COLT Telecom Group plc Announces Results For The Three And Nine Months Ended 30 September 2004


LONDON, Oct. 20, 2004 (PRIMEZONE) -- 20 October 2004


     COLT TELECOM GROUP PLC ANNOUNCES RESULTS FOR THE
       THREE AND NINE MONTHS ENDED 30 SEPTEMBER 2004

COLT Telecom Group plc (COLT), a leading pan-European provider of business communications solutions and services said today that during the third quarter it continued to grow turnover and reduce losses in line with market expectations. COLT also said that it would be announcing separately today its strategic direction for profitable growth - "Future in Focus" - which it expects will enhance its prospects and position in the marketplace.

Highlights of the quarter (1) include:



 - Turnover of GBP303.7 million, up 7% (2) on a constant currency
   basis
 - Gross margin before depreciation of 31.6%
 - EBITDA (3) decreased by 23% from GBP43.3 million to GBP33.4 million
 - Loss for the period (4) decreased by 11% from GBP35.7 million to
   GBP31.8 million
 - Strong financial position with cash and liquid resources of
   GBP791.4 million
 - Early redemption of GBP324 million of bonds, transaction completed
   on 19 October
 - Proforma cash and liquid resources of GBP467.4 million post
   redemption of the bonds
 - Further strengthening of top management team
 - COLT wins World Communication Award for Customer Care for fourth
   successive year

Barry Bateman, Chairman, said:

"During the third quarter COLT contined to grow revenues and margins were broadly in line with the second quarter. However price erosion across a number of products and pressure on costs combined to lead to a disappointing decline in EBITDA. Nevertheless, COLT's underlying financial position remains strong: losses are reducing and we have taken action to reduce interest payments through the early redemption of some of our bonds, reflecting our confidence in the future. Our financial performance needs to improve further to enable us to achieve a satisfactory return on capital and to this end, we have strengthened our senior management team during the quarter and are setting a future direction for profitable growth which builds on the core strengths of our pan-European backbone, 32 metropolitan area networks with fibre access and best-in-industry customer service."

Jean-Yves Charlier, Chief Executive Officer, said:

"COLT made further progress in a difficult quarter by growing revenues and reducing losses. We further reinforced our reputation for best-in-industry customer service by winning the prestigious World Communication Award for Customer Care for the fourth successive year.

"Despite these achievements, the revenue mix was not what it needs to be and we continue to be challenged by the market environment and by pressures on our cost base. We have taken action to strengthen our senior management team in sales and marketing as well as in our key markets of France and the UK. Furthermore, after a strategy review, we are implementing an enhanced set of strategic initiatives - "Future in Focus" - designed to re-establish the company as an innovator and as one of the top three players in each of the metropolitan markets in which it operates across Europe.

"To renew with innovation, we are also announcing today our SecureIT service for SME customers, the first in a portfolio of new services to extend COLT's IP management services to the LAN and desktop environment."

(1) Comparison with equivalent quarter of the prior year.

(2) Excluding Fitec, which was disposed of in December 2003.

(3) EBITDA is earnings before interest, tax, depreciation, amortisation, foreign exchange and exceptional items.

(4) Before exceptional items.



 KEY FINANCIAL DATA           Three months         Nine months ended
                            ended 30 September        30 September
                             2003        2004        2003        2004
                            GBP m       GBP m       GBP m       GBP m

 Turnover                   295.4       303.7       860.1       906.1

 Interconnect
 and network costs         (193.3)     (207.8)     (569.3)     (610.9)

 Gross profit
 before depreciation        102.1        95.9       290.8       295.2

 Gross profit before
 depreciation %              34.5%       31.6%      33.8%        32.6%

 Network depreciation       (54.0)      (46.6)    (154.0)      (139.2)

 Gross profit                48.1        49.3      136.8        156.0

 Loss for the period
 (before exceptional        (35.7)      (31.8)    (111.1)       (77.8)
 items)

 Loss for the period
 (after exceptional         (35.7)      (31.5)    (103.6)       (77.6)
 items)

 EBITDA (1)                  43.3        33.4      115.2        118.1

(1) EBITDA is earnings before interest, tax, depreciation, amortisation, foreign exchange and exceptional items.

Financial Review

Unless otherwise stated all comparisons are between the three and nine months ended 30 September 2004 and 30 September 2003.

Turnover

Turnover for the three months ended 30 September 2004 was GBP303.7 million (2003: GBP295.4 million). This was an increase of 7% on a constant currency basis and excluding the turnover contributed by Fitec (which was disposed of in December 2003). Turnover for the nine months ended 30 September 2004 was GBP906.1 million (2003: GBP860.1 million). This was an increase of 9% on a constant currency basis and excluding the turnover contributed by Fitec. The increase in turnover was driven by demand for COLT's services from existing and new customers and new service introductions.

Corporate

Turnover from corporate customers for the three months ended 30 September 2004 decreased by 2% to GBP173.6 million (2003: GBP177.2 million). Turnover from corporate customers for the nine months ended 30 September 2004 increased by 1% to GBP518.4 million (2003: GBP511.3 million). Turnover from corporate customers represented 57% of total turnover in the three and nine months ended 30 September 2004 (2003: 60% and 59%). Switched turnover for the three months decreased by 5% to GBP81.0 million (2003: GBP85.4 million) and for the nine months increased by 1% to GBP250.9 million (2003: GBP248.8 million). Non-switched turnover for the three months decreased by 1% to GBP90.7 million (2003: GBP91.2 million) and for the nine months increased by 1% to GBP265.1 million (2003: GBP261.6 million).

