LONDON, July 21, 2004 (PRIMEZONE) -- COLT Telecom Group plc (COLT), a leading pan-European provider of business communications solutions and services said today that its second quarter results were in line with the position indicated in the Trading Update of 1 July.
Highlights of the quarter compared with the corresponding period of the prior year include:
-- Turnover of GBP301.2 million, up 8% (1) on a constant currency
basis
-- Gross margin before depreciation of 31.9%
-- EBITDA (2) up 1% to GBP38.3 million
-- Loss for the period (3) decreased by 24% from GBP34.5million to
GBP26.3 million
-- Positive free cash flow (4) of GBP4.5 million; second consecutive
quarter of positive free cash flow
-- Strong financial position with cash and liquid resources of
GBP794.0 million
-- Significant new contract wins with SunGard, lastminute.com and
EDS
(1) Excluding Fitec, which was disposed of in December 2003.
(2) EBITDA is earnings before interest, tax, depreciation,
amortisation, foreign exchange and exceptional items.
(3) Before exceptional items.
(4) Free cash flow is the net cash inflow from operating activities
less net cash outflows from returns on investments and
servicing of finance and from capital expenditure and financial
investment.
Since the publication of its first quarter results on 21 April, COLT has experienced tougher than expected trading conditions. In addition, there has been slower than anticipated uptake of its data products and the performance of some higher margin voice products has been disappointing. During the second quarter, revenue growth has therefore come mainly from the lower margin segments of the business. As a result, even though costs continued to be under tight control, overall margins were under pressure. COLT has taken action to improve revenues and is continuing to improve its sales capability and develop new products, particularly in the higher margin data segments. These initiatives are expected to have a positive impact in the longer term.
Commenting on the results, Chairman of COLT, Barry Bateman, said:
"Whilst we grew revenue, EBITDA and free cash flow compared to the same quarter last year, the overall results were disappointing. This was partly due to the continuous pricing pressure within the industry but we also made less progress than we would have liked in growing higher margin data services whilst much of our growth in voice revenues was from lower margin products.
"Nevertheless much progress has been made in the last two years in positioning the company for the future. Costs have been reduced, capital expenditure is well controlled and success driven, and free cash flow is consistently improving. We are well on track to achieve our goal of being free cash flow positive on a sustainable basis during 2005. Additionally, many of the building blocks are in place in terms of development of new products and services that should positively impact revenue in the medium and longer term.
"We are announcing today the appointment of Jean-Yves Charlier as President, Chief Executive Officer and Director of COLT, with effect from 30 August, succeeding Steve Akin who is returning to Fidelity in Boston. On behalf of the Board I would like to thank Steve for the exceptional job he has done in leading COLT through a period of great change in a challenging operating environment and to add my personal thanks for his wholehearted support and commitment to COLT.
"The appointment of Jean-Yves Charlier and plans we have in place to further strengthen the senior management of our sales organisation should, I believe, help position COLT well to meet the challenges going forward in building higher margin revenue streams."
Steve Akin, President and Chief Executive Officer, said:
"Our strong customer base and industry leading customer service, combined with tight management of costs and strong financial position, are enabling us to withstand a challenging operating environment.
"Second quarter revenues, EBITDA and free cash flow were all ahead of the second quarter of last year and we have now been free cash flow positive on a cumulative basis for the past 12 months.
"During the quarter, volume growth remained robust but overall revenues continued to be affected by price erosion and revenue mix was disappointing. Building on the initiatives taken over the past two years we are taking further action to improve revenues and develop new products, particularly in the higher margin data segments. These initiatives are expected to have a positive impact in the medium term."
