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.
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