Wholesale

Turnover from wholesale customers for the three months ended 30 September 2004 increased by 10% to GBP130.2 million (2003: GBP118.2 million). Turnover from wholesale customers for the nine months ended 30 September 2004 increased by 11% to GBP387.6 million (2003: GBP348.7 million). Turnover from wholesale customers represented 43% of total turnover in the three and nine months ended 30 September 2004 (2003: 40% and 41%).

Switched turnover for the three months increased by 13% to GBP103.8 million (2003: GBP91.5 million) and for the nine months increased by 16% to GBP309.0 million (2003: GBP265.9 million). Non-switched turnover for the three months decreased by 1% to GBP26.3 million (2003: GBP26.7 million) and for the nine months decreased by 5% to GBP78.5 million (2003: GBP82.5 million).

Cost of Sales

Cost of sales for the three months ended 30 September 2004 increased by 3% to GBP254.4 million (2003: GBP247.3 million). Cost of sales for the nine months ended 30 September 2004 increased by 4% to GBP750.1 million (2003: GBP723.3 million).

Interconnection and network costs for the three months ended 30 September 2004 increased by 7% to GBP207.8 million (2003: GBP193.3 million). Interconnection and network costs for the nine months ended 30 September 2004 increased by 7% to GBP610.9 million (2003: GBP569.3 million). The increases reflected the overall increase in switched revenues.

Network depreciation for the three months ended 30 September 2004 decreased by 14% to GBP46.6 million (2003: GBP54.0 million). Network depreciation for the nine months ended 30 September 2004 decreased by 10% to GBP139.2 million (2003: GBP154.0 million). The decreases reflected the effect of some assets being fully depreciated, partially offset by further investment in fixed assets to support the growth in demand for services and new service developments.

Operating Expenses

Operating expenses for the three months ended 30 September 2004 increased by 2% to GBP69.9 million (2003: GBP68.5 million). Operating expenses for the nine months ended 30 September 2004 decreased by 3% to GBP199.2 million (2003: GBP204.8 million).

Selling, general and administrative (SG&A) expenses for the three months ended 30 September 2004 increased by 6% to GBP62.5 million (2003: GBP58.8 million). SG&A expenses for the nine months ended 30 September 2004 increased by 1% to GBP177.0 million (2003: GBP175.6 million). SG&A expenses as a proportion of turnover for the three and nine months was 20.6% and 19.5% (2003: 19.9% and 20.4%). The increases in SG&A expenses reflected the initial costs associated with the establishment of COLT's presence in India and increased personnel costs.

Other depreciation and amortisation for the three months ended 30 September 2004 decreased by 25% to GBP7.3 million (2003: GBP9.8 million). Other depreciation and amortisation for the nine months ended 30 September 2004 decreased by 24% to GBP22.1 million (2003: GBP29.2 million). The reductions reflected the effect of some assets being fully depreciated, partially offset by increased investment in customer service and other support systems.

Interest Receivable, Interest Payable and Similar Charges

Interest receivable for the three months ended 30 September 2004 decreased by 7% to GBP5.6 million (2003: GBP6.0 million). Interest receivable for the nine months ended 30 September 2004 decreased by 18% to GBP16.6 million (2003: GBP20.2 million). The decreases were as a result of reduced average balances of cash and investments in liquid resources following the purchase and redemption of GBP144.5 million of the Company's outstanding notes during 2003.

Interest payable and similar charges for the three months ended 30 September 2004 decreased by 24% to GBP16.9 million (2003: GBP22.1 million). Interest payable and similar charges for the nine months ended 30 September 2004 decreased by 24% to GBP51.5 million (2003: GBP67.3 million). These decreases were due primarily to the reduction in debt levels following the purchase and redemption of GBP144.5 million of the Company's outstanding notes during 2003.

Interest payable and similar charges for the three months included GBP8.4 million (2003: GBP8.6 million) of interest and accretion on convertible debt and GBP8.7 million (2003: GBP12.9 million) of interest and accretion on non-convertible debt. Interest payable and similar charges for the nine months included GBP25.2 million (2003: GBP25.8 million) of interest and accretion on convertible debt and GBP26.1 million (2003: GBP39.4 million) of interest and accretion on non-convertible debt. In the three and nine months there was also GBP(0.2) million and GBP0.1 million respectively of other interest and unwinding of discounts on provisions. Interest payable and similar charges for the quarter comprised GBP11.2 million and GBP5.7 million of interest and accretion respectively.

Gain on Purchase of Debt

Gains arising on the purchase of GBP13.2 million of debt during the three months ended 30 September 2004 were GBP0.2 million (2003: nil). Gains arising on the purchase of GBP13.2 million of debt during the nine months ended 30 September 2004 were GBP0.2 million (2003: GBP7.6 million).

Exchange Gains

For the three months ended 30 September 2004 there were exchange gains of GBP0.1 million (2003: GBP0.9 million). For the nine months ended 30 September 2004 there were exchange gains of GBP0.2 million (2003: GBP4.1 million). The exchange gains in the prior year 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

COLT had no taxable profits in the nine months ended 30 September 2003 and 2004.

