COLT Telecom Group plc Announces Results for The Three and Twelve Months Ended 31 December 2003 -- Part 2


LONDON, Feb. 24, 2004 (PRIMEZONE) --


 Consolidated Profit and Loss Account


                               Three months ended 31 December
                            2002            2002            2002
                           Before                           After
                         Exceptional     Exceptional     Exceptional
                           Items            Items           Items
                          GBP'000          GBP'000         GBP'000
  Turnover             263,176          --              263,176
  Cost of sales
  Interconnect and     (175,699)        --              (175,699)
  network
  Network              (50,765)         --              (50,765)
  depreciation
                       (226,464)        --              (226,464)
  Gross profit         36,712           --              36,712
  Operating expenses
  Selling, general     (59,815)         --              (59,815)
  and administrative
  Other depreciation   (9,136)          --              (9,136)
  and amortisation
                       (68,951)         --              (68,951)
  Operating profit     (32,239)         --              (32,239)
  (loss)
  Other income
  (expense)
  Interest             8,364            --              8,364
  receivable
  Interest payable     (23,594)         --              (23,594)
  and similar
  charges
  Amounts written      --               (409)           (409)
  off investment in
  own shares
  Gain on purchase     --               --              --
  of debt
  Exchange gain        2,643            --              2,643
                       (12,587)         (409)           (12,996)
  Profit (loss) on     (44,826)         (409)           (45,235)
  ordinary
  activities before
  taxation
  Taxation             --               --              --
  Profit (loss) for    (44,826)         (409)           (45,235)
  period
  Basic and diluted    GBP(0.03)        GBP(0.00)       GBP(0.03)
  loss per share




                             Three months ended 31 December
                      2003         2003         2003         2003
                     Before                     After        After
                   Exceptional  Exceptional  Exceptional  Exceptional
                     Items        Items        Items         Items
                    GBP'000      GBP'000      GBP'000        $'000
  Turnover         306,263      --           306,263      546,434
  Cost of sales
  Interconnect     (197,677)    --           (197,677)    (352,695)
  and network
  Network          (50,378)     --           (50,378)     (89,884)
  depreciation
                   (248,055)    --           (248,055)    (442,579)
  Gross profit     58,208       --           58,208       103,855
  Operating
  expenses
  Selling,         (60,339)     2,453        (57,886)     (103,280)
  general and
  administrative
  Other            (9,284)      --           (9,284)      (16,565)
  depreciation
  and amortisation

                   (69,623)     2,453        (67,170)     (119,845)
  Operating        (11,415)     2,453        (8,962)      (15,990)
  profit (loss)
  Other income
  (expense)
  Interest         6,532        --           6,532        11,654
  receivable
  Interest         (20,988)     --           (20,988)     (37,447)
  payable and
  similar
  charges
  Amounts          --           --           --           --
  written off
  investment in
  own shares
  Gain on          --           --           --           --
  purchase of
  debt
  Exchange gain    2,329        --           2,329        4,156
                   (12,127)     --           (12,127)     (21,637)
  Profit (loss)    (23,542)     2,453        (21,089)     (37,627)
  on ordinary
  activities
  before
  taxation
  Taxation         --           --           --           --
  Profit (loss)    (23,542)     2,453        (21,089)     (37,627)
  for period
  Basic and        GBP(0.02)       GBP0.01   GBP(0.01)    $(0.02)
  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