KEY FINANCIAL DATA Three months Six months
ended 30 June ended 30 June
2003 2004 2003 2004
GBP m GBP m GBP m GBP m
Turnover 293.0 301.2 564.7 602.3
Interconnect and network costs (195.5) (205.0) (375.9) (403.1)
Gross profit before depreciation 97.5 96.2 188.8 199.2
Gross profit before
depreciation % 33.3% 31.9% 33.4% 33.1%
Network depreciation (51.6) (45.7) (100.1) (92.5)
Gross profit 45.9 50.5 88.7 106.7
Loss for the period (before
exceptional items) (34.5) (26.3) (75.4) (46.1)
Loss for the period (after
exceptional items) (27.3) (26.3) (67.8) (46.1)
EBITDA (1) 37.9 38.3 71.9 84.7
(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 six months ended 30 June 2004 and 30 June 2003.
Turnover
Turnover for the three and six months was GBP301.2 million and GBP602.3 million, increases of 8% and 9% on a constant currency basis and excluding the turnover contributed by Fitec, which was disposed of in December 2003. 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 was flat at GBP171.2 million and, for the six months, increased by 3% to GBP344.9 million. Turnover from corporate customers represented 57% of total turnover in the three and six months ended 30 June 2004 compared with 58% and 59% in the equivalent periods of 2003. Switched turnover for the three and six months was GBP80.3 million and GBP163.4 million, a decrease of 4% and increase of 4% respectively and non-switched was GBP90.8 million and GBP174.4 million, increases of 4% and 2% respectively.
Wholesale
Turnover from wholesale customers for the three and six months was GBP130.1 million and GBP257.5 million, increases of 7% and 12% respectively. Turnover from wholesale customers represented 43% of total turnover in the three and six months ended 30 June 2004 compared with 42% and 41% in the equivalent periods of 2003. Switched turnover for the three and six months was GBP107.4 million and GBP205.2 million, increases of 15% and 18% respectively and non-switched was GBP22.7 million and GBP52.2 million, decreases of 21% and 6% respectively.
Cost of Sales
Cost of sales for the three and six months were GBP250.8 million and GBP495.7 million, increases of 1% and 4% respectively.
Interconnection and network costs for the three and six months were GBP205.0 million and GBP403.1 million, increases of 5% and 7% respectively reflecting the overall increase in switched revenues and ongoing cost containment measures.
Network depreciation for the three and six months was GBP45.7 million and GBP92.5 million, decreases of 11% and 8% respectively. 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 and six months were GBP64.9 million and GBP129.3 million, decreases of 7% and 5% respectively.
Selling, general and administrative (SG&A) expenses for the three and six months were GBP57.9 million and GBP114.5 million, decreases of 3% and 2% respectively. SG&A as a proportion of turnover for the three and six months was 19.2% and 19.0% compared with 20.3% and 20.7% in the equivalent periods of 2003 reflecting the scale effects of the business and the benefits of the ongoing cost containment programmes.
Other depreciation and amortisation for the three and six months was GBP6.9 million and GBP14.8 million, decreases of 30% and 24% respectively. The reduction 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 and six months was GBP5.2 million and GBP11.0 million, decreases of 23% and 22% respectively as a result of reduced average balances of cash and investments in liquid resources.
Interest payable and similar charges for the three and six months were GBP17.0 million and GBP34.6 million, decreases of 25% and 23% respectively. These decreases were due primarily to the reduction in debt levels following the purchase and redemption of some of the Company's outstanding notes during 2003.
Interest payable and similar charges for the three and six months included: GBP8.4 million and GBP16.8 million respectively of interest and accretion on convertible debt; GBP8.6 million and GBP17.4 million respectively of interest and accretion on non-convertible debt; and GBPnil million and GBP0.4 million respectively of other interest and unwinding of discounts on provisions. Interest payable and similar charges for the quarter comprised GBP11.3 million and GBP5.7 million of interest and accretion respectively.
Gain on Purchase of Debt
There were no purchases of debt in the three and six months. Gains arising on the purchase of debt during the equivalent periods of 2003 were GBP7.2 million and GBP7.6 million.