Financial Needs and Resources



 FREE CASHFLOW               Three months ended   Nine months ended
                                30 September        30 September
                              2003      2004       2003      2004
                             GBP m     GBP m      GBP m     GBP m

 EBITDA                       43.3      33.4      115.2     118.1

 Changes in working
 capital and                   1.9       2.9       (2.2)      6.3
 provisions

 Interest paid (net)          (3.2)     (4.8)     (21.3)    (17.7)

 Capital expenditure         (32.9)    (32.5)    (108.3)    (89.4)

 Free cash inflow (outflow)    9.1      (1.0)     (16.6)     17.3

There was a free cash outflow of GBP1.0 million in the three months ended 30 September 2004 (2003: inflow of GBP9.1 million). For the nine months ended 30 September 2004 there was an inflow of GBP17.3 million (2003: outflow of GBP16.6 million). The improvement in free cash flow for the nine months was driven by reduced capital expenditure, lower payments against provisions and reduced interest payments.

Net cash outflows from financing for the three months ended 30 September 2004 were GBP13.2 million (2003: inflow of GBP0.5 million). Net cash outflows from financing for the nine months ended 30 September 2004 were GBP12.7 million (2003: outflow of GBP23.3 million). COLT had balances of cash and investments in liquid resources at 30 September 2004 of GBP791.4 million compared with GBP802.4 million at 31 December 2003.

On 19 October 2004 all of the outstanding DM600 million 2% Senior Convertible Notes due August 2005 and the EUR368 million 2% Senior Convertible Notes due December 2006 were redeemed. The redemptions were at the accreted principal amount of the Notes plus accrued interest and were funded out of cash and liquid resources. The aggregate amount payable was GBP324 million.



                      Consolidated Profit and Loss Account

                           Three months ended 30 September
                2003       2004         2004        2004        2004
                         Before    Exceptional      After       After
                     Exceptional     Items     Exceptional Exceptional
                          Items                      Items      Items
             GBP'000    GBP'000     GBP'000        GBP'000      $'000

 Turnover   295,368      303,710        --         303,710    549,411

 Cost of
 sales

 Inter
 connect
 and       (193,322)    (207,813)       --        (207,813)  (375,934)
 network

 Network    (53,977)     (46,611)       --         (46,611)   (84,319)
 deprecia
 tion
           (247,299)    (254,424)       --        (254,424)  (460,253)

 Gross
 profit      48,069       49,286        --          49,286     89,158

 Operating
 expenses

 Selling,
 general    (58,790)     (62,522)       --         (62,522)  (113,102)
 and
 admini
 strative


 Other
 deprecia
 tion       (9,756)      (7,337)       --          (7,337)   (13,273)
 and
 amortisa
 tion
           (68,546)     (69,859)       --         (69,859)  (126,375)

 Operating
 loss      (20,477)     (20,573)       --         (20,573)   (37,217)

 Other
 income
 (expense)
 Interest    6,010        5,600        --           5,600     10,130
 receivable
 Gain on
 purchase       --           --       205             205        371
 of debt

 Interest
 payable   (22,139)     (16,882)       --         (16,882)   (30,540)
 and
 similar
 charges

 Exchange
 gain          880          104        --             104        188
           (15,249)     (11,178)      205         (10,973)   (19,851)

 Loss on
 ordinary  (35,726)     (31,751)      205         (31,546)   (57,068)
 activities
 before
 taxation

 Taxation       --           --        --              --         --

 Loss for
 period    (35,726)     (31,751)      205         (31,546)   (57,068)

 Basic
 and
 diluted  GBP(0.02)    GBP(0.02)  GBP0.00        GBP(0.02)    $(0.04)
 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

                      2003         2003          2003
                     Before     Exeptional      After
                   Exceptional    Items      Exceptional
                     Items                      Items
                     GBP'000     GBP'000       GBP'000

 Turnover             860,055         --        860,055

 Cost of sales
 Interconnect and    (569,265)        --       (569,265)
  network
 Network             (154,039)        --       (154,039)
  depreciation
                     (723,304)        --       (723,304)

 Gross profit         136,751         --        136,751

 Operating expenses
 Selling, general    (175,589)        --       (175,589)
  and
 administrative
 Other                (29,247)        --        (29,247)
  depreciation and
  amortisation
                     (204,836)        --       (204,836)

 Operating loss       (68,085)        --        (68,085)

 Other income
 (expense)
 Interest              20,186         --         20,186
  receivable

 Gain on purchase          --      7,589          7,589
  of debt
 Interest payable     (67,307)        --        (67,307)
 and similar
 charges
 Exchange gain          4,058         --          4,058
                      (43,063)     7,589        (35,474)

 Profit (loss) on    (111,148)     7,589       (103,559)
 ordinary
 activities
 before taxation
 Taxation                  --         --             --
 Loss for            (111,148)     7,589       (103,559)
 period
 Basic and           GBP(0.07)   GBP0.00       GBP(0.07)
  diluted loss per
  share


                         2004         2004       2004           2004
                        Before     Exceptional   After          After
                     Exceptional      Items    Exceptional Exceptional
                         Items                    Items          Items
                        GBP'000     GBP'000      GBP'000         $'000

