5,327 5,003 5,092 -4% 2%
Private Wire VGEs (000) (at end of period)
North Region 6,089 8,749 9,104 50% 4%
Central Region 7,238 8,541 9,012 25% 6%
South Region 2,426 3,133 3,643 50% 16%
15,753 20,423 21,759 38% 7%
Racks (at end of period)
eBusiness 2,376 2,774 2,858 20% 3%
Headcount (at end of period)
North Region 1,614 1,496 1,284 -20% -14%
Central Region 1,764 1,537 1,490 -16% -3%
South Region 962 937 917 -5% -2%
eBusiness 666 481 455 -32% -5%
Group/other 234 233 296 26% 27%
5,240 4,684 4,442 -15% -5%
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 GBP246.8 million for the three months ended 31 March 2002 to GBP271.7 million for the three months ended 31 March 2003, an increase of GBP24.9 million or 10%. Turnover also benefited from the weakness of the British pound relative to the Euro; at constant exchange rate the growth over the first quarter 2002 was 3%. 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 and reduced demand in some areas, particularly the wholesale market.
Turnover from switched network services increased from GBP152.1 million for the three months ended 31 March 2002 to GBP161.0 million for the three months ended 31 March 2003. For the three months ended 31 March 2003 compared to the equivalent period of 2002, average switched revenue per minute increased by 11% as a result of changes in mix and a more stable pricing environment. Carrier revenues represented 33% of total switched revenue for the three months ended 31 March 2003 compared with 35% for the comparable period in 2002 and 33% for the three months ended 31 December 2002. Total wholesale (carriers, resellers and ISPs) switched revenues represented 51% of total switched revenues for the three months ended 31 March 2003 compared with 54% in the equivalent period in 2002 and 51% in the three months ended 31 December 2002.
Turnover from non-switched services, increased from GBP93.8 million for the three months ended 31 March 2002 to GBP110.2 million for the three months ended 31 March 2003. Non-switched network services revenue increased from GBP80.7 million in the three months ended 31 March 2002 to GBP97.5 million in the equivalent period in 2003. eBusiness revenue decreased from GBP13.1 million for the three months ended 31 March 2002 to GBP12.7 million for the corresponding period in 2003 reflecting the impact of the mothballing of ISCs announced in February 2002. Growth in non-switched network services revenue 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 revenue also reflects the growing success COLT is achieving in the provision of IPVPN services. At 31 March 2003 COLT had 21.8 million voice grade equivalent private wires in service, an increase of 38% compared to 31 March 2002. At 31 March 2003, COLT had 2,858 racks installed, an increase of 20% compared to 31 March 2002 and 1,586 eBusiness customers. Non-switched turnover from retail customers represented 75% of total non-switched turnover for the three months ended 31 March 2003 compared to 69% in the equivalent period in 2002.
Turnover from other activities was GBP0.5 million for the three months ended 31 March 2003 and GBP0.9 million for the equivalent period in 2002.
Cost of Sales
Cost of sales, before exceptional items, increased from GBP226.7 million for the three months ended 31 March 2002 to GBP228.9 million for the three months ended 31 March 2003, an increase of GBP2.2 million or 1.0%.
Interconnection and network costs, before exceptional items, increased from GBP176.1 million for the three months ended 31 March 2002 to GBP180.5 million for the three months ended 31 March 2003, as a result of the overall increase in business partially offset by the cost containment measures introduced during 2002.
Network depreciation decreased from GBP50.6 million for the three months ended 31 March 2002 to GBP48.5 million for the three months ended 31 March 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 three months ended 31 March 2002, an exceptional charge of GBP5.7 million was recognised for severance provisions related to the staff reduction programmes announced in February 2002. There were no exceptional charges for the three months ended 31 March 2003.
Operating Expenses
Operating expenses, before exceptional items, decreased from GBP75.4 million for the three months ended 31 March 2002 to GBP66.8 million for the comparable period in 2003.
