UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended 31 December 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28970
COLT TELECOM GROUP plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
Beaufort House, 15 St. Botolph Street, London EC3A 7QN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each representing the right to receive four Ordinary
Shares, nominal value 2.5p each; Ordinary Shares, nominal value 2.5p each;
Warrants to purchase Ordinary Shares, nominal value 2.5p each; Units consisting
of 12% Senior Discount Notes due 2006 and Warrants to purchase Ordinary Shares,
nominal value 2.5p each; and 2% Senior Convertible Notes due 2005.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary Shares, nominal value 2.5p each: 1,507,536,535
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow
Item 17 Item 18 X
PRESENTATION OF FINANCIAL INFORMATION
Our Financial Statements, incorporated herein by reference from the
2002 Annual Report of COLT Telecom Group plc (the "2002 Annual Report"), are
presented in British pounds sterling. In this report, references to "U.S.
dollars," or "$" are to the currency of the United States, references to "pounds
sterling," "pounds," "(pound)," "pence" or "p" are to the currency of the United
Kingdom, and references to "(euro)" are to Euros. Solely for your convenience,
this report contains translations of certain pounds sterling amounts into U.S.
dollars at specified rates. These translations should not be read as
representations that the pounds sterling amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated or
at any other rate. Unless otherwise indicated, the translations of pounds
sterling into U.S. dollars have been made at $ 1.6095 per (pound)1.00, the noon
buying rate in the City of New York for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on 31 December 2002. See "Exchange Rates" in Item 3 of this
report for additional exchange rate information. On 2 June 2003, the Noon Buying
Rate was 1.6372 per (pound)1.00.
We prepare our financial statements using accounting principles
generally accepted in the United Kingdom ("U.K. GAAP"), which differ in certain
respects from accounting principles generally accepted in the United States
("U.S. GAAP"). The principal differences between U.K. GAAP and U.S. GAAP are
summarised in "Summary of Differences Between U.K. Generally Accepted Accounting
Principles and U.S. Generally Accepted Accounting Principles ("GAAP")" included
in note 25 to the Financial Statements referred to above.
References in this report to the following companies and
organisations include their subsidiaries and affiliates: ABN-AMRO Bank ("ABN
AMRO"); Albacom Ltd. ("Albacom"); Arcor Mannesmann Telecommunications ("Arcor"),
a consortium with Vodafone Group plc, Deutsche Bahn AG and Deutsche Bank;
Belgacom S.A. ("Belgacom"); Berlin Stock Exchange ("Berlin Stock Exchange");
Bloomberg L.P. ("Bloomberg"); BT Group plc ("BT"); BT Ignite ("BT Ignite"), part
of BT Group plc; Bull S.A. ("Bull"); Cable & Wireless Communications plc ("Cable
& Wireless"); Cadbury Schweppes plc, ("Cadbury Schweppes"); Canon Communication
& Image France ("Canon Communication & Image"); CEGEDIM Group S.A. ("CEGEDIM
Group"); Group Cegetel, a joint venture between Vivendi Universal, Vodafone
Group plc, BT and SBC Communications Inc. ("Cegetel"); CIENA Corporation
("CIENA"); Cisco Systems Inc. ("Cisco"); CompleTel Europe N.V. ("Completel");
Corning, Inc. ("Corning"); DAT va ("DAT"); Deutsche Bank AG ("Deutsche Bank");
Deutsche Bundesbank ("Bundesbank"); Deutsche Telekom AG ("Deutsche Telecom");
e.Biscom S.p.A. ("eBiscom"); Energis Communications Limited ("Energis");
Europcar International a subsidiary of Volkswagen A.G. ("Europcar"); Fitec SAS
("Fitec"); France Telecom; Global Crossing Ltd. ("Global Crossing"); Exane
S.A."(Group Exane"); HVB Info, a subsidiary of Hypo-und-vereinsbank A.G ("HVB
Info"); Independent Technology Systems Limited ("Independent Technology
Systems"); JazzTel plc ("JazzTel"); Jean Paul Gaultier ("Jean Paul Gaultier
organisation"); KPN Telecom B.V. ("KPN"); KPN Qwest, a joint venture between KPN
and Qwest Communications International, Inc. ("KPNQwest"); LDCommunications SA
("LDCom"); Level 3 Communications, Inc. ("Level 3"); La Banque Federale des
Banques Populaires ("La Banque Federale des Banques Populaires"); London Stock
Exchange Limited ("London Stock Exchange"); Marconi plc ("Marconi");
McCann-Erikson Worldgroup ("McCann-Erikson"); McDonalds Corporation
("McDonalds"); MCI Inc.
("MCI"); Northern Telecom Limited ("Nortel"); Novis Telecom SA ("Novis");
NetDoktor.dk ("NetDoktor"); Oracle Corporation ("Oracle"); Pernod Ricard S.A.
("Pernod Ricard Europe"); Pirelli Spaelectrica ("Pirelli"); Priority Telecom NV
("Priority Telecom"); PT Comunicacoes, S.A. and PT Prime-Solucoes Empresariais
de Telecomunicacoes e Sistemas, S.A. ("PT Comunicacoes/PT Prime"); Rabobank
Group ("Rabobank"); Retevision S.A. ("Retevision"); Radio Telefis Eireann
("RTE") Siemens A.G. ("Siemens"); Skyguide ("Skyguide"); Swisscom AG
("Swisscom"); T-Systems International GmbH ("T-Systems"); TDC Switzerland AG
("TDSunrise"); Telekom Austria; Telecom Italia S.p.A. ("Telecom Italia");
Telefonaktiebolaget LM Ericsson ("Ericsson"); Telefonica de Espana S.A.
("Telefonica"); Telenet AG ("Telenet"); Universal Music Group, ("Universal
Music") Van Doome Partnership ("Van Doome"); Versatel Telecom International N.V.
("Versatel"); Wind-Infostrada ("Wind-Infostrada"), a joint venture between ENEL
and France Telecom.
References in this report to "we," "our," "us," "COLT" or the
"Company" refer to COLT Telecom Group plc and, where appropriate, its
subsidiaries and to its predecessors and, where appropriate, their subsidiaries.
FORWARD-LOOKING STATEMENTS
This report, including the documents that are incorporated by
reference, contains statements, which constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
U.S. Federal Securities laws. These forward-looking statements appear in a
number of places in this report and include, among other things, statements
concerning:
o our strategies,
o beliefs or current expectations of our management,
o the business plan, its advantages and our strategy for
implementing the business plan,
o anticipated growth of the communications and information
services industry,
o expectations as to our future revenues, margins, expenses and
capital requirements,
o anticipated dates on which we will begin providing certain
services or reach specific milestones in the business plan,
and
o other statements of expectations, beliefs, trends, future
plans and strategies, anticipated developments and other
matters that are not historical facts.
You should be aware that these forward-looking statements are
subject to risks and uncertainties, including those Risk Factors described in
Item 3(D) of this report, financial, regulatory, environmental, industry growth
and trends, that could cause actual events or results to differ materially from
those expressed or implied by the statements. The most
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important factors that could prevent us from achieving our stated goals include,
but are not limited to:
o the adverse effects of a highly competitive market for our
products and services,
o our vulnerability to adverse general economic and industry
conditions because of leverage,
o our ability to obtain future financing on acceptable terms and
to sufficiently fund the business plan,
o changes in our key management professionals, and
o adverse changes in laws or regulations.
The information contained in this report and the documents that are
incorporated by reference, including information under the headings "Information
on the Company" and "Operating and Financial Review and Prospects" identify
other important factors that could cause such differences. We have no obligation
to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
-3-
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected financial data below is derived from the Financial
Statements, incorporated herein by reference from our 2002 Annual Report. The
audited financial statements at 31 December, 2000, 2001 and 2002 and for the
three fiscal years then ended have been audited by PricewaterhouseCoopers LLP,
Independent Chartered Accountants, as indicated in their report which is filed
as an exhibit to this report. The selected financial data should be read in
conjunction with the Financial Statements and related notes, as referred to
above, as well as Item 5 - "Operating and Financial Review and Prospects."
-4-
Profit and Loss Account Data
Amounts in accordance
with U.K. GAAP Year ended 31 December
--------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Turnover 215,052 401,552 686,977 905,687 1,027,258 1,653,372
Gross profit (loss) 42,701 77,947 120,073 (35,983) (424,686) (683,532)
Operating loss (34,130) (65,321) (84,913) (359,931) (778,594) (1,253,147)
Loss on ordinary activities
before taxation (55,602) (101,261) (116,860) (360,369) (718,282) (1,156,075)
Loss for year (55,602) (101,261) (116,860) (360,369) (718,282) (1,156,075)
Basic and diluted loss per
share (pound)(0.10) (pound)(0.16) (pound)(0.17) (pound)(0.48) (pound)(0.48) $ (0.77)
Dividends declared per
share (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 $ 0.00
Weighted average number
of Ordinary Shares (`000) 542,706 631,816 693,385 745,550 1,507,164 1,507,164
Basic and diluted loss per
ADS (pound)(0.41) (pound)(0.64) (pound)(0.67) (pound)(1.93) (pound)(1.91) $ (3.07)
Dividends declared per ADS (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 $ 0.00
Weighted average number
of ADSs (`000) 135,677 157,954 173,346 186,388 376,791 376,791
-5-
Amounts in accordance
with U.S. GAAP Year ended 31 December
--------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Turnover 215,052 401,552 621,263 878,225 1,026,721 1,652,507
Gross profit (loss) 42,701 77,947 90,133 (49,538) (320,864) (516,430)
Operating loss (36,312) (69,024) (104,532) (362,586) (674,098) (1,084,961)
Loss on ordinary activities
before taxation (55,688) (99,052) (121,924) (344,841) (611,130) (983,614)
Loss for year (55,688) (99,052) (121,924) (344,841) (611,130) (983,614)
Basic and diluted loss per
share (pound)(0.11) (pound)(0.16) (pound)(0.18) (pound)(0.54) (pound)(0.41) $ (0.65)
Dividends declared per share (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 $ 0.00
Weighted average number
of Ordinary Shares (`000) 499,528 631,816 693,385 745,550 1,507,164 1,507,164
Basic and diluted loss per
ADS (pound)(0.45) (pound)(0.63) (pound)(0.70) (pound)(2.16) (pound)(1.62) $ (2.61)
Dividends declared per ADS (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 (pound) 0.00 $ 0.00
Weighted average number
of ADSs (`000) 124,882 157,954 173,346 186,388 376,791 376,791
-6-
Balance Sheet Data
Amounts in accordance
with U.K. GAAP At 31 December
--------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Total assets 1,176,430 2,442,181 3,352,188 3,427,792 2,588,930 4,166,882
Creditors falling due after
more than one year
(including convertible debt) 671,522 1,205,321 1,426,307 1,318,025 1,193,899 1,921,581
Shareholders' equity 387,068 1,000,875 1,501,857 1,624,359 955,010 1,537,088
Amounts in accordance
with U.S. GAAP At 31 December
--------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Total assets 1,177,581 2,441,518 3,382,231 3,475,302 2,738,745 4,408,008
Creditors falling due after
more than one year
(including convertible debt) 671,522 1,205,321 1,426,307 1,318,025 1,193,899 1,921,581
Shareholders' equity 387,074 997,260 1,513,668 1,652,127 1,086,058 1,748,010
-7-
Exchange Rates
Solely for your convenience, this report contains translations of
certain pounds sterling amounts into U.S. dollars at specified rates. These
translations should not be read as representations that the pounds sterling
amounts actually represent such U.S. dollar amounts or could be converted into
U.S. dollars at the rate indicated or at any other rate. Unless otherwise
indicated, the translations of pounds sterling into U.S. dollars have been made
at $ 1.6095 per (pound)1.00, the Noon Buying Rate on 31 December 2002.
The table below sets forth, for the periods and dates indicated,
certain information concerning the Noon Buying Rates for British pounds sterling
expressed in U.S. dollars per pound. On 2 June 2003, the Noon Buying Rate was
$1.6372 per (pound)1.00.
Period
Period High Low Average(1) Period End
1998 1.72 1.61 1.66 1.66
1999 1.68 1.55 1.61 1.61
2000 1.65 1.40 1.51 1.50
2001 1.50 1.37 1.44 1.45
2002 1.61 1.41 1.51 1.61
2003 to (2 June) 1.65 1.55 1.61 1.64
(1) The average of the Noon Buying Rates on the last day of each full month
during the period.
The high and low exchange rate for each of the last 6 months was as
follows:
Month High Low
December 2002 1.61 1.56
January 2003 1.65 1.60
February 2003 1.65 1.57
March 2003 1.61 1.56
April 2003 1.60 1.55
May 2003 1.65 1.59
B. Capitalisation and Indebtedness
Not Applicable.
C. Reason for the Offer and Use of Proceeds
Not Applicable.
-8-
D. Risk Factors
In addition to the other information contained in this report, you
should carefully consider the following risk factors. If any of the possible
events described below occurs, our business, prospects, financial condition or
results of operations could be materially and adversely affected.
To Maintain a Competitive Position Within Our Industry, We Must Continually
Develop And Adapt Our Networks And Our Products To Meet Our Customers Needs
Although we have completed the main phase of our city and long
distance network builds, to be successful, we must continue to further develop
and adapt our networks and the products and services that we offer. We must be
prepared to provide new categories of telecommunications services in response to
changing customer needs. Failure to successfully deliver products and services
desired by our customers (due to operating or technical problems or otherwise),
could have a material adverse effect on our business, financial condition and
operating results.
If We Do Not Effectively Continue To Provide A High Level Of Customer Service,
Our Business Prospects Could Be Harmed And Our Financial Performance Adversely
Affected
We have grown rapidly in the last few years as our assets have been
developed. We expect the growth in revenues to continue, but the rate of that
growth to decline, as we gain greater utilisation of our assets. Our growth is
likely to place a significant strain on our administrative, operational and
financial resources and systems as we expand the scope of our services. To
continue to manage our growth successfully, we will have to further enhance our
operational, management, financial and information systems and controls and to
expand, train and manage our employee base. In addition, as we increase our
service offerings and expand our targeted markets, we will have to cope with the
additional demands on our customer support, sales, marketing and administrative
resources, whilst reducing our cost base.
We cannot ensure that we will be able to manage our growth
effectively. If we are unable to manage our expansion or cope with unforeseen
difficulties, we could lose customers, suffer damage to our reputation and incur
significant expenses. This could have a material adverse effect on our business,
financial condition and operating results.
We Are Subject To Uncertain And Changing Regulation That Could Change In A
Manner Adverse To Our Business
The telecommunications industry is highly regulated in all the
countries where we provide services. We are reliant on regulatory compliance to
engage in our business. We need licences or similar permits to carry on our
business in each of these countries. Our ability to establish and develop our
networks depends on obtaining and retaining appropriate licences, which in some
cases will require adopting and implementing a new regulatory regime. Our
ability to continue to provide services depends on our licences remaining in
force. In some cases these licences have expiry dates. We cannot ensure that we
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will be able to obtain, maintain or renew licences for our services, or that
these licences will be issued or renewed on terms or with fees that are
commercially viable. If we were to lose our licences, if we have substantial
limitations imposed upon our licence terms, or if there are any changes in the
regulatory environment, it could have a material adverse effect on our business,
financial condition and operating results.
The European Commission has issued a series of Directives which will
completely overhaul the regulatory regime in all European Union ("E.U.") Member
States (the "new regulatory package"). Our business may suffer because of
regulatory uncertainties and possible delays, inconsistencies and adverse
changes relating to the implementation of the new regulatory package. If the new
regulatory package is not implemented by the deadline of 25 July 2003 in a
particular country, the regulatory authority in that country may not have power
to enforce regulation until it is implemented.
We may also be the subject of burdensome regulatory requirements
imposed on us by regulators, including an obligation to pay money into universal
service funds.
Our Industry Is Highly Competitive With Participants That Have Greater Resources
Which Could Intensify Price Competition And Limit Our Ability to Increase Our
Market Share
The telecommunications industry is highly competitive. Competition
in the industry is based upon:
o price,
o customer service,
o network quality,
o products and services, and
o customer relationships.
We compete with the dominant national telephone companies that for
many years have provided local, long-distance and international services to
their customers. Their historically established networks, substantially greater
resources, closer ties to governmental authorities and longer operating
histories give them a competitive advantage over younger companies like ours. We
expect that we will encounter greater competition as we expand our network, and
we may suffer increased price competition and or be unable to expand our market
share as competitive pressures increase.
Our principal competitor in each market is the dominant national,
public telephone operator. We also face competition from other operators in each
market, some of which, such as MCI, operate internationally.
The financial failure of many of the alternative operators, although
reducing competitive pressures, also represents a short-term risk, as these
companies are our wholesale customers as well as competitors, so cancellation of
their business reduces revenues. These failures also represent an enhanced
credit risk exposure.
-10-
There is also the risk that increased competition will materialise
from those carriers that emerge from Chapter 11, or having gone through other
forms of debt restructuring, have beneficial financial structures and assets
acquired at low cost.
We May Not Be Able To Obtain And Maintain Government Approvals And Rights-of-Way
To Successfully Operate Our Business
Much of our business development, expansion and operation depend on
our ability to obtain licences and permits from central and local government
authorities and acceptable agreements for public and private rights-of-way. We
cannot ensure that we will be able to maintain our existing approvals and
rights-of-way or that we will be able to obtain the approvals and rights-of-way
required to connect new customers and enter new markets as needed. If our
existing approvals or rights-of-way were cancelled or not renewed, or if we were
unable to obtain the approvals or rights-of-way to expand in accordance with our
plans, then these events could have a material adverse effect on our business,
financial condition and operating results.
We May Not See A Return On Our Investment In Our Network
The development and construction costs of our networks has been
substantial, and as the demand for our network services is uncertain, we may not
make an economic return on our investment. In some locations, the investment may
prove not to be commercially justifiable. We cannot give an assurance that we
will make an economic return from investments in our networks nor as to the
timing of our doing so. In the event that we fail to generate significant
revenue from our network services or fail to do so in the time scale we
envisage, our business, financial condition and results of operations may
suffer.
Rapid Technological Changes Can Lead To Equipment Obsolescence
The telecommunications industry is subject to rapid and significant
changes in technology. In addition, the introduction of new products or
technologies may reduce the cost or increase the supply of certain services
similar to those that we provide. As a result, our competitors in the future may
be new entrants to the telecommunications industry. We cannot predict the effect
of technological changes on our business, such as changes relating to emerging
wireline and wireless transmission technologies. Technological changes and the
resulting competition could have a material adverse effect on our business,
financial condition and results of operations.
The telecommunications industry is a rapidly changing sector, and as
a result, we are exposed to changes in the depreciation rates we use to write
down equipment. This risk ranges from the life of some of our equipment being
shortened to the extreme whereby a current technology is deemed obsolete,
requiring a substantial write-down.
Physical Loss Or Damage To One Of Our Major Sites Could Disrupt Our Business
We depend on electronic equipment, which is inherently susceptible
to fire, smoke and water damage. This means that a significant incident at one
of our major sites could cause disruption to the business. Fire and security
systems mitigate these risks, while business continuity / crisis management
plans and insurance should mitigate any impact. However, the withdrawal of
insurance coverage (for example on account of terrorism risks) may limit the
effectiveness of our protection mechanisms.
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Electronic Attack From Hackers Or Computer Viruses Could Disrupt Our Business
Although our systems are protected by firewalls, there is a risk
that the business could be disrupted by hackers or viruses gaining access to our
systems. Our exposure to liabilities from our customers, particularly on
Internet services, where case law is developing quickly, is risk managed through
contract conditions and insurance. However, the latter is limited with regard to
disruption caused by viruses or hackers.
We May Be Unable To Hire And Retain Qualified Personnel
We compete with other telecommunications operators for highly
qualified sales, marketing, administrative, operating and technical personnel.
Our success depends on our ability to attract, hire and retain enough qualified
personnel, and we cannot ensure that we will be able to do so. In addition, a
small number of management and operating personnel manage our business. The loss
of certain of these individuals could have a material adverse impact on our
business, financial condition and operating results.
Onerous Contract Conditions Could Damage Our Competitiveness
Contract management is undertaken using both in-house lawyers and
external legal advisors. However, unduly onerous contracts with suppliers,
customers, or employees could adversely impact the business, making achievement
of our business plan more difficult.
Failure Of Key Suppliers Could Affect Our Ability To Operate Our Business
We are reliant on a consistent and effective supply chain to meet
our business plan commitments. The current economic scenario that both
telecommunications equipment suppliers and information technology software
suppliers presently face has led to the risk of:
o delays to new products and features from suppliers, impacting
our product development programs,
o products being discontinued, impacting supply of existing
products,
o deteriorating support quality, affecting operational and
customer service, and
o higher volatility with regard to our demands on suppliers, and
in stock levels affected by customer returned equipment.
We May Not Be Able To Deliver Sales Expectations And Revenue Mix
We have adopted an infrastructure-based strategy entailing
significant investment based on the expectation of future sales and resulting
revenues and profits. Over the long term to the extent that we cannot deliver on
these expectations, whether as a result of our failure or as a result of a
material change in the environment, then the business may be unprofitable and
returns on investment may not materialise. In the short term, if we are unable
to deliver on quarterly results expectations, both in terms of total revenue and
the mix between 'switched' and 'non-switched' revenue, it could have a material
impact on our market valuation.
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We regularly review revenue expectations as part of our reporting
processes. Revenue trends and mix are quickly identified and to the extent
possible, remedial action is taken. As the majority of capital investment is now
made to grow our business, to the extent that revenues do not develop as
expected, the capital investment is scaled back accordingly.
There Are Potential Conflicts Of Interest Related To Our Controlling
Shareholders Which Could Be Resolved In A Manner Unfavorable To Us
FMR Corp. ("Fidelity") and certain other related persons (the
"Fidelity Group") have voting control of approximately 56.0% of our issued
Ordinary Shares. As a result of the level of the Fidelity Group's ownership, it
is able to exercise control and purchase additional Ordinary Shares without
making a general offer for all of our Ordinary Shares under Rule 9 of the U.K.
Takeover Code.
As long as the Fidelity Group owns, or has voting control of, at
least 50% of our Ordinary Shares, the terms of the relationship agreement among
COLT and certain members of the Fidelity Group restrict us from issuing any
Ordinary Shares or other equity securities (including securities convertible
into Ordinary Shares), subject to certain exceptions, without the prior written
consent of Fidelity. The concentration of stock ownership could have the effect
of delaying or preventing a change of control of our company or the removal of
existing management and may discourage attempts to do so, which could be
contrary to our interests. The relationship agreement, which continues in effect
so long as the Fidelity Group holds at least 30% of our share capital, also
provides that the Fidelity Group will not acquire more of our Ordinary Shares
if, as a result of doing so, less than 25% of our Ordinary Shares would be held
by members of the public.
We Have A History Of Operating Losses And Expect These Losses To Continue
We have incurred operating losses and negative cash flows while
installing, developing and expanding our telecommunications network and building
our customer base. For the year ended 31 December 2002, these operating losses
totalled (pound)190.3 million, before exceptional items of (pound)588.2 million.
In addition, we had net cash outflows from returns on investments
and servicing of finance, capital expenditure, financial investment and
acquisitions and disposals of (pound)780.8 million in 2001 and (pound)439.3
million in 2002. The decrease in net cash outflows was primarily as a result of
reduced purchases of tangible fixed assets, which decreased from (pound)804.3
million in 2001 to (pound)412.1 million in 2002.
We expect these operating losses and negative cash flows to continue
while we expand our business. We cannot guarantee that our operations will
become profitable or that we will have positive cash flows in the future. If we
cannot sustain profitability or positive cash flows, we probably will not be
able to meet our capital requirements or make our required debt payments. If
this happens, then our Ordinary Shares will have little or no value.
-13-
Failure To Finance Our High Capital Requirements Could Adversely Affect Our
Business Plan
We may depend on additional capital to finance our continuing
capital requirements. The extent of our future capital requirements will depend
on many factors, including:
o the success of our business,
o the rate at which we expand our networks,
o the types of services we offer,
o staffing levels,
o acquisitions, and
o the growth of our customer base.
Our capital requirements also depend on factors beyond our control,
such as:
o competition,
o government regulations, and
o capital costs.
We are currently undertaking a cost reduction programme, which if
not successfully implemented will threaten the cash flow expectations within our
business plan.
Our business plan involves significant capital expenditures in
addition to funding operating and financing costs. Capital expenditures, for
example, are expected to total between (pound)220 million and (pound)270 million
during 2003. Under the current business plan, current cash balances are expected
to be sufficient to fund us to the point where the company is free cash flow
positive (net cash inflow from the total of operating activities, returns on
investments and servicing of finance and outflow from capital expenditure and
financial investment). However, if cash flow expectations on the existing
business plan are not accurate, we could require additional funding.
We may require additional funds, if:
o we enlarge the scope of our expansion plans,
o our plans or assumptions change or prove to be inaccurate, or
o we make any significant acquisitions.
Additional sources of financing may include equity, hybrid
debt/equity and debt financings or other arrangements, such as vendor financing.
We cannot be sure that we will be able to obtain additional financing on
acceptable terms when it is required. In addition, for as long as Fidelity and
certain related parties own or have voting control over at least 50% of our
Ordinary Shares, we would need Fidelity's consent to sell any additional equity
securities under the relationship agreement. If Fidelity's consent were
necessary and we were unable to obtain this consent, we would be unable to raise
additional equity capital. At 2 June 2003, Fidelity had voting control of
approximately 56.0% of our Ordinary Shares.