 Turnover             906,053          --        906,053    1,639,050

 Cost of sales
 Interconnect and    (610,931)         --       (610,931)  (1,105,174)
  network
 Network             (139,155)         --       (139,155)    (251,731)
  depreciation
                     (750,086)         --       (750,086)  (1,356,905)

 Gross profit         155,967          --        155,967      282,145

 Operating expenses
 Selling, general    (177,023)         --       (177,023)   (320,235)
 and
 administrative
 Other                (22,129)         --        (22,129)    (40,031)
 depreciation and
 amortisation
                     (199,152)         --       (199,152)   (360,266)

 Operating loss       (43,185)         --        (43,185)    (78,121)

 Other income
 (expense)
 Interest              16,637          --         16,637      30,096
 receivable
 Gain on purchase          --         205            205         371
 of debt
 Interest payable     (51,477)         --        (51,477)    (93,122)
 and similar
 charges
 Exchange gain            222          --            222         402
                      (34,618)        205        (34,413)    (62,253)

 Profit (loss) on     (77,803)        205        (77,598)   (140,374)
 ordinary
 activities
 before taxation
 Taxation                  --          --             --          --
 Loss for             (77,803)        205        (77,598)   (140,374)
 period
 Basic and           GBP(0.05)    GBP0.00       GBP(0.05)     $(0.09)
 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         Nine months ended
                       30 September              30 September
             2003       2004       2004     2003       2004     2004
           GBP'000   GBP'000      $'000   GBP'000    GBP'000   $'000

 Loss for  (35,726)  (31,546)   (57,068)  (103,559) (77,598)(140,374)
 period
 Exchange    3,473     7,371     13,335     28,968  (11,869) (21,471)
 differences
 Total     (32,253)  (24,175)   (43,733)   (74,591) (89,467)(161,845)
 recognised
 losses


 Consolidated Reconciliation of Changes in Equity Shareholders' Funds

                Three months ended 30 September
                   2003       2004         2004
                GBP'000    GBP'000        $'000

 Loss for        (35,726)   (31,546)     (57,068)
  period
 Issue of            610         --           --
 share capital
 Shares to be       (117)        --           --
  issued
 Transfer             --         --           --
  investment in
  own shares
 Exchange           3,473     7,371       13,335
  differences
 Net changes      (31,760)  (24,175)     (43,733)
  in equity
 shareholders'
 funds
 Opening          912,562    797,933   1,443,461
 equity
 shareholders'
 funds
 Closing equity   880,802    773,758   1,399,728
 shareholders'
 funds


                 Nine months ended 30 September
                     2003       2004        2004
                  GBP'000    GBP'000       $'000

 Loss for        (103,559)   (77,598)   (140,374)
 period
 Issue of             612        742       1,342
 share capital
 Shares to be        (229)      (215)       (389)
 issued
 Transfer             --       (195)       (353)
 investment in
 own shares
 Exchange          28,968   (11,869)    (21,471)
 differences
 Net changes      (74,208)  (89,135)   (161,245)
 in equity
 shareholders'
 funds
 Opening          955,010   862,893   1,560,973
 equity
 shareholders'
 funds
 Closing equity   880,802   773,758   1,399,728
 shareholders'
 funds


                           Consolidated Balance Sheet

                              At 31         At 30 September 2004
                            December
                              2003
                             GBP'000       GBP'000          $'000

 Fixed assets
 Intangible fixed
 assets (net)                  9,493         7,691         13,913
 Tangible fixed
 assets (cost)             2,934,503     2,951,025      5,338,404
 Accumulated depreciation (1,590,218)   (1,701,121)    (3,077,328)
 Tangible fixed
 assets (net)              1,344,285     1,249,904      2,261,076
 Investments in
 own shares                      195            --            --
 Total fixed assets        1,353,973     1,257,595      2,274,989

 Current assets
 Trade debtors               199,849       194,269        351,433
 Prepaid expenses
 and other                    66,834        46,444         84,017
 debtors
 Investments in
 liquid resources            742,143       736,077      1,331,563
 Cash at bank and in hand     60,239        55,290        100,020
 Total current assets      1,069,065     1,032,080      1,867,033

                           2,423,038     2,289,675      4,142,022

 Capital and reserves
 Called up share capital      37,754        37,776         68,337
 Share premium             2,315,904     2,316,624      4,190,773
 Merger reserve               27,359        27,359         49,492
 Shares to be issued             215           --              --
 Profit and loss account  (1,518,339)   (1,608,001)    (2,908,874)
 Equity shareholders'
 funds                       862,893       773,758      1,399,728

 Provisions for
 liabilities and              62,860        48,966         88,579
 charges

 Creditors
 Amounts falling due within
 one year
 Convertible debt                 --       315,866       571,402
 Other                       352,736       351,952       636,681
 Amounts falling due after
 more than one year
 Convertible debt            700,131      367,110       664,102
 Non-convertible debt        444,418      432,023       781,530
 Total amounts falling due 1,144,549      799,133     1,445,632
 after more than one year
 Total creditors           1,497,285    1,466,951     2,653,715
 Total liabilities,
 capital and               2,423,038    2,289,675     4,142,022
 reserves



                        Consolidated Cash Flow Statement

                        Three months ended 30 September
                           2003       2004      2004
                          GBP'000   GBP'000    $'000