Selling, general and administrative (SG&A) expenses, before exceptional items, decreased from GBP61.0 million for the three months ended 31 March 2002 to GBP57.2 million for the three months ended 31 March 2003 reflecting the cost containment measures introduced during 2002. SG&A before exceptional items as a proportion of turnover in the three months ended 31 March 2003 was 21.1% compared to 24.7% in the equivalent period of 2002.
Other depreciation and amortisation decreased from GBP14.4 million for the three months ended 31 March 2002 to GBP9.6 million in the comparable period in 2003 reflecting the effect of the impairment provisions recorded in September 2002 and other assets being fully depreciated.
For the three months ended 31 March 2002, an exceptional charge of GBP6.6 million was recognised for severance provisions related to the staff reduction programmes announced in February 2002. There were no exceptional charges for the three months ended 31 March 2003.
Interest Receivable, Interest Payable and Similar Charges
Interest receivable decreased from GBP10.3 million for the three months ended 31 March 2002 to GBP7.5 million for the three months ended 31 March 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 GBP25.7 million for the three months ended 31 March 2002 to GBP22.4 million for the equivalent period in 2003. The decrease was due primarily to a reduction in debt levels reflecting the cumulative purchases of GBP343.1 million accreted amount of the Company's outstanding notes.
Interest payable and similar charges for the three months ended 31 March 2003 included: GBP8.6 million of interest and accretion on convertible debt; GBP13.2 million of interest and accretion on non-convertible debt; and GBP0.6 million of interest and unwinding of discounts on provisions. Interest payable and similar charges for the three months ended 31 March 2003 comprised GBP16.4 million and GBP6.0 million of interest and accretion, respectively.
Gain on Purchase of Debt
Gains arising on the purchase of debt for the three months ended 31 March 2003 were GBP0.3 million compared with GBP38.4 million in the equivalent period in 2002.
Exchange Gain (Loss)
For the three months ended 31 March 2003 COLT had exchange losses of GBP1.9 million compared with exchange losses of GBP3.2 million in the equivalent period in 2002. These 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 months ended 31 March 2002 and 2003, COLT generated losses on ordinary activities of GBP47.8 million and GBP40.6 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 GBP220 million and GBP270 million compared with GBP412.1 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 GBP25.9 million for the three months ended 31 March 2002 and GBP30.4 million for the three months ended 31 March 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 GBP136.6 million in the three months ended 31 March 2002 to GBP42.8 million for the three months ended 31 March 2003.
The decrease in net cash outflow was primarily a result of reduced purchases of tangible fixed assets, which decreased from GBP139.1 million for the three months ended 31 March 2002 to GBP41.6 million for the equivalent period in 2003.
There were no proceeds from the exercise of options in the three months ended 31 March 2003, while proceeds of GBP0.1 million were raised during the three months ended 31 March 2002. COLT had balances of cash and investments in liquid resources at 31 March 2003 of GBP954.0 million compared to GBP934.9 million at 31 December 2002. The increase reflected foreign exchange translation gains.