Exchange Gains (Losses)
For the three months ended 30 June 2004, there were no exchange gains or losses compared to gains of GBP5.1million in the equivalent period in 2003. For the six months ended 30 June 2004 there were exchange gains of GBP0.1 million compared to GBP3.2 million in the equivalent period in 2003. 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 six months ended 30 June 2003 and 2004.
Financial Needs and Resources
Free cash flow, the sum of the net cash inflow from operating activities less net cash outflows from returns on investments and servicing of finance and from capital expenditure and financial investment, improved from outflows of GBP13.3 million and GBP25.7 million in the three and six months ended 30 June 2003 to inflows of GBP4.5 million and GBP18.2 million in the three and six months ended 30 June 2004.
The improvement in free cash flow for the three and six months ended 30 June 2004 compared to the equivalent periods in 2003 was driven by reduced purchases of tangible fixed assets, lower net interest, improvements in working capital and higher EBITDA for the six months ended 30 June 2004.
Net cash inflow from financing for the three and six months ended 30 June 2004 was GBP0.1 million and GBP0.5 million compared with outflows of GBP23.3 million and GBP23.8 million in the equivalent periods in 2003. COLT had balances of cash and investments in liquid resources at 30 June 2004 of GBP794.0 million compared with GBP802.4 million at 31 December 2003.
Consolidated Profit and Loss Account
Three months ended 30 June
2003 2003 2003 2004 2004
Before Exceptional After
Exceptional Items Exceptional
Items Items
GBP'000 GBP'000 GBP'000 GBP'000 $'000
Turnover 292,967 -- 292,967 301,233 546,015
Cost of sales
Interconnect
and network (195,477) -- (195,477) (205,028) (371,634)
Network
depreciation (51,616) -- (51,616) (45,736) (82,901)
(247,093) -- (247,093) (250,764) (454,535)
Gross profit 45,874 -- 45,874 50,469 91,480
Operating
expenses
Selling,
general and
administra-
tive (59,564) -- (59,564) (57,946) (105,033)
Other
depreciation
and
amortisation (9,897) -- (9,897) (6,946) (12,590)
(69,461) -- (69,461) (64,892) (117,623)
Operating
loss (23,587) -- (23,587) (14,423) (26,143)
Other income
(expense)
Interest
receivable 6,705 -- 6,705 5,174 9,378
Interest
payable
& similar
charges (22,724) -- (22,724) (16,983) (30,783)
Gain on
purchase
of debt -- 7,240 7,240 -- --
Exchange
gain/(loss) 5,115 -- 5,115 (34) (62)
(10,904) 7,240 (3,664) (11,843) (21,467)
Profit/(loss)
on ordinary
activites
before
taxation (34,491) 7,240 (27,251) (26,266) (47,610)
Taxation -- -- -- -- --
Profit/(loss)
for
period (34,491) 7,240 (27,251) (26,266) (47,610)
Basic and
diluted
loss per
share GBP(0.02) GBP0.00 GBP(0.02) GBP(0.02) $(0.03)
There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents. All of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements.
Consolidated Profit and Loss Account
Six months ended 30 June
2003 2003 2003 2004 2004
Before Exceptional After
Exceptional Items Exceptional
Items Items
GBP'000 GBP'000 GBP'000 GBP'000 $'000
Turnover 564,687 -- 564,687 602,343 1,091,807
Cost of sales
Interconnect
and
network (375,943) -- (375,943) (403,118) (730,692)
Network
depreciation (100,062) -- (100,062) (92,544) (167,745)
(476,005) -- (476,005) (495,662) (898,437)
Gross profit 88,682 -- 88,682 106,681 193,370
Operating
expenses
Selling,
general &
administrative (116,799) -- (116,799) (114,501) (207,545)
Other
depreciation
and amortisation(19,491) -- (19,491) (14,792) (26,812)
(136,290) -- (136,290) (129,293) (234,357)
Operating loss (47,608) -- (47,608) (22,612) (40,987)
Other income
(expense)
Interest
receivable 14,176 -- 14,176 11,037 20,006
Interest
payable
& similar
charges (45,168) -- (45,168) (34,595) (62,707)
Gain on
purchase
of debt -- 7,589 7,589 -- --
Exchange gain 3,179 -- 3,179 118 214
(27,813) 7,589 (20,224) (23,440) (42,487)
Profit/(loss)
on ordinary
activites
before
taxation (75,421) 7,589 (67,832) (46,052) (83,474)
Taxation -- -- -- -- --
Profit/(loss)
for period (75,421) 7,589 (67,832) (46,052) (83,474)
Basic and
diluted
loss per
share GBP(0.05) GBP0.00 GBP(0.05) GBP(0.03) $(0.06)
There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents. All of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements.