-14-
If we are unable at any time to obtain any necessary financing, we
may have to postpone or abandon some or all of our expansion or spending plans.
This may limit our ability to make payments on our debt and may cause the prices
of our Ordinary Shares and American Depositary Shares ("ADSs") to fall.
Currency Fluctuations May Adversely Affect Our Results
Our international operations expose us to fluctuations in foreign
currencies, particularly the Euro, and as we expand into new markets, we will be
increasingly exposed to such fluctuations. A majority of our revenues, costs,
assets and liabilities are denominated in foreign currencies, but our financial
condition and results of operations are reported in British pounds sterling. As
a result, fluctuations in the value of these foreign currencies will affect our
financial and operational results.
Some of our notes also expose us to exchange rate fluctuations
because payments of principal and interest will be made in U.S. dollars, British
pounds sterling and Euros, but a substantial part of our future cash flow used
to service these payments will be denominated in Euros and other local
currencies. We may be required to maintain financial hedging instruments to
offset any exchange rate risk with respect to some of our notes. We do not
currently intend to use other financial hedging instruments to offset exchange
rate risk.
Our Substantial Level of Debt May Inhibit Future Results
At 31 December 2002, our total indebtedness was approximately
(pound)1,193.9 million ($1,921.6 million), and our capital and reserves were
(pound)955.0 million ($1,537.1 million) and on 31 May 2003 and after the
purchase of part of our debt our total indebtedness was approximately
(pound)1,273.9 million ($2,088.3 million) and our capital and reserves were
(pound)942.6 million ($1,545.3 million).
Our level of indebtedness could affect us in materially adverse
ways, such as:
o limiting our ability to obtain additional financing for our
capital expenditures, acquisitions, working capital or other
general requirements,
o requiring the dedication of a substantial portion of our cash
flow from operations to the payment of principal of, and
interest on, our indebtedness, which means that this cash flow
will not be available to fund capital expenditures or other
corporate purposes,
o limiting our flexibility in planning for, or reacting to,
changes in our business, the competitive environment and the
industry,
o placing us at a competitive disadvantage to competitors with
less debt,
-15-
o making us more vulnerable to economic downturns, which could
weaken our ability to compete effectively and could reduce our
flexibility in responding to changing economic conditions, and
o limiting our ability to take advantage of new business
opportunities.
Our Ability To Make Our Debt Payments In The Future May Necessitate Refinancing
Which May Not Be Available
Our ability to meet our debt obligations will depend on whether we
can successfully implement our strategy, as well as on financial, competitive,
legal and technical factors, including some factors that are beyond our control.
If we are unable to generate sufficient cash flows from operations to meet
principal and interest payments on our debt, we may have to refinance all or
part of our debt. Cash flows from our operations may be insufficient to repay in
full at maturity our outstanding notes, and some of our notes may need to be
refinanced. If that happens, our ability to refinance the notes will depend on,
among other things:
o our financial condition at the time,
o restrictions in agreements governing our debt, and
o other factors, including market conditions.
We cannot ensure that any such refinancing would be possible on
terms that we could accept or that we could obtain additional financing. If
refinancing were not possible or if additional financing were not available, we
may have to sell our assets under circumstances that might not yield the highest
prices, or default on our debt obligations, including our notes, which would
permit the holders of our notes to accelerate their maturity dates.
Our Debt Covenants Limit Our Financing Activity
Our indentures (except for the indentures for the four series of our
senior convertible notes) contain restrictive covenants that affect, and in some
cases significantly limit or prohibit, among other things, our ability to:
o incur indebtedness,
o make prepayments of certain indebtedness,
o pay dividends,
o make investments,
o engage in transactions with stockholders and affiliates,
o issue capital stock,
-16-
o create liens,
o sell assets, and
o engage in mergers and consolidations.
If we fail to comply with the restrictive covenants in these
indentures our obligations to repay our notes may be accelerated.
The indentures for the four series of our senior convertible notes
do not contain restrictive covenants, other than a limitation on liens and a
limitation on sale-leaseback transactions.
Unavailability of Cash Flows Could Affect our Ability to Service our Debt
Generally. We are a holding company for our subsidiaries and have no
material business operations, sources of income or assets other than the stock
of our subsidiaries. Because we conduct our operations through subsidiaries, our
cash flow and our ability to meet our obligations under our notes, including
payment of principal, premium, if any, and interest, depends upon the cash flow
of our subsidiaries and their dividends, fees, loans and other payments to us.
Our subsidiaries will have no obligations to make any payments under our notes
or to make funds available to us so that we can make these payments.
Restrictions on Distributions. Some of our subsidiaries may be
governed by local laws regarding how much they may pay in dividends or in what
situations they may pay dividends. For example, these laws may prohibit dividend
payments when net assets would fall below subscribed share capital, when the
subsidiary lacks available profits or when the subsidiary fails to meet certain
capital and reserve requirements. In addition, some of our financing
arrangements also limit the situations where our subsidiaries may pay us
dividends or make loans or other distributions.
Subordination to our Subsidiaries' Creditors. Our subsidiaries do
not guarantee payment of our obligations under our notes. Thus, our right to
receive the assets of any subsidiary upon its liquidation or reorganisation is
subordinated to the claims of the subsidiary's creditors, except where we are a
creditor of the subsidiary. If we were a creditor of a subsidiary, our right to
be paid back would be subordinated to any indebtedness of the subsidiary that
was either:
o secured by a security interest in that subsidiary's assets, or
o senior to that subsidiary's indebtedness to us.
The Price Of Our Securities May Be Volatile And You May Not Be Able to Resell
Your Shares At Or Above The Price You Paid For Them
The market price for our Ordinary Shares and ADSs may vary greatly
from time to time, both up and down and you may not be able to resell your
shares at or above the price you paid for them. This may be due to a number of
factors, including:
-17-
o the depth and liquidity of the market for our Ordinary Shares
and ADSs,
o investor perceptions of our company (including our financial
condition and results of operations) and other
telecommunications companies,
o competition, regulatory conditions and the status of
telecommunications liberalisation in Europe, and
o fluctuations in foreign exchange rates.
In addition, broad market fluctuations and general economic
conditions may adversely affect the market price of our Ordinary Shares and
ADSs, regardless of our actual performance.
There Are A Substantial Number Of Shares Eligible For Future Sale Which If
Issued Could Adversely Affect The Market Price For Our Securities
Future sales of substantial amounts of Ordinary Shares in the public
market, or even a perception that such sales may occur, could have an adverse
effect on the market price for the Ordinary Shares and ADSs or on our ability to
raise capital through a public offering of equity securities. At 2 June 2003,
there were approximately 1,507 million Ordinary Shares issued of which
approximately 843.4 million were held by our affiliates and therefore are not
freely tradeable without restriction under the Securities Act of 1933.
Additional Ordinary Shares will be issued from time to time upon:
o the conversion of our convertible notes, and
o the exercise of our stock options and warrants.
We Do Not Intend To Pay Dividends
We have never paid dividends on our Ordinary Shares, and we do not
expect to pay dividends in the foreseeable future. Instead, we intend to retain
all our earnings for use in our business. Furthermore, the terms of some of our
financing arrangements restrict us from paying dividends.
If You Hold Shares Through American Depositary Shares, You May Have Less Access
To Information About Our Company And Less Opportunity To Exercise Your Rights As
A Shareholder
There are risks associated with holding our shares in the form of
ADSs since we are a public company organised under the laws of England and
Wales. The depositary will appear in our records as the holder of all shares
represented by the ADSs and your rights as a holder of ADSs will be contained in
the deposit agreement. Your rights as a holder of ADSs will differ in various
ways from a shareholder's rights, and you may be affected in other ways,
including:
-18-
o you may not be able to vote if we do not ask the depositary to
ask for your instructions or if you do not receive the voting
materials either in time to instruct the depositary or at all,
o you may not be able to participate in rights offers or
dividend alternatives if, in the discretion of the depositary,
after consultation with us, it is unlawful or not feasible to
do so,
o the deposit agreement may be amended by us and the depositary,
or may be terminated by us or the depositary, each within
thirty days notice to you and without your consent in a manner
that could prejudice your rights, and
o the deposit agreement limits our obligations and liabilities
and those of the depositary.
We Might Have Been A Passive Foreign Investment Company For 2002, And Might Be
One For 2003
Based on an analysis of current law and of our financial position,
discussed in more detail below under "Taxation - U.S. Federal Income Tax
Consequences - Passive Foreign Investment Company," we believe that we might
have been a passive foreign investment company for U.S. federal income tax
purposes for 2002, and that we might be such a passive foreign investment
company for 2003. We do not believe we have been one for any year prior to 2002.
These are factual determinations made separately for each calendar year, and we
cannot guarantee that the IRS will agree with our methodology for ascertaining
passive foreign investment company status or with our ultimate determination. In
addition, because passive foreign investment company status is in part based on
facts on and through 31 December of each year, it is not possible to determine
whether we will have become a passive foreign investment company for a calendar
year until after the close of the year, when we finalise our financial
information on and through 31 December. Also, we cannot provide any assurance
that the applicable tax law or other relevant circumstances will not change in a
manner which affects determinations of our status as a passive foreign
investment company.
If we are a passive foreign investment company for a taxable year
and you hold our Ordinary Shares, ADSs, or other of our securities convertible
into Ordinary Shares or ADSs at any time during that taxable year, then you
could be subject to an increased tax liability, possibly including an interest
charge, under the default U.S. federal income tax regime for passive foreign
investment companies. Alternatively, you might be subject to some tax liability
if you are eligible to elect one of two alternative tax regimes.
The three different tax regimes for passive foreign investment
company shareholders are discussed in more detail below under the heading
"Taxation - U.S. Federal Income Tax Consequences - Passive Foreign Investment
Company." They are extremely complicated and the most appropriate regime for you
is dependent on your personal tax situation. Accordingly, you should consult
your personal tax advisor as to which of the three tax regimes would be best for
you.
-19-
It May Be Difficult For Investors To Effect Service Of Process And Enforce Legal
Process Against Our Directors And Executive Officers Outside The United States
We are incorporated under the laws of England and Wales, and most of
our directors and executive officers and certain of the experts named in this
report are residents of the United Kingdom or other countries outside the United
States. Substantially all of our assets and the assets of such persons are
located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon us or upon
such persons, or to enforce against us or against such persons in courts inside
or outside the United States judgements of courts inside the United States based
upon the civil liability provisions of United States securities laws or to
enforce, in an original action brought outside the United States, rights based
on such provisions.
There Is A Limit To The Payments That Can Be Made In Case Of A Liquidation
If we go into liquidation in England the claim of a noteholder for
amounts owing under our notes may be limited to the issue price of the notes.
Any cash interest accruing under our notes for any period after we go into
liquidation would not be recoverable by noteholders in a liquidation. However,
U.K. insolvency law provides for any surplus remaining after payment of all
other debts provided in a liquidation to be available for paying interest
accrued on debts in respect of any period after the start of the liquidation.
The Loss Of Large Customers Or Changes In Their Purchasing Patterns Could
Adversely Affect Our Results
The loss of purchases from our larger customers, including resale
carriers, for any reason, including downturns in the economy, decisions by them
to cut back on staff or services, or loss of confidence arising from quality
issues, would undermine one of our important competitive strengths and could
have an adverse impact on our results. As occurred in 2001 and 2002, termination
of contracts for the provision of wholesale products and services to other
carriers could result in a substantial loss of revenue.
The Current Economic Downturn May Worsen Or Last Longer Than Anticipated Which
Could Adversely Affect Our Results And Our Ability to Remain In Compliance With
Our Debt Covenants
The current downturn in the global economy is adversely affecting
our business. While we cannot predict the depth or duration of these effects, we
have made plans assuming that the current economic conditions will remain
unchanged and will adversely affect our order flow and results through to at
least the end of 2003. We continue to take actions to reduce costs in light of
the downturn. However, if the downturn is more severe or longer in duration than
expected, our financial condition could worsen, and we could fail to remain in
compliance with our financial covenants under our debt obligations.
-20-
Competitive Pricing Pressures Could Reduce Our Results And Cash Flow
In our business, competition is based on product features, service
quality, reliability, breadth of product offerings, customer relationships and
price. We expect the competitive environment in which we operate to remain
difficult for the foreseeable future. We have a number of competitors, each
offering the same or similar services in geographic regions in which we operate
some of which have greater financial and marketing resources than we do. Price
is a very important competitive factor in our industry. Sustained competition on
price would decrease our margins on sales and would therefore impact our results
and cash flow.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
COLT Telecom Group plc, commercially known as COLT, was organised as
a public limited company under the laws of England and Wales in 1996 as a
holding company for operations already commenced in the U.K. in 1993 and Germany
in 1996.
We own and operate modern fibre-optic networks in many of the major
financial and business centres of Europe. At 31 December 2002, we operated an
integrated international digital fibre optic network of approximately 20,000
route kilometres (12,420 route miles) providing long distance international
network facilities, linking 32 major cities in 13 countries augmented by a
further 27 points of presence and 11 Internet solution centres, across Europe,
and providing service to customers in 9,238 buildings.
We initiated service in London in October 1993, in Frankfurt in
March 1996, in Paris in June 1997, in Munich in August 1997, in Hamburg in
September 1997, in Berlin in December 1997, in Zurich in June 1998, in Amsterdam
and Brussels in July 1998, in Madrid in August 1998, in Dusseldorf in September
1998, in Stuttgart in March 1999, in Milan in April 1999, in Geneva in May 1999,
in Lyon, Vienna, Cologne and Barcelona in June 1999, in Rotterdam and Marseilles
in December 1999, in Turin in March 2000, in Hanover in May 2000, in Antwerp and
Rome in September 2000, in Stockholm in October 2000, in Birmingham and Dublin
in December 2000, in Copenhagen and The Hague in September 2001, in Lisbon and
Valencia in November 2001 and in Manchester in December 2001.
Capital expenditure was (pound)412.1 million in 2002, compared with
(pound)804.3 million for 2001, a reduction of 49%, and (pound)639.0 million in
2000. Capital expenditure paid for in 2002 also included approximately
(pound)125 million in respect of prior year's infrastructure investment.
Importantly, this substantial reduction reflects the completion of the
infrastructure construction phase of the business plan at the end of 2001. We
anticipate further reductions in capital expenditure during 2003 to an
approximate level of between (pound)220 million and (pound)270 million, as a
result of our change of emphasis from the network build phase to exploitation of
the assets.
Our registered address is Beaufort House, 15 St. Botolph Street,
London EC3A 7QN , England and our phone number is +44 20 7863 5000.
-21-
B. Business Overview
We are a leading provider of high bandwidth data, Internet, voice
and advanced business communications services. We have constructed, own and
operate modern, competitive local and international telecommunications networks
that employ optical transport technologies with dual path architectures being
the accepted industry standards for high quality fibre-optic transmissions. In
order to optimise performance across a range of services a mix of synchronous
digital hierarchy ("SDH") transmission technology, asynchronous transfer mode
("ATM") cell switched technology and Internet protocol ("IP") technology is
used. These technologies enable communication for fixed bandwidth traffic,
traffic of variable speeds and Internet based traffic, respectively, regardless
of the hardware, software or protocol used by our customers.
Our fibre optic local city-networks and our Internet Solution
Centres are inter-linked to form a single IP-based pan-European network.
Monitoring and maintenance of each of these networks is centralised. Our
advanced networks, combined with our superior customer service, allow us to
provide telecommunications-intensive customers with uniform, reliable, high
quality services which are competitive with services provided by dominant local
public telephone operators ("PTOs") and other providers.
Our focus is on the financial and business centres of Europe and our
customers are primarily large corporate, business and government end users, many
of whom have operations in more than one city in which we operate. Therefore, we
provide services to many of our customers in more than one city. We also provide
a range of services to other telecommunications carriers. Our goal is to be the
most successful European provider of business communication services.
We offer a broad range of high bandwidth data, Internet, voice and
advanced telecommunications services including: (i) private wire services; (ii)
switched telephony services for directly connected customers; (iii) local area
network interconnect services; (iv) intercity network end-to-end pan-European
connectivity ("Euro-LAN"); (v) video transmission services; (vi) switched
telephony services for customers indirectly connected to our network and (vii)
Internet access, web hosting and other value added services.
We are able to provide, through our local access to major businesses
and high bandwidth inter-city links, the backbone transmission capacity needed
for transaction based services on the Internet. We also provide value added
services including application service provider enabling, content distribution
and web hosting services.
In response to increasing customer demand and the significant
bandwidth and end-to-end connectivity requirements of current and future
enhanced products and services, we have constructed our Euro-LAN inter-city
network infrastructure to form a network of national and international
facilities linking our local city-networks. The Euro-LAN enables us to reach a
broader target market and to provide unique, end to end European products and
services. Wavelength services, for example, provide extremely high capacity from
building to building on the network. Customers are able to rapidly transmit
large volumes of information from end to end over a single network.
The construction of the Euro-LAN, linking together our local
networks, commenced during 2000 and was completed during 2002. It now comprises
approximately 15,000 route kilometres of long distance capability inter-linking
not only our major network cities, but also a further 27 cities where we have
established points-of-presence. The Euro-LAN is entirely operational now that we
-22-
have completed the final section in Spain between Barcelona and Valencia, which
became operational during 2002. We are also exploring the possibility of
acquiring additional transatlantic capacity.
During 2002 we continued to grow our Digital Subscriber Line ("DSL")
business and at the end of the year had approximately 5,000 DSL lines in
service. DSL technology enhances local copper loops to enable high-speed digital
connections for carrying data. The use of DSL allows us to extend the range of
services we can offer to large corporate customers, as well as to expand the
addressable market for services to small and medium sized companies and broaden
penetration of target markets in cities where our networks are already
operating. The deployment of DSL enables us to offer a range of voice and data
products to customers who do not have the volume of business to justify a direct
fibre optic connection but wish, for example, to connect their branch offices
and remote locations. Services that are available over DSL include voice
services, virtual private networks, e-mail, web hosting, security and storage
services. Customers are able to tailor their own package from a menu of
services. COLT Internet offers high quality, high speed data rates while
providing users with the benefits of both an ATM transatlantic backbone network
as well as our local SDH access network. We have eleven Internet Solution
Centres ("ISCs") in service, each one integrated into one of our fibre optic
networks, in: London (2), Frankfurt, Paris (2), Amsterdam, Milan, Madrid,
Berlin, Barcelona and Turin.
Our ISCs offer customers a managed environment for outsourcing their
web infrastructure and other services. More significantly, they are the enabling
platforms for a range of communications intensive products and services that we
expect will create incremental network revenue opportunities.
Internet Protocol Virtual Private Network ("IPVPN") services were
initially launched in France and Germany during 2000. We have since extended our
IPVPN offering and have continued to expand our IPVPN customer base. At 31
December 2002, we had 433 customers utilising IPVPN services at 1,989 sites
across Europe.
These services simulate private networks while the purchaser only
actually leases lines to the local operator and the rest of the service is
handled on the operator's network to mimic a fully leased network. IPVPNs mirror
the speed, security and configuration flexibility of private wire networks. They
allow businesses to create communications networks tailored to their specific
business requirements, but, because they are "virtual" rather than hardwired,
they can be created quickly, cost effectively and with more potential for
mobility and remote connection.
Eventually, we expect our IPVPN offering to comprise a suite of
products, ranging from basic connectivity through to security, authentication
and accreditation, dial up access and other value added services. In 2001, we
introduced a remote access service, offering customers true roaming capability
so that they can link their users, branches and offices with an IPVPN over our
network and Internet facilities. In 2002, we launched a high level encryption
capability to strengthen remote access security.
We intend to make continued and significant additional investments
in both advanced telecommunications and Internet-related services. The
development of intranet services is expected to continue, providing connectivity
-23-
for corporations on a local, national and international scale, establishing
Internet points of presence ("POPs"), as well as creating an overlay network
directly connecting major Internet service providers.
During 2002, we continued to expand our service range. We launched
our media streaming service. This service, directed at the corporate, Internet
service provider and the Small to Medium Enterprise markets, allows companies to
store and deliver rich content and multimedia (video, audio or both) across our
entire network. In addition, as we own the network, we have a high level of
control over the quality and security of the service.
During 2002, we also continued to expand our presence in the
metropolitan markets in Europe and, by the end of 2002, operated metropolitan
area networks in a total of 32 European cities across 13 countries with a
further 27 other network cities connected by establishing POPs, and 11 ISCs. We
may continue to widen our geographical coverage further, in selected markets, by
establishing POPs in smaller cities without building networks.
We remain uniquely positioned across Europe with local, national and
international fibre infrastructure, an extensive hosting footprint and the
technology and service partnership foundations to significantly expand our
product and service range as we grow in 2003.
Based in London, we currently operate networks in 32 cities: London,
Frankfurt, Paris, Munich, Hamburg, Berlin, Stuttgart, Dusseldorf, Zurich,
Amsterdam, Brussels, Madrid, Milan, Geneva, Vienna, Lyon, Cologne, Barcelona,
Rotterdam, Marseilles, Turin, Hanover, Antwerp, Rome, Stockholm, Birmingham,
Dublin, Copenhagen, The Hague, Lisbon, Valencia and Manchester.
North Region
The North Region comprises the countries of Belgium, Denmark,
Ireland, The Netherlands, Sweden and the United Kingdom. Our revenues in the
region reached (pound)331.5 million in 2002. The total telecommunications market
in our North Region countries is approximately 35.49% of the total
telecommunications market of the E.U. plus Norway and Switzerland1
At 31 December 2002 we had 11 city-networks operational: Amsterdam,
Antwerp, Birmingham, Brussels, Copenhagen, Dublin, London, Manchester, The
Hague, Rotterdam and Stockholm. A further 343 buildings were added during the
year, bringing the total at 31 December 2002 to 2,730. DSL based services were
available from 106 central offices at the end of the year, compared with 59 at
the end of 2001.
- --------
1 Market data in this section is derived from the "European
Information Technology Observatory 2003" (11th edition, ISSN 0947-4862), pages
349 and following. Please refer to the source for details.
-24-
Central Region
The Central Region comprises the countries of Austria, Germany and
Switzerland. Our revenues in the region reached (pound)429.8 million in 2002.
The total telecommunications market in the Central Region countries comprises
approximately 26.79% of the telecommunications market of the E.U. plus Norway
and Switzerland.
At 31 December 2002, we had 11 city-networks operational: Berlin,
Cologne, Dusseldorf, Frankfurt, Geneva, Hamburg, Hanover, Munich, Stuttgart,
Vienna and Zurich. A further 356 buildings were added during the year, bringing
the total at 31 December 2002 to 3,784. DSL based services were available from
324 central offices at the end of the year, compared with 247 at the end of
2001.
South Region
The South Region comprises the countries of France, Italy, Portugal
and Spain.
At 31 December 2002, there were 10 city-networks operational:
Barcelona, Lisbon, Lyon, Madrid, Marseilles, Milan, Paris, Rome, Turin and
Valencia. We derived (pound)265.9 million of our revenues from the South Region
in 2002. The South Region countries account for approximately 35.86% of the
total telecommunications market of the E.U. plus Norway and Switzerland.
A further 696 buildings were added to our network during the year
bringing the total at 31 December 2002 to 2,724. DSL based services were
available from 89 central offices at the end of the year compared with 45 at the
end of 2001.
New Markets
We intend to expand our business in our existing metropolitan
markets by delivering added value products and services that effectively target
specific customer segments, by continuing to leverage our local presence and
market knowledge and our reputation for excellent customer service and to build
our multi-national customer business via more focused multi-national account
management and our ability to offer global connectivity via our fully owned and
managed network. We may expand our business in other metropolitan markets in
Europe, by establishing POPs rather than building additional networks. We may
also take advantage of other market opportunities in cities in Europe, as they
become available. These opportunities may be in the form of the acquisition of a
company, which has an existing licence or an application for a licence and
operating rights. Prior to entering a new market, we conduct an analysis of the
demographic, economic, competitive and telecommunications demand characteristics
of the market as well as applicable regulations affecting development in the
market.
-25-
Inter-city Network
Since the completion in 2002 of the Barcelona to Valencia segment,
our Euro-LAN is now complete and entirely operational. Our Euro-LAN joins our
local networks across Europe and gives us a high degree of control over service
quality on a pan-European basis. The Euro-LAN infrastructure offers us the
opportunity to provide unique, end-to-end European products and services.
Customers are able to rapidly transmit large volumes of information from end to
end over a single network. In total, we now have approximately 20,000 route
kilometres of metropolitan and international network in operation serving and
inter-linking not only our major network cities but also 27 cities where we have
established points-of-presence. These international facilities enable us to meet
customer demand for significant bandwidth and end-to-end connectivity
requirements.
-26-
Breakdown of revenues by segment
Year ended 31 December 2002
North Region Central Region South Region Corporate Total
and
eliminations
Turnover (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Switched 213,025 309,458 164,871 (63,971) 623,383 1,003,335
Non-switched 140,517 142,829 94,218 (27,041) 350,523 564,167
eBusiness 15,446 8,488 29,209 (1,613) 51,530 82,937
Other 65 1,330 485 (58) 1,822 2,933
Inter region
Revenue (37,543) (32,300) (22,840) 92,683 -- --
--------- --------- --------- --------- --------- ---------
Total 331,510 429,805 265,943 -- 1,027,258 1,653,372
========= ========= ========= ========= ========= =========
Year ended 31 December 2001
North Region Central Region South Region Corporate Total
and
eliminations
Turnover (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Switched 222,670 262,749 125,646 (78,418) 532,647 857,296
Non-switched 121,775 139,098 76,295 (13,741) 323,427 520,556
EBusiness 11,145 8,445 25,772 (2,084) 43,278 69,656
Other (i) 158 5,860 456 (139) 6,335 10,196
Inter region
Revenue (42,822) (35,810) (15,750) 94,382 -- --
--------- --------- --------- --------- --------- ---------
Total 312,926 380,342 212,419 -- 905,687 1,457,704
========= ========= ========= ========= ========= =========
<FN>
(i) Central Region "Other" includes infrastructure sales of (pound)3,829,000.