Consolidated Profit and Loss Account
Three months ended 31 March
2002 2002 2002
Before After
Exceptional Exceptional Exceptional
Items Items Items
GBP'000 GBP'000 GBP'000
Turnover
Switched 152,109 -- 152,109
Non-switched 93,823 -- 93,823
Other 866 -- 866
246,798 -- 246,798
Cost of sales
Interconnect and (176,054) (5,680) (181,734)
network
Network (50,616) -- (50,616)
depreciation
(226,670) (5,680) (232,350)
Gross profit 20,128 (5,680) 14,448
(loss)
Operating
expenses
Selling, general (60,988) (6,574) (67,562)
and
administrative
Other (14,429) -- (14,429)
depreciation and
amortisation
(75,417) (6,574) (81,991)
Operating loss (55,289) (12,254) (67,543)
Other income
(expense)
Interest 10,272 -- 10,272
receivable
Gain on purchase -- 38,409 38,409
of debt
Interest payable (25,703) -- (25,703)
and similar
charges
Exchange gain (3,197) -- (3,197)
(loss)
(18,628) 38,409 19,781
Loss on ordinary (73,917) 26,155 (47,762)
activities before
taxation
Taxation -- -- --
Loss for period (73,917) 26,155 (47,762)
Basic and diluted GBP(0.05) GBP0.02 GBP(0.03)
loss per share
Three months ended 31 March
2003 2003 2003 2003
Before After After
Exceptional Exceptional Exceptional Exceptional
Items Items Items Items
GBP'000 GBP'000 GBP'000 $'000
Turnover
Switched 160,951 -- 160,951 254,141
Non-switched 110,248 -- 110,248 174,082
Other 521 -- 521 823
271,720 -- 271,720 429,046
Cost of sales
Interconnect (180,466) -- (180,466) (284,956)
and network
Network (48,446) -- (48,446) (76,496)
depreciation
(228,912) -- (228,912) (361,452)
Gross profit 42,808 -- 42,808 67,594
(loss)
Operating
expenses
Selling, (57,235) -- (57,235) (90,374)
general and
administrative
Other (9,594) -- (9,594) (15,149)
depreciation
and
amortisation
(66,829) -- (66,829) (105,523)
Operating (24,021) -- (24,021) (37,929)
loss
Other income
(expense)
Interest 7,471 -- 7,471 11,797
receivable
Gain on -- 349 349 551
purchase of
debt
Interest (22,444) -- (22,444) (35,439)
payable and
similar
charges
Exchange gain (1,936) -- (1,936) (3,057)
(loss)
(16,909) 349 (16,560) (26,148)
Loss on (40,930) 349 (40,581) (64,077)
ordinary
activities
before
taxation
Taxation -- -- -- --
Loss for (40,930) 349 (40,581) (64,077)
period
Basic and GBP(0.03) GBP0.00 GBP(0.03) $(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 Statement of Total Recognised Gains and Losses
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Loss for the period (47,762) (40,581) (64,077)
Exchange differences (596) 24,362 38,467
Total recognised (48,358) (16,219) (25,610)
losses
Consolidated Reconciliation of Changes in Equity Shareholders'
Funds
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Loss for the period (47,762) (40,581) (64,077)
Issue of share 110 -- --
capital
Shares to be issued (190) (167) (264)
Exchange difference (596) 24,362 38,467
Net changes in equity (48,438) (16,386) (25,874)
shareholders' funds
Opening equity 1,624,359 955,010 1,507,961
shareholders' funds
Closing equity 1,575,921 938,624 1,482,087
shareholders' funds
Consolidated Balance Sheet
At 31
December At 31 March 2003
2002
GBP'000 GBP'000 $'000
Fixed assets
Intangible fixed 10,639 10,734 16,949
assets (net)
Tangible fixed 2,695,499 2,839,953 4,484,286
assets (cost)
Accumulated (1,316,690) (1,425,083) (2,250,206)
depreciation
Tangible fixed 1,378,809 1,414,870 2,234,080
assets (net)
Investments in own 206 206 325
shares
Total fixed assets 1,389,654 1,425,810 2,251,354
Current assets
Trade debtors 189,788 196,543 310,342
Prepaid expenses 74,606 73,920 116,720
and other debtors
Investments in 889,590 907,581 1,433,070
liquid resources
Cash at bank and 45,292 46,389 73,248
in hand
Total current assets 1,199,276 1,224,433 1,933,380
Total assets 2,588,930 2,650,243 4,184,734
Capital and reserves
Called up share 37,688 37,688 59,509
capital
Share premium 2,314,335 2,314,335 3,654,335
Merger reserve 27,227 27,227 42,992
Shares to be 454 287 453
issued
Profit and loss (1,424,694) (1,440,913) (2,275,202)
account
Equity shareholders' 955,010 938,624 1,482,087
funds
Provisions for 87,368 82,778 130,707
liabilities and charges
Creditors
Amounts falling 352,653 366,270 578,340
due within one year
Amounts falling
due after more than one
year:
Convertible debt 639,829 683,025 1,078,497
Non-convertible 554,070 579,546 915,103
debt
Total amounts 1,193,899 1,262,571 1,993,600
falling due after more
than one year
Total creditors 1,546,552 1,628,841 2,571,940
Total liabilities, 2,588,930 2,650,243 4,184,734
capital and reserves
Consolidated Cash Flow Statement
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Net cash inflow from 25,872 30,364 47,945
operating activities
Returns on investments
and servicing of
finance
Interest received 10,687 7,508 11,855
Interest paid, finance (8,211) (8,649) (13,657)
costs and similar
charges
Net cash inflow 2,476 (1,141) (1,802)
(outflow) from returns
on investments and
servicing of finance
Capital expenditure
and financial
investment
Purchase of tangible (139,053) (41,629) (65,732)
fixed assets
Net cash outflow from (139,053) (41,629) (65,732)
capital expenditure
and financial
investment
Management of liquid 126,143 11,258 17,776
resources
Financing
Issue of ordinary 110 -- --
shares
Issue (purchase) of (13,492) -- --
non-convertible debt
Issue (purchase) of (23,386) (424) (669)
convertible debt
Net cash inflow (36,768) (424) (669)
(outflow) from
financing
Increase (decrease) in (21,330) (1,572) (2,482)
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 months ended 31 March 2002 and 2003 and at 31 December 2002 and 31 March 2003.