Consolidated Statement of Total Recognised Gains and Losses
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Loss for
period (27,251) (26,266) (47,610) (67,832) (46,052) (83,474)
Exchange
differ-
ences 1,133 2,316 4,198 25,495 (19,240) (34,875)
Total
recognised
losses (26,118) (23,950) (43,412) (42,337) (65,292) (118,349)
Consolidated Reconciliation of Changes in Equity Shareholders' Funds
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Loss (27,251) (26,266) (47,610) (67,832) (46,052) (83,474)
for
period
Issue 1 84 152 1 742 1,345
of
share
capital
Shares 55 -- -- (112) (215) (390)
to be
issued
Transfer -- -- -- -- (195) (353)
investment
in
own
shares
Exchange 1,133 2,316 4,198 25,495 (19,240) (34,875)
differences
Net (26,062) (23,866) (43,260) (42,448) (64,960) (117,747)
changes
in
equity
shareholders'
funds
Opening 938,624 821,799 1,489,593 955,010 862,893 1,564,080
equity
shareholders'
funds
Closing 912,562 797,933 1,446,333 912,562 797,933 1,446,333
equity
shareholders'
funds
Consolidated Balance Sheet
At 31 At 30 June 2004
December
2003
GBP'000 GBP'000 $'000
Fixed assets
Intangible fixed assets (net) 9,493 8,031 14,557
Tangible fixed assets (cost) 2,934,503 2,877,241 5,215,287
Accumulated depreciation (1,590,218) (1,631,456) (2,957,177)
Tangible fixed assets (net) 1,344,285 1,245,785 2,258,110
Investments in own shares 195 -- --
Total fixed assets 1,353,973 1,253,816 2,272,667
Current assets
Trade debtors 199,849 188,610 341,874
Prepaid expenses and other debtors 66,834 48,470 87,857
Investments in liquid resources 742,143 721,440 1,307,682
Cash at bank and in hand 60,239 72,536 131,479
Total current assets 1,069,065 1,031,056 1,868,892
Total assets 2,423,038 2,284,872 4,141,559
Capital and reserves
Called up share capital 37,754 37,776 68,473
Share premium 2,315,904 2,316,624 4,199,112
Merger reserve 27,359 27,359 49,591
Shares to be issued 215 -- --
Profit and loss account (1,518,339) (1,583,826) (2,870,843)
Equity shareholders' funds 862,893 797,933 1,446,333
Provisions for liabilities and 62,860 51,594 93,519
charges
Creditors
Amounts falling due within one
year 352,736 332,887 603,392
Amounts falling due after more
than one year
Convertible debt 700,131 677,247 1,227,578
Non-convertible debt 444,418 425,211 770,737
Total amounts falling due after
more than one year 1,144,549 1,102,458 1,998,315
Total creditors 1,497,285 1,435,345 2,601,707
Total liabilities, capital and 2,423,038 2,284,872 4,141,559
reserves
Consolidated Cash Flow Statement
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Net 37,324 41,565 75,341 67,688 88,031 159,565
cash
inflow
from
operating
activities
Returns
on
investments
and
servicing
of
finance
Interest 6,747 5,119 9,279 14,255 10,352 18,764
received
Interest(23,646) (14,417) (26,132) (32,295) (23,261) (42,163)
paid,
finance
costs
and
similar
charges
Net (16,899) (9,298) (16,853) (18,040) (12,909) (23,399)
cash
outflow
from
returns
on
investments
and
servicing
of
finance
Capital
expenditure
and
financial
investment
Purchase(33,762) (29,214) (52,953) (75,391) (60,771)(110,153)
of
tangible
fixed
assets
Sale of -- 1,430 2,592 -- 3,884 7,040
tangible
fixed
assets
Net (33,762) (27,784) (50,361) (75,391) (56,887)(103,113)
cash
outflow
from
capital
expenditure
and
financial
investment
Management
of 31,585 10,377 18,809 42,843 (3,905) (7,078)
liquid
resources
Financing
Issue of 1 84 152 1 527 955
ordinary
shares
Purchase(14,166) -- -- (14,166) -- --
of
convertible
debt
Purchase (9,182) -- -- (9,606) -- --
of
non-
convertible
debt
Net (23,347) 84 152 (23,771) 527 955
cash
(outflow)
/inflow
from
financing
(Decrease)(5,099) 14,944 27,088 (6,671) 14,857 26,930
/increase
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 six months ended 30 June 2003 and 2004.