</FN>
Year ended 31 December 2000
North Region Central Region South Region Corporate Total
and
eliminations
Turnover (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 $'000
Switched 183,282 196,891 82,469 (57,373) 405,269 652,280
Non-switched 96,588 93,564 50,898 (8,193) 232,857 374,783
Other (i) 480 47,942 494 (65) 48,851 78,626
Inter region
Revenue (17,226) (34,538) (13,867) 65,631 -- --
--------- --------- --------- --------- --------- ---------
Total 263,124 303,859 119,994 -- 686,977 1,105,689
========= ========= ========= ========= ========= =========
<FN>
(i) Central Region "Other" includes infrastructure sales of (pound)46,212,000.
</FN>
-27-
Services
We are a leading pan-European provider of business communication
services and we operate in a single segment: telecommunications. The services,
which we provide, can be broken down into two general categories: switched and
non-switched.
The range of services offered by us in any particular market may
vary because of the extent of telecommunications liberalisation in the market
and other business considerations.
Switched Services
Switched services involve the transmission of voice, data or video
to locations specified by end users or carriers. We have the technological
capability to provide a full range of switched services, including local,
national and international calls as well as enhanced services. Switched services
include the following:
COLT Line. Through our switching centres and interconnection
arrangements with other carriers, COLT Line switched service offers customers an
economical and flexible way to make telephone calls on a local, national or
international basis. COLT Line provides several enhanced calling features as
well as a choice of digital or analogue connectivity with multiple service
options. COLT Line Enhanced provides a variety of additional features normally
only available with virtual private network ("VPN") or Centrex services,
including desk-to-desk dialling, four-digit dialling and full network monitoring
and maintenance. Full customer support is provided, with a dedicated account
manager and customer helpdesk.
COLT Line DualHoming. COLT Line DualHoming is a security solution
offering the highest level of security for incoming and outgoing traffic where
more than one public exchange is attached. It is especially well suited to
customers with any kind of critical applications.
COLT Line DistributedTraffic. COLT Line DistributedTraffic is a
security solution offering the distribution of all incoming traffic to multiple
customer locations using the same number range, including the balancing and
overflow management of incoming traffic. This solution is best suited to
customers, who require traffic management over two or more geographical
locations.
COLT Line DisasterRecovery. COLT Line DisasterRecovery is a security
solution offering the diversion of traffic for a specific number range to a
definable destination in the case of total system failure. The destination and
the duration of the diversion are flexible and are password protected.
COLT Connect. COLT Connect is an indirect telecommunications service
available to business users who are not connected to our network, giving
customers an economical and flexible way to make local, national and
international calls. Acting as a 'broker' on behalf of the user, we can use our
bulk buying power to continually negotiate the most competitive prices for our
customers without compromising service or quality. This product allows us to
serve markets beyond the reach of our core infrastructure, enabling us to
provide service nationally without building a national network.
-28-
COLT BusinessConnect. COLT BusinessConnect is an advanced portfolio
of intelligent network (IN) telephone numbers. We supply the service either to
on- or off-Net customers. This service is mainly used as a marketing instrument.
Non-Switched Services
Non-switched services involve a fixed communications link or "pipe"
between specific locations. Our non-switched services currently include the
following:
COLT Link. Through our COLT Link services, we offer customers a full
range of digital and analogue private wire services, ranging from low-speed
voice circuits (64 kilobits per second and lower speeds) to high-speed links of
34, 45, 155 and 622 megabits per second. Broadcast and multiple link services
are also available. The resilience of the SDH network provides users with a high
level of reliability for critical applications. These are local (within a city)
or national (within a country) "private wire" services. We also offer
international private wire services.
COLT LANLink. COLT LANLink offers a high performance connection for
geographically distributed local area networks ("LANs"). The communication of
data uses the full bandwidth of the respective LAN technologies and is
independent of the LAN protocols. Thus, COLT LANLink avoids the delays and
compatibility problems of conventional LAN to LAN connecting solutions (e.g.
leased lines or Frame Relay). The COLT LANLink solution facilitates the
development of innovative solutions with high data transfer rates such as
Intranets, distributed client/server environments, server farms and computing
centres. Furthermore, COLT LANLink is particularly adapted to real time voice
and multimedia transmissions. We provide these services for the three most
common LAN protocols - Ethernet, Token Ring and Fibre Distributed Data
Interface. Unlike some other LAN interconnection networks which limit LAN speeds
to that of the network, COLT LANLink interconnects each type of LAN at its
native speed.
COLT EuroLink. COLT EuroLink is an end-to-end managed SDH private
wire service that provides international companies operating throughout Europe
with a high quality, cost-effective network. This service supports high volume,
secure data links, videoconferencing, corporate LAN interconnect, intranet
applications and Internet services exclusively over our local access networks
and is connected to our international SDH backbone at several points. COLT
EuroLink provides fully redundant SDH protected services in both the local and
long-distance sections of a customer connection. SDH technology provides an
alternative path locally and internationally for a customer's services should
the normal path become unavailable for any reason. This results in very high
levels of service availability.
COLT EuroCell. COLT EuroCell provides transport of ATM traffic over
a Permanent Virtual Path. It has different levels of quality of service with
variants suitable for a number of applications, including real time/delay
sensitive applications such as voice or video, unconstrained delay applications
such as LAN interconnection, as well as applications with little requirement for
tight delay such as e-mail or over-night back-up. We offer two different
customer selectable traffic and Quality of Service types: CBR (Constant Bit
Rate) and VBR-nrt (Variable Bit Rate - non real time). We support access speeds
from 2Mbit/s to 155Mbit/s. Global connectivity can also be provided on a case by
case basis.
-29-
COLT Euroframe. COLT Euroframe is a Frame Relay service for data
networking available via a user network interface ("UNI") connected by Permanent
Virtual Circuits ("PVC"). Two additional service options are available to
customers: COLT EuroFramePlus, an enhanced service used for delay-sensitive
applications, and COLTEuroFrame(2)Cell, where the PVC can be supported through
an ATM UNI on one end and a Frame Relay on the other. This service, together
with COLT EuroCell, strengthens and enhances our portfolio of high bandwidth
pan-European products and complements the existing end-to-end managed private
wire service, COLT EuroLink. We support access speeds from 64Kbit/s to 2Mbit/s.
Global connectivity can also be provided on a case by case basis.
COLT Vision. The wide bandwidth and high quality of our network
enables us to support a wide range of video applications. COLT Vision allows
point-to-point transmission of live broadcast, text, video and images and is
usually tailored to meet the specific requirements of particular end users.
Current applications of COLT Vision include security monitoring and financial
news services.
COLT Internet. COLT Internet offers high quality, high speed data
rates while providing users the benefits of both an ATM transatlantic backbone
network as well as our local SDH access network.
COLT InterAccess. COLT InterAccess enables high bandwidth leased
line Internet access utilising our IP Network and worldwide peering agreements.
COLT InterTransit. COLT InterTransit offers to Internet Service
Providers a permanent, fast and secure connectivity to the Internet. The service
connects the Internet service provider's ("ISP's") site to our high capacity
backbone network. It is specifically designed for high wholesale bandwidth
resellers or ISPs.
COLT ManagedFirewall. COLT ManagedFirewall is a fully managed and
dedicated firewall solution. A firewall is a set of hardware and software
components used for the protection of a network from unauthorised accesses onto
the protected network from users of another network. Firewalls are located in
our rack, at the customer's site for COLT InterAccess customers or at the ISC
for COLTInterHosting and COLTInterHousing customers.
COLT InterHousing. COLT InterHousing is a managed co-location
service which offers a flexible and cost-effective alternative to an in-house
Internet facility. Dedicated full and half racks are offered. COLT InterHousing
racks are located in the highly secure and 24 x 7 x 365 monitored COLT Internet
Solution Centre.
COLT InterHosting. COLT InterHosting UNIX is a managed, dedicated
web and Internet applications hosting solution for business customers. Such
applications could be a web site, an e-business platform or an SAP application.
This service is located in our highly secure and 24 x 7 x 365 monitored ISC.
-30-
COLT InterSuite. COLT InterSuite is a service offering a dedicated,
secure and private area for customers to house their equipment. It offers
unlimited bandwidth, reliability, resilience, flexibility, total security and
privacy. It has all the benefits of COLT InterHousing, but with the added
advantage of allowing the customer to design and install its own facility. It is
specially dedicated for large amounts of hosting equipment.
COLT Eurowavelength. COLT Eurowavelength is a service offering
greater speed, flexibility and more efficient bandwidth utilisation allowing
carriers, ISPs and large corporate customers to design and operate their own
express networks ranging from a choice of protocols to the ability to set the
level of protection.
COLT Stream. COLT Stream is a media streaming service aimed at the
corporate, ISP and SME markets that allows companies to broadcast rich content
and multimedia (video, audio or both) across our network. It facilitates a very
high speed transfer of content across the Internet, enabling users, regardless
of their location, to view the media files as if they were connected locally.
COLT IP Corporate. COLT IP Corporate is a virtual private network
service that allows customers to access private data, such as company
information, across a public or shared network. IP Corporate allows this access
using a number of transport technologies, such as ATM, IPSec (a collection of IP
security measures which support an authentication process used to verify the
validity of the originating address from which data is being sent) & MPLS (a
method of speeding up IP based data communication over ATM networks).
COLT IPCorporateConnect. COLT IPCorporateConnect is a
connection-orientated VPN service built on proven, widely used Layer 2 transport
services, ATM and Frame Relay. As such, traffic flows via PVCs (Permanent
Virtual Circuits) are fixed and known for true path determination. Routers are
deployed at each site providing feature-rich services that can be applied to
application demands. The result is a virtual private network service with a very
high degree of flexibility for the customer.
COLT DSL. As an alternative to some of the fibre connectivity
services mentioned earlier, we also have a copper based offering via DSL
technology and as a result are able to offer voice or data, subject to the
chosen DSL type.
COLT Consulting. We also offer system integration and consulting
services for some of the more complex solutions that our customers expect from
us.
New Services
We intend to continue to expand our service offerings to take
advantage of market opportunities and the increasing data and Internet
opportunities that exist. We are continuing to develop enhanced voice, data and
Internet services to reach new markets, offer additional services to new and
existing customers and benefit from the fast expanding market for high bandwidth
applications and advanced intelligent network services. Our ability to offer new
services will depend upon regulatory conditions and other business
considerations.
Sales and Marketing
Our principal method of selling services to directly connected
customers is through our internal sales force. Our directly connected customers
consist of end users and carriers.
-31-
End users are businesses, government organisations, ISPs and institutions who
have high-volume telecommunications requirements. Carriers are both national and
international telecommunications service providers. In general, we enter into
non-exclusive contracts with our end user customers that typically last from a
few months to one year for switched services and one to three years for
non-switched services. Interconnection agreements with our carrier customers
typically either provide for an initial term of one year, terminable on three
months notice after the expiry of the initial period, or are ongoing, terminable
on three months notice by either party.
Many of our directly connected end user customers are among the
largest financial, media, corporate and government consumers of
telecommunications services. Many have multiple sites and space in multi-tenant
buildings. These customers generally require dedicated sales and customer
service representatives who understand their demanding requirements. We market
our services to these customers on the basis of price, quality, reliability,
product diversity and service. We typically offer our services to end users at
prices below those offered by the dominant PTOs. In addition, our networks
provide reliability which we believe is generally superior to the reliability
provided by the dominant PTOs.
In addition to end users, we also target national and international
carriers. Since carriers have unique needs and buying patterns, marketing to
carriers is conducted by account representatives from our internal sales force.
We focus on serving carriers in our markets with a view to establishing a
European preferred vendor relationship. We believe that we can effectively
compete to provide products and services to carriers in the markets in which we
operate on the basis of price, quality, reliability,
state-of-the-art-technology, route diversity, ease of ordering and customer
service. We offer carrier to carrier and carrier to end user non-switched access
services and switched access termination and origination services at prices
typically below those of the dominant PTOs. We believe that as dominant PTOs
expand into other markets, carriers in those markets who provide service in the
dominant PTOs' home markets are likely to prefer to use competitive
telecommunications providers such as us for local access.
To complement our direct sales force, we use non-exclusive sales
agents and dealers to market our switched services, especially COLT Connect.
These sales agents and dealers primarily target small and medium sized
businesses outside each network's core infrastructure.
Through a separate subsidiary, we also own a small number of retail
"call shops" in London, which serve as agents for pre-paid switched services.
Customer Service
We strive to provide superior customer service and believe that the
quality of our customer service before, during and after installation is one of
our competitive advantages. We have a tailored order entry and project
management system to track orders from receipt to installation. During the
installation process a dedicated project manager works with large accounts to
provide a single point of contact for complex installations across many sites.
After installation, our network control centre monitors equipment 24 hours a
day, 365 days a year, often resolving problems before any service interruption
occurs.
-32-
Network Design and Construction
The main build phase of our city and long distance network is now
complete. Before we constructed our network in a particular market, we reviewed
the demographic, economic, competitive, regulatory and telecommunications demand
characteristics of the market. This included its location, the concentration of
potential business, government and institutional end user customers, the
economic prospects for the area, available data regarding carrier and end user
switched and non-switched services demand and actual and potential competitors.
In most cases, we have built a network to ensure that we control our
network quality in densely populated city centres. Construction and installation
services were provided by independent contractors selected through a competitive
bidding process. Our personnel provided project management services, including
contract negotiation and supervision of construction, testing and certification
of all facilities. The construction period of a new network varied depending
upon such factors as the number of backbone route metres to be installed, the
initial number of buildings targeted for connection to the network and the
general deployment of the network. Construction was planned to allow
revenue-generating operations to commence prior to the completion of the entire
city-network. After installing the network backbone, expansion to other regions
of a metropolitan area is evaluated based on detailed assessments of market
potential. Once a building is connected to our network, connecting additional
tenants requires less investment in infrastructure and therefore generates
higher margins. Based upon our experience with our operational networks, we
believe that a new competitive local network can be commercially operational
within six months after construction commences.
The Networks
We use the latest technologies and network architecture to develop
highly reliable infrastructure for delivering high-speed, quality digital voice,
Internet, IP, data and video telecommunications services. The basic transport
platform consists primarily of optical fibre, in some cases, equipped with Dense
Wave Division Multiplex equipment (DWDM). DWDM systems carry multiple
wavelengths over long distances, without the need for intermediate regeneration
of signals at the electrical level. It is a mechanism to increase transmission
speeds on fibre-optic systems by allowing multiple signals to be encoded into
multiple wavelengths and transmitted down the same fibre.
This DWDM system in turn is overlaid with either high capacity IP
(including ATM and Frame Relay) equipment deployed in diverse configurations or
high capacity SDH equipment deployed in rings with dual paths, both of which
give us the capability of routing customer traffic simultaneously in two
directions, eliminating loss of service in the event of a cut cable.
The network consists of fibre optic rings extending to customer
locations, with each ring connecting an average of five to seven customer
locations. We extend SDH rings to each customer's premises over our fibre optic
cable and transmission facilities. We then place necessary customer-dedicated or
shared electronic equipment at a location near or in the customer's premises to
terminate the link. The combination of IP and SDH technology allows a wide range
of customer services to be provided with flexibility and reliability. We
-33-
own substantially all of the fibre in our networks and the majority of the ducts
in which it is laid. Where fibre or ducts are not owned by us they are leased
from the owner.
We serve our customers from one or more nodes or hubs strategically
positioned throughout our networks. The node houses the transmission and
switching equipment needed to interconnect customers with each other, carriers
and other networks. Redundant electronics, with automatic switching to backup
equipment in the event of failure, protect against signal deterioration or
outages. Continuous monitoring of system components focuses on proactively
avoiding problems rather than just reacting upon failure, and permits near real
time reporting on the network status to the customer, using web browsers for
access to these reports. Network coverage is provided 24 hours a day, 365 days a
year, monitoring equipment and facilities and providing customer assistance and
support. We use an internal staff of technicians to both install and repair
electronics and provide service to customers.
We own and operate major switches in all of our operational markets
for switching local, national and international calls. We add switched,
dedicated and routed services to our basic fibre optic transmission platform by
installing sophisticated digital electronics at our network nodes and at
customer locations. Similarly, we provide router and LAN equipment at the
customer's premises and in our nodes to provide high-speed Internet, ATM and LAN
interconnection services. We strive to have two major suppliers of services and
equipment. If a supplier has the capability to provide services or equipment in
several markets, we negotiate a master supply agreement. At the present time,
the following companies are major suppliers to us: Nortel and Siemens for
switches, Nortel, Marconi and Lucent for transmission, Cisco and Alcatel for IP
and ATM services and Pirelli and Corning for fibre optic cable.
The technology being used in the Long Distance network is also a
DWDM system. Initially, this DWDM system has been deployed with a 32-wavelength
capacity per fibre - each at 10Gbit/s giving a capacity per fibre of 320Gbit/s.
The system may be expanded, in time, to 160 wavelengths giving each fibre a
capacity of 1.6 Tbit/s.
The fibre to be supplied is also of the latest technology, being a
development of the Non Zero Dispersion Shifted Fibre. This type of fibre has
been used for long distance networks for the past few years, permitting longer
distances between repeaters and more wavelengths than conventional fibres,
resulting in improved quality and reduced cost.
Nortel has supplied the DWDM system for the Long Distance network
and Corning has supplied its LEAF(R) fibre.
We use DSL equipment in the offices of the incumbent operators (when
permitted by 'unbundling' regulation) to provide multiple IP based services to
small and medium sized companies as well as utilising the incumbents' wholesale
DSL offers where appropriate.
-34-
We have developed an IP backbone network to support our IPVPN and
Internet client base. This largely follows our optical networks, which are used
as an underlying infrastructure. To support global connectivity, the IP backbone
also extends, through diverse links, to dual points of presence in New York,
where we have peering and transit arrangements to provide U.S. and rest-of-world
connectivity.
We have deployed a number of Internet hosting and housing centres,
known as "Internet Solution Centres," or ISCs. The ISCs are large-scale
equipment rooms. These are constructed with resilient power, networking and
managed environmental systems. The ISCs are connected to the IP backbone within
the local country networks.
The ISCs provide a managed environment for customers wishing to host
applications, such as web sites and e-commerce platforms.
Currently we use Cisco equipment within our Internet backbone. Cisco
routers and switches are also used within the local country networks and the
Internet Solutions Centres. Our IP network is accredited as a "Cisco Powered
Network."
Billing and Information Systems
We believe that effective information and billing systems are key
elements for growth and success in the telecommunications industry.
Maintaining sophisticated and reliable billing and customer service
information systems that provide billing, accounts receivable and customer
support is a core capability necessary to record and process the data generated
by a telecommunications service provider. Accordingly, we use Remedy Corp.'s
Action Request System for customer service, project management and fault
management in addition to billing systems provided by Ericsson, and Independent
Technology Systems. We will continue to make significant investments to upgrade
and acquire sophisticated information systems designed to enable us to: (i)
monitor and respond to customer needs by developing new and customised services;
(ii) provide customised billing information; (iii) provide high quality customer
service; (iv) verify payables to suppliers; (v) rapidly integrate new customers
and (vi) improve least-cost routing of traffic on our network. We provide
billing in local currency, itemised call detail and electronic output for select
accounts. While we believe that our systems are currently sufficient for our
operations, our network intelligence, selling and financial reporting systems
will require enhancements and ongoing investments to accommodate our growth. A
usage-based billing offering for hosting and access customers has been
introduced. This expansion of our product and service range gives customers the
flexibility to pick their Internet connectivity according to their usage profile
and reflects our innovative customer-oriented approach to service. The
introduction of a usage based billing solution is another measure of our
commitment to maximising the benefit to customers of our continuing
infrastructure and service investment. Customers, large and small, can select a
billing model that most closely matches their actual usage profile. The new
system presents customers with a choice based on usage profiles resulting from
the customer's connectivity pattern. It means actual bandwidth use rather than
mere availability governs what the customer pays. By offering this new product
feature, we strive to ensure that we maintain a lead in servicing our business
Internet connectivity customers across Europe.
-35-
Competition
In every region, we compete primarily with the dominant PTOs. We
also face competition for customers' switched traffic from a number of smaller
service providers. By region, our primary competitors are as follows:
North Region
We compete primarily with the incumbent operators, i.e., Belgacom in
Belgium, TDC in Denmark, Eircom in Ireland, KPN in The Netherlands, Telia in
Sweden and BT in the U.K. We also face competition from a number of pan-European
operators, including MCI, Cable & Wireless, BT Ignite, Level 3 and others. There
are also some local infrastructure competitors, such as Versatel and Priority
Telecom in The Netherlands, and Versatel and Telenet in Belgium. In Sweden and
Denmark, we also compete with Tele2. In the U.K., domestic competitors include
Energis.
Central Region
We compete primarily with the dominant PTOs, i.e., Telekom Austria,
Deutsche Telekom in Germany and Swisscom in Switzerland. In Germany, we also
face competition from several other operators, notably Arcor, BT Ignite, MCI and
Level 3 who have built-out nation-wide backbone networks, and MCI , along with
some city carriers (which are often owned or supported by local governments) who
have built local infrastructure in selected geographies. Priority Telecom, in
Austria, is a local infrastructure competitor. In Switzerland, TDC-Sunrise and
T-Systems each has a strong domestic market position.
South Region
The principal competitors in the South Region are the incumbent
operators, i.e., France Telecom in France, Telecom Italia in Italy, Telefonica
in Spain and PT Comunicacoes/PT Prime in Portugal. We also face competition in
France from Cegetel, LDCom and Completel. In Italy, we compete with major
national new entrants such Wind-Infostrada, e.Biscom and Albacom, and in Spain
with major national players such as Retevision, JazzTel and Uni2. In Portugal,
competition is relatively limited, but we face some competition from CIENA,
Novis and JazzTel.
Regulatory Environment
We believe we have obtained all national and local government
authorities, permits or licences as are required in order to be able to conduct
our business as currently contemplated, in each of the jurisdictions in which we
operate.
European Union regulatory framework
The current E.U. regulatory framework for telecommunications
includes the Services Directive/Full Competition Directive which provided for
full liberalisation of the telecommunications networks and services sector on 1
January 1998, the Open Network Provision (ONP) Framework Directive, the Revised
ONP Leased Lines Directive and the Revised ONP Voice Telephony Directive which
guarantee the provision of certain services to end users, the ONP
Interconnection Directive which ensures interconnection and interoperability of
-36-
networks and services, the Licensing Directive which provides for the reasonable
availability of licences and authorisations to new entrant operators, and the
Numbering Directive which mandates carrier pre-selection and number portability
and, a Regulation requiring the incumbent fixed network telecommunications
operators to enable local loop unbundling. The implementation of E.U. directives
and policy is different in every E.U. Member State, but the intent and spirit of
liberalisation has now been broadly adopted. Iceland, Liechtenstein and Norway
are bound by the E.U. directives as a consequence of their membership of the
European Economic Area. Switzerland is not required to follow the E.U.
directives but has implemented a broadly similar national legal and regulatory
framework for telecommunications.
The telecommunications regulatory regimes in each of the countries
in which we are currently operating therefore have certain common features. We
are not subject to regulatory constraints on the prices we charge to our
customers, although the dominant Public Telecommunications Operator is subject
to price controls under each national regulatory regime, which result in a price
ceiling on the market. In addition, the telecommunications licences granted to
us are subject to certain conditions, including, in certain countries,
termination in case of a change of control and in some cases, for instance,
France and the U.K., in the event of a substantial change of ownership not
amounting to a change of control. However, in most countries, licences can be
transferred with the consent of the regulatory authority.
On 5 December 2000, a legally binding regulation was published by
the European Parliament and Council, which mandated the implementation of local
loop unbundling by incumbent operators with significant market power as of 1
January 2001. This change allowed new entrant telecommunication companies access
to the local switches of incumbent operators and thus the ability to offer
access to customers using their own network. This regulation has been
implemented in the national telecommunications legislations, and, while there
have been serious delays and difficulties in the past, local loop unbundling is
now available in all the E.U. Member States in which we operate (although in
some countries we have chosen not to deploy it).
On 7 March 2002, the E.U. adopted a set of Directives, which
constitute a new European regulatory framework for telecommunications
(consisting of a Framework Directive, an Authorisations Directive, an Access and
Interconnection Directive, a Universal Service and Users' Rights Directive, and
a Radio Spectrum Decision. A Consolidated Directive on Competition in the Market
for Communications Services was adopted on 16 September 2002 (together, as
already defined, the "new regulatory package")). A key feature of the new
regulatory package is that it contains a drive towards common market definitions
and common regulatory instruments to assess and address the dominance of certain
operators in communications markets within the E.U., and is based on concepts
that are identical to those employed in general competition law. The new
regulatory package also provides for increased co-ordination of the actions of
national regulatory authorities in the Member States, and a European Commission
veto right over certain key decisions of the national regulatory authorities.
E.U. Member States are given until 25 July 2003 to implement the new
directives into their national law and to regulate the telecommunications sector
in accordance with this new legal and regulatory package. Our freedom to
-37-
determine our own end user pricing will not be affected. The E.U. Member States
are at different stages in their preparation for the implementation of these
directives. Some may not complete it on time. Details of the progress towards
implementation in our major countries is given below.