 Net cash inflow from     45,264    36,354    65,765
 operating activities

 Returns on investments
 and servicing of
 finance
 Interest received         6,023     5,550    10,040
 Interest paid, finance   (9,251)  (10,378)  (18,774)
 costs and similar
 charges

 Net cash outflow from    (3,228)   (4,828)   (8,734)
 returns on investments
 and servicing of
 finance

 Capital expenditure and
 financial investment
 Purchase of tangible    (32,909)  (32,574)  (58,926)
 fixed assets
 Sale of tangible fixed       --        86       155
 assets

 Net cash outflow from   (32,909)  (32,488)  (58,771)
 capital expenditure
 and financial
 investment

 Management of liquid      3,816    (4,170)   (7,544)
 resources

 Financing
 Issue of ordinary           473        --        --
 shares
 Purchase of convertible      --    (1,635)   (2,958)
 debt
 Purchase of                  --   (11,612)  (21,006)
 non-convertible debt

 Net cash inflow             473   (13,247)  (23,964)
 (outflow) from
 financing

 Increase (decrease)      13,416   (18,379)  (33,248)
 in cash




                                Nine months ended 30 September
                                  2003       2004       2004
                                 GBP'000    GBP'000    $'000

 Net cash inflow from           112,951    124,385    225,012
 operating activities

 Returns on investments
 and servicing of
 finance
 Interest received              20,277     15,902     28,767
 Interest paid, finance        (41,546)   (33,639)   (60,853)
 costs and similar
 charges

 Net cash outflow from         (21,269)   (17,737)   (32,086)
 returns on investments
 and servicing of
 finance

 Capital expenditure and
 financial investment
 Purchase of tangible        (108,300)  (93,345)   (168,860)
 fixed assets
 Sale of tangible fixed            --     3,970       7,182
 assets

 Net cash outflow from       (108,300)  (89,375)   (161,678)
 capital expenditure
 and financial
 investment

 Management of liquid         46,659    (8,075)    (14,608)
 resources

 Financing
 Issue of ordinary               474       527         953
 shares
 Purchase of convertible     (14,166)   (1,635)     (2,958)
 debt
 Purchase of                  (9,606)  (11,612)    (21,006)
 non-convertible debt

 Net cash inflow             (23,298)  (12,720)    (23,011)
 (outflow) from
 financing

 Increase (decrease)           6,743    (3,522)     (6,371)
 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 Group for the three and nine months ended 30 September 2003 and 2004.

The financial statements for the three and nine months ended 30 September 2003 and 2004 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 generally accepted accounting principles in the U.K. All adjustments, with the exception of the exceptional items described in Note 4, were of a normal recurring nature. The balance sheet at 31 December 2003 has been extracted from the Group's 2003 statutory accounts.

Accounting policies and presentation applied are consistent with those applied in preparing the Group's financial statements for the year ended 31 December 2003 except for the adoption of UITF 38 "Accounting for ESOP trusts". Applying the UITF has resulted in the balance sheet reclassification of the GBP195,000 investment in own shares from fixed assets to the profit and loss account.

Certain British pound amounts in the financial statements have been translated into U.S. dollars at 30 September 2004 and for the periods then ended at the rate of $1.809 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 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.

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.

Switched turnover comprises services that involve the transmission of voice, data or video through a switching centre. Non-switched turnover includes managed and non-managed network services, 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 2003 and 2004, turnover by segment was as follows:



                    Three months ended 30 September 2003

                                            North
                   Corporate   Wholesale    Region
                     GBP'000     GBP'000    GBP'000

 Switched            85,428       91,469     52,271
 Non-switched        91,202       26,695     41,720
 Other                  533           41         --
 Total              177,163      118,205     93,991


                   Three months ended 30 September 2003

                    Central      South
                     Region     Region       Total
                     GBP'000    GBP'000     GBP'000

 Switched             82,566     42,060     176,897
 Non-switched         41,594     34,583     117,897
 Other                   574        --          574
 Total               124,734     76,643     295,368


                 Three months ended 30 September 2004

                                             North
                    Corporate   Wholesale    Region
                      GBP'000     GBP'000    GBP'000

 Switched             81,000      103,813     52,404
 Non-switched         90,727       26,343     40,726
 Other                 1,827           --        159
 Total               173,554      130,156     93,289

                 Three months ended 30 September 2004

                    Central      South
                     Region     Region      Total
                     GBP'000    GBP'000    GBP'000

 Switched             95,578     36,831     184,813
 Non-switched         43,293     33,051     117,070
 Other                 1,228        440       1,827
 Total               140,099     70,322     303,710

For the nine months ended 30 September 2003 and 2004, turnover by segment was as follows:



                  Nine months ended 30 September 2003


                                              North
                  Corporate     Wholesale     Region
                   GBP'000       GBP'000      GBP'000

 Switched           248,796       265,904    155,527
 Non-switched       261,609        82,483    123,944
 Other                  909           354         79
 Total              511,314       348,741    279,550


                  Nine months ended 30 September 2003


                    Central    South
                    Region     Region      Total
                    GBP'000   GBP'000     GBP'000

 Switched           238,255   120,918     514,700
 Non-switched       120,181    99,967     344,092
 Other                  905       279       1,263
 Total              359,341   221,164     860,055