The financial statements for the three months ended 31 March 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 charges for the three months ended 31 March 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 31 March 2003 and for the periods then ended at the rate of $1.5790 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 31 March 2002 and 2003, turnover by region was as follows:
Three months ended 31 March 2002
North Central South eBusiness Total Retail Wholesale
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 45,300 71,297 35,512 -- 152,109 69,883 82,226
Non-
switched 29,026 31,877 19,814 13,106 93,823 64,621 29,202
Other 37 761 68 -- 866 437 429
Total 74,363 103,935 55,394 13,106 246,798 134,941 111,857
Three months ended 31 March 2003
North Central South eBusiness Total Retail Wholesale
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 49,913 73,489 37,549 -- 160,951 79,575 81,376
Non-
switched 36,561 36,156 24,830 12,701 110,248 83,037 27,211
Other 45 317 159 -- 521 235 286
Total 86,519 109,962 62,538 12,701 271,720 162,847 108,873
3. Profit (loss) per share
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Profit (loss) for (47,762) (40,581) (64,077)
period
Weighted average 1,507,083 1,507,503 1,507,503
of ordinary
shares ('000)
Basic and diluted GBP(0.03) GBP(0.03) $(0.04)
loss per share
Notes to Financial Statements
4(a). Net cash inflow from operating activities
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Operating loss (67,543) (24,021) (37,929)
Depreciation, 65,045 58,040 91,645
amortisation of fixed
assets
Exchange differences 100 163 258
Decrease (increase) 10,592 4,696 7,415
in debtors
Increase (decrease) 9,705 (238) (376)
in creditors
Movement in provision 7,973 (8,276) (13,068)
for liabilities and
charges
Net cash inflow from 25,872 30,364 47,945
operating activities
4(b). EBITDA reconciliation
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Net cash inflow from 25,872 30,364 47,945
operating activities
Adjusted for:
Exchange differences (100) (163) (258)
Movement in debtors (10,592) (4,696) (7,415)
Movement in creditors (9,705) 238 376
Total working capital (20,297) (4,458) (7,039)
adjustments
Movement in provision (7,973) 8,276 13,068
for liabilities and
charges
Add back
Exceptional 5,680 -- --
interconnect and
Network charges
Exceptional selling and 6,574 -- --
Administrative charges
EBITDA before 9,756 34,019 53,716
exceptional items
5. Changes in cash and investments in liquid resources
Three months ended 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Beginning of period 1,304,477 934,882 1,476,179
Net increase (126,143) (11,258) (17,776)
(decrease) in
investments in
liquid resources
before exchange
differences
Effects of exchange 47 29,249 46,183
differences in
investments in
liquid resources
Net increase (21,330) (1,572) (2,482)
(decrease) in cash
before exchange
differences
Effects of exchange (2,155) 2,669 4,214
differences in cash
End of period 1,154,896 953,970 1,506,318
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 31 March
2002 2003 2003
GBP'000 GBP'000 $'000
Loss for period: (47,762) (40,581) (64,077)
Adjustments:
Deferred (604) (270) (427)
compensation (i), (ii)
Amortisation of 247 521 823
intangibles (iii)
Capitalised 1,875 (912) (1,440)
interest, net of
depreciation (iv)
Profit on sale of 261 261 412
IRUs (v)
Warrants (vi) 4 (157) (248)
Installation revenue (1,467) (636) (1,004)
(vii)
Direct costs 1,467 636 1,004
attributable to
installation revenue
(vii)
Unrealised gain on 467 -- --
forward foreign
exchange contracts
(viii)
Impairment (ix) -- (2,805) (4,429)
Loss for period (45,512) (43,943) (69,386)
under U.S. GAAP
Weighted average of 1,507,083 1,507,503 1,507,503
ordinary shares
('000)
Basic and diluted GBP(0.03) GBP(0.03) $(0.05)
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 paid over the two year period ending June 2003, subject to certain conditions being met.