On 11 February 2003 the European Commission issued the
Recommendation on Relevant Markets in the communications sector. The
Recommendation sets out individual markets which national regulatory authorities
in each Member State must analyse and, depending on the level of competition
within each market, to which the regulator must apply regulation.
We do not anticipate that the implementation of the new regime will
result in any material adverse change to our revenues or margins. However, as
the process is not finalised in any Member State, it is too early to predict the
actual outcome with certainty.
North Region
Full telecommunications liberalisation was introduced in Belgium on
1 January 1998. We have been granted a public telecommunications network licence
in Belgium covering the main areas of economic importance and a nation-wide
voice telephony licence. A draft Bill to introduce the new regulatory package
has been in intra-Government consultation since February 2003. Due to
Parliamentary elections, the legislative process is not expected to be completed
before the Fall of 2003.
In Denmark, no licence, authorisation, registration or other
procedure is applicable for conducting fixed network telecommunications
activities. Legislation to implement the new regulatory package has been
presented to Parliament in May 2003, and is expected to be passed before the
deadline of 25 July 2003.
On 12 June 2000, COLT Telecom Ireland Limited was granted a General
Telecommunications Licence which allows it to construct, own and operate a
telecommunications network and to offer voice telephony and other services in
Ireland. The Republic of Ireland is expected to meet the deadline of 25 July
2003 for the implementation of the new regulatory package.
Full telecommunications liberalisation was introduced in The
Netherlands in 1997. The current Telecommunications Act is dated 15 December
1998. We have registered as a provider of public telecommunications services, as
a builder or provider of a public telecommunications network and as a builder or
provider of leased lines in The Netherlands. In April 2003, a Bill was
introduced to adopt the new regulatory package.
In Sweden, we have simply had to register with the regulatory
authority PTS to enable us to build our network and provide services. Sweden is
expected to meet the deadline of 25 July 2003 for the implementation of the new
regulatory package.
-38-
The U.K. Telecommunications Act 1984 (the "U.K. Act") provides a
licensing and regulatory framework for telecommunications activities in the
United Kingdom. The Secretary of State for Trade and Industry at the Department
of Trade and Industry is responsible for granting licences under the U.K. Act
and for overseeing telecommunications policy, while the Director General of
Telecommunications is responsible, inter alia, for enforcing the terms of such
licences (through his office, OFTEL). COLT is currently operating under a PTO
licence awarded on 9 June 1995 (as amended), which replaced an earlier licence.
In May 2002 the U.K. government published a draft Communications
Bill which will replace the existing regime some time in mid-2003. The major
substantive changes will involve the abolition of OFTEL (to be replaced by
OFCOM, a body with responsibility for regulating all the communications
industries including, for example, TV content, as well as telecommunications)
and the implementation of the new regulatory package. If the Bill is not in
force as an Act by the deadline of 25 July 2003, the U.K. government intends to
implement the new regulatory package on an interim basis by a series of
Statutory Instruments issued under the European Communities Act 1972.
In Norway and Finland, we have registered as a provider of
telecommunications services.
Central Region
In Austria, the Telecommunications Act (the "TKG") provides a
licensing and regulatory framework for telecommunications activities since 1
January 1998. An independent authority has been established, which is
responsible for granting licences under the TKG and for overseeing
telecommunications policy, to survey the regulatory framework and to decide and
to settle disputes between operators and licencees. The authority is created as
a tribunal (Telekom Control Kommission) with 3 members (one of them is a judge).
Beside the Telekom Control Kommission, there exists another authority, the
"Rundfunk und Regulierungs GmbH" (RTR). RTR is the agency for the Telekom
Control Kommission and is also responsible for the administration (e.g.
numbering). The Ministry of Traffic, Innovation and Technology also has
responsibilities concerning telecommunications. These responsibilities are
limited to "telecommunications policing" (e.g., punishment for violations of the
TKG) and drafting new acts or directives.
COLT Telecom Austria is currently operating under a nation-wide
concession which allows it to operate a public fixed telecommunications network
and to offer leased lines. COLT Telecom Austria is entitled to sell Internet and
data services because of a notification to the regulatory authority.
A revised Telecommunications Act was published by the Ministry of
Transport in September 2002, and is expected to be presented to Parliament
shortly. The legislation is delayed due to elections in October 2002 and the
establishment of a new government.
The German Telecommunications Act of 25 July 1996 provides a
licensing and regulatory framework for telecommunications activities in Germany.
The national regulatory authority is responsible for granting licences for all
types of telecommunication activities. There are separate licences for the
establishment and operation of public telecommunications networks and for the
provision of voice telephony services.
-39-
We operate our networks in Germany under a nation-wide fixed network
licence and a nation-wide voice telephony licence.
In April 2003 the Ministry of Economics and Labour published a
series of legislative instruments to facilitate adoption of the new regulatory
package. The Parliamentary process to enact the new law is expected to begin in
June 2003.
Switzerland is not a member of the E.U., but liberalised its
telecommunications market on 1 January 1998 and has broadly followed the E.U.
liberalisation policies. We have obtained a concession covering the
establishment and operation of our networks and we have registered as a service
provider, which allows the provision of voice telephony. The concession grants
similar rights and imposes similar obligations as those in other European
countries, through the individual licensing system.
The Swiss Telecommunication Law does not currently require Swisscom
to unbundle its local loops, but the Decree on Telecommunications Services (as
amended from 7 March 2003) requires full unbundling of the local loop together
with bitstream and shared access. This Decree became effective on 1 April 2003.
In practice, the Decree may not be successful in enforcing local loop unbundling
because its provisions may be the subject of a Court appeal by Swisscom in the
absence of a mandate for unbundling derived from primary legislation.
A complete overhaul of the Telecommunication Law is still under
discussion in the national parliament and it is expected that it will not become
effective before the end of 2004 / beginning of 2005. Changes in the Decree on
Address Elements for Telecommunication (AEFV) became effective on 1 April 2003
with new requirements concerning mainly Value Added Services. A new revision of
the Decree on Price Announcements (PBV) was recently published for consultation
with 17 April 2003 as the deadline for comments. The changes concern mainly the
price aspects of Value Added Services. It is expected to become effective in
January 2004.
South Region
The Code des Postes et Telecommunications was amended by the Law of
26 July 1996 to provide for the immediate and full liberalisation of all
telecommunications activities in France, with a partial exception applicable to
the provision of telephone service for the public between fixed points. This
service, which is the equivalent of the voice telephony service as defined in
the E.U. regulatory framework, was liberalized effective 1 January 1998. This
legislation has been complemented by decrees clarifying detailed aspects of the
telecommunications environment such as the content of authorisations, the
regulation of interconnection and the financing of universal service. The French
Regulatory Authority for Telecommunications was also created by the Law of 26
July 1996. It participates with the Minister in charge of Telecommunications in
the preparation of regulations regarding the rights and obligations of
operators, ensures the compliance of operators with applicable legislation,
regulations and obligations and clarifies the applicable regulations in areas
such as interconnection, number portability, technical specifications of
networks and terminal equipment.
-40-
We are entitled to operate a public telecommunications network in
all French regions of economic importance and to provide voice telephony
services on a nation-wide basis under a combined L.33-1 and L.34-1 licence most
recently amended on 5 January 2000.
On 1 April 2003, the Ministry of Economics and the Ministry of
Culture published a draft Bill to implement the new European regulatory package
into French law. After consultation by interested bodies, including the
telecommunications regulatory authority and the competition authority, the draft
bill will then be submitted to the Conseil d'Etat for review, and subsequently
introduced in Parliament.
Full telecommunications liberalisation was introduced in Italy on 1
January 1998, while Spain and Portugal were granted temporary exemptions from
the applicability of the E.U. directives by the European Commission, resulting
in full market opening in Spain on 1 December 1998 and in Portugal on 1 January
2000.
In Italy and Spain, there are multiple categories of licences,
including separate as well as combined licences for the establishment and
operation of public telecommunications networks on the one hand, and for the
provision of voice telephony on the other. Consequently, the COLT subsidiaries
in these countries have obtained multiple licences (regional network licences in
Milan, Turin and Rome, combined licences in Madrid, Barcelona and Valencia, a
nation-wide licence for the provision of voice telephony in Italy, and a
nation-wide licence for long distance backbone network between the cities in
Spain). In Portugal, we have obtained a combined nation-wide licence, but have
only launched operations in and around Lisbon at this time.
In Italy, the Ministry of Communications published a consultation on
the implementation of the regulatory package in November 2002. Law n.166 of
1 August 2002 "Provisions related to infrastructure and transport" (art. 41)
which calls on the government to adopt, within one year, one or more legislative
decrees to transpose the directives.
In Spain, the Council of Ministers approved a new telecommunications
law on 7 March 2003. The Parliament is expected to adopt this Bill before August
2003.
C. Organisational structure
We are the holding company for the following subsidiaries, each of
which is a private company registered in its country of incorporation. Each
subsidiary operates in its country of incorporation.
Date of Country of
Name Incorporation Incorporation
- ---- --------------------- ------------------------
COLT Telecom Limited (1) 18 October 1996 England and Wales
COLT Telecom Europe Limited (5) 28 June 1996 England and Wales
COLT Telecom Holdings Limited (5) 6 December 1999 England and Wales
COLT Telecommunications* (2)(4) 15 December 1989 England and Wales
City of London Telecommunications Limited (1) 16 August 1985 England and Wales
COLT Telecom GmbH* (6) 17 March 1995 Germany
COLT Telecommunications France SAS *(10) 23 October 1995 France
COLT Telecom U.S. Corp. (10) 19 November 1996 Massachusetts USA
COLT Internet U.S. Corp. (10) 27 September 1999 Delaware USA
-41-
Date of Country of
Name Incorporation Incorporation
- ---- --------------------- ------------------------
COLT Telecom Espana SA* (10) 2 January 1997 Spain
COLT Telecom AG *(9) 30 July 1997 Switzerland
COLT Telecom SA *(10) 16 September 1997 Belgium
COLT Telecom SpA *(10) 4 November 1997 Italy
Callshop etc. Limited *(1) 16 October 1995 England and Wales
COLT Netherlands Holding Limited (10) 17 April 1988 England and Wales
COLT Telecom BV *(7) 28 May 1998 The Netherlands
COLT Telecom Holding GmbH (10) 9 October 1998 Germany
COLT Telecom Austria GmbH *(10) 28 September 1998 Austria
COLT Telecom AB *(10) 11 October 1999 Sweden
COLT Internet AB *(10) 5 July 2000 Sweden
COLT Telecom Ireland Limited *(10) 31 March 2000 Ireland
COLT Telecom QUEST Trustees Limited (1) 3 February 2000 England and Wales
COLT Telecom A/S (10) 20 November 2000 Denmark
COLT Telecom Pension Trustees Limited (1) 16 November 2000 England and Wales
COLT Telecom Finance Limited (5) 20 January 2002 England and Wales
COLT Telecom Share Scheme Trustees Limited (1) 2 February 2001 England and Wales
COLT Telecom ENS GmbH *(6) 22 November 2001 Germany
COLT Telecom A/S *(10) 9 January 2001 Norway
COLTEL-Servicos de Telecomunicacoes Unipessoal Lda *(10) 17 January 2001 Portugal
COLT eCustomer Solutions France SAS *(5)(13) 6 October 1992 France
Apogee Communication SAS *(11) 7 May 1997 France
Asthea Ingenerie SARL *(11) 18 May 1998 France
COLT Telecom Finance Euro (4)(12) 22 April 2002 England and Wales
COLT Telecom Finance Switzerland (4) (12) 22 April 2002 England and Wales
COLT Telecom Finance Denmark (4)(12) 22 April 2002 England and Wales
COLT Telecom Finance Sweden (4)(12) 22 April 2002 England and Wales
COLT Telecommunications Nominees Limited (1) 26 March 2002 England and Wales
COLT Telecom Finland *(10) 19 August 2002 Finland
<FN>
Notes:
* Operating Companies.
(1) 100% owned by COLT Telecom Holdings Limited.
(2) 100% owned by COLT Telecom Limited.
(3) 100% owned by COLT Telecommunications.
(4) A company incorporated with unlimited liability.
(5) 100% owned by the company.
(6) 100% owned by COLT Telecom Holding GmbH.
(7) 100% owned by COLT Netherlands Holding Limited.
(8) 100% owned by COLT Telecommunications France SA.
(9) 74.5% owned by COLT Telecom Europe Limited and 25.5% by COLT Telecom
Holding GmbH.
(10) 100% owned by COLT Telecom Europe Limited.
(11) 100% owned by COLT eCustomer Solutions France SAS.
(12) 99% owned by the company and 1% owned by COLT Telecom Holdings Limited.
(13) Formerly Fitec SAS
</FN>
-42-
D. Property, Plant and Equipment
We lease node sites, office and Internet space and other facility
locations and sales administrative offices in each of the cities in which we
operate networks. All of the property that we occupy is on a leasehold basis,
without major encumbrances, and it is all either in use or in preparation for
use in our operations, or it has been identified as being surplus to
requirements and the building is being actively marketed either on a part or
full basis either by sub-letting or assignment of the lease, as appropriate. We
have a 3 year plan to reduce the property that we occupy to approximately
250,000 square metres. We had by 3 June 2003 achieved reductions of
approximately 20,000 square metres. We believe that our properties, taken as a
whole, are in good operating condition and are suitable and adequate for our
business operations. At 31 December 2002, we leased an aggregate of
approximately 321,495 square metres, including the following principal
locations:
LOCATION SIZE USE STATUS
-------- ---- --- ------
4 Norton Folgate, 3,390 square metres Office, Node and Storage Part marketed
London, England
15 Marylebone Road, 2,902 square metres Office, Node and Storage Part marketed
London, England
16-22 Gervinusstrasse, 6,328 square metres Office, Node and Storage Part sub-let
Frankfurt, Germany
Bleichstrasse 52, 6,973 square metres Offices Fully marketed
Frankfurt Germany
Eschersheimer Landstrasse 10, 3,638 square metres Office, Node and Storage Part surrendered
Frankfurt, Germany
Von-der-Tann-Strasse 5,125 square metres Office, Node and Storage Part marketed
11, Munich, Germany
90 Uerdinger Strausse, 3,060 square metres Office, Node and Storage Occupied
Dusseldorf, Germany
25 rue de Chazelles, 2,317 square metres Office, Node and Storage Occupied
Paris, France
12-14 van de Madeweg, 7,000 square metres Office, Node and Storage Occupied
Amsterdam, The Netherlands
Telemaco 5, 4,250 square metres Office, Node and Storage Part marketed
Madrid, Spain
Viale Jennet 56, 3,162 square metres Office, Node and Storage Occupied
Milan, Italy
Beaufort House, 7,480 square metres Offices Occupied
15 St. Botolph Street,
London, England
20/22 Wharf Road 3,470 square metres Storage Fully marketed
London, England
Samuel House 185 square metres Node Occupied
St. Albans Street Haymarket,
London, England
One Canada Square, Canary Wharf, 28 square metres Node Occupied
Isle Of Dog,
London, England
-43-
LOCATION SIZE USE STATUS
- -------- ---- --- ------
City Forum, City Road, 2,330 square metres Node Occupied
London, England
Drebahn 1, Deutschlandhaus, 2,048 square metres Office, Node and Storage Occupied
Hamburg, Germany
La Defense 5, Le Lafayette 2, 272 square metres Offices Occupied
Place DesVosges, Paris, France
Uhlandstrasse 181 - 183, 1,800 square metres Office, Node and Storage Part marketed
Berlin, Germany
Rue De La Fontaine Au Roi, 6,131 square metres Storage Fully marketed
21 Paris, France
Murtschenstrasse, 27 3,566 square metres Office, Node and Storage Occupied
Baslerpark, Baslerstrabe
25, Zurich, Switzerland
Murtschenstrasse, 27 3,444 square metres Office and Storage Fully marketed
Baslerpark, 2
Baslerstrabe 25,
Zurich, Switzerland
Rue De Planeur, 10 3,665 square metres Offices, Storage Occupied
Brussels, Belgium
1430 Chaussee De 1,100 square metres Offices Occupied
Haecht, Brussels, Belgium
Rue De Notre Dames Des 1,606 square metres Offices Fully marketed
Victoires, 46 129 Rue
Montmartre, Paris, France
Theodor Haus 3,060 square metres Office, Node and Storage Occupied
Uerdinger Strasse, 90
Dusseldorf, Germany
Kartner Ring 12, 2,374 square metres Office, Node and Storage Occupied
Vienna, Austria
Poplar Business Park, 485 square metres Offices Occupied
Poplar High Street,
Aspen Way, Tower
Hamlets England
Magnusstasse 13-15, 1,612 square metres Office, Node and Storage Part marketed
Cologne, Germany
Kronenstrasse 25, 1,750 square metres Office, Node and Storage Occupied
Stuttgart, Germany
Rue Des Teinturiers, 2,523 square metres Office, Node and Storage Occupied
9 Lyon 3eme, Lyon, France
Sovereign House, 1,898 square metres Office, Node and Storage Occupied
1 King John Court,
London, England
-44-
LOCATION SIZE USE STATUS
- -------- ---- --- ------
Gran Via De Les Corts 1,697 square metres Office, Node and Storage Occupied
Catalanes, 8-10
Hospitalet De Llobregat,
Barcelona, Spain
Rue Wattignes, 60/62, 4,121 square metres Internet Solution Centre Part marketed
Paris, France
Rue De Montbrillant 36, 1,481 square metres Office, Node and Storage Occupied
Geneva, Switzerland
306 Hanuaer 2,620 square metres Internet Solution Centre Occupied
Landerstrasser,
Frankfurt, Germany
63 Boulevard Bessieres, 2,941 square metres Internet Solution Centre Occupied
Paris, France
93 Avenue Du Prado, 870 square metres Office, Node and Storage Occupied
Marseille, France
Groothandelsgebouw, 2,653 square metres Office, Node and Storage Occupied
Rotterdam,
The Netherlands
Environment Park, Via 3,386 square metres Office, Node and Storage Occupied
Livorono 60, Turin, Italy
Princes Court, Wapping Lane, 5,000 square metres Internet Solution Centre Occupied
London, England
Richard-Nneutra-Gasse 10, 7,000 square metres Internet Solution Centre Fully marketed
Vienna Austria
Nooderlaan 121, 1,727 square metres Office Node and Storage Occupied
Antwerp, Belgium
1930 Zaventem, 6,850 square metres Internet Solution Centre Fully marketed
Brussels, Belgium
Paepsemlaan 16-16a, 1,413 square metres Internet Solution Centre Occupied
Paepsem Business Park,
Anderlecht, Belgium
1430 Chaussee de Haecht, 1,100 square metres Office Node and Storage Occupied
Brussels, Belgium
St. Stephens Street 1,645 square metres Office, Node and Storage Occupied
Central Gate, New Town
Road, Birmingham, England
126 Chapman Street, 1,472 square metres Storage Occupied
Lehman Street, London,
England
-45-
LOCATION SIZE USE STATUS
- -------- ---- --- ------
Chase Road, Park 8,412 square metres Internet Solution Centre Occupied
Royal, London, England
79 Cavendish Street, 3,344 square metres Offices Fully marketed
London, England
152 Avenue du Prado, 330 square metres Offices Occupied
Marseille, France
Cap Horn, Les Ulis, 9,130 square metres Internet Solution Centre Occupied
Cortebeouf, Paris, France
23-27 RuePierre 11,340 square metres Office, Node and Storage Occupied
Valette, Malakoff,
Paris, France
46-49 Wieberstrasse, 2,693 square metres Office, Node and Storage Occupied
Berlin, Germany
Wiebestrasse 49 Werk 7,948 square metres Internet Solution Centre Occupied
3 Berlin, Germany
Walter Klob Strasse 13, 3,687 square metres Office, Node and Storage Fully marketed
Frankfurt, Germany
4 Heriotstrasse, 21,275 square metres Offices Part marketed
Frankfurt, Germany
Langer Kornweg 34, 12,494 square metres Internet Solution Centre Fully marketed
Kelsterbach,
Frankfurt, Germany
Schmidstrasse 12, 2,320 square metres Offices Occupied
Frankfurt, Germany
ABC Strasse, 19, 1,239 square metres Offices Fully marketed
Hamburg, Germany
-46-
LOCATION SIZE USE STATUS
- -------- ---- --- ------
Sportalle 72, 22335 5,603 square metres Internet Solution Centre Fully marketed
Hamburg, Germany
Wendenstrasse 255, 1,800 square metres Office, Node and Storage Occupied
Hamburg, Germany
Calenberger Neustadt, 1,760 square metres Office, Node and Storage Part marketed
Sheet 1389, Hanover, Germany
26 Munchner Strasse, 2,830 square metres Office, Node and Storage Occupied
Uterfohring, Munich, Germany
11 Nawiasky Strasse, 8,108 square metres Internet Solution Centre Fully marketed
Munich, Germany
Foxes Property, Long 6,316 square metres Internet Solution Centre Fully marketed
Mile Road, Walkinstone,
Dublin, Ireland
Seagrave House, 19-20 459 square metres Offices Fully marketed
Earlsfort Terrace,
Dublin, Ireland
East Wall Road, Docklands, 1,533 square metres Office, Node and Storage Occupied
Dublin, Ireland
Via Lancetti, Milan, Italy 6,735 square metres Office, Node and Storage Occupied
127-129 Via Simone 4,900 square metres Office, Node and Storage Occupied
Martini, Rome, Italy
Luchtvaartstraat, 2,275 square metres Internet Solution Centre Occupied
Amsterdam,
The Netherlands
Calle Acero 5-9, 8,850 square metres Internet Solution Centre Part marketed
Y Motores 83-89,
Barcelona, Spain
Poligono Industrial 5,000 square metres Internet Solution Centre Occupied
Monoteras,
Madrid, Spain
Borgmester Christiansens 4,963 square metres Office, Node and Storage Occupied
Gade 55,
Copenhagen, Denmark
Oxen Mindre 33, 1,906 square metres Office, Node and Storage Occupied
Luntmakargatan 18,
Stockholm, Sweden
-47-
LOCATION SIZE USE STATUS
- -------- ---- --- ------
Karlsrogartan 2, Solna, 10,726 square metres Internet Solution Centre Fully marketed
Stockholm, Sweden
Umbau Bardnerstrasse 7,250 square metres Internet Solution Centre Occupied
820, Zurich, Switzerland
Bouwery 71-73, 9,148 square metres Internet Solution Centre Fully marketed
Amstelveen, Amsterdam
The Netherlands
Coriander Avenue, 74 square metres Storage Occupied
Clifton, Street,
London, England
Estrada Da Outorela, 2,174 square metres Office, Node and Storage Occupied
Carnaxide, Oeiras,
Lisbon, Portugal
<FN>
Fully marketed = the whole property is actively being marketed
Part marketed = only a portion of the property is actively being marketed
</FN>
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion and analysis should be read in conjunction
with our financial statements and notes thereto, incorporated herein by
reference from our 2002 Annual Report. Our financial statements have been
prepared in accordance with U.K. GAAP, which differs in certain respects from
U.S. GAAP. See note 25 to our financial statements for a summary of the
principal differences between U.K. GAAP and U.S. GAAP as they relate to us.
Unless otherwise noted, all amounts are presented in British pounds sterling.
The results for the three years ended 31 December 2002 include the
impact of exceptional transactions and provisions. We believe that it is useful
for investors to be also provided with an analysis of the underlying financial
and operating results of the Company before the impact of these material
non-operational amounts. Therefore in the following discussion and analysis,
reference is made to both UK GAAP and non UK GAAP measurements. Pursuant to the
requirements of Regulation G under the Securities Act, we have provided a
reconciliation of non-GAAP financial measurements to the most directly
comparable GAAP financial measurement. The table below lists these measurements
and starting with UK GAAP identifies the reconciling items to arrive at the non
UK GAAP measurement.
-48-
KEY FINANCIAL DATA 2002 2001 2000
(pound)'m (pound)'m (pound)'m
Turnover 1,027.2 905.7 687.0
Infrastructure sales
-- 3.8 46.2
---------------------------------------------
Turnover excluding infrastructure sales 1,027.2 901.9 640.8
=============================================
Cost of sales 1,451.9 941.7 566.9
Exceptional items 526.3 135.8 --
Costs associated with infrastructure sales -- 2.4 27.2
---------------------------------------------
Cost of sales before exceptional items and costs
associated with infrastructure sales 925.6 803.5 539.7
=============================================
Interconnection and network costs 731.9 704.9 478.2
Exceptional items 18.3 62.4 --
Costs associated with infrastructure sales -- 2.4 27.2
---------------------------------------------
Interconnection and network costs before exceptional
items and costs associated with infrastructure sales 713.6 640.1 451.0
=============================================
Network depreciation 720.0 236.8 88.7
Exceptional items 508.0 73.4 --
---------------------------------------------
Network depreciation before exceptional items 212.0 163.4 88.7
=============================================
Gross profit (loss) (424.7) (36.0) 120.1
Margin on infrastructure sales -- (1.4) (19.0)
Exceptional interconnect and network costs 18.3 62.4 --
Exceptional network depreciation 508.0 73.4 --
---------------------------------------------
Gross profit before margin on infrastructure sales
and excluding exceptional cost of sales 101.6 98.4 101.1
=============================================
Operating expenses 353.9 323.9 205.0
Exceptional items 61.9 39.8 --
---------------------------------------------
Operating expenses before exceptional items 292.0 284.1 205.0
=============================================
Selling, general and administration costs 261.1 265.0 181.7
Exceptional items 19.0 27.9 --
---------------------------------------------
Selling, general and administration costs before
exceptional items 242.1 237.1 181.7
=============================================
Other depreciation and amortisation 92.9 59.0 23.3
Exceptional items 43.0 12.0 --
---------------------------------------------
Other depreciation and amortisation before
exceptional items 49.9 47.0 23.3
=============================================
Loss for period (718.3) (360.4) (116.9)
Gross profit on infrastructure sales -- (1.4) (19.0)
Exceptional interconnect and network cost of sales 18.3 62.4 --
Exceptional network depreciation 508.0 73.4 --
Exceptional selling general and administration costs 19.0 27.9 --
Exceptional other depreciation and amortisation 43.0 12.0 --
Exceptional other (income) expense (106.1) (56.0) --
---------------------------------------------
Loss for period before margin on infrastructure sales
and exceptional items (236.1) (242.1) (135.9)
=============================================
-49-
We are a leading provider of high bandwidth data, Internet and
advanced telecommunications services to business and government customers across
Europe. We operate fibre-optic networks in the major financial and business
centres of Europe with each of our local city-networks and Internet Solution
Centres inter-linked to form a single IP-based pan-European network.