The financial statements for the three and six months ended 30 June 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 June 2004 and for the periods then ended at the rate of $1.8126 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 June 2003 and 2004, turnover by segment was as follows:
Three months ended 30 June 2003
Corporate Wholesale North Central South Total
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 83,792 93,059 53,342 82,199 41,310 176,851
Non- 87,370 28,575 42,145 40,923 32,877 115,945
switched
Other 142 29 36 15 120 171
Total 171,304 121,663 95,523 123,137 74,307 292,967
Three months ended 30 June 2004
Corporate Wholesale North Central South Total
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 80,321 107,401 54,911 92,070 40,741 187,722
Non- 90,822 22,651 41,194 41,242 31,037 113,473
switched
Other 29 9 4 15 19 38
Total 171,172 130,061 96,109 133,327 71,797 301,233
For the six months ended 30 June 2003 and 2004, turnover by
segment was as follows:
Six months ended 30 June 2003
Corporate Wholesale North Central South Total
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 163,367 174,435 103,255 155,688 78,859 337,802
Non- 170,407 55,786 82,224 78,587 65,382 226,193
switched
Other 377 315 81 332 279 692
Total 334,151 230,536 185,560 234,607 144,520 564,687
Six months ended 30 June 2004
Corporate Wholesale North Central South Total
Region Region Region
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Switched 169,908 205,166 109,485 185,378 80,211 375,074
Non- 174,387 52,193 81,390 82,875 62,315 226,580
switched
Other 576 113 116 124 449 689
Total 344,871 257,472 190,991 268,377 142,975 602,343
3. Loss per share
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Loss for (27,251) (26,266) (47,610) (67,832) (46,052) (83,474)
period
Weighted 1,507,507 1,510,888 1,510,888 1,507,371 1,510,664 1,510,664
average
number
of
ordinary
shares
('000)
Basic GBP(0.02) GBP(0.02) $(0.03) GBP(0.05) GBP(0.03) $(0.06)
and
diluted
loss
per
share
4. Exceptional items
Gain on purchase of debt
During the first half of 2003, the Group purchased some of its debt for a cash outlay of GBP23.8 million, resulting in exceptional gains of GBP7.6 million.