                              Twelve months ended 31 December
                           2002            2002             2002
                           Before                           After
                        Exceptional     Exceptional      Exceptional
                           Items           Items           Items
                          GBP'000         GBP'000         GBP'000
  Turnover             1,027,258       --              1,027,258
  Cost of sales
  Interconnect and     (713,615)       (18,320)        (731,935)
  network
  Network              (212,009)       (508,000)       (720,009)
  depreciation
                       (925,624)       (526,320)       (1,451,944)
  Gross profit         101,634         (526,320)       (424,686)
  (loss)
  Operating expenses
  Selling, general     (242,095)       (18,934)        (261,029)
  and administrative
  Other depreciation   (49,879)        (43,000)        (92,879)
  and amortisation
                       (291,974)       (61,934)        (353,908)
  Operating profit     (190,340)       (588,254)       (778,594)
  (loss)
  Other income
  (expense)
  Interest             38,108          --              38,108
  receivable
  Interest payable     (96,300)        --              (96,300)
  and similar
  charges
  Amounts written      --              (409)           (409)
  off investment in
  own shares
  Gain on purchase     --              101,668         101,668
  of debt
  Exchange gain        12,401          4,844           17,245
                       (45,791)        106,103         60,312
  Profit (loss) on     (236,131)       (482,151)       (718,282)
  ordinary
  activities before
  taxation
  Taxation             --              --              --
  Profit (loss) for    (236,131)       (482,151)       (718,282)
  period
  Basic and diluted    GBP(0.16)       GBP(0.32)       GBP(0.48)
  loss per share




                            Twelve months ended 31 December
                      2003         2003         2003         2003
                     Before                     After        After
                   Exceptional  Exceptional  Exceptional  Exceptional
                     Items        Items        Items         Items
                    GBP'000      GBP'000      GBP'000        $'000
  Turnover         1,166,318    --           1,166,318    2,080,945
  Cost of sales
  Interconnect     (766,942)    --           (766,942)    (1,368,378)
  and network
  Network          (204,417)    --           (204,417)    (364,721)
  depreciation
                   (971,359)    --           (971,359)    (1,733,099)
  Gross profit     194,959      --           194,959      347,846
  (loss)
  Operating
  expenses
  Selling,         (235,928)    2,453        (233,475)    (416,566)
  general and
  administrative
  Other            (38,531)     --           (38,531)     (68,747)
  depreciation
  and amortisation

                   (274,459)    2,453        (272,006)    (485,313)
  Operating        (79,500)     2,453        (77,047)     (137,467)
  profit (loss)
  Other income
  (expense)
  Interest         26,718       --           26,718       47,670
  receivable
  Interest         (88,295)     --           (88,295)     (157,536)
  payable and
  similar
  charges
  Amounts          --           --           --           --
  written off
  investment in
  own shares
  Gain on          --           7,589        7,589        13,540
  purchase of
  debt
  Exchange gain    6,388        --           6,388        11,398
                   (55,189)     7,589        (47,600)     (84,928)
  Profit (loss)    (134,689)    10,042       (124,647)    (222,395)
  on ordinary
  activities
  before
  taxation
  Taxation         --           --           --           --
  Profit (loss)    (134,689)    10,042       (124,647)    (222,395)
  for period
  Basic and        GBP(0.09)      GBP0.01    GBP(0.08)    $(0.15)
  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      Twelve months ended 31
                     December                   December
               2002     2003     2003      2002      2003      2003
               GBP'000 GBP'000   $'000    GBP'000   GBP'000    $'000
  Loss for    (45,235) (21,089) (37,627) (718,282) (124,647) (222,395)
  the period
  Exchange     22,749  2,035     3,631    49,030    31,002    55,314
  differences

  Total        (22,486)(19,054) (33,996) (669,252) (93,645)  (167,081)
  recognised
  losses

 Consolidated Reconciliation of Changes in Equity Shareholders' Funds

               Three months ended 31      Twelve months ended 31
               December                   December
               2002     2003     2003      2002      2003      2003
               GBP'000 GBP'000   $'000    GBP'000   GBP'000    $'000

  Loss for   (45,235) (21,089) (37,627)  (718,282) (124,647) (222,395)
  period
  Issue of    --      1,155    2,061     170       1,767     3,153
  share
  capital
  Shares to   16      (10)     (18)      (267)     (239)     (426)
  be issued
  Exchange    22,749  2,035    3,631     49,030    31,002    55,314
  differences