                    Nine months ended 30 September 2004

                                         North
               Corporate   Wholesale     Region
                GBP'000     GBP'000      GBP'000

 Switched        250,908    308,979      161,889
 Non-switched    265,114     78,536      122,116
 Other             2,403        113          275
 Total           518,425    387,628      284,280





              Nine months ended 30 September 2004

                   Central     South
                    Region      Region    Total
                    GBP'000    GBP'000    GBP'000

 Switched           280,956    117,042    559,887
 Non-switched       126,168     95,366    343,650
 Other                1,352        889      2,516
 Total              408,476    213,297    906,053

3. Loss per share



                        Three months ended
                           30 September
                       2003      2004      2004
                      GBP'000   GBP'000   $'000
 Loss for period     (35,726)  (31,546)  (57,068)

 Weighted average  1,508,037  1,511,021 1,511,021
 number of
 ordinary
 shares ('000)

 Basic and diluted  GBP(0.02) GBP(0.02)   $(0.04)
 loss per share


                        Nine months ended
                           30 September
                       2003       2004      2004
                     GBP'000    GBP'000     $'000
 Loss for period    (103,559)   (77,598)  (140,374)

 Weighted average  1,507,463  1,510,784  1,510,784
 number of
 ordinary
 shares ('000)

 Basic and diluted  GBP(0.07)   GBP(0.05)   $(0.09)
 loss per share

4. Exceptional items

Gain on purchase of debt

During the three and nine months ended 30 September 2004, the Group purchased some of its debt for a cash outlay of GBP13.2 million, resulting in an exceptional gain of GBP0.2 million. There were no purchases of debt in the three months ended 30 September 2003. Exceptional gains arising on the purchase of debt during the nine months ended 30 September 2003 amounted to GBP7.6 million.

5. Cash flow reconciliations

5a. Reconciliation of operating loss to net cash inflow from operating activities



                        Three months ended
                           30 September
                      2003      2004      2004
                     GBP'000   GBP'000    $'000

 Operating loss      (20,477) (20,573)  (37,217)
 Depreciation and     63,733   53,948    97,592
 amortisation
 Exchange                (19)    (846)   (1,530)
 differences
 Decrease in debtors  11,206      272       492
 (Decrease) increase    (935)   6,856    12,403
 in creditors
 Movement in          (8,244)  (3,303)   (5,975)
 provisions for
 liabilities and
 charges
 Net cash inflow      45,264   36,354    65,765
 from operating
 activities


                         Nine months ended
                            30 September
                       2003     2004       2004
                      GBP'000  GBP'000     $'000

 Operating loss      (68,085)  (43,185)  (78,121)
 Depreciation and    183,286   161,284   291,762
 amortisation
 Exchange                123        56       101
 differences
 Decrease in debtors  15,020    21,465    38,830
 (Decrease) increase   3,325    (2,477)   (4,481)
 in creditors
 Movement in         (20,718)  (12,758)  (23,079)
 provisions for
 liabilities and
 charges
 Net cash inflow     112,951   124,385   225,012
 from operating
 activities

5b. EBITDA reconciliation



                        Three months ended
                            30 September

                      2003     2004      2004
                     GBP'000  GBP'000    $'000

 Net cash inflow     45,264   36,354    65,765
 from operating
 activities
 Adjusted for:
 Exchange                19      846     1,530
 differences

 Movement in        (11,206)    (272)     (492)
 debtors
 Movement in            935   (6,856)  (12,403)
 creditors

 Total working      (10,271)  (7,128)  (12,895)
 capital
 adjustments

 Movement in          8,244    3,303     5,975
 provisions
 for liabilities
 and charges
 EBITDA              43,256   33,375    60,375


                        Nine months ended
                          30 September

                      2003     2004      2004
                     GBP'000  GBP'000    $'000

 Net cash inflow    112,951   124,385   225,012
 from operating
 activities
 Adjusted for:
 Exchange              (123)      (56)     (101)
 differences

 Movement in        (15,020)  (21,465)  (38,830)
 debtors
 Movement in         (3,325)    2,477     4,481
 creditors

 Total working      (18,345)  (18,988)  (34,349)
 capital
 adjustments

 Movement in         20,718    12,758    23,079
 provisions
 for liabilities
 and charges
 EBITDA             115,201   118,099   213,641

6. Changes in cash and investments in liquid resources



              Three months ended 30 September
                   2003      2004          2004
                  GBP'000   GBP'000       $'000

 Beginning        920,519   793,976    1,436,303
 of period
 Net (decrease)    (3,816)    4,170        7,544
 increase in
 investments
 in liquid
 resources before
 exchange
 differences
 Effects of         4,715    10,467       18,935
 exchange
 differences
 on
 investments
 in liquid
 resources
 Net               13,416   (18,379)     (33,248)
 increase
 (decrease)
 in cash
 before
 exchange
 differences
 Effects of         (430)     1,133        2,049
 exchange
 differences
 on cash
 End of           934,404   791,367    1,431,583
 period


                 Nine months ended 30 September
                    2003     2004        2004
                   GBP'000  GBP'000      $'000