At 31 December 2002, we operated approximately 20,000 route
kilometres (12,420 route miles) of integrated international digital fibre optic
network, providing long distance international service to customers, linking 32
major cities in 13 countries augmented by a further 27 points of presence and 11
Internet solution centres across Europe to customers in 9,238 buildings. Our
revenues for the year ended 31 December 2002 were approximately (pound)1,027.2
million.
Revenue in 2002 was (pound)1,027.2 million, an increase of 13.4% on
2001. Excluding infrastructure sales made in 2001, as there were no
infrastructure sales in 2002, the revenue increase was 13.9% . While the slow
down in economic growth across Europe has impacted the level of demand from our
customers, particularly those within the wholesale sector, we have still been
able to grow our overall revenues by attracting new customers, introducing new
services and developing our level of business with existing customers. The gross
loss for 2002 was (pound)424.7 million, up (pound)388.7 million from the gross
loss reported in 2001. The increase in the loss was caused by an increase in the
cost of sales associated with exceptional items.
Operating expenses increased from (pound)323.9 million in 2001 to
(pound)353.9 million in 2002. Operating expenses before exceptional costs also
increased from (pound)284.1 million in 2001 to (pound)292.0 million in 2002, but
reduced as percentage of turnover before infrastructure sales from 31.5% in 2001
to 28.4% in 2002.
The loss for 2002 was (pound)718.3 million and included exceptional
items of (pound)482.2 million. The loss before exceptional items and
infrastructure sales of (pound)236.1 million was down (pound)6.0 million from
the corresponding level in 2001.
Capital expenditure on network, services and systems infrastructure
totalled (pound)412.1 million in 2002, a reduction of 49%. Importantly, this
reduction is a result of completion of the infrastructure build phase of the
business plan at the end of 2001. Capital expenditure paid for in 2002 included
approximately (pound)125 million in respect of prior years infrastructure
investment.
At 31 December 2002, we had balances of cash and liquid resources
totalling (pound)934.9 million. We also took advantage of the volatile financial
markets in 2002 to purchase (pound)198.9 million for our notes for (pound)97.2
million. We will continue to monitor the trading levels of our notes and may
take advantage of other such opportunities to enhance shareholder value if they
present themselves.
Reflecting the current economic environment it is prudent to ensure
that our asset base remains aligned with the realities of the market.
Accordingly, we have written down the book value of certain assets including
parts of the network, equipment and electronics and selected IT software
developments and goodwill. This action has resulted in an exceptional charge in
our 2002 results of (pound)551.0 million. We also announced a further reduction
in staff levels of up to 800 people and the combined provisions recorded in
2002, including the provision related to the staff reduction of 500 announced in
the 2001 Annual Report, amounted to (pound)37.3 million, which we expect to
utilise this year. Following completion of the infrastructure build, and
alignment of resources to the harvesting of the opportunities made available by
the pan-European network, significant operational efficiencies have been
identified and are being implemented.
-50-
We are a holding company for our subsidiaries and have no material
business operations, sources of income or assets other than the stock of our
subsidiaries. We currently conduct our operations through 38 direct and indirect
wholly-owned subsidiaries. All of our obligations under our outstanding senior
notes described in note 15 to our financial statements are our own, not those of
our subsidiaries. Because we conduct our operations through subsidiaries, our
cash flow and our ability to meet our obligations under the notes, including
payment of principal, premium, if any, and interest, depends upon the cash flow
of our subsidiaries and their dividends, fees, loans, and other payments to us.
Our subsidiaries have no obligations to make any payments under the notes or to
make funds available to us so that we can make payments.
Some of our subsidiaries are governed by local laws regarding how
much they may pay in dividends or in what situations they may pay dividends. For
example, these laws may prohibit dividend payments when net assets fall below
subscribed share capital, when the subsidiary lacks available profit or when the
subsidiary fails to meet certain capital and reserve requirements. In addition,
some of our financing arrangements also limit the situations where our
subsidiaries may pay us dividends or make loans or other distributions.
Our subsidiaries have not guaranteed our payment obligations under
the notes. Thus, our right to receive the assets of any subsidiary upon its
liquidation or reorganisation is subordinated to the claims of the subsidiary's
creditors, except where we are a creditor of the subsidiary. If we were a
creditor of a subsidiary, our right to be paid back would be subordinated to any
indebtedness of the subsidiary that was either:
o secured by a security interest in that subsidiary's assets, or
o senior to that subsidiary's indebtedness to us.
Our telecommunications services are broadly grouped into two
categories, switched and non-switched, and include high bandwidth data, Internet
and voice services. Internet services include a range of Internet access,
transit, hosting, as well as additional ISC related services enabling content
distribution and other value added services. We currently offer both
non-switched and switched services in all the markets in which we operate. In
future markets, we expect we will continue to introduce both switched and
non-switched services to the extent that regulatory conditions permit. In
addition, we offer DSL based services encompassing a range of high speed access
techniques. Internet services offer corporate end users and other ISPs high
quality, high speed data rates while providing users the benefits of both an ATM
transatlantic backbone network as well as our local SDH access network. The
following is a brief description of our services:
Switched services
Through switching centres in each city, we offer our customers high
quality local, national and international switched telecommunications services
to the extent permitted by regulation in each country. In each of our markets,
we offer a full range of switched services. Customers include end users directly
connected to our network, telecommunications carriers and end users, which
connect to our network indirectly through the network of the national PTO.
Switched service revenue is based on customer minutes of use as well as
destination of calls. Most customers utilise our network as one of two or more
potential service providers and typically have the ability to increase or
decrease their use of our services at little or no cost. We compete based on our
ability to offer the best value in terms of quality and price to customers that
desire reliable, high quality and cost effective services. Pricing for switched
services has decreased as competition has increased, and we believe this trend
will continue for the foreseeable future. Price reductions will reduce our gross
margins if costs do not decrease at the same rate.
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Non-switched services
We offer a full range of non-switched services including private
wire, VPN, LAN interconnection, video and Internet services. Non-switched
revenue is based on monthly rates for specific services and does not generally
vary with usage levels. Customer contracts generally have one or three-year
terms and, upon expiration, are either renegotiated or automatically converted
to month-to-month arrangements. Pricing is based on a number of factors,
including bandwidth, distance and charges by the dominant local provider,
usually the national PTO, for comparable services. Although we are often not the
only service provider to our customers, we have been able to increase our share
of a customer's non-switched services through service quality, flexibility and
the ability to quickly respond to customer requests. Once service is initiated
with a particular customer, we seek to expand non-switched services by
increasing the number of services installed and the bandwidth of services
provided. In addition, we will seek to offer non-switched customers more
services including switched services as regulatory conditions permit.
We offer a portfolio of Internet products including high bandwidth
leased line Internet access utilising our IP network and world-wide peering
agreements. We also provide a permanent connection for the delivery of IP
traffic for customers reselling bandwidth. A co-located server housing service
that provides secure rack space enabling customers to locate their own servers
and telecommunications equipment in secure sites with a dedicated high-speed
Ethernet connection to our Internet backbone is available. Supplementary
value-added products and services, including managed access routers, firewalls
and content filtering are also offered.
Segmental organisation
We operate in a single business segment, telecommunications and in
geographical areas as discussed below. Country activities and local business are
managed by local management teams. These local management teams are co-ordinated
through a regional and functional organisational structure.
In 2001, we reported our segments as UK, Germany, France, South
Region and North Region, which reflected our management structure at the time.
In February 2002, we announced a new organisational structure consisting of
three geographic regions (North, South and Central) and two pan-European
businesses, European Network Services and eBusiness. During 2002, a decision was
made to integrate eBusiness into each country operation. However, we do monitor
eBusiness revenue separately.
Our organisational structure is now based on geographic regions and
we consider our reportable segments to be North, South and Central. Prior years
have been restated on that basis. We define our geographic regions as follows:
Region Countries comprising the region
------ -------------------------------
North Region Belgium, Denmark, Ireland, The Netherlands,
Sweden and the United Kingdom
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South Region France, Italy, Portugal and Spain
Central Region Austria, Germany and Switzerland
Network operations
The costs associated with the initial installation and expansion of
our existing networks, including development, installation and early operating
expenses, have been, and in any new markets would be expected to be, significant
and result in negative cash flow. Capital expenditures on network, services and
systems infrastructure totalled (pound)412.1 million in 2002 a reduction of 49%.
Importantly, this reduction is as a result of the completion of the
infrastructure build phase of the business plan. With this phase complete,
future capital investment will not only more closely mirror revenue growth but
is expected to decline in both absolute terms and as a percent of revenue
growth. Capital expenditure paid for in 2002 included approximately (pound)125
million in respect of prior years infrastructure investment.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance
with U.K. GAAP, which require us to make estimates and assumptions. We believe
that of our significant accounting policies, which are described in Note 1 to
our consolidated financial statements incorporated herein by reference from our
2002 Annual Report, the following are important to our financial condition and
results and involved a higher degree of judgment and complexity, and are
therefore considered critical. In the consolidated financial statements, we also
provide a reconciliation of our net loss and net equity from the reported U.K.
GAAP, to U.S. GAAP.
Revenue Recognition
Under UK GAAP, revenue for switched services, which are generally
billed in arrears, and for non-switch and other services, which are generally
billed in advance, are recognised when services are provided. Installation
revenue associated with these services is recognised in the month in which the
installation takes place and in management's estimation is proportionate to the
attributable direct costs. Under U.S. GAAP, in accordance with S.E.C. Staff
Accounting Bulletin 101 "Revenue Recognition", installation revenue and
attributable direct costs are deferred and recognised over the expected customer
relationship period which is estimated based upon our historical experience of
customer retention patterns. This requires us to assess the period management
believes the customer is expected to maintain a service contract with us, which
may exceed the contract term.
Revenue recognised is adjusted to reflect changes in management's
estimates for provisions required for possible billing or service credits.
Under UK GAAP, revenue attributable to infrastructure sales in the
form of indefeasible rights of use agreements ("IRUs") resulting from sale of
inventory held for future sale is recognised at the time of delivery and
acceptance by the customer. Under U.S. GAAP, these sales are treated as
operating leases with the asset retained on our balance sheet and the income
deferred over the length of the IRU term. The revenue recognised in 2001 is
disclosed in note 2 to the consolidated financial statements incorporated herein
by reference from the 2002 Annual Report. There were no infrastructure sales in
2002, hence the adjustment reflects the recognition of revenue previously
deferred.
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Cost of sales
Cost of sales includes payments made to other carriers, depreciation
of network infrastructure and equipment, direct network costs and construction
costs associated with infrastructure sales.
When telephony traffic is carried by other operators, we incur
interconnect costs. Some interconnect costs are subject to regulation by local
regulatory authorities in the countries in which we operate. A determination may
give rise to amendments, most often in the form of reductions, to interconnect
costs relating to prior periods.
We review our interconnect costs on a regular basis and adjust the
rate at which these costs are charged in the profit and loss account in
accordance with the estimated interconnect costs for the current period.
Amendments to costs relating to prior periods are made in the current period,
but only when recovery or payment of these amounts is reasonably certain.
Receivables
We perform ongoing reviews of the bad debt risk within our
receivables and make provisions to reflect our views of the financial condition
of our customers and their ability to pay in full for amounts owing for services
provided. Such reviews, particularly in the current environment of slower
economic growth in Europe and turbulence in the telecommunications sector, are
difficult and the financial condition of certain customers may be worse than is
perceived by management, resulting in the need for additional provisions.
Tangible fixed assets
Under U.K. GAAP, tangible fixed assets are recorded at historical
cost. Network infrastructure and equipment comprises assets purchased and built,
at cost, together with capitalised labour, directly attributable to the cost of
construction. Under U.S. GAAP, the interest cost incurred during the period of
construction of the network infrastructure is capitalised as part of the cost of
the assets.
The annual depreciation charge is sensitive to the estimated service
lives allocated to each asset type. We regularly review these asset lives and
change them when it is considered necessary to reflect our current estimates of
their remaining lives in light of changes in technology, the actual condition
and expected utilisation of the assets concerned.
Impairment
Under U.K. GAAP, tangible and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that carrying
amounts may not be recoverable. Goodwill is also reviewed for impairment at the
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end of the first financial year after acquisition. An impairment loss is
recognised to the extent that the carrying amount of an asset exceeds its
recoverable amount, being the higher of its value in use and net realisable
value.
The impairment charge taken in 2002 was computed in accordance with
our accounting policy and the requirements of FRS 11 'Impairment of Fixed Assets
and Goodwill'. The carrying amounts of the relevant assets were compared to
recoverable amounts represented by the present value of the cash flows expected
to arise from their use, using a discount rate of 13.7%.
Under U.S. GAAP, FAS 144 'Accounting for the impairment or disposal
of long-lived assets' requires long-lived assets to be evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
a long-lived asset is not recoverable. On a regular basis, the undiscounted
estimated future net cash flows associated with the asset are compared to the
assets carrying amount to determine if an impairment has occurred. If such
assets are deemed impaired, an impairment loss equal to the amount by which the
carrying amount exceeds the fair value of the assets is recognised. If quoted
market prices for the assets are not available, the fair value is calculated
using the present value of estimated expected future net cash flows.
Under U.S. GAAP, FAS 142 'Goodwill and other intangible assets'
requires that goodwill and intangible assets with indefinite useful lives not be
amortised but should be tested for impairment annually. This impairment test has
been included in the review detailed above.
Considerable management judgment is necessary in the preparation of
the forecasted cash flows. While the calculation of the discounted future cash
flows projected to arise from the use of assets is based upon management's best
estimates of such cash flows and the required discount rate, these estimates do
contain an amount of uncertainty. Management's estimates may change over time
and actual results may differ from those estimates due to the economic,
technological and competitive environment in which we operate.
Resulting from such a review, we recorded for the year ended 31
December 2002 an impairment provision of (pound)551.0 million for certain
long-lived assets.
Deferred tax
In accordance with U.K. GAAP, from time to time we must report an
item of income, deduction, gain, or loss for financial accounting purposes in a
financial period prior to the financial period in which we must report the same
item for tax accounting purposes. When we recognise income for financial
accounting purposes before we do for tax purposes, then U.K. GAAP rules state
that we should accrue, as a liability, our estimate of the tax to be paid in the
future, using the average tax rates that are expected to apply in the periods in
which the timing differences are expected to reverse (based on the tax laws and
rates in effect at the balance sheet date). Similarly, when we recognise a
deduction or a loss for financial accounting purposes before we can for tax
purposes, we should accrue, as an asset, our estimate of the future tax benefit
we will receive where it is more likely than not that there will be suitable
taxable profits in the future from which the asset can be recovered. We do not
discount these estimated assets or liabilities. See Note 8 to our consolidated
financial statements from our 2002 Annual Report, incorporated herein by
reference, for disclosure of the amount of our deferred tax asset.
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Under U.S. GAAP rules, we account for deferred tax assets and
liabilities on temporary differences between income for financial accounting and
tax purposes, and we reduce the value of deferred tax assets (that is, deferred
tax benefits) to the amount that we consider likely to be recovered on future
tax returns.
Provisions
Our provisions are established based on our best estimate of the
amounts necessary to settle existing obligations or commitments as of the
balance sheet date.
In 2001, we made provision for future rents, services and
re-instatement costs associated with certain ISCs being closed or "mothballed"
and excess leased space. Management must estimate the financial impact of
sustaining contractual commitments, unutilised facilities, exiting certain
activities, sublease arrangements and disposal and contractual termination
costs. The estimate for the provision required is inherently judgmental and may
change based upon actual experience of future void periods and costs associated
with dilapidation and costs of re-instatement during the course of the void
period and at the conclusion of the lease terms. At 31 December 2002, such
provisions amounted to (pound)59.3 million.
In February 2002, we announced an operational effectiveness review
programme to reduce staff levels by approximately 500. On 27 September 2002, we
announced a pan-European organisational restructuring following the completion
of the construction of our core network infrastructure, which is expected to
result in the reduction of our workforce by 800 additional employees over the
following twelve months.
Exceptional charges, amounting to (pound)37.3 million for the twelve
months ended 31 December 2002, represent the provisions in respect of the cost
of these programmes and are expected to be utilised during 2003.
Year Ended 31 December 2002 compared to Year Ended 31 December 2001
Turnover
Turnover increased from (pound)905.7 million in 2001 to
(pound)1,027.2 million in 2002, an increase of 13.4%. Excluding infrastructure
sales in 2001 the revenue increase was 13.9%. There were no infrastructure sales
in 2002. While the slowdown in economic growth across Europe has impacted the
level of demand from our customers, particularly those within the wholesale
sector, we have been able to grow overall revenues by attracting new customers,
introducing new services and developing the level of business with existing
customers. Turnover from switched services increased from (pound)532.6 million
in 2001 to (pound)623.4 million in 2002. Growth in switched revenue reflects a
change in mix towards higher revenue per minute business. Switched minutes
decreased from 20.2 billion in 2001 to 20.0 billion in 2002. Average switched
revenue per minute increased by 18% in 2002, compared to 2001. Carrier revenues
represented 34% of total switched revenue in 2002 compared with 36% in 2001.
Turnover from non-switched services, increased from (pound)366.7 million in 2001
to (pound)402.1 million in 2002. Growth in non-switched and other revenue
reflects continuing growth in demand for local, national and international
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bandwidth from both corporate and wholesale customers, partially offset by
circuit cancellations from selected carriers exiting the market or rationalising
their networks. Increased turnover also reflects growth in Internet related
services including hosting, the introduction of new services including IP-VPN,
expansion into new markets and the inclusion of the Fitec results following its
acquisition in July 2001. At 31 December 2002 we had over 20 million private
wire voice grade equivalents in service, an increase of 33% compared to 31
December 2001 and 2,774 racks installed, an increase of 25% compared to 31
December 2001. Non-switched turnover from retail customers represented 72% of
total non-switched turnover in 2002 compared with 62% in 2001. Turnover from
other activities was (pound)1.8 million in 2002 and (pound)6.3 million in 2001.
Turnover from other activities in 2001 included (pound)3.8 million of
infrastructure sales. There were no infrastructure sales during 2002.
North Region
At 31 December 2002 we had 11 city-networks operational: Amsterdam,
Antwerp, Birmingham, Brussels, Copenhagen, Dublin, London, Manchester, The
Hague, Rotterdam and Stockholm, which was unchanged from the number of
city-networks at the end of 2001. Turnover increased by 6% to (pound)331.5
million compared to 2001. Growth in turnover reflected our expanded geographic
reach, expanded product range as well as our success in extending sales to
existing and new customers.
343 buildings were added during the year bringing the total at 31
December 2002 to 2,730. Switched minutes carried during the year decreased by
29.4% to 5,457 million compared to 7,733 million in 2001 as a result of a
reduction in low priced switched minute business. Private wire voice grade
equivalents at the end of the year totalled 8.749 million, an increase of 45.5%
over the position at the end of 2001. There were 966 racks in service at the end
of the year compared to 651 racks at the end of 2001 reflecting the continuing
growth in demand. DSL based services were available from 106 central offices at
the end of the year compared with 59 at the end of 2001, also an indication of
greater demand.
During the year we were chosen as a primary contractor to provide
service to Transport for London. This is a minimum (pound)15 million transaction
and the partnership will have a term of at least five years. We also won a major
contract to provide high bandwidth services to the Belgian government as part of
its e-government project, and NASDAQ Europe placed a major IPVPN order covering
30 sites in 6 countries.
Among other significant new customers were Cadbury Schweppes, RTE,
the Irish national television service, Oracle, Siemens and Rabobank.
In The Netherlands we were selected by the Dutch government to be
one of its four providers of web hosting activities and in Germany we won new
business with the Federal Bureau of Statistics and the Humboldt University,
Berlin. We were also successful in gaining a major contract for IPVPN services
with SWIFT, the supplier of secure messaging services to the financial industry
and we also provided an IPVPN solution for SwapsWire, creating the world's first
IP-based electronic dealing network for the OTC derivatives market.
Central Region
At 31 December 2002, there were 11 city-networks operational:
Berlin, Cologne, Dusseldorf, Frankfurt, Geneva, Hamburg, Hanover, Munich,
Stuttgart, Vienna and Zurich which was unchanged from the number of
city-networks at the end of 2001. Turnover increased by 13% to (pound)429.8
million compared to 2001. Growth in turnover reflected our expanded geographic
reach, expanded product range as well as our success in extending sales to
existing and new customers.
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356 buildings were added during the year bringing the total at 31
December to 3,784. Switched minutes carried during the year, increased by 23.0%
to 11,029 million compared to 8,977 million in 2001. Private wire voice grade
equivalents at the end of the year totalled 8.541 million, an increase of 18.1%
over the position at the end of 2001. There were 726 racks in service at the end
of the year compared to 712 racks at the end of 2001. DSL based services were
available from 324 central offices at the end of the year compared with 247 at
the end of 2001. The growth was due to our success in increasing sales to new
and existing customers, as well as introducing new products and expanding our
geographic reach.
During the year we sold network services to Universal Music,
Bloomberg, and Deutsche Bank, the United Nations International Fund for
Agricultural Development and Switzerland's air traffic control administration,
Skyguide. A major customer success for eBusiness was a new order for hosting
services worth over (euro)1 million per year from the Berlin Stock Exchange. We
also secured The Federal Bureau of Statistics in Germany as a customer and were
successful in obtaining a contract for the provision of a 140 site IPVPN,
awarded by HVB Info, a subsidiary of Hypovereinsbank, the second largest bank in
Germany.
South Region
At 31 December 2002, there were 10 city-networks operational:
Barcelona, Lisbon, Lyon, Madrid, Marseilles, Milan, Paris, Rome, Turin and
Valencia, which was unchanged from the number of city-networks at the end of
2001. Turnover increased by 25% for the year to (pound)265.9 million compared to
2002. Growth in turnover reflected our expanded geographic reach, expanded
product range as well as success in extending sales to existing and new
customers.
696 buildings were added during the year bringing the total at 31
December to 2,724. For reasons already stated, Switched minutes carried during
the year, increased by 0.48% to 3,554 million compared to 3,538 million in 2001.
Private wire voice grade equivalents at the end of the year totalled 3.133
million, an increase of 51.6% over the position at the end of 2001. There were
1,082 racks in service at the end of the year compared to 849 racks at the end
of 2001. DSL based services were available from 89 central offices at the end of
the year compared with 45 at the end of 2001. The growth was due to our success
in increasing sales to new and existing customers, as well as introducing new
products and expanding our geographic reach.
During the year we added Group Exane and Pernod Ricard Europe as new
customers and in France we signed a master agreement with La Banque Federale des
Banques Populaires which offers the potential to provide IPVPN services to 2,200
branches. Among other significant new business for eBusiness was the Jean Paul
Gaultier organisation. We also entered into new contracts with the local
government authority of Issy les Moulineaux, Europcar, a car rental company, and
McCann-Erikson, a media company. An important new customer for our range of very
high bandwidth services, including SDH links from 155Mb/s to 2.5Gb/s and
Ethernet links from 10 Mb/s up to 1 Gb/s, was Atos Origin, an IT services
provider. The football club FC Barcelona also became a new customer with a 3
year contract to provide their hosting services, including media streaming.
Banco de Portugal also became a customer, and we continued to achieve success in
the government sector with an important new contract with the French Ministry of
Agriculture for video streaming services.
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Cost of Sales
Cost of sales increased from (pound)941.7 million in 2001 to
(pound)1,451.9 million in 2002 as a result primarily of an exceptional charge of
(pound)526.3 million taken against costs associated with the workforce reduction
announced in September 2002 and the impairment provision take to write down the
book value of fixed assets.
Cost of sales, before exceptional items and costs associated with
infrastructure sales, increased from (pound)803.5 million in 2001 to
(pound)925.6 million in 2002, an increase of (pound)122.1 million or 15.2%.
Interconnection and network costs, before exceptional items and excluding costs
associated with infrastructure sales, increased from (pound)640.1 million in
2001 to (pound)713.6 million in 2002. The increase was primarily attributable to
higher interconnection charges resulting from higher switch revenue, increased
network costs associated with the introduction of additional services on our
inter-city network and the inclusion of the Fitec results following its
acquisition in July 2001.
Network depreciation increased by (pound)483.2 million from
(pound)236.8 million in 2001 to (pound)720.0 million in 2002. Exceptional
depreciation accounted for (pound)434.6 million of this increase. The increase
in network depreciation before exceptional items, from (pound)163.4 million in
2001 to (pound)212.0 million in 2002, was attributable to the significant
capital expenditure during 2001 related to the building of the network and
further investment in fixed assets in 2002 to support the growth in demand for
existing services and new service developments in existing markets.