  Net        (22,470) (17,909) (31,953)  (669,349) (92,117)  (164,354)
  changes in
  equity
  shareholders'
  funds
  Opening    977,480 880,802 1,571,528  1,624,359  955,010   1,703,929
  equity
  shareholders'
  funds
  Closing    955,010 862,893  1,539,575 955,010   862,893   1,539,575
  equity
  shareholders'
  funds


 Consolidated Balance Sheet




                             At 31
                             December 2002    At 31 December 2003
                              GBP'000       GBP'000        $'000

  Fixed assets
       Intangible fixed      10,639        9,493         16,937
       assets (net)
       Tangible fixed        2,695,499     2,934,503     5,235,740
       assets (cost)
       Accumulated           (1,316,690)   (1,590,218)   (2,837,267)
       depreciation
       Tangible fixed        1,378,809     1,344,285     2,398,473
       assets (net)
       Investments in own    206           195           348
       shares
  Total fixed assets         1,389,654     1,353,973     2,415,758

  Current assets
       Trade debtors         189,788       199,849       356,571
       Prepaid expenses      74,606        66,834        119,245
       and other debtors
       Investments in        889,590       742,143       1,324,132
       liquid resources
       Cash at bank and in   45,292        60,239        107,478
       hand
  Total current assets       1,199,276     1,069,065     1,907,426
  Total assets               2,588,930     2,423,038     4,323,184
  Capital and reserves
       Called up share       37,688        37,754        67,361
       capital
       Share premium         2,314,335     2,315,904     4,132,036
       Merger reserve        27,227        27,359        48,814
       Shares to be issued   454           215           384
       Profit and loss       (1,424,694)   (1,518,339)   (2,709,020)
       account
  Equity shareholders'       955,010       862,893       1,539,575
  funds
  Provisions for             87,368        62,860        112,155
  liabilities and charges
  Creditors
       Amounts falling due   352,653       352,736       629,349
       within one year
       Amounts falling due
       after more than one year
            Convertible      639,829       700,131       1,249,174
            debt
            Non-convertible  554,070       444,418       792,931
            debt
       Total amounts         1,193,899     1,144,549     2,042,105
       falling due after more
       than one year
  Total creditors            1,546,552     1,497,285     2,671,454
  Total liabilities,         2,588,930     2,423,038     4,323,184
  capital and reserves



 Consolidated Cash Flow Statement



                                Three months ended 31 December
                              2002            2003         2003
                            GBP'000         GBP'000       $'000
  Net cash inflow from     26,898             34,915       62,295
  operating activities
  Returns on investments
  and servicing of
  finance
  Interest received        8,553              6,249        11,149
  Interest paid, finance   (24,396)           (22,303)     (39,793)
  costs and similar
  charges
  Gain on cancellation     --                 --           --
  of forward foreign
  currency contracts
  Net cash outflow from    (15,843)           (16,054)     (28,644)
  returns on investments
  and servicing of
  finance
  Capital expenditure
  and financial
  investment
  Purchase of tangible     (72,393)           (32,673)     (58,295)
  fixed assets
  Net cash outflow from    (72,393)           (32,673)     (58,295)
  capital expenditure
  and financial
  investment

  Acquisitions and
  disposals
  Sale of subsidiary       --                 912          1,627
  undertakings
  Net cash sold with       --                 (2,944)      (5,253)
  subsidiary
  Net cash outflow from    --                 (2,032)      (3,626)
  acquisitions and
  disposals

  Management of liquid     62,649             141,106      251,761
  resources

  Financing

  Issue of ordinary        --                 1,156        2,063
  shares
  Purchase of              --                 --           --
  convertible debt
  Purchase of              --                 (120,703)    (215,358)
  non-convertible debt
  Net cash outflow from
  financing               --                 (119,547)    (213,295)
  Increase in cash        1,311              5,715        10,196



 Consolidated Cash Flow Statement



                                Twelve months ended 31 December
                                 2002            2003         2003
                               GBP'000         GBP'000       $'000
  Net cash inflow from     139,279            147,866      263,823
  operating activities