 Beginning        934,882   802,382   1,451,509
 of period
 Net (decrease)   (46,659)    8,075      14,608
 increase in
 investments
 in liquid
 resources before
 exchange
 differences
 Effects of        37,268   (14,141)    (25,581)
 exchange
 differences
 on
 investments
 in liquid
 resources
 Net                6,743   (3,522)     (6,371)
 increase
 (decrease)
 in cash
 before
 exchange
 differences
 Effects of         2,170    (1,427)    (2,582)
 exchange
 differences
 on cash
 End of           934,404   791,367  1,431,583
 period

7. 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
                     2003      2004      2004
                    GBP'000   GBP'000    $'000

 Loss for period    (35,726)  (31,546)  (57,068)
 Adjustments:
 Deferred              (292)      441       798
 compensation (i),
 (ii)
 Amortisation of        544       502       908
 intangibles (iii)
 Capitalised           (715)     (810)   (1,465)
 interest, net of
 depreciation (iv)
 Profit on sale of      262       261       472
 IRUs (v)
 Warrants (vi)          140      (352)     (637)
 Installation           773       855     1,547
 revenue (vii)
 Direct costs        (1,401)     (796)   (1,440)
 attributable to
 installation
 revenue (vii)
 Impairment  (viii)  (2,805)   (2,805)   (5,073)
 Loss for period    (39,220)  (34,250)  (61,958)
 under US GAAP
 Weighted         1,508,037  1,511,021  1,511,021
 average
 number of
 ordinary
 shares ('000)
 Basic and diluted GBP(0.03)  GBP(0.02)  GBP(0.04)
 loss per share


                          Nine months ended
                            30 September
                      2003      2004      2004
                     GBP'000  GBP'000     $'000

 Loss for period   (103,559) (77,598)  (140,374)
 Adjustments:
 Deferred              (815)     310        561
 compensation (i),
 (ii)
 Amortisation of      1,612    1,508      2,728
 intangibles (iii)
 Capitalised         (2,268)  (2,816)    (5,094)
 interest, net of
 depreciation (iv)
 Profit on sale of      783      783      1,416
 IRUs (v)
 Warrants (vi)          127     (929)    (1,681)
 Installation         2,044    4,252      7,692
 revenue (vii)
 Direct costs        (2,672)  (4,180)    (7,562)
 attributable to
 installation
 revenue (vii)
 Impairment  (viii)  (8,416)  (8,415)   (15,223)
 Loss for period   (113,164) (87,085)  (157,537)
 under US GAAP
 Weighted         1,507,463  1,510,784  1,510,784
 average
 number of
 ordinary
 shares ('000)
 Basic and diluted GBP(0.08)  GBP(0.06) GBP(0.10)
 loss per share

(i) The Group acquired ImagiNet in July 1998 and Fitec in July 2001. The consideration for both of these purchases included deferred shares and payments. The final elements of the consideration were paid in July 2003.

Under U.K. GAAP, the deferred shares and payments were included in the purchase consideration. The excess purchase consideration over the fair value of assets and liabilities acquired was attributed to goodwill and is being amortised over its estimated economic life.

Under U.S. GAAP, these deferred shares and payments were excluded from the purchase consideration and recognised as compensation expense in the profit and loss account over the period in which the payments vested. Total compensation charge for the three and nine months ended 30 September 2003 was GBPnil million and GBP0.3 million respectively. Because no payments were outstanding in the nine months to 30 September 2004, the total compensation charge for the period was GBPnil.

(ii) The Group 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 vest.

Also under U.S. GAAP, an employer's 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 for 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 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 cost for the three and nine months ended 30 September 2003 was a charge of GBP0.3 million and GBP0.5 million respectively and for the three and nine months ended 30 September 2004 was a credit of GBP0.4 million and GBP0.3 million respectively.

(iii) Under U.S. GAAP, goodwill with an indefinite useful life 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.

The Group had unamortised goodwill of GBP8.1 million at 30 September 2004, 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 GBP0.5 million and GBP1.6 million for the three and nine months ended 30 September 2003 and for the three and nine months ended 30 September 2004 was GBP0.5 million and GBP1.5 million respectively.

(iv) Adjustment to reflect interest amounts capitalised under U.S. GAAP, less depreciation for the period.

(v) In 2000 and 2001 the Group 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 profit under U.S. GAAP on the sale of IRUs concluded in prior years.

(vi) The Group 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 2003 and 2004, customer installation revenues together with attributable direct costs are recognised over the expected customer relationship period. At 30 September 2004, the cumulative increase in net losses under SAB 101 was GBP0.7 million, representing cumulative deferred installation revenues of GBP69.1 million and costs of GBP68.4 million.

(viii) During the quarter ended 30 September 2002, the Group recorded charges of GBP443.8 million under U.S. GAAP to reflect the impairment of goodwill, network and non-network fixed assets, resulting in a GAAP difference of GBP107.2 million at that time. For the three and nine months ended 30 September 2004 depreciation in the amount of GBP2.8 million and GBP8.4 million was recorded in respect of the assets which had not been impaired for U.S. GAAP purposes.