The current nature of the telecommunications market has also led us
to re-evaluate the value of our assets. Accordingly, we have written down the
book value of certain assets, including parts of our network, equipment and
electronics and information technology software assets. In 2002, an impairment
charge of (pound)508.0 million was recognised relating to the write down of
certain parts of the network, equipment and electronics. Exceptional charges of
(pound)18.3 million associated with the announced staff reductions was recorded
in 2002. In 2001, an impairment charge of (pound)73.4 million was recognised
relating to the "mothballing" of Internet Solution Centres ("ISC") and further
charges of (pound)62.4 million were recorded relating to the write down of
inventory held for sale and provisions against mothballed ISC rental and other
obligations.
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Operating Expenses
During 2002, we repositioned our organisational structure, systems
and people to reflect the current nature of the telecommunications market and
the completion of our network. The organisation has been changed from one which
was appropriate as we entered new geographic markets and built out our network
infrastructure to one that is more suited to harvesting that infrastructure,
developing our portfolio of advanced services; extending our global reach and
growing profitable market share.
As part of that process, we reviewed our cost structure and
identified a number of areas where efficiency could be improved. From our peak
staffing levels of approximately 5,700 people, including 355 temporary and
contract workers, we reduced our staffing level such that at the end of 2002 we
had 4,855 employees, including 171 temporary and contract workers. We expect to
further reduce our staffing level to approximately 4,300 during 2003. Overall,
the full year savings which we anticipate to realise during 2004 as a result of
our review of our cost structure is approximately (pound)60 million.
Operating expenses increased from (pound)323.9 million in 2001 to
(pound)353.9 million in 2002, primarily resulting from an exceptional charge of
(pound)61.9 million incurred in connection with our employee reduction programme
and a further write down of the book value of fixed assets. Operating expenses,
before exceptional items, increased from (pound)284.1 million in 2001 to
(pound)292.0 million in 2002, an increase of (pound)7.9 million or 3%.
Selling, general and administrative expenses (SG&A) decreased from
(pound)265.0 million in 2001 to (pound)261.1 million in 2002. SG&A before
exceptional items, increased from (pound)237.1 million in 2001 to (pound)242.1
million in 2002, but decreased as a proportion of turnover excluding
infrastructure sales from 26.3% in 2001 to 23.6% in 2002.
Other depreciation and amortisation, increased from (pound)59.0
million in 2001 to (pound)92.9 million in 2002. In 2002, an impairment charge of
(pound)43.0 million was recognised compared with (pound)12.0 million in 2001.
Other depreciation and amortisation, before exceptional items, increased from
(pound)47.0 million in 2001 to (pound)49.9 million in 2002.
In 2002, an impairment charge of (pound)43.0 million was recognised
relating to the write down in net book value of leasehold improvements in excess
leased space, selected IT software developments and goodwill. Exceptional
charges of (pound)18.9 million associated with the announced staff reductions
were also recorded in 2002. In 2001 an impairment charge of (pound)12.0 million
was recorded relating to the write down in net book value of leasehold
improvements in excess leased space and a further charge of (pound)27.9 million
was recognised relating to provisions against future rents in the excess leased
space.
Interest receivable, interest payable and similar charges
Interest receivable decreased from (pound)60.7 million in 2001 to
(pound)38.1 million in 2002 due to decreased average balances of cash and
investments in liquid resources and lower rates of return.
Interest payable and similar charges were (pound)112.0 million in
2001 compared with (pound)96.3 million in 2002. The decrease was due primarily
to reduced debt levels reflecting the purchase of (pound)198.9 million of our
outstanding notes during 2002. In 2001, (pound)143.5 million of debt was
purchased.
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Interest payable and similar charges in 2002 included: (pound)36.1
million of interest and accretion on convertible debt; (pound)57.5 million of
interest and accretion on non-convertible debt and (pound)2.7 million of
interest, bank commitment fees and unwinding of discounts on provisions.
Amounts written off investment in own shares
In 2002 we recognised a charge of (pound)0.4 million relating to the
revaluation of shares held in a trust for certain compensations plans compared
to a charge in 2001 of (pound)2.8 million.
Gain on purchase of debt
We recorded a gain of (pound)101.7 million during 2002 as a result
of the purchase of a number of our notes by COLT Telecom Finance Limited,
compared to a gain in 2001 of (pound)58.8 million.
Exchange gain (loss)
In 2002, we had exchange gains of (pound)12.4 million, compared with
losses of (pound)5.2 million in 2001. These gains and losses were due primarily
to movements in the British pound relative to the U.S. dollar on cash and debt
balances denominated in U.S. dollars. In 2002, an exceptional exchange gain of
(pound)4.8 million was recognised on the cancellation of financial hedge
instruments after cancellation of a bank facility whose terms required hedging
of foreign currency risk.
Loss for period
For the twelve months ended 31 December 2001 and 31 December 2002,
we generated losses on ordinary activities of (pound)360.4 million and
(pound)718.3 million, respectively, and therefore did not incur a tax
obligation. The increase of (pound)357.9 million in the level of losses was
accounted for by the increase in exceptional items from (pound)119.7 million in
2001 to (pound)482.2 million in 2002.
Losses on ordinary activities in the North, Central and South
regions for the twelve months ended 31 December 2002 were (pound)296.6 million,
(pound)146.4 million and (pound)242.2 million, respectively, compared to losses
of (pound)131.3 million, (pound)201.9 million and (pound)82.6 million,
respectively, for the twelve months ended 31 December 2001. The underlying
business performance improved across all regions during 2002, however, all
regions incurred exceptional charges during the period. As discussed below, the
magnitude of those exceptional charges resulted in increased losses in the North
and South regions as compared to 2001.
The level of exceptional charges incurred within each region for the
twelve months ended 31 December 2002 was (pound)258.0 million, (pound)123.6
million and (pound)175.3 million for the North, Central and South regions,
respectively, compared to (pound)61.0 million, (pound)108.1 million and
(pound)2.8 million, respectively, for the twelve months ended 31 December 2001.
The Central region had a margin on infrastructure sales in 2001 of (pound)1.4
million and there were no infrastructure sales in 2002. Write downs of the book
value of certain of our assets, including parts of our network, equipment and
electronics, selected information technology software assets and goodwill,
together with costs relating to our workforce reduction, accounted for the
increase in exceptional charges.
Losses before exceptional charges and excluding the margin on
infrastructure sales for the twelve months ended 31 December 2002 were
(pound)38.6 million, (pound)22.8 million and (pound)66.9 million for the North,
Central and South regions, respectively, compared to (pound)70.3 million,
(pound)95.2 million and (pound)79.8 million, respectively, for the twelve months
ended 31 December 2001. Improved financial performance in the regions accounted
for the decreased loss before exceptional charges.
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Year Ended 31 December 2001 compared to Year Ended 31 December 2000
Turnover
Turnover, excluding infrastructure sales, increased from
(pound)640.8 million in 2000 to (pound)901.9 million in 2001, an increase of
(pound)261.1 million or 41%. Turnover including infrastructure sales in 2000 and
2001 was (pound)687.0 million and (pound)905.7 million, respectively. In 2001,
72% of turnover excluding infrastructure sales, was generated outside the U.K.
compared with 65% during 2000. Increased turnover was driven by continued demand
for our services from existing and new customers, new service introductions and
the expansion of our addressable market. However, the rate of growth has been
affected by the slowdown in economic growth across Europe generally and reduced
demand in the wholesale bandwidth market.
Turnover from switched services increased from (pound)405.3 million
in 2000 to (pound)532.6 million in 2001. Growth in switched revenue reflected an
increase in the number of markets in which we provided switched services and
growth in switched minutes from 15.8 billion in 2000 to 20.2 billion in 2001.
Average switched revenue per minute increased by 2% in 2001, compared to 2000
primarily as a result of changes in product mix somewhat offset by price
declines. Carrier revenues represented 36% of total switched revenue in 2001
compared with 37% in 2000. Turnover from non-switched and other services,
excluding infrastructure sales, increased from (pound)235.5 million in 2000 to
(pound)369.2 million in 2001. Growth in non-switched and other revenue reflects
continuing growth in demand for local, national and international bandwidth from
both corporate and wholesale customers, partially offset by circuit
cancellations from selected carriers exiting the market or rationalising their
networks. Increased turnover also reflects growth in Internet related services
including hosting, the introduction of new services including IP-VPN, expansion
into new markets and the inclusion of the Fitec results following its
acquisition in July 2001. At 31 December 2001 we had over 15 million private
wire voice grade equivalents in service, an increase of 80% compared to 31
December 2000 and 2,212 racks installed, an increase of 95% compared to 31
December 2000. Turnover from non-switched and other services, excluding
infrastructure sales, represented 41% of total turnover in 2001 compared with
37% in 2000. Including infrastructure sales, turnover from non-switched and
other services increased from (pound)281.7 million in 2000 to (pound)373.0
million in 2001.
North Region
At 31 December 2001, we had 11 city-networks operational: Amsterdam,
Antwerp, Birmingham, Brussels, Copenhagen, Dublin, London, Manchester, The
Hague, Rotterdam and Stockholm, compared to 8 city-networks at the end of 2000.
Turnover increased by 19% to (pound)312.9 million compared to 2000. Growth in
turnover reflected our expanded geographic reach, expanded product range as well
as our success in extending sales to existing and new customers.
438 buildings were added during the year, bringing the total at 31
December 2001 to 2,387. Switched minutes carried during the year increased by 9%
to 7,733 million compared to 7,088 million in 2000. Private wire voice grade
equivalents at the end of the year totalled 6.0 million, an increase of 87% over
the position at the end of 2000. Local network route kilometres increased to
1,359 and there were 651 racks in service at the end of the year compared to 871
route kilometres and 407 racks at the end of 2000. DSL based services were
available from 59 central offices at the end of the year compared with 12 at the
end of 2000.
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The regional customer base continued to grow, as did business with
existing customers. ABN AMRO, Bull, the Antwerp Port Authority and DAT, an
airline company were new customers of a range of voice, high bandwidth and
intelligent network services in Belgium. In The Netherlands we expanded the
services provided to McDonalds, a fast food chain. New customers included Van
Doome, a law firm which is now using our IP-VPN, managed router, firewall and
voice services and Optiver, a derivatives trader. One of our first customers in
Copenhagen was NetDoktor, a medical services portal, for whom we are providing a
range of hosting and Internet solution services.
Central Region
At 31 December 2001 there were 11 city-networks operational: Berlin,
Cologne, Dusseldorf, Frankfurt, Geneva, Hamburg, Hanover, Munich, Stuttgart,
Vienna and Zurich, compared to 11 city-networks at the end of 2000. Turnover
increased by 25% to (pound)380.3 million compared to 2000. Growth in turnover
reflected our expanded geographic reach, expanded product range as well as our
success in extending sales to existing and new customers. Turnover included
infrastructure sales in 2001 of (pound)3.8 million which had associated cost of
sales of (pound)2.4 million compared with infrastructure sales of (pound)46.2
million which had associated cost of sales of (pound)27.2 million in 2000. These
infrastructure sales took the form of 20-year indefeasible rights-of-use over
parts of our network in Germany. These transactions are characterised as
outright sales under U.K. GAAP, whereas under U.S. GAAP, these sales are treated
as 20-year operating leases.
783 buildings were added during the year bringing the total at 31
December 2001 to 3,428. Switched minutes carried during the year, increased by
55% to 8,977million compared to 5,788 million in 2000. Private wire voice grade
equivalents at the end of the year totalled 7.2 million, an increase of 70% over
the position at the end of 2000. Local network route kilometres increased to
1,778 and there were 712 racks in service at the end of the year compared to
1,375 route kilometres and 324 racks at the end of 2000. DSL based services were
available from 247 central offices at the end of the year compared with 79 at
the end of 2000.
In Austria, new customers for high bandwidth services included the
Technical University of Vienna and among new Internet access and hosting
customers was ex-it, a provider of on-line financial solutions. Significant new
customers in Germany included the Bundesbank, the Federal Bureau for Foreign
Affairs, Berlin Police Headquarters, the City of Hamburg and the University of
Munich. In Switzerland we signed a major contract to provide Crossair's data
services. We gained significant new business with Geneva Airport and Citibank.
South Region
At 31 December 2001, there were 10 city-networks operational:
Barcelona, Lisbon, Lyon, Madrid, Marseilles, Milan, Paris, Rome, Turin and
Valencia, compared to 8 city-networks at the end of 2000. Turnover for the year
increased by 77.0% to (pound)212.4 million compared to 2000. Growth in turnover
reflected our expanded geographic reach, expanded product range as well as its
success in extending sales to existing and new customers.
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817 buildings were added during 2001 bringing the total at 31
December to 2,028. Switched minutes carried during the year increased by 23% to
3,537 million, compared to 2,882 million in 2000. Private wire voice grade
equivalents at the end of the year totalled 2.1 million, an increase of 127%
over the position at the end of 2000. Local network route kilometres increased
to 1,320 and there were 850 racks in service at the end of the year compared to
819 route kilometres and 407 racks at the end of 2000. DSL based services were
available from 45 central offices at the end of the year compared with 20 at the
end of 2000.
In France, significant new customers for hosting services included
Canon Communication & Image, a camera manufacturer. TF1, a television channel,
extended its business with us by outsourcing the hosting of its staracademy.fr
web site. Other new customers included Marseilles Airport and CEGEDIM Group, a
leader in the provision of technologies and services dealing with medical
information. IP-VPN demand was strong with 60 new customers signed for 175 sites
in the fourth quarter. In Italy new customers included Europcar, a car rental
company, Pininafaria, a car design and styling specialist, and ICE, a state
institute for foreign trade.
Cost of Sales
Cost of sales increased from (pound)566.9 million in 2000 to
(pound)941.7 million in 2001 as a result primarily of an exceptional charge of
(pound)135.8 million. In 2001, an impairment charge of (pound)73.4 million was
recognised relating to the closing or `mothballing' of Internet Solution Centre
capacity and writing down certain equipment and electronics. Additional charges
of (pound)28.8 million and (pound)33.6 million were also recognised relating to
the write down of ducts on the German section of our inter-city network
allocated for sale to other carriers and provisions against future rents,
services and reinstatement costs in the Internet Solution Centres, respectively.
Cost of sales, before exceptional items and excluding costs
associated with infrastructure sales, increased from (pound)539.7 million in
2000 to (pound)803.5 million in 2001, an increase of (pound)263.8 million or
49%. Interconnection and network costs, before exceptional items and excluding
costs associated with infrastructure sales, increased from (pound)451.0 million
in 2000 to (pound)640.1 million in 2001. The increase was primarily attributable
to interconnection payments associated with the 28% increase in switched minutes
in the year, as well as additional network operating costs related to growth
achieved in the 27 city-networks and 10 ISCs in service at 31 December 2000 and
the new networks and ISCs brought into service during 2001. In addition,
operating costs attributable to the expansion of our inter-city network
contributed to the increases in interconnection and network costs.
Network depreciation increased from (pound)88.7 million in 2000 to
(pound)236.8 million in 2001. The increase of (pound)148.1 million included an
exceptional charge of (pound)73.4 million. Network depreciation, before
exceptional items, increased from (pound)88.7 million in 2000 to (pound)163.4
million in 2001. This increase was attributable to further investment in fixed
assets to support the growth in demand for services, new service developments in
existing markets, including hosting services, expansion of the inter-city
network and entry into new markets.
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In 2001, following a review of the future discounted cash flows from
the ISCs and based on current and expected market conditions, an impairment
charge of (pound)73.4 million was recognised relating to the closing or
`mothballing' of ISC capacity and the writing down of certain equipment and
electronics. Associated with the decision to mothball ISCs, provisions of
(pound)33.6 million were made for future rents, services and re-instatement
costs. In addition, given the depressed market for telecommunications
infrastructure assets, a charge of (pound)28.8 million was also recognised
relating to the write down of ducts on the German section of our inter-city
network allocated for sale to other carriers ("Inventory held for future sale"
on the Balance Sheet).
Operating Expenses
Operating expenses increased from (pound)205.0 million in 2000 to
(pound)323.9 million in 2001. In 2001, following a comparison of net book value
with fair value, based on expected discounted future cash flows, an impairment
charge of (pound)12.0 million was recognised relating to leasehold improvements
in excess leased space and selected IT software developments. An additional
charge of (pound)27.9 million was also recognised relating to provisions against
future rents, services and reinstatement costs in the excess leased space.
Operating expenses, before exceptional items, increased from
(pound)205.0 million in 2000 to (pound)284.1 million in 2001, an increase of
(pound)79.1 million or 39%.
SG&A expenses increased from (pound)181.7 million in 2000 to
(pound)265.0 million in 2001, and decreased as a proportion of turnover from
26.4% in 2000 to 26.3% in 2001. SG&A expenses before exceptional items increased
from 181.7 million in 2000 to 237.1 million in 2001 and as a proportion of
turnover before infrastructure sales decreased from 28.4% in 2000 to 26.3% in
2001. The increase in the pre-exceptional cost level was primarily due to
increased personnel, office space, marketing and information technology expenses
associated with the expansion of our customer base, new services development and
expansion into new markets.
Other depreciation and amortisation, before exceptional items,
increased from (pound)23.3 million in 2000 to (pound)47.0 million in 2001. The
increase was due mainly to depreciation on increased investment in information
technology, customer service and support systems and office equipment in
existing and new markets.
Interest receivable, interest payable and similar charges
Interest receivable decreased from (pound)80.5 million in 2000 to
(pound)60.7 million in 2001 due to decreased average balances of cash and
investments in liquid resources and lower rates of return.
Interest payable and similar charges were (pound)104.8 million in
2000 compared with (pound)112.0 million in 2001. The increase was due primarily
to increased average debt levels reflecting the issuance of senior notes in
April 2000 partially offset by the purchase and cancellation of approximately
(pound)143 million of our outstanding notes during the third quarter of 2001.
Interest payable and similar charges in 2001 included: (pound)43.3
million of interest and accretion on convertible debt; (pound)67.7 million of
interest and accretion on non-convertible debt and (pound)1.0 million of
interest and bank commitment fees.
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Amounts written off investment in own shares
In 2001, we recognised a charge of (pound)2.8 million relating to
the revaluation of shares held in a trust for certain compensations plans.
Gain on purchase of debt
We recorded a gain of (pound)58.8 million as a result of the
purchase of a number of our notes by COLT Telecom Finance Limited during the
third quarter of 2001. These notes have been cancelled.
Exchange gain (loss)
In 2001, we had exchange losses of (pound)5.2 million, compared with
losses of (pound)7.7 million in 2000. These losses were due primarily to
movements in the British pound relative to the U.S. dollar on cash and debt
balances denominated in U.S. dollars.
Loss for Period
For the twelve months ended 31 December 2000 and 31 December 2001,
we generated losses on ordinary activities of (pound)116.9 million and
(pound)360.4 million, respectively, and therefore did not incur a tax
obligation. Losses before exceptional items and excluding the margin on
infrastructure sales were (pound)135.9 million in 2000 and (pound)242.1 million
in 2001.
Losses on ordinary activities for the twelve months ended 31
December 2001 in the North, Central and South regions were (pound)131.3 million,
(pound)201.9 million and (pound)82.6 million, respectively, compared to losses
of (pound)69.4 million, (pound)52.0 million and (pound)49.8 million
respectively, for the twelve months ended 31 December 2000. The increase in the
losses are accounted for by the exceptional charges incurred in the twelve
months ended 31 December 2001, lower infrastructure sales in 2001 and the
increase in the volume of activities in the development of the business.
The level of exceptional charges was (pound)61.0 million,
(pound)108.1 million and (pound)2.8 million for the North, Central and South
regions, respectively. The Central region also had a margin on infrastructure
sales of (pound)1.4 million in 2001 and (pound)19.0 million in 2000. There were
no exceptional charges incurred in the twelve months ended 31 December 2000. In
2001, the Company recognised an aggregate exceptional charge of (pound)175.6
million. This charge reflects a provision of (pound)85.3 million for the write
down of the book value of certain assets, including Internet Solution Centres
capacity, equipment and electronics, selected IT software developments and
leasehold improvements in excess leased space, a charge of (pound)28.8 million,
reflecting the write down of inventory held for future sale, and a charge of
(pound)61.5 million, reflecting reserves against future rents, services and
reinstatement costs in the Internet Solution Centres and excess leased space.
Losses before exceptional charges and margins on infrastructure
sales for the twelve months ended 31 December 2001 were (pound)70.3 million,
(pound)95.2 million and (pound)79.8 million for the North, Central and South
regions, respectively, compared to losses of (pound)69.4 million, (pound)71.0
million and (pound)49.8 million, respectively, for the twelve months ended 31
December 2000. The increase in losses reflects the increase in the volume of
activities in the development of the business in each of the regions.
New Accounting Standards
A number of new US accounting standards were issued during 2001 and
2002 that will have a potential effect on our consolidated financial statements.
The detail and the potential effect of our adoption of those accounting
standards are discussed in Section f of note 25 of our 2002 Annual Report
entitled "Other disclosures."
Transactions with affiliates
In December 1996, we entered into a Relationship Agreement with FMR
Corp., COLT Inc., Fidelity Investors Limited Partnership, FIL Bank and Trust
Company Limited and Fidelity International Limited (the "Contracting Parties").
In general, the Relationship Agreement will continue in effect while the
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Contracting Parties or their affiliates hold at least 30% of our share capital.
The Relationship Agreement contains certain undertakings by the Contracting
Parties, including undertakings relating to voting for directors,
non-competition, arms length dealings and acquisition of additional Ordinary
Shares.
Both Fidelity Capital Associates Inc. ("FCA") (a wholly owned
subsidiary of FMR Corp.) and COLT have entered into separate 10 year agreements
with each other to provide to the other certain consultancy services. The
consultancy services we have agreed to provide to FCA include, regulatory and
economic advice, assistance in applying for licences and advice on FCA network
construction (outside Europe). We are entitled to fees for services rendered at
prevailing market rates for such services which will only be provided if not
detrimental to the business or operations of the Company, as determined by our
independent directors. FCA's consultancy services to us include on an as and
when needed basis, assistance in establishing and maintaining the Company's
relationships with banks and other financial institutions, providing tax
planning advice and financial and strategic planning. FCA is entitled to fees at
the then prevailing market rates for such services. Both of the above agreements
are terminable for material breach. No services were provided by us or to us in
2002.
The U.K. pension scheme is administered by Fidelity Pensions
Management, a subsidiary of Fidelity Investments Management Limited, a wholly
owned subsidiary of Fidelity International Limited. The fees for the above
services for the year ended 31 December 2002 were approximately (pound)170,000
(2001:(pound) 88,000 2000: (pound)83,000 ).
Pursuant to a contract with us, certain FMR Corp. ("FMR") employees
provide consulting and other services to us at agreed rates. The fees for these
services for the year ended 31 December 2002 were approximately (pound)1,377,000
(2001: (pound)110,000, 2000: (pound)295,000) for FMR employees and
(pound)300,000 for Fidelity International Limited employees. FMR also provided
additional compensation and benefits to these employees related to services to
the Company. For the year ended 31 December 2002 these totalled (pound)Nil
(2001:(pound)58,000, 2000:(pound)658,000).
B. Liquidity and Capital Resources
The costs associated with the initial installation and expansion of
our networks, and services, including development, installation and initial
operating expenses, have resulted in negative cash flows. Capital expenditure
was reduced in 2002 and is expected to reduce further in 2003. Negative cash
flows are expected to continue in each of our markets until an adequate customer
base and related revenue stream have been established. In 2002, net cash inflows
from operations were (pound)139.3 million, compared with net cash inflows for
the equivalent period in 2001 of (pound)39.7 million. Changes to cash flows from
operations include the effect of the timing of stage billings and payments with
the telecommunications operators associated with the construction of our
inter-city network. Net cash outflows from returns on investments, servicing of
finances, capital expenditure, and from financial investment and acquisitions
and disposals decreased from (pound)780.8 million in 2001 to (pound)439.3
million in 2002. The decrease in net cash outflows was primarily as a result of
reduced purchases of tangible fixed assets, which decreased from (pound)804.3
million in 2001 to (pound)412.1 million in 2002. We also took advantage of the
volatile financial markets in 2002 to purchase (pound)198.9 million of our notes
for (pound)97.2 million during the year compared with the purchase of
(pound)143.5 million of our notes for (pound)84.7 million in 2001. We will
continue to monitor the trading levels of our notes and may take advantage of
other such opportunities to enhance shareholder value if they present
themselves.
In 2001, proceeds of (pound)498.9 million were raised from our
placement of Ordinary Shares. Balances of cash and investments in liquid
resources at 31 December 2002 totalled (pound)934.9 million compared with
(pound)1,304.5 million at 31 December 2001.
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A portion of direct labour and other compensation related costs
attributable to the development, installation and expansion of our networks is
capitalised and depreciated in network depreciation cost of sales. In addition
to capital expenditures, we incurred direct operating costs upon commencement of
the installation phase of a network for such items as salaries and office rent.
These expenditures and costs are incurred in advance of receiving any revenue.