  Returns on investments
  and servicing of
  finance

  Interest received        39,227             26,526       47,328
  Interest paid, finance   (71,268)           (63,849)     (113,919)
  costs and similar
  charges
  Gain on cancellation     4,844              --           --
  of forward foreign
  currency contracts
  Net cash outflow from    (27,197)           (37,323)     (66,591)
  returns on investments
  and servicing of
  finance
  Capital expenditure
  and financial
  investment
  Purchase of tangible     (412,115)          (140,973)    (251,524)
  fixed assets
  Net cash outflow from    (412,115)          (140,973)    (251,524)
  capital expenditure
  and financial
  investment

  Acquisitions and
  disposals

  Sale of subsidiary       --                 912          1,627
  undertakings
  Net cash sold with       --                 (2,944)      (5,253)
  subsidiary
  Net cash outflow from    --                 (2,032)      (3,626)
  acquisitions and
  disposals
  Management of liquid     400,390            187,765      335,010
  resources

  Financing

  Issue of ordinary        110                1,630        2,908
  shares
  Purchase of              (55,573)           (9,606)      (17,139)
  convertible debt
  Purchase of              (41,704)           (134,869)    (240,633)
  non-convertible debt

  Net cash outflow from
  financing                (97,167)           (142,845)    (254,864)

  Increase in cash          3,190              12,458       22,228

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 twelve months ended 31 December 2002 and 2003 and at 31 December 2002 and 31 December 2003.

The financial statements for the twelve months ended 31 December 2002 and 2003 and at 31 December 2002 and 2003 have been extracted from the Group's audited financial statements for those periods and do not constitute the Group's statutory accounts for those periods. The auditors have made a report on the Group's financial statements for the years ended 31 December 2002 and 2003 under Section 235 of the Companies Act 1985 which does not contain a statement under sections 237 (2) or (3) of the Companies Act and is unqualified. The statutory accounts for the twelve months ended 31 December 2002 have been filed and the statutory accounts for the twelve months ended 31 December 2003 will be filed with the Registrar of Companies.

The financial statements for the three months ended 31 December 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 generally accepted accounting principles in the UK. All adjustments, with the exception of the exceptional items described in Note 4, were of a normal recurring nature.

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 December 2003 and for the periods then ended at the rate of $1.7842 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 31 December 2002 and 2003, turnover by region was as follows:


                        Three months ended 31 December 2002
              Corporate  Wholesale  North    Central   South   Total
                                    Region   Region   Region
               GBP'000   GBP'000    GBP'000  GBP'000  GBP'000  GBP'000

  Switched     75,761    79,316     49,062   69,392   36,623   155,077

  Non-Switched 80,498    27,310     39,255   37,422   31,131   107,808
  Other        125       166        8        160      123      291
  Total        156,384   106,792    88,325   106,974  67,877   263,176





                        Three months ended 31 December 2003
              Corporate  Wholesale  North    Central   South   Total
                                    Region   Region   Region
               GBP'000   GBP'000    GBP'000  GBP'000  GBP'000  GBP'000

  Switched     88,184    99,754     51,442   92,281   44,215   187,938

  Non-Switched 93,185    25,127     41,610   42,768   33,934   118,312
  Other        --        13         --       13       --       13
  Total        181,369   124,894    93,052   135,062  78,149   306,263


 For the twelve months ended 31 December 2002 and 2003, turnover by
 region was as follows:



                        Twelve months ended 31 December 2002
              Corporate Wholesale  North   Central   South    Total
                                   Region  Region   Region

               GBP'000   GBP'000  GBP'000  GBP'000  GBP'000  GBP'000
  Switched     294,757   328,626   187,595 285,724  150,064  623,383
  Non-Switched 288,962   113,091   143,850 142,753  115,450  402,053
  Other        1,040     782       65      1,328    429      1,822
  Total        584,759   442,499   331,510 429,805  265,943  1,027,258




                        Twelve months ended 31 December 2003
               Corporate Wholesale North   Central   South    Total
                                   Region  Region   Region