(ix) The Group operates a number of employee share schemes on which it incurs employer payroll taxes. Under U.K. GAAP, the cost of employer payroll taxes is recognised over the period from the date of grant to the end of the performance period. Under U.S. GAAP, the cost is recognised when the tax obligation arises.

b. Effects of conforming to U.S. GAAP - impact on net equity



                                       At 30 September 2004
                                       GBP'000           $'000

 Equity shareholders' funds under      773,758       1,399,728
  U.K. GAAP
 U.S. GAAP adjustments:
  Adjustment for deferred             (10,456)        (18,915)
   compensation (i), (ii)
  Unearned compensation (i), (ii)         (25)            (45)
  Additional paid in share             10,481          18,960
   capital (i), (ii)
  Amortisation of intangibles           7,524          13,611
   (iii)
  Warrants (vi)                           122             220
  Payroll taxes on employee share         385             696
   schemes (ix)
  Impairment (viii)                    84,754         153,320
  Profit on sale IRUs (v)             (16,940)        (30,644)
  Capitalised interest, net of         35,064          63,431
   depreciation (iv)
  Deferred profit on                     (690)         (1,248)
   installations (vii)
 Approximate equity shareholders'     883,977       1,599,114
  funds under U.S. GAAP

(i) - (ix) See note a. for description and adjustment.

c. Effects of conforming to U.S. GAAP - stock options

At 30 September 2004 the Group had certain options outstanding under its Option Plan. As permitted by SFAS No.123, "Accounting for Stock-Based Compensation", the Group 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 Group's loss for the three months ended 30 September 2004 would have been GBP36.5 million ($66.1 million).

Additional Information

Constant currency turnover analysis

Turnover for the three months ended 30 September 2004, compared to the three months ended 30 June 2004 and 30 September 2003 and after excluding the impact of foreign exchange, is shown below:



                          Compared to Q2 2004

               Q3 2004    Q3 2004      % Growth
              GBP'000     GBP'000
               Actual    Adjusted  Actual  Adjusted
                            (1)               (1)
 Corporate
 Switched        81,000     80,516     0.8%     0.2%
 Non-switched    92,554     92,009     1.9%     1.3%
 and Other
 Total          173,554    172,525     1.4%     0.8%

 Wholesale
 Switched       103,813    103,137   (3.3%)   (4.0%)
 Non-switched    26,343     26,188    16.3%    15.6%
 and Other
 Total          130,156    129,325     0.1%   (0.6%)

 Total
 Switched       184,813    183,653   (1.5%)   (2.2%)
 Non-switched   118,897    118,197     4.7%     4.1%
 and Other
 Total          303,710    301,850     0.8%     0.2%

                          Compared to Q3 2003

                        Q3 2004      % Growth
                        GBP'000
                       Adjusted  Actual Adjusted
                         (2)                (2)
 Corporate
 Switched                 83,434  (5.2%)   (2.3%)
 Non-switched             95,442    0.9%     4.0%
 and Other
 Total                   178,876  (2.0%)     1.0%

 Wholesale
 Switched                107,510   13.5%    17.5%
 Non-switched             27,178  (1.5%)     1.7%
 and Other
 Total                   134,688   10.1%    13.9%

 Total
 Switched                190,944    4.5%     7.9%
 Non-switched            122,620    0.4%     3.5%
 and Other
 Total                   313,564    2.8%     6.2%

(1) Q3 2004 turnover has been restated using Q2 2004 exchange rates, and compared to turnover which was reported in Q2 2004

(2) Q3 2004 turnover has been restated using Q3 2003 exchange rates, and compared to turnover which was reported in Q3 2003



                                Q3 03   Q2 04   Q3 04  Gro    Gro
                                                      -wth   -wth
                                                      Q3 04  Q3 04
                                                     -Q2 04 -Q3 03
 Customers (at end of quarter)
 North Region                    5,334   5,736   5,724  0%     7%
 Central                         6,466   7,929   7,960  0%     23%
 Region
 South Region                    5,605   5,940   6,041  2%     8%
                                17,405  19,605  19,725  1%     13%
 Customers (at end of quarter)
 Corporate                      16,532  18,432  18,518  0%     12%
 Wholesale                         873   1,173   1,207  3%     38%
                                17,405  19,605  19,725  1%     13%
 Switched minutes (million) (for
 quarter)
 North Region                    1,519   1,489   1,425 (4%)   (6%)
 Central                         2,969   3,593   3,580  0%     21%
 Region
 South Region                    1,010   1,114   1,060 (5%)    5%
                                5,498   6,196   6,065 (2%)    10%
 Private wire VGEs (000) (at end
 of quarter)
 North Region                   10,125  11,737  12,619  8%     25%
 Central                        10,621  13,013  15,623  20%    47%
 Region
 South Region                    4,432   5,642   6,431  14%    45%
                                25,178  30,392  34,673  14%    38%
 Headcount (at end of quarter)
 North Region                    1,597   1,568   1,603  2%      0%
 Central                         1,461   1,361   1,330 (2%)    (9%)
 Region
 South Region                    1,114     928     956  3%     (14%)
                                 4,172   3,857   3,889  1%      (7%)

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. Customers represent the number of customers who purchase network and data solutions products. Headcount comprises active employees excluding temporary and contract workers.

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. COLT Telecom Group plc 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 Group's actual results and could cause the Group's actual results for future periods to differ materially from those expressed in any forward looking statement made by or on behalf of the Group. 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 Group to expand and develop its networks in new markets, (iii) the Group's ability to manage its growth, (iv) the nature of the competition that the Group will encounter and (v) unforeseen operational or technical problems. The Group 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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