5. Cash flow reconciliations
5a. Reconciliation of operating loss to net cash inflow from operating activities
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Operating (23,587) (14,423) (26,143) (47,608) (22,612) (40,987)
loss
Depreciation 61,513 52,682 95,491 119,553 107,336 194,557
and
amortisation
Exchange (20) 521 945 143 902 1,636
differences
(Increase)/ (882) (420) (761) 3,814 21,193 38,414
decrease in
debtors
Decrease/ 4,498 6,595 11,954 4,260 (9,333) (16,917)
(increase)
in
creditors
Movement in (4,198) (3,390) (6,145) (12,474) (9,455) (17,138)
provisions
for
liabilities
and charges
Net cash 37,324 41,565 75,341 67,688 88,031 159,565
inflow
from
operating
activities
5b. EBITDA reconciliation
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Net cash 37,324 41,565 75,341 67,688 88,031 159,565
inflow
from
operating
activities
Adjusted
for:
Exchange 20 (521) (945) (143) (902) (1,636)
differences
Movement in 882 420 761 (3,814) (21,193)(38,414)
debtors
Movement (4,498) (6,595) (11,954) (4,260) 9,333 16,917
in
creditors
Total
working (3,616) (6,175) (11,193) (8,074) (11,860)(21,497)
capital
adjustments
Movement
in 4,198 3,390 6,145 12,474 9,455 17,138
provisions
for
liabilities
and charges
EBITDA 37,926 38,259 69,348 71,945 84,724 153,570
6. Changes in cash and investments in liquid resources
Three months ended 30 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Beginning 953,970 786,123 1,424,927 934,882 802,382 1,454,398
of
period
Net (31,585)(10,377) (18,809) (42,843) 3,905 7,078
(decrease)/
increase in
investments
in liquid
resources
before
exchange
differences
Effects of 3,302 2,896 5,248 32,551 (24,608) (44,605)
exchange
differences
on
investments
in liquid
resources
Net (5,099) 14,944 27,088 (6,671) 14,857 26,930
(decrease)/
increase in
cash before
exchange
differences
Effects of (69) 390 707 2,600 (2,560) (4,640)
exchange
differences
on cash
End of 920,519 793,976 1,439,161 920,519 793,976 1,439,161
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 June Six months ended 30 June
2003 2004 2004 2003 2004 2004
GBP'000 GBP'000 $'000 GBP'000 GBP'000 $'000
Loss for (27,251) (26,266) (47,610) (67,832) (46,052) (83,474)
period
Adjustments:
Deferred (253) (65) (118) (523) (131) (237)
compensation
(i), (ii)
Amortisation 547 498 903 1,068 1,006 1,823
of
intangibles
(iii)
Capitalised (641) (910) (1,649) (1,553) (2,006) (3,636)
interest,
net of
depreciation
(iv)
Profit on 261 261 473 522 522 946
sale of IRUs
(v)
Warrants 141 (260) (471) (16) (577) (1,046)
(vi)
Installation (636) 1,651 2,993 (1,271) 3,397 6,157
revenue
(vii)
Direct costs 636 (1,641) (2,974) 1,271 (3,384) (6,134)
attributable
to
installation
revenue
(vii)
Impairment (2,805) (2,805) (5,086) (5,610) (5,610) (10,167)
(viii)
Loss for (30,001) (29,537) (53,539) (73,944) (52,835) (95,768)
period
under
US GAAP
Weighted 1,507,507 1,510,888 1,510,888 1,507,371 1,510,664 1,510,664
average
number of
ordinary
shares
('000)
Basic and GBP(0.02) GBP(0.02) $(0.04) GBP(0.05) GBP(0.03) $(0.06)
diluted 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 six months ended 30 June 2003 was GBP0.2 million and GBP0.3 million respectively. Because no payments were outstanding in the six months to 30 June 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 are earned.