               GBP'000   GBP'000   GBP'000 GBP'000  GBP'000  GBP'000
  Switched     336,980   365,658   206,969 330,536  165,133  702,638
  Non-Switched 354,794   107,610   165,554 162,949  133,901  462,404
  Other        909       367       79      918      279      1,276
  Total        692,683   473,635   372,602 494,403  299,313  1,166,318


 3. Loss per share


          Three months ended 31         Twelve months ended 31
          December                      December
           2002      2003      2003      2002       2003       2003
          GBP'000   GBP'000    $'000    GBP'000   GBP'000     $'000
 Loss    (45,235)  (21,089)  (37,627)  (718,282) (124,647)  (222,395)
 for
 period

 Weighted 1,507,238 1,508,922 1,508,922 1,507,164 1,507,771  1,507,771
 average
 of ordinary
 shares   ('000)

 Basic   GBP(0.03) GBP(0.01) $(0.02)   GBP(0.48) GBP(0.08)  $(0.15)
 and diluted
 loss
 per share

4. Exceptional Items

Gain on purchase of debt

During 2003, the Group purchased some of its convertible and non-convertible debt for a cash outlay of GBP144.5 million (2002: GBP97.3 million) resulting in an exceptional gain of GBP7.6 million (2002: GBP101.7 million).

Disposal of subsidiaries

In December 2003 the Group sold COLT eCustomer Solutions France SAS ("Fitec") and COLT Internet AB (Sweden Internet) for a consideration of GBP0.9 million and GBP0.3 million respectively, which gave rise to a profit on disposal of GBP2.2 million on Fitec and GBP0.3 million on Sweden Internet. In the period to December 2003, Fitec's turnover was GBP9.2 million and its loss after tax was GBP3.3 million.

Severance

On 21 February 2002, the Group announced an operational effectiveness review programme to reduce staff levels by approximately 500. On 27 September 2002, the Group further announced a move to a pan-European organisation structure following the completion of the construction of its core network infrastructure enabling the reduction of employee numbers by up to a further 800. The operational exceptional charge of GBP18.3 million included in the total interconnect and network charges for the twelve months ended 31 December 2002, together with the operational exceptional charge of GBP18.9 million included in the selling, general and administration charges for the same period, represent the provisions in respect of the cost of these programmes.

Impairment

During 2002, the Group announced that given the downturn in the telecommunications industry and overall economic environment it was prudent to take further action to ensure that its asset base remained aligned with the realities of the market. As a result "Network depreciation" includes an exceptional charge of GBP508.0 million and "Other depreciation and amortisation" included an exceptional charge of GBP43.0 million, representing an impairment provision to write down the book value of fixed assets. These non-cash charges were computed in accordance with the requirements of FRS 11 "Impairment of fixed assets and goodwill".

Investments in own shares

In 2002 the Group recognised a charge of GBP0.4 million relating to the revaluation of shares held in the COLT Qualifying Share Ownership Trust for certain compensation plans.

Foreign exchange gain

In 2002, the Group realised an exceptional exchange gain of GBP4.8 million from the unwinding of forward foreign currency contracts previously held as a condition of a bank facility that was terminated in June 2002.

5a. Net cash inflow from operating activities


                 Three months ended 31       Twelve months ended 31
                       December                    December
                2002     2003     2003     2002      2003      2003
               GBP'000  GBP'000  $'000    GBP'000   GBP'000   $'000

  Operating    (32,239) (8,962)  (15,990) (778,594) (77,047) (137,467)
  loss
  Depreciation 59,901   59,662   106,449  812,888   242,948  433,468
  and
  amortisation
  Exchange     20       264      471      540       387      691
  differences

  Profit on    --       (2,453)  (4,377)  --        (2,453)  (4,377)
  disposal
  of
  subsidiaries
  Decrease     8,021    5,661    10,100   56,881    20,681   36,899
  in debtors
  Increase     (5,029)  (12,788) (22,816) 24,948    (9,463)  (16,884)
  (decrease)
  in
  creditors
  Movement     (3,776)  (6,469)  (11,542) 22,616    (27,187) (48,507)
  in
  provision
  for
  liabilities
  and
  charges
  Net cash     26,898   34,915   62,295   139,279   147,866  263,823
  inflow
  from
  operating
  activities