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 months ended 31 March 2002 and 31 March 2003 was GBP0.4 million and GBP0.1 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, are 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 was GBP0.2 million for the three month periods ended 31 March 2002 and 2003. Notes to Financial Statements
(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 GBP6.6 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 GBP0.2 million and GBP0.5 million for the three months ended 31 March 2002 and 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. Under U.S. GAAP, the warrants are recorded at fair value with unrecognised gains and losses reflected in the profit and loss account. Hence for U.K. GAAP purposes the warrants have been recognised at nil.
(vii) In accordance with SAB 101 "Revenue Recognition in Financial Statements", for the three months ended 31 March 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 relationship period for wholesale customers was reduced during the three months ended 30 June 2002. At 31 March 2003, the cumulative impact on net losses under SAB 101 was nil, representing cumulative deferred installation revenues of GBP57.0 million and costs of the same amount.
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 gain of GBP0.5 million for the three months ended 31 March 2002, represents the unrealised gain on that ineffective portion of the hedge attributable to the cumulative notes purchased as at 31 March 2002. There was no impact on profits for the three months ended 31 March 2003 as the forward foreign exchange contracts were cancelled in June 2002.
(ix) During the quarter ended 30 September 2002, the Company recorded charges of GBP443.8 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 GBP107.2 million. For the three months ended 31 March 2003 depreciation in the amount of GBP2.8 million 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 31 March 2003
GBP'000 $'000
Equity shareholders' funds for 938,624 1,482,087
the Company
U.S. GAAP adjustments:
Adjustment for deferred (10,024) (15,828)
compensation
Unearned compensation (1,262) (1,993)
Additional paid in share 11,286 17,821
capital
Own shares held in trust (206) (325)
(i)
Amortisation of intangibles 4,421 6,981
Shares to be issued (62) (98)
Warrants 695 1,097
Impairment 101,585 160,403
Deferred profit on IRUs (18,506) (29,221)
Capitalised interest, net 40,048 63,236
of depreciation
Approximate equity shareholders' 1,066,599 1,684,160
funds under U.S. 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 31 March 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 months ended 31 March 2003 would have been GBP48.1 million ($76.0 million).
d. New U.S. Accounting Standards
FAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets, was issued in July 2001. This standard is effective for the Group's fiscal year beginning 1 January 2003. The standard provides the accounting requirements for retirement obligations associated with tangible long-lived assets. The standard requires that the obligation associated with the retirement of tangible long-lived assets be capitalised into the asset cost at the time of initial recognition. The liability is then discounted to its fair value at the time of recognition using the guidance provided by that standard. Management has adopted SFAS 143 in the consolidated financial statements and its impact is not material.
FASB Interpretation No. 46 ("FIN 46" or the "Interpretation"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51" was issued in January 2003. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. For any variable interest entities created after 31 January 2003, FIN 46 is effective immediately. This Interpretation will be effective for the Group's fiscal year beginning 1 January 2004. Management believes the adoption of FIN46 will have no impact on its consolidated financial statements. 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.
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