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 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 six months ended 30 June 2003 and was GBP0.1 million and GBP0.3 million respectively and for the three and six months ended 30 June 2004 was GBP0.1 million and GBP0.1 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 GBP7.8 million at 30 June 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 GBP1.1 million for the three and six months ended 30 June 2003 and for the three and six months ended 30 June 2004 was GBP0.5 million and GBP1.0 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 six months ended 30 June 2003 and 2004, customer installation revenues together with attributable direct costs are recognised over the expected customer relationship period. At 30 June 2004, the cumulative increase in net losses under SAB 101 was GBP0.7 million, representing cumulative deferred installation revenues of GBP50.7 million and costs of GBP50.0 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. For the three and six months ended 30 June 2004 depreciation in the amount of GBP2.8 million and GBP5.6 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 June 2004
------------------
GBP'000 $'000
Equity shareholders' funds under U.K. GAAP 797,933 1,446,333
U.S. GAAP adjustments:
Adjustment for deferred compensation (i), (ii) (10,897) (19,752)
Unearned compensation (i), (ii) (148) (268)
Additional paid in share capital (i), (ii) 11,045 20,020
Amortisation of intangibles (iii) 7,022 12,728
Warrants (vi) 474 859
Payroll taxes on employee share schemes (ix) 385 698
Impairment (viii) 87,559 158,711
Profit on sale IRUs (v) (17,201) (31,179)
Capitalised interest, net of depreciation (iv) 35,874 65,025
Deferred profit on installations (vii) (749) (1,358)
Approximate equity shareholders' funds under
U.S. GAAP 911,297 1,651,817
(i) -- (ix) See note a. for description and adjustment.
c. Effects of conforming to U.S. GAAP -- stock options
At 30 June 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 June 2004 would have been GBP32.7 million ($59.2 million).
Additional Information
Constant currency turnover analysis
Turnover for the three months ended 30 June 2004, compared to the three months ended 31 March 2004 and 30 June 2003 and after excluding the impact of foreign exchange, is shown below:
Compared to Q1 2004 Compared to Q2 2003
Q2 2004 Q2 2004 % Growth Q2 2004 % Growth
GBP'000 GBP'000 GBP'000
Actual Adjusted Actual Adjusted Adjusted Actual Adjusted
(1) (1) (2) (2)
Corporate
Switched 80,321 81,427 (10%) (9%) 83,530 (4%) 0%
Non-
switched 90,851 92,010 8% 9% 94,517 4% 8%
and Other
Total 171,172 173,437 (1%) 0% 178,047 0% 4%
Wholesale
Switched 107,401 109,138 10% 12% 112,196 15% 21%
Non-
switched 22,660 23,020 (24%) (22%) 23,641 (21%) (17%)
and Other
Total 130,061 132,158 2% 4% 135,837 7% 12%
Total
Switched 187,722 190,565 0% 2% 195,726 6% 11%
Non-
switched 113,511 115,030 0% 1% 118,158 (2%) 2%
and Other
Total 301,233 305,595 0% 1% 313,884 3% 7%
(1) Q2 2004 turnover has been restated using Q1 2004 exchange rates, and compared to turnover which was reported in Q1 2004
(2) Q2 2004 turnover has been restated using Q2 2003 exchange rates, and compared to turnover which was reported in Q2 2003
Q2 03 Q1 04 Q2 04 Growth Growth
Q2 04- Q2 04-
Q1 04 Q2 03
Customers (at end of period)
North Region 5,287 5,796 5,736 (1%) 8%
Central Region 6,385 7,213 7,929 10% 24%
South Region 5,662 5,813 5,940 2% 5%
17,334 18,822 19,605 4% 13%
Customers (at end of period)
Corporate 16,363 17,841 18,432 3% 13%
Wholesale 971 981 1,173 20% 21%
17,334 18,822 19,605 4% 13%
Switched Minutes (million)
(for quarter)
North Region 1,490 1,605 1,489 (7%) 0%
Central Region 2,784 3,752 3,593 (4%) 29%
South Region 971 1,092 1,114 2% 15%
5,245 6,449 6,196 (4%) 18%
Private Wire VGEs (000)
(at end of quarter)
North Region 9,526 11,179 11,737 5% 23%
Central Region 9,964 11,993 13,013 9% 31%
South Region 3,857 5,298 5,642 6% 46%
23,347 28,470 30,392 7% 30%
Headcount (at end of quarter)
North Region 1,648 1,536 1,568 2% (5%)
Central Region 1,519 1,370 1,361 (1%) (10%)
South Region 1,150 928 928 0% (19%)
4,317 3,834 3,857 1% (11%)
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. 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.
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