 5b. EBITDA reconciliation



                 Three months ended 31       Twelve months ended 31
                       December                    December
                 2002    2003     2003     2002      2003      2003
                GBP'000  GBP'000 $'000    GBP'000   GBP'000    $'000

  Net cash      26,898   34,915  62,295   139,279   147,866   263,823
  inflow from
  operating
  activities
  Adjusted
  for:
  Exchange      (20)     (264)   (471)    (540)     (387)     (691)
  differences
  Movement in   (8,021)  (5,661) (10,100) (56,881)  (20,681)  (36,899)
  debtors
  Movement in   5,029    12,788  22,816   (24,948)  9,463     16,884
  creditors
  Total         (2,992)  7,127   12,716   (81,829)  (11,218)  (20,015)
  working
  capital
  adjustments
  Movement in   3,776    6,469   11,542   (22,616)  27,187    48,507
  provision
  for
  liabilities
  and charges
  Add back
  Exceptional   --       --      --       18,320    --        --
  interconnect
  and
  network
  charges
  Exceptional   --       --      --       18,934    --        --
  selling and
  administrative
  charges
  EBITDA        27,662   48,247  86,082   71,548    163,448   291,624
  before
  exceptional
  items


 6.  Changes in cash and investments in liquid resources

                Three months ended 31        Twelve months ended 31
                      December                     December
              2002     2003      2003      2002      2003      2003
             GBP'000  GBP'000    $'000    GBP'000   GBP'000    $'000

  Beginning 978,094  934,404   1,667,164 1,304,477 934,882   1,668,016
  of period
  Net       (62,649) (141,106) (251,761) (400,390) (187,765) (335,010)
  decrease
  in investments
  in liquid
  resources
  before
  exchange
  differences
  Effects    16,747   3,050     5,442     30,900    40,318    71,935
  of exchange
  differences
  in investments
  in liquid
  resources

  Net        1,311    5,715     10,196    3,190     12,458    22,228
  increase
  in cash
  before
  exchange
  differences
  Effects    1,379    319       569       (3,295)   2,489     4,441
  of exchange
  differences
  in cash
  End of    934,882  802,382   1,431,610 934,882   802,382   1,431,610
  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 31        Twelve months ended 31
                      December                     December
               2002     2003     2003      2002      2003      2003
              GBP'000  GBP'000   $'000    GBP'000   GBP'000    $'000

  Loss for   (45,235) (21,089) (37,627)  (718,282) (124,647) (222,395)
  period
  Adjustments:
  Deferred    (329)    (197)    (351)     (1,946)   (1,012)   (1,806)
  compensation
  (i), (ii)
  Amortisation 203      504      899       1,076     2,116     3,775
  of intangibles (iii)
  Capitalised (1,064)  (814)    (1,452)   3,662     (3,082)   (5,499)
  interest,
  net of
  depreciation (iv)
  Profit on   260      261      466       1,044     1,044     1,863
  sale of
  IRUs (v)
  Warrants    386      72       128       (991)     199       355
  (vi)
  Installation (3,852)  1,425    2,542     (3,172)   3,469     6,189
  revenue
  (vii)
  Direct      3,852    (1,559)  (2,781)   3,172     (4,231)   (7,549)
  costs
  attributable
  to
  installation
  revenue
  (vii)
  Impairment  (2,810)  (2,805)  (5,005)   104,390   (11,221)  (20,020)
  (viii)
  Payroll     (68)     385      687       (68)      385       687
  taxes on
  employee
  share
  schemes
  (ix)
  Amount      409      --       --        409       --        --
  written
  off
  investment
  in own
  shares
  (x)
  Unrealised  --       --       --        (424)     --        --
  gain on
  forward
  foreign
  exchange
  contracts
  (xi)
  Loss for   (48,248) (23,817) (42,494)  (611,130) (136,980) (244,400)
  period
  under US
  GAAP
  Weighted 1,507,238 1,508,922 1,508,922 1,507,164 1,507,771 1,507,771
  average number
  of ordinary
  shares ('000)
  Basic and   GBP(0.03) GBP(0.02) $(0.03)  GBP(0.41) GBP(0.09) $(0.16)
  diluted
  loss per
  share

(i) On 15 July 1998, the Group completed the acquisition of ImagiNet. A total of 1,395,292 ordinary shares were issued at completion. An additional 476,208 remained to be issued during 1999 and 2000 subject to certain criteria being met.