The exact amounts and timing of these expenditures and costs are subject to a
variety of factors, which may vary significantly by geographic market. As
network usage rises, we incur increased sales and marketing expenses (including
sales commissions), administrative costs and local taxes. Right-of-way costs are
also incurred in order to construct our network or connect buildings. Although
our revenues have increased substantially, our expenses associated with the
expansion and development of our local telecommunications networks have also
increased. The most significant portion of cost of sales is the cost of
interconnecting to other carriers. The cost of interconnecting is determined on
an operator by operator basis. Our operating losses increased with the continued
expansion of our networks and a high level of fixed costs and capital investment
was required to build the network and add customers. However, after a customer
base is established, incremental revenues are added with minimal additional
expense, providing significant contributions to operating results.
As we have now completed the build phase of our business plan, we
believe that we are well positioned with the assets, products, services, people
and financial resources to achieve the scale required to achieve the
profitability necessary in an infrastructure based business such as ours.
We operate a centralised treasury function, the prime objective of
which is to manage both our working capital and capital expenditure
requirements. In addition to liquidity risks, the principal financial risks to
which we are exposed arise from volatility in foreign currency exchange rates
and interest rates. Our Board regularly reviews these risks and approves
associated risk management policies, including treasury strategy.
Transactions denominated in foreign currencies are translated at the
rate prevailing at the time of the transaction. Monetary assets and liabilities
are translated at the period end rate. Exchange differences arising from the
retranslation of the opening net assets of foreign subsidiaries, denominated in
foreign currencies, and any related loans, together with the differences between
profit and loss accounts translated at average rates and rates ruling at the
period end are taken directly to reserves.
Translation differences on intra-group currency loans and foreign
currency borrowings to the extent that they are used to finance or hedge group
equity investments in foreign enterprises are taken directly to reserves
together with the exchange differences on the carrying value of the related
investments.
Forward exchange contracts are deemed hedges only where they relate
to actual foreign currency assets and liabilities or commitments which have been
identified and where they involve the same, or similar, currency as the hedged
transaction and reduce the risk to our operations arising from foreign currency
exchange movements. Gains and losses on forward exchange contracts deemed as
hedges are deferred and included in the value of the related foreign currency
transaction. We do not use any other derivative instruments.
All other exchange differences are taken to the profit and loss
account.
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We believe that current assets, together with internally generated
funds, will provide sufficient funds for us to expand our business as planned
and to fund our operating losses. There can be no guarantee that we will not
require significant additional funds. Sources of financing may include equity
and debt financings and other financing arrangements such as vendor financing.
There can be no assurance that additional financing arrangements will be
available, or if available, that they can be concluded on terms acceptable to
us. Failure to obtain any such financing would result in delay or abandonment of
some or all of our development and expansion plans which could have a material
adverse effect on our ability to service our debt.
Bond buy back
During the twelve months ended 31 December 2002 we made purchases in
aggregate of (pound)198.9 million (2001: (pound)143.5 million) of our
outstanding convertible and non-convertible notes for cash consideration of
(pound)97.2 million (2001: (pound)84.7 million). Exceptional gains arising from
the purchases were (pound)101.7 million (2001: (pound)58.8 million). We were
able to take advantage of the volatile financial markets in 2002 to purchase
some of our notes at favourable rates, and we will continue to monitor the
trading levels of our notes and may take advantage of other such opportunities
to enhance shareholder value if they present themselves.
See note 15 to our financial statements for a summary of the terms
of our debt obligations.
Creditors - Amounts falling due after more than one year.
At 31 December
------------------------------------------------------
2001 2002 2001
(pound)'000 (pound)'000 $'000
Repayable between two and three years
Senior convertible notes -- 98,283 158,186
Repayable between three and four years
Senior convertible notes 91,867 321,057 516,742
Senior discount notes -- 142,408 229,206
Repayable between four and five years
Senior convertible notes 337,403 220,489 354,877
Senior discount notes 201,936 -- --
Senior notes -- 79,861 128,536
Repayable in more than five years
Senior convertible notes 228,147 -- --
Senior notes 458,672 331,801 534,034
--------- --------- ---------
1,318,025 1,193,899 1,921,581
--------- --------- ---------
Contractual obligations
The following table summarises the Company's long-term commitments
as at 31 December 2002, including commitments pursuant to debt agreements, lease
obligations and other long terms contracts.
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Payment due by period
(000) Total Less than 1-3 4-5 More than 5
1 year years years Years
--------------------------------------------------------------------------
Long-term debt 1,193,899 -- 561,748 300,350 331,801
Capital lease obligations 2,553 482 814 279 978
Operating leases 331,085 71,155 86,261 46,956 126,713
--------------------------------------------------------------------------
Total Contractual Cash 1,527,537 71,637 648,823 347,585 459,492
Obligations --------------------------------------------------------------------------
The Company had a Bank
Facility of up to (pound)75,000,000
which it cancelled in June 2002
No amounts had been drawn under the
facility
Other commercial commitments
Guarantees provided by banks -- -- -- -- --
Standby repurchase obligations -- -- -- -- --
Other commercial commitments 47,832 47,832 -- -- --
--------------------------------------------------------------------------
47,832 47,832 -- -- --
--------------------------------------------------------------------------
C. Research and Development, Patents and Licences, etc.
We do not engage in significant research and development activities.
D. Trend information
Telecommunications Market
Whilst we have continued to grow and increase our margins, the
economy has continued to slow and the growth in telecommunications demand has
remained sluggish, negatively affecting our own growth rate. Throughout Europe,
as the economic conditions have continued to deteriorate, we have seen more of
our customers, suppliers and competitors withdraw from the market or consolidate
activities. We have experienced the continued loss of high margin bandwidth
revenue from carriers exiting the market or rationalising their networks as a
result of continued economic pressure. These factors made 2002 a difficult year
and there are no signs that the market will improve in 2003. We have taken steps
in the light of these trends to ensure that our asset base remains aligned with
the realities of the market by recognising an impairment charge of (pound)551m
this year.
We do not underestimate the challenges facing us in 2003. However,
we have benefited and expect further to benefit from the growth in bandwidth
intensive applications and the trend to outsourcing of customer networks and
operating environments. Prices in the telecommunications services industry have
been declining and are expected to continue to decline. We believe that such
declines have been beneficial insofar as they have assisted in the stimulation
of demand. Unit costs of the technology we use to provide and support our
services have also been declining and are expected to continue to do so. For
further discussion of significant recent trends in our financial condition and
results of operations, please see Item 5.A "Operating and Financial Review and
Prospects--Operating Results" and 5.B "Operating and Financial Review and
Prospects--Liquidity and Capital Resources."
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Foreign Currency Exchange Rates
We trade in the local currencies of the countries in which we
operate, which are predominantly Euros. Although fluctuations in foreign
exchange rates do not affect our ability to trade in those countries, such
fluctuations do affect our results.
In 2002, we had exchange gains of (pound)17.2 million. In 1999, 2000
and 2001, we had exchange losses of (pound)2.5 million, (pound)7.7 million, and
(pound)5.2 million, respectively. These gains and losses were due primarily to
movements in the British pound relative to the U.S. dollar on cash, investments
in liquid resources and debt balances denominated in U.S. dollars.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Barry R. J. Bateman (57) is Vice Chairman of Fidelity International
Limited, having served as President of Fidelity International Limited from 1991
until 2001. Mr. Bateman joined Fidelity in 1981, initially as Marketing
Director. From 1989 to 1991, he was Managing Director of Fidelity Investment
Management Ltd. and from 1986 to 1989 he served as Managing Director of Fidelity
Investment Services Ltd. Prior to joining Fidelity, Mr. Bateman was Marketing
Director at Datastream from 1975 until 1981 and prior to this served as Research
Director at Hoare Govett Ltd. from 1972 until 1975. Mr. Bateman served as
Chairman of AUTIF from 1991 until 1993 and is currently a Director of the
Investment Management Association. He was appointed to the Board of Directors of
COLT on 27 September 1996 becoming the non-executive Chairman on 1 January 2003.
Steven P. Akin (57) was appointed President and Chief Executive
Officer of COLT on 25 July 2002. He served as President of Fidelity Capital, the
emerging business development arm of Fidelity Investments, between January 1999
and July 2002 and as a member of Fidelity 's Operating Committee. From 1997 to
1999, he was President of Fidelity Investments Systems Company in which position
he served as Chief Information Officer responsible for computer operations,
global telecommunications networks and enterprise-wide applications support and
development. Prior to joining Fidelity in 1992, as President of Fidelity Retail
Investor Services, Mr. Akin was President of Sprint Long Distance Consumer
Services Group. He also served as Senior Vice President of National Customer
Operations of Sprint. In 1987, Mr. Akin was Chief Operations Officer at United
Telephone Company Midwest Group. Previously, Mr. Akin served as Chief Operations
Officer at United Telephone of Indiana. He was appointed to the Board of
Directors of COLT on 23 July 2002.
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Paul W. Chisholm (54) served as our President from 1995 and our
Chief Executive Officer from 1996, until January 2001 when he resigned from his
executive position. He was appointed to our Board of Directors on 22 September
1996. He served as the first Managing Director of COLT Telecommunications from
its inception in 1992 until 1995. From 1988 until 1992, he was the first Vice
President and General Manager of Teleport Communications Boston, Inc., one of
the first competitive access providers in the U.S. From 1985 until 1988, Mr.
Chisholm was the Vice President-Telecommunications of Shawmut Bank in Boston.
From 1974 until 1985, he was employed in various management positions at New
England Telephone & Telegraph Co. and AT&T Corp. He served as the first Chairman
of the Other Licensed Operators Group, a regulatory reform group in the United
Kingdom from 1993 to 1995. Mr. Chisholm is also a non-executive director of
Sycamore Networks Inc. and Netifice Communications Inc.
James. C. Curvey (67) is a Director and Vice Chairman of FMR Corp.
He was appointed to our Board of Directors on 27 September 1996 and served as
non-executive Chairman between May 1999 and December 2002. Mr. Curvey joined
Fidelity Investments in June 1982, as Vice President, Human Resources, became
Senior Vice President for Administration in January 1983 and President of
Fidelity Capital in December 1986. He served as Chief Operating Officer of FMR
from May 1997 until September 1998 and as President and Chief Operating Officer
of FMR Corp. from September 1998 until July 2000. Prior to joining Fidelity
Investments, Mr. Curvey was Vice President, Human Resources for Chase Manhattan
Corp. in New York. Before joining Chase Manhattan Corp. in 1976, Mr. Curvey
served for six years as Director of Personnel for the Department of Housing and
Urban Development in Washington, D.C. Mr. Curvey is a Director of Geerlings &
Wade, a wine distribution company.
Timothy T. Hilton (50) is President of Fidelity Broadband Group. He
joined Fidelity in 1996 as Senior Vice President of Fidelity Capital, became a
Managing Director and served as President of Fidelity Capital from June 1997
until July 1999 and served as President of Fidelity Ventures from January 1999
until April 2000. Prior to joining Fidelity Mr. Hilton was a senior partner and
member of the management and executive committees of the Boston based corporate
law firm of Sullivan & Worcester LLP. He was appointed to our Board of Directors
on 26 May 1999.
H.F. van den Hoven (79) served as Chairman of the Supervisory Board
of ABN AMRO Bank from 1984 to 1994 and as Chairman of Unilever N.V. from 1976 to
1984. He was appointed to our Board of Directors on 27 September 1996. He is a
member of the supervisory board of Hunter Douglas and is a director for a number
of funds in the Fidelity Group of International Funds.
Robert Hawley (66) was Chief Executive of British Energy plc until
1997 and until 1995 he was Chief Executive of Nuclear Electric plc. He is a
non-executive director of RockTron plc, Rutland Trust plc and Creative Value
Networks(CNV) Ltd. Dr. Hawley is advisor to HSBC Investment Bank plc and is
registered with the Securities and Futures Authority. He was the Chairman of
Taylor Woodrow plc until the middle of May of 2003, and was Chairman of the
Engineering Council and the Particle Physics and Astronomy Research Council and
the CBI/UK Korea Economic Co-operation Council. He was appointed to our Board of
Directors on 21 August 1998.
-72-
Vincenzo Damiani (63) was, until August 2002, Corporate Vice
President, EDS Corporation and a member of the EDS Executive Board for Europe,
Middle East and Africa with specific responsibility for the Mediterranean Region
and Chairman of the Board of EDS Italy. Before joining EDS in 1997, Mr.Damiani
spent 29 years at IBM where he held several management positions, including
President of Marketing and Services of IBM Europe, Middle East and Africa. Mr.
Damiani was also a member of the Executive European Committee and member of the
Board of IBM Europe. In 1993 Mr. Damiani was appointed Corporate Vice President
and President of Digital Equipment Europe. Mr. Damiani is a non-executive
Director of Banca di Roma, and is a member of its Executive Committee. Mr.
Damiani is also a non executive director of Augeo Holding BV. He was appointed
to the Board of Directors of COLT on 23 July 2002.
Mark A. Jenkins (45) was appointed as our Director of Legal Services
and Company Secretary in May 1998 and to our Board of Directors on 23 May 2002.
Prior to joining us he was Group Company Secretary and Head of Legal of Peek
plc. From 1987 until 1992 he was Company Secretary of SKF (UK) Limited, the U.K.
operations of AB SKF, a Swedish multinational rolling bearing manufacturer, and
between 1985 and 1987 he was Group Company Secretary's Assistant at M.K.
Electric Group plc. From 1981 until 1985, he practised at the Bar.
Hans Eggerstedt (64) is a former Finance Director of Unilever,
having retired from that position in 1999. Prior to being appointed Finance
Director he held a range of management positions with Unilever and is currently
a member of the Supervisory Board of Unilever Deutschland. He is also a member
of the Advisory Council of the ING Group, a member of the Supervisory Board of
Rodamco Europe and has non-executive directorships with Jeronimo Martins and
bolero.net. He was appointed to the Board of Directors of COLT on 2 June 2003.
Lakh Jemmett (43) joined us as Regional Director in 1997. Between
1989 and his joining us he worked for Sprint International and subsequently
GlobalOne in various capacities including that of Chief Executive Officer and
Operations and Engineering Director of GlobalOne UK. From 1982 until 1989, he
worked in a number of marketing and technical positions for both BT and
Commercial Cable Telecom.
Andrew J. K. Steward (45) was our Acting Chief Financial Officer
between June 2002 and up to and including 31 December 2002, whereupon a
permanent Chief Financial Officer took over the role with effect from 1 January
2003. Mr. Steward joined us on assignment from Fidelity International Limited
(one of our major shareholders) where he was, and remains Chief Financial
Officer, returning there, once his assignment with us concluded in December
2002. The purpose of the assignment was to undertake the responsibilities of
Chief Financial Officer after the resignation of our previous Chief Financial
Officer and before the appointment of a permanent successor.
Marina M. Wyatt (39) joined us in November 2002 taking over as Chief
Financial Officer from 1 January 2003. Immediately before she joined us, she had
been Group Financial Director of Psion plc since 1996. She joined Psion
originally as Group Financial Controller in 1994. She is a Chartered Accountant
and worked for Arthur Andersen LLP in London and in the U.S. between 1985 and
1994. She is a Non-Executive Director of Blackwell Publishing Ltd.
-73-
Christopher J. Woodman (41) joined us as Managing Director, Human
Resources, in January 2003 on assignment from Fidelity International Limited.
Following an early career at Ford Motor Company, London Docklands Development
Corporation and Cleanaway, a joint venture subsidiary of GKN/Brambles, Mr.
Woodman joined Fidelity International Limited in 1995 as Human Resources
Manager. In 1997, he was appointed as Human Resources Director for the
Investment and Institutional business organisations within Fidelity
International Limited. From 2000 through to the end of 2002, he undertook an
assignment with Fidelity Management and Research Company in Boston, MA, as Human
Resources Director for the Equity Research and Equity Trading organisations. On
his return to the U.K. he was appointed as acting Executive Director of Human
Resources for Fidelity International Limited before taking up his current duties
with us.
J. William Freeze (48) joined COLT in July 2002 as Regional Director
for the North Region. Prior to joining us, he held the position of Vice
President-Northern Europe for Dell after which he was Chief Operating Officer of
KPNQwest between August 2001 and May 2002. The majority of his
telecommunications career was spent with AT&T Corp. in the U.S., where he served
in various sales, marketing, product management and operations positions, before
leaving the United States in 1996, to become the Chief Operating Officer of
AT&T-Unisource.
Kenneth C. Starkey (47) joined us as Chief Network Officer in 2002,
becoming Chief Operations Officer in May 2003 when he took over responsibility
for the IT function in addition to Network & Operations. Prior to joining COLT
he held the position of Executive Vice President, Telecommunications for
Fidelity Investments from 1998 to 2002. From 1987 to 1998 he held various
positions with Bear Stearns & Co., including Managing Director of Telecom. Early
in his career he was with Executone of New York and MCI Communications Corp.
Graham N. F. Hanson (51) joined us in 1999 as Group Director,
Corporate Development, with responsibility for our business strategy. From
1996-1999, he was President and CEO of GN Comtext Ltd., a global messaging
company. Prior to this he spent a year with Arthur Anderson LLP, as Director of
European Telecommunications, developing their strategy for professional services
support to the telecommunications industry. Additionally, he spent 11 years with
BT, holding a number of positions, both within the U.K. and internationally in
various marketing and product management, business planning and market
development roles, including responsibility for their Payphone business.
Ronald C. Duff (54) joined us in January 2003 as Managing Director,
Corporate Services with responsibility for all internal service delivery
including procurement, travel, real estate, security, health and safety. Prior
to this position he was Managing Director of Fidelity Broadband Group, the
telecommunications venture capital division of Fidelity Investments. Before this
he was president of Fidelity's Corporate Real Estate group, the real estate
division of Fidelity Investments. Before joining Fidelity in 1994, Mr. Duff was
senior vice president of corporate real estate at Bank of America. Before he
joined Bank of America in 1983, he managed a variety of facilities functions as
-74-
well as Security and Telecommunications at Trilogy Systems Corporation in
Cupertino, California. He began his career at Amdahl Corporation in Sunnyvale,
California.
Paul I. David (42) joined us in June 2000 to lead our Internet and
Hosting business in the UK, becoming our Director of Marketing responsible for
implementing our product and service strategy, in 2002. Prior to this he spent
19 years with Cable and Wireless initially specialising in telecommunications
pricing. He then had various marketing and product development positions at
Cable & Wireless and Mercury, their UK division and in Hong Kong with Hong Kong
Telecom, a company majority-owned by Cable & Wireless, where he eventually
became General Manager for Corporate Markets. In 1997 he became Vice President
of Intranet and Internet Solutions of Omnes a joint venture between Cable &
Wireless and Schlumberger, in the USA. In 1999, Mr. David moved back to Cable &
Wireless in the UK as Customer Development Director for its global
Multi-National Customers division.
-75-
B. Compensation
The total aggregate remuneration (including pension contributions)
paid or accrued by us to (or for the benefit of) the members of the Board of
Directors and the executive officers (who are not directors) taken as a group
(23 persons) during the financial year ended 31 December 2002 was
(pound)6,027,921. The aggregate compensation paid or accrued by us to all
Directors and executive officers as a group during such period included
(pound)1,715,987 in bonuses.
Travel PPP/Blue Other
Name Salary/Fee Allowance Bonus Cross Pension Housing Benefits Total
==================================================================================================================================
Paul Chisholm 30,000 0 0 9,798 0 0 0 39,798
Werner Klatten *1 0 0 0 0 0 0 0 0
Catherine Biner Bradley*2 20,877 0 0 0 0 0 0 20,877
H. F. Van Den Hoven* 30,000 0 0 0 0 0 0 30,000
Robert Hawley* 30,000 0 0 0 0 0 0 30,000
Timothy T. Hilton* 0 0 0 0 0 0 0 0
James Curvey* 0 0 0 0 0 0 0 0
Barry Bateman* 0 0 0 0 0 0 0 0
Vincenzo Damiani* 13,316 0 0 0 0 0 0 13,316
Lawrence Ingeneri3 216,125 0 252,831 3,763 30,529 0 30,342 533,590
Mark Jenkins 58,140 0 33,841 673 8,140 0 0 100,794
Horst Enzelmuller4 143,570 0 188,173 1,956 962 0 410,167 744,828
Claude Olier5 141,801 9,750 211,781 0 8,290 0 317,602 689,224
Jonathan Watts6 117,850 2,666 144,000 722 20,664 0 180,465 466,367
Peter Manning7 322,500 0 0 1,719 46,800 0 915,200 1,286,219
Lakh Jemmett 125,500 410 76,500 1,116 17,430 0 0 220,956
Hugh Wilson8 85,256 25,666 45,000 884 29,167 0 151,666 337,639
Steven Robertson9 151,146 346 0 918 20,527 0 0 172,937
Steve Akin 103,495 0 269,235 0 14,931 37,382 0 425,043
Kenneth Starkey 82,812 0 159,085 0 0 0 15,743 257,640
J. William Freeze 96,107 0 162,371 4,320 983 0 3,059 266,840
Marina Wyatt 36,607 0 100,000 0 114 0 0 136,721
Graham Hanson 152,900 424 73,170 1,116 27,522 0 0 255,132
-------------------------------------------------------------------------------------------------------
TOTAL 1,958,002 39,262 1,715,987 26,985 226,059 37,382 2,024,244 6,027,921
=======================================================================================================
<FN>
* The outside directors do not receive any retirement benefits.