On 3 July 2001 the Group acquired all the share capital of Fitec. A total of 1,518,792 ordinary shares and 4.04 million Euros was paid at completion, with an additional 1.2 million Euros and 317,784 shares to be earned over the two year period ending June 2003, subject to certain conditions being met. The final payments were made in July 2003.

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

Under U.S. GAAP, these deferred shares and payments are excluded from the purchase consideration and recognised as compensation expense in the profit and loss accounts over the period in which the payments vest. The total compensation charge for the three and twelve months ended 31 December 2002 was GBP0.1 million and GBP1.2 million respectively and for the three and twelve months ended 31 December 2003 nil and GBP0.3 million respectively.

(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 are earned.

Also under U.S. GAAP, 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 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 twelve months ended 31 December 2002 was GBP0.2 million and GBP0.8 million respectively and for the three and twelve months ended 31 December 2003 GBP0.2 million and GBP0.7 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 Group 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 Group had unamortised goodwill of GBP8.5 million at 31 December 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 GBP1.1 million for the three and twelve months ended 31 December 2002 respectively and GBP0.5 million and GBP2.1 million for the three and twelve months ended 31 December 2003 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 twelve months ended 31 December 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 31 December 2003, the cumulative increase in net losses under SAB 101 was GBP0.8 million, representing cumulative deferred installation revenues of GBP54.2 million and costs of GBP53.4 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 (see note iii), network and non-network fixed assets, resulting in a GAAP difference of GBP107.2 million. For the three and twelve months ended 31 December 2003 depreciation in the amount of GBP2.8 million and GBP11.2 million respectively 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.

(x) Under U.K. GAAP, shares held by a QUEST and similar employee share trusts are recorded as fixed asset investments as 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.

(xi) The Group entered into forward foreign exchange contracts for payments relating to its U.S. dollar denominated senior discount notes, all of which have now been purchased. As a result, the Group recognised an unrealised gain on that ineffective portion of the hedge attributable to the purchased notes. The forward contracts were cancelled in June 2002. The resulting gain of GBP4.8 million was recognised for U.K. and U.S. purposes. The adjustment of GBP0.4 million in 2002 is to reverse the unrealised gain already recognised in 2001.

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



                                     At 31 December 2003
                                         GBP'000           $'000
  Equity shareholders' funds for     862,893               1,539,575
  the Company
  U.S. GAAP adjustments:
       Adjustment for deferred       (10,766)              (19,209)
       compensation (i), (ii)
       Unearned compensation (i),    (1,510)               (2,694)
       (ii)
       Additional paid in share      12,276                21,903
       capital (i), (ii)
       Own shares held in trust      (195)                 (348)
       (xii)
       Amortisation of intangibles   6,016                 10,734
       (iii)
       Warrants (vi)                 1,051                 1,875
  Payroll taxes on employee share    385                   687
  schemes (ix)
  Impairment (viii)                  93,169                166,231
       Profit on sale IRUs (v)       (17,723)              (31,621)
       Capitalised interest, net     37,879                67,584
       of depreciation (iv)
  Deferred profit on installations   (762)                 (1,360)
  (vii)
  Approximate equity shareholders'   982,713               1,753,357
  funds under U.S. GAAP

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

(xii) 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 December 2003 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 and twelve months ended 31 December 2003 would have been GBP27.5 million ($49.1 million) and GBP153.0 million ($273.1 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 Group 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.

This information is provided by RNS The company news service from the London Stock Exchange



            

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