1. Mr. Klatten resigned on 15 January 2002.
2. Ms. Biner Bradley resigned on 23 May 2002.
3. Mr. Ingeneri resigned on 30 June 2002.
4. Mr. Enzelmuller resigned on 30 September 2002.
5. Mr. Olier resigned on 31 March 2003.
6. Mr. Watts resigned on 31 October 2002.
7. Mr. Manning resigned on 25 July 2002.
8. Mr. Wilson resigned on 31 October 2002.
9. Mr. Robertson resigned on 18 October 2002.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Share
Options Usual
01-Jan-02 Granted Exercised Lapsed 1-Apr-03 Date of Market Option Date from
Exercise Value Exercise Which Usual
Price per Exer- Expiry
Share cisable Date
Paul W. Chisholm 5,100,000 5,100,000 0.6875 17 Dec 97 to 17 Dec 01 17 Dec 06
400,000 400,000 1.7000 15 Dec 98 to 15 Dec 02 15 Dec 07
- ------------------------------------------------------------------------------------------------------------------------------------
5,500,000 5,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Werner E. Klatten 1 85,000 85,000 Nil 12.7440 14 Aug 00 to 14 Aug 04 14 Aug 09
- ------------------------------------------------------------------------------------------------------------------------------------
85,000 85,000 Nil
- ------------------------------------------------------------------------------------------------------------------------------------
H. F. van den Hoven 8 48,000 48,000 17 Dec 96 to 17 Dec 00 17 Dec 06
(KBE) 0.6875 for 1st 16,000 exercised
1.6590 for 2nd 16,000 exercised
8.5000 for 3rd 16,000 exercised
29.0000 for 4th 16,000 exercised
14.8600 for 5th 16,000 exercised
- ------------------------------------------------------------------------------------------------------------------------------------
48,000 48,000
- ------------------------------------------------------------------------------------------------------------------------------------
Catherine Biner 48,000 48,000 17 Dec 96 to 17 Dec 00 17 Dec 06
Bradley 8 0.6875 for 1st 16,000 exercised
1.6590 for 2nd 16,000 exercised
8.5000 for 3rd 16,000 exercised
29.0000 for 4th 16,000 exercised
14.8600 for 5th 16,000 exercised
- ------------------------------------------------------------------------------------------------------------------------------------
48,000 48,000
- ------------------------------------------------------------------------------------------------------------------------------------
-76-
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Share
Options Usual
01-Jan-02 Granted Exercised Lapsed 1-Apr-03 Date of Market Option Date from
Exercise Value Exercise Which Usual
Price per Exer- Expiry
Share cisable Date
Robert Hawley (CBE) 68,060 68,060 7.4940 25 Nov 99 to 25 Nov 03 25 Nov 08
- ------------------------------------------------------------------------------------------------------------------------------------
68,060 68,060
- ------------------------------------------------------------------------------------------------------------------------------------
Peter D. Manning 7 850,000 850,000 Nil 10.9340 04 Apr 00 to 04 Apr 04 04 Apr 09
166,492 166,492 Nil 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
400,000 400,000 Nil 20.0550 27 Feb 02 to 27 Feb 06 27 Feb 11
750,000 750,000 Nil 26.7400 27 Feb 02 to 27 Feb 06 27 Feb 11
1,000,000 500,000 500,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
2,166,492 1,000,000 2,666,492 500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Timothy T. Hilton Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
James C. Curvey Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Barry R.J. Bateman Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence M. Ingeneri7 2,050,000 2,050,000 0.6875 17 Dec 97 to 17 Dec 01 17 Dec 06
400,000 400,000 1.7000 15 Dec 98 to 15 Dec 02 15 Dec 07
120,926 100,926 20,000 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
300,000 300,000 Nil 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
2,570,926 300,000 400,926 2,470,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Jenkins 3,4 160,000 160,000 6.6000 4 Aug 99 to 4 Aug 03 4 Aug 08
5,055 5,055 Nil 13.3700 27 Feb 06 (cliff vest) 27 Feb 11
20,000 20,000 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
20,000 20,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
20,000 20,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
185,055 40,000 5,055 220,000
- ------------------------------------------------------------------------------------------------------------------------------------
Steven P. Akin Nil 500,000 500,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
500,000 500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Vincenzo Damiani Nil 40,000 40,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
40,000 40,000
- ------------------------------------------------------------------------------------------------------------------------------------
E.Jonathan Watts 4,5 369,780 369,780 Nil 2.7425 23 Feb 99 to 23 Feb 03 23 Feb 08
12,035 12,035 Nil 13.3700 27 Feb 04 to 27 Feb 06 27 Feb 11
100,000 100,000 Nil 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
- ------------------------------------------------------------------------------------------------------------------------------------
481,815 481,815 Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Hugh R.Wilson 4,5 19,200 19,200 Nil 0.6875 17 Dec 97 to 17 Dec 01 17 Dec 06
32,000 32,000 Nil 0.9563 6 Aug 98 to 6 Aug 02 06 Aug 07
40,000 40,000 Nil 11.3000 5 Mar 00 to 5 Mar 04 05 Mar 09
6,441 6,441 Nil 13.3700 27 Feb 04 to 27 Feb 06 27 Feb 11
75,000 75,000 Nil 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
- ------------------------------------------------------------------------------------------------------------------------------------
172,641 172,641 Nil
- ------------------------------------------------------------------------------------------------------------------------------------
-77-
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Share
Options Usual
01-Jan-02 Granted Exercised Lapsed 1-Apr-03 Date of Market Option Date from
Exercise Value Exercise Which Usual
Price per Exer- Expiry
Share cisable Date
Horst Enzelmuller 6 780,000 780,000 0.6875 17 Dec 97 to 17 Dec 01 17 Dec 06
100,000 100,000 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
300,000 300,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
880,000 300,000 1,180,000
- ------------------------------------------------------------------------------------------------------------------------------------
Claude Olier 6 850,000 850,000 0.6875 17 Dec 97 to 17 Dec 01 17 Dec 06
100,000 60,000 40,000 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
250,000 200,000 50,000 8.4370 15 May 02 to 15 May 06 15 May 11
250,000 200,000 50,000 12.6555 15 May 02 to 15 May 06 15 May 11
250,000 200,000 50,000 16.8740 15 May 02 to 15 May 06 15 May 11
400,000 320,000 80,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
1,700,000 400,000 980,000 1,120,000
- ------------------------------------------------------------------------------------------------------------------------------------
Lakh Jemmett 594,000 594,000 1.7000 15 Dec 98 to 15 Dec 02 15 Dec 97
8,565 8,565 13.3700 27 Feb 04 to 27 Feb 06 27 Feb 11
75,000 75,000 13.3700 27 Feb 02 to 27 Feb 06 27 Feb 11
200,000 200,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
677,565 200,000 877,565
- ------------------------------------------------------------------------------------------------------------------------------------
Steven Robertson 5 250,000 250,000 Nil 21.0000 12 Nov 00 to 12 Nov 04 12 Nov 09
15,000 15,000 Nil 13.3700 27 Feb 06 (cliff vest) 27 Feb 11
75,000 75,000 Nil 8.4370 15 May 02 to 15 May 06 15 May 11
25,000 25,000 Nil 7.1000 8 Jun 02 to 8 Jun 06 8 Jun 11
400,000 400,000 Nil 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
- ------------------------------------------------------------------------------------------------------------------------------------
365,000 400,000 765,000 Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald Duff Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
J. William Freeze Nil 400,000 400,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
Nil 400,000 400,000
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth Starkey Nil 250,000 250,000 0.5042 6 Aug 03 to 6 Aug 07 06 Aug 12
- ------------------------------------------------------------------------------------------------------------------------------------
250,000 250,000
- ------------------------------------------------------------------------------------------------------------------------------------
Graham Hanson 125,000 125,000 24.3940 7 Dec 00 to 7 Dec 04 07 Dec 09
15,000 15,000 13.3700 27 Feb 06 (cliff vest) 27 Feb 11
30,000 30,000 7.1000 8 Jun 02 to 8 Jun 06 08 Jun 11
20,000 20,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
20,000 20,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
170,000 40,000 210,000
- ------------------------------------------------------------------------------------------------------------------------------------
Paul David 40,000 40,000 19.1570 11 Aug 01 to 11 Aug 05 11 Aug 10
40,000 40,000 19.4840 10 Nov 01 to 10 Nov 05 10 Nov 10
40,000 40,000 7.1000 8 Jun 02 to 8 Jun 06 8 Jun 11
20,000 20,000 0.4125 26 Feb 03 to 26 Feb 07 26 Feb 12
25,000 25,000 0.4800 29 Jul 03 to 29 Jul 07 29 Jul 12
- ------------------------------------------------------------------------------------------------------------------------------------
120,000 45,000 165,000
- ------------------------------------------------------------------------------------------------------------------------------------
Marina Wyatt Nil 400,000 400,000 0.4359 21 Nov 03 to 21 Nov 07 21 Nov 12
- ------------------------------------------------------------------------------------------------------------------------------------
Nil 400,000 400,000
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher Woodman Nil 200,000 200,000 0.4067 3 Mar 04 to 3 Mar 08 3 Mar 13
- ------------------------------------------------------------------------------------------------------------------------------------
Nil 200,000 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
1. Mr. Klatten resigned as a director on 15 January 2002, and therefore, all of
his options have subsequently lapsed.
2. Ms. Biner Bradley resigned as a director on 23 May 2003, and therefore, all
of her options have subsequently lapsed.
3. Mr. Jenkins was appointed director on 23 May 2002.
-78-
4. Messrs Jenkins, Watts and Wilson originally held deferred bonus options,
which subsequently lapsed.
5. Mr. Robertson resigned on 18 October 2002 and Messrs. Watts & Wilson resigned
on 31 October 2002 and consequently their options lapsed.
6. Mr. Olier resigned on 31 March 2003 but retains the ability to exercise any
vested options until 31 December 2004 and Mr. Enzelmuller resigned on 30
September 2002 but retains the ability to exercise any vested options until 31
December 2004.
7. Messrs. Ingeneri and Manning resigned as directors on 30 June 2002 and 25
July 2002 respectively. Of the Options over shares granted to Mr. Ingeneri all
of those that had vested by 31 December 2002, amounting to an option over
2,050,000 shares at the exercise price of (pound)0.6875, an option over 400,000
shares at the exercise price of (pound)1.700 and an option over 20,000 at the
exercise price of (pound)13.370, will remain capable of exercise until 31
December 2003 at which time all those options over shares not exercised will
lapse. All other options over shares have lapsed. Of the options over shares
granted to Mr. Manning an option over 500,000 shares at the exercise price of
(pound)0.4125, will vest on 26 February 2003 and may be exercised at any time up
until 31 December 2005, at which time all those options over shares not
exercised will lapse. All other options over shares have lapsed.
8. Each of Mr. van den Hoven and Ms. Biner Bradley have been granted options to
subscribe for 80,000 Ordinary Shares, 16,000 of which vested and became
exercisable upon the closing of the Company's initial public offering on 17
December 1996 and additional amounts of 16,000 each, vested, and became
exercisable on 17 December 1997, 1998, 1999 and 2000. The exercise price for the
initial 16,000 options over shares is (pound)0.6875 per share and the price for
the second, third, fourth and fifth 16,000 options over shares is (pound)1.659
per share, (pound)8.50 per share (pound)29.00 per share and (pound)14.86 per
share, respectively. Both Mr. van den Hoven and Ms. Biner Bradley have
previously exercised those options over shares that vested in December 1996 and
December 1997. Ms. Biner Bradley having resigned as a director on 23 May 2002,
her options over shares have lapsed, to the extent they were not exercised by 23
May 2003.
Directors' and Officers Savings-Related Share Options
Name Date Date Date Granted Exercised Lapsed Outstanding(1)
of grant of vesting of expiration
Peter Manning Dec-01 Mar-05 Aug-05 4,703 -- 4,703 --
Lawrence Ingeneri Dec-01 Mar-05 Aug-05 4,703 -- 4,703 --
Mark Jenkins Dec-01 Mar-05 Aug-05 4,703 -- 4,703 --
Dec-02 Mar-06 Aug-06 18,000 -- -- 18,000
Paul Chisholm -- -- -- -- -- -- --
Catherine Biner Bradley -- -- -- -- -- -- --
H.F. van den Hoven -- -- -- -- -- -- --
Robert Hawley (CBE) -- -- -- -- -- -- --
Werner Klatten -- -- -- -- -- -- --
Timothy Hilton -- -- -- -- -- -- --
James C. Curvey -- -- -- -- -- -- --
Barry R.J. Bateman -- -- -- -- -- -- --
Claude Olier -- -- -- -- -- -- --
Steve Akin -- -- -- -- -- -- --
Vincenzo Damiani -- -- -- -- -- -- --
Ronald Duff -- -- -- -- -- -- --
Hugh Wilson Dec-01 Mar-05 Aug-05 4,703 -- 4,703 --
E. Jonathan Watts -- -- -- -- -- -- --
Horst Enzelmuller -- -- -- -- -- -- --
Lakh Jemmet Dec-01 Mar-05 Aug-05 4,703 -- -- 4,703
Steven Robertson -- -- -- -- -- -- --
William Freeze -- -- -- -- -- -- --
Christopher Woodman -- -- -- -- -- -- --
Marina Wyatt Dec-02 Mar-06 Aug-06 18,000 -- -- 18,000
Paul David Dec-01 Mar-05 Aug-05 4,703 -- 4,703 --
Graham Hanson -- -- -- -- -- -- --
<FN>
(1) As at 2 June 2003.
</FN>
-79-
C. Board Practices
Directors' Service Agreements
Messrs. van den Hoven, Hilton, Chisholm, Hawley and Damiani have
service contracts with us in which there is no minimum term and no express right
to compensation for the termination of such agreement(s). Messrs. Bateman and
Curvey have no specific service contracts in respect of their office of
directors of the Board. Messrs. Bateman, Curvey and Hilton do not receive any
remuneration for their services to the Company. Of the fees paid to Messrs. van
den Hoven, Chisholm, Hawley and Damiani under the terms of their appointment,
50% is paid in shares of the Company.
None of our directors has a notice period of greater than one year,
or receives retirement benefit. The non-executive directors are not appointed
for specified terms. The Board will review on a regular basis (and not less than
every three years) whether a non-executive director should continue in office.
Each non-executive director's appointment may be terminated by us at any time.
Mr. Jenkins was appointed a director on 23 May 2002 and has an employment
relationship with us under which if such arrangement is terminated by us for any
reason other than for cause, we will make a severance payment equal to 3 months
salary.
Mr. Akin was appointed as a director on 23 July 2002 and he is an
employee of FMR Corp. His services are provided to us on the terms of a
secondment agreement dated 31 July 2002 which provides for a secondment period
of up to three years with no express rights to compensation from us for the
termination of such agreement.
For further information regarding the period of service of our
directors, please see Item 6.A. "Directors and Senior Management."
Compensation for senior executive officers comprises base salary,
annual bonus, pension contributions, benefits and participation in our share and
share option plans. Base salary is not normally reviewed annually, but senior
executive officers' bonuses (to the extent that any are paid) account for a
considerable amount of total consideration, reflecting their performance and the
contribution they make to our success. Pension contributions are determined
based on employee age and years of service and benefits include, as appropriate,
car allowances, housing benefits, private health insurance and other similar
benefits.
The Board, which meets not less than four times each year, is
primarily responsible for our strategy and approval of budgets, acquisition and
divestment policy. Certain matters may be delegated from time to time to the
Sub-Committee of the Board.
The Board has established four committees as follows:
The Sub-Committee of the Board: comprising Messrs. Bateman
(Chairman), Akin and any other director, as appropriate. The Sub-Committee
oversees the management of our business and affairs of the Company generally in
accordance with the authority delegated by the Board from time to time.
The Audit Committee: comprising exclusively the non-executive
directors Messrs. van den Hoven (Chairman), Hawley and Damiani. The Audit
Committee examines the process of internal control including the scope and work
of internal audit and financial reporting, accounts and interim statements. It
also reviews the independence, scope, quality and cost effectiveness of the
external audit and provides a forum through which both internal and external
auditors report to the Board. The Audit Committee meets not less than three
times in each year and reports to the Board. The directors are responsible for
our system of internal control and for reviewing its effectiveness while the
role of management is to implement Board policies on risk and control. The Audit
-80-
Committee, in addition to its review of the scope and results of the audit and
the activities of the external and internal auditors, has as part of its terms
of reference the responsibility for overseeing internal control including
operational and financial controls, business ethics, risk management and
compliance.
The Nominating Committee: comprising Messrs. Chisholm (Chairman),
Bateman, Curvey and Hawley. The Nominating Committee nominates directors for
appointment to stand for election to the Board. The Chairman will propose
candidates (although other directors may also do so) and the Committee will meet
to ensure the suitability of the candidate and will then put a formal proposal
to the Board. Before the nomination is formally made each director will have an
opportunity to meet the candidate.
The Compensation Committee: comprising Messrs Bateman (Chairman),
Curvey and Damiani. The Compensation Committee examines and makes
recommendations with regard to the compensation of our executive directors and
is responsible for approving the grant of options and shares under the COLT
Telecom Group Share Plan, the COLT Performance Share Plan and the COLT Deferred
Bonus Plan. The Compensation Committee is responsible for ensuring that the
remuneration packages of the executive directors are appropriate to attract,
retain and motivate individuals of the calibre and quality required by us.
The Articles of Association require that all directors retire and
submit themselves for re-election each year.
The business address of the Directors is c/o COLT Telecom Group plc,
Beaufort House, 15 St. Botolph's House, London, EC3A 7QN, England.
D. Employees
At 31 December 1999, we employed 2,494 employees, at 31 December
2000 we employed 4,012 employees and at 31 December 2001 we employed 5,345
employees.
At 31 December 2002, we employed 4,684 employees none of whom is
represented by a union or covered by a collective bargaining agreement. We
believe that our relationship with our employees is good. In connection with the
construction and maintenance of our networks and the conduct of our other
business operations, we use third party contractors, some of whose employees may
be represented by unions or collective bargaining agreements.
Headcount at 31 December 2002 by geographic region was:
North Region(1): 1,365
Central Region(2): 1,447
South Region(3): 916
EBusiness: 481
ENS: 242
Group/other: 233
------------ ---
Total: 4,684
(1) The North Region comprises the countries of Belgium, Denmark, Ireland, The
Netherlands, Sweden and the United Kingdom.
(2) The Central Region comprises the countries of Austria, Germany and
Switzerland.
(3) The South Region comprises the countries of France, Italy, Portugal and
Spain.
-81-
E. Share Ownership
On 7 November 1996, we established the Share Option Plan1 (the
"Option Plan") for the issuance to employees of the Group and consultants to the
Group of options to purchase our Ordinary Shares. At 2 June 2003 options to
subscribe for our Ordinary Shares under the Option Plan were as follows:
Date of Exercise Dates of Date of Number of Ordinary Shares under option
grant price vesting expiration Granted Exercised Lapsed Outstanding
- ----- ------------- ---------------- ---------- ---------- ---------- --------- -----------
Dec 96 (pound)0.6880 Dec 97 to Dec 01 Dec 06 25,824,000 9,947636 6,025,964 9,850,400
Jan 97 (pound)0.7790 Jan 98 to Jan 02 Jan 07 396,000 178,400 149,600 68,000
Apr 97 (pound)0.7060 Apr 98 to Apr 02 Apr 07 1,280,000 665,400 377,600 237,000
Aug 97 (pound)0.9560 Aug 98 to Aug 02 Aug 07 2,488,000 722,000 759,600 1,006,400
Nov 97 (pound)1.2850 Nov 98 to Nov 02 Nov 07 3,196,000 1,418,362 881,981 895,657
Dec 97 (pound)1.7000 Dec 98 to Dec 02 Dec 07 4,204,000 1,104,400 528,800 2,570,800
Feb 98 (pound)2.7380 Feb 99 to Feb 03 Feb 08 140,000 56,000 73,044 10,956
Feb 98 (pound)2.7430 Feb 99 to Feb 03 Feb 08 900,000 530,220 369,780 --
May 98 (pound)4.7560 May 99 to May 03 May 08 830,000 207,750 136,000 486,250
Aug 98 (pound)6.6000 Aug 99 to Aug 03 Aug 08 2,906,000 591,544 1,398,256 916,200
Nov 98 (pound)7.4940 Nov 99 to Nov 03 Nov 08 1,408,075 113,215 969,167 325,693
Dec 98 (pound)7.8770 Dec 99 to Dec 03 Dec 08 100,000 -- 100,000 --
Mar 99 (pound)11.300 Mar 00 to Mar 04 Mar 09 990,000 122,500 505,346 362,154
Apr 99 (pound)10.934 Apr 00 to Apr 04 Apr 09 1,000,000 150,000 850,000 --
May 99 (pound)12.254 May 00 to May 04 May 09 585,000 58,000 240,000 287,000
Aug 99 (pound)12.744 Aug 00 to Aug 04 Aug 09 930,000 15,000 619,292 295,708
Nov 99 (pound)21.000 Nov 00 to Nov 04 Nov 09 800,500 -- 517,644 282,856
Dec 99 (pound)24.394 Dec 00 to Dec 04 Dec 09 740,000 -- 166,271 573,729
Feb 00 (pound)36.177 Feb 01 to Feb 05 Feb 10 745,000 -- 375,000 370,000
May 00 (pound)22.610 May 01 to May 05 May 10 792,500 -- 310,000 482,500
Jun 00 (pound)26.660 Jun 01 to Jun 05 Jun 10 846,000 -- 298,875 547,125
Aug 00 (pound)19.157 Aug 01 to Aug 05 Aug 10 1,181,500 -- 499,802 681,698
Aug 00 (pound)17.727 Aug 01 to Aug 05 Aug 10 317,500 -- 126,250 191,250
Nov 00 (pound)19.484 Nov 01 to Nov 05 Nov 10 800,000 -- 250,000 550,000
Dec 00 (pound)15.184 Dec 01 to Dec 05 Dec 10 757,441 -- 247,900 509,541
Feb 01 (pound)13.370 Feb 02 to Feb 06 Feb 11 2,401,040 -- 1,141,749 1,259,291
Feb 01 (pound)20.055 Feb 02 to Feb 06 Feb 11 400,000 -- 400,000 --
Feb 01 (pound)26.740 Feb 02 to Feb 06 Feb 11 750,000 -- 750,000 --
May 01 (pound) 8.437 May 02 to May 06 May 11 866,500 -- 469,890 396,610
May 01 (pound)12.656 May 02 to May 06 May 11 250,000 -- 200,000 50,000
May 01 (pound)16.874 May 02 to May 06 May 11 250,000 -- 200,000 50,000
Jun 01 (pound) 7.100 Jun 02 to Jun 06 Jun 11 2,688,750 -- 857,500 1,831,250
Aug 01 (pound)3.2170 Aug 02 to Aug 06 Aug 11 1,464,500 -- 450,340 1,014,160
Nov 01 (pound)1.7240 Nov 02 to Nov 06 Nov 11 231,000 -- 3,000 228,000
Dec 01 (pound)1.5610 Dec 02 to Dec 06 Dec 11 1,410,500 -- 177,500 1,233,000
Feb 02 (pound)0.4125 Feb 03 to Feb 07 Feb 12 4,688,500 2,000 1,896,000 2,792,500
May 02 (pound)0.4475 May 03 to May 07 May 12 72,500 -- 50,000 22,500
Jul 02 (pound)0.4800 Jul 03 to Jul 07 Jul 12 5,602,300 -- 379,720 5,222,580
Aug 02 (pound)0.5042 Aug 03 to Aug 07 Aug 12 250,000 -- -- 250,000
Oct 02 (pound)0.3234 Oct 03 to Oct 07 Oct 12 250,000 -- 180,000 70,000
Nov 02 (pound)0.4359 Nov 03 to Nov 07 Nov 12 400,000 -- -- 400,000
Mar 03 (pound)0.4067 Mar 04 to Mar 08 Mar 13 200,000 -- -- 200,000
Apr 03 (pound)0.4550 Apr 04 to Apr 08 Apr 13 32,500 -- -- 32,500
May 03 (pound)0.4675 May 04 to May 08 May 13 150,000 -- -- 150,000
May 03 (pound)0.4925 May 04 to May 08 May 13 50,000 -- -- 50,000
76,565,606 15,882,427 23,931,871 36,751,308
<FN>
- ----------
1 Also known as the COLT Telecom Group Share Plan.
</FN>
-82-
In addition to options granted under the Option Plan, options to
subscribe for 80,000 Ordinary Shares were granted to each of Ms. Biner Bradley
and Mr. van den Hoven, 16,000 of which vested on the closing of our initial
public offering, 16,000 of which vested on each of 17 December 1997, 1998, 1999
and 2000. The exercise price for the initial 16,000 options is (pound)0.6875;
the exercise price for the 16,000 options vesting on 17 December 1997, 1998,
1999 and 2000 is (pound)1.65875, (pound)8.50, (pound)29.00 and (pound)14.86 per
share respectively. Mr. van den Hoven exercised 16,000 options with an exercise
price of (pound)0.6875 and 16,000 with an exercise price of (pound)1.65875 on 13
August 1999 and 5 June 2000, respectively. On 8 December 2000, Ms. Biner Bradley
exercised 16,000 options with an exercise price of (pound)0.6875 and 16,000 with
an exercise price of (pound)1.65875. These Options are included in the
Directors' and Officers' Share Options table above. For additional information
relating to the Option Plan, please refer to our financial statements,
incorporated herein by reference from our 2002 Annual Report. On 23 May 2002 Ms.
Biner Bradley ceased to be a director of the Company and her remaining options
lapsed on 23 May 2003.
Save as You Earn Purchase Plan. The COLT Save as You Earn Purchase Plan2 (the
"SAYE Scheme") was approved by our shareholders on 17 June 1997. It is open to
all of our U.K. employees and our participating subsidiaries subject to the
power of the Board to impose a minimum qualification period, which must not
exceed five years (and in the case of any director, who is required to devote
not less than 25 hours a week to his duties). We have established a Qualifying
Employee Share Ownership Trust ("QUEST") to deliver the shares to U.K. option
holders at the time of exercise in the most efficient manner. At 1 June 2003,
outstanding options to subscribe for our Ordinary Shares under the SAYE Scheme
were as follows:
Date of Grant Option Price Date of Vesting Options Exercised Lapsed Outstanding
- ------------- ------------ --------------- ---------- --------- ------- -----------
19 Dec. 1997 (pound) 1.19 1 Mar. 2001 2,289,244 1,919,819 369,425 --
18 Dec. 1998 (pound) 6.01 1 Mar. 2002 592,929 -- 592,929 --
17 Dec. 1999 (pound) 16.656 1 Mar. 2003 441,124 -- 426,652 14,472
15 Dec. 2000 (pound) 11.784 1 Mar. 2004 804,128 -- 766,933 37,195
28 Dec. 2001 (pound) 1.615 1 Mar. 2005 6,986,000 -- 5,473,625 1,512,375
18 Dec. 2002 (pound) 0.40 1 Mar. 2006 18,409,635 -- 203,860 18,205,775
---------- --------- --------- ----------
29,523,060 1,919,819 7,833,424 19,769,817
- -------
2 Also known as the Savings-Related Share Option Plan.
-83-
Of the options outstanding under the SAYE Scheme on 1 June 2003,
40,703 were held by our officers and directors.
For additional information relating to the SAYE Scheme, please refer
to our financial statements, incorporated herein by reference from our 2002
Annual Report.
Performance Share Plan. The Performance Share Plan was established in 2000.
Awards under the Performance Share Plan are granted according to an objective
performance target set against demanding Company, financial and individual
targets by the Compensation Committee at the time of grant. Vesting of any such
grant only occurs if the long term performance criteria are achieved. No awards
have been made under the plan to any director, officer or employee other than an
award of 20,194 shares made to Mr. Manning in February 2001. When Mr. Manning
subsequently resigned as a director of the Company, this award of shares has
lapsed. At 31 December 2002, none of these shares had vested and none other than
as detailed above had lapsed. If awards are made in the future, they will be
made to our Executive Directors or other key executives. It is anticipated that
any new grants would have a vesting period of five years and a maximum annual
vesting of shares having a value equal to approximately 100% of the
participant's basic salary, but the actual amount will depend upon seniority.
Participants in the Performance Share Plan will continue to be entitled to
receive grants of options under the COLT Telecom Group Share Plan.
Deferred Bonus Plan. The Deferred Bonus Plan was established in 2000. It is
intended that selected senior employees will be entitled to receive an award of
shares representing a proportion (initially expected to be 50%) of the amount of
their annual cash bonus.
Date of Grant Price Date of Vesting No. of Shares Lapsed Outstanding
- ------------- ----- --------------- ------------- ------ -----------
27 Feb. 2001 (pound)13.370 Feb 04 24,182 7,319 16,863
Of the share awards outstanding under this plan 1,685 are held by
our officers and directors.
Participants may also be invited to defer all or a proportion of the
annual cash bonuses which they would otherwise have expected to receive.
Individuals who do so will be entitled to receive an additional matching award
in the form of an option to acquire additional shares with a market value equal
to twice the amount of the deferred bonus. These awards are made in accordance
with the terms of the Option Plan. Receipt of the matching award may be subject
to the achievement of performance targets. Awards will vest after a period set
by the Compensation Committee, which is expected normally to be three years.
-84-
Of the options outstanding under this plan 8,565 are held by
officers and directors and are included in the Directors' and Officers' Share
Options table above.
The interests of Directors and Officers in our Ordinary Shares (all
of which are beneficial interests) at 1 April 2003 are shown below:
Paul Chisholm 4,670,582
Barry Bateman --
James Curvey --
H. F. van den Hoven 70,086
Robert Hawley 49,423
Timothy Hilton 46,080
Mark Jenkins(1) 2,522
Lakh Jemmett 272,138
Steven Akin --
Vincenzo Damiani 29,834
Ronald Duff --
J. William Freeze --
Stefan Pattberg --
Graham Hanson --
Paul David --
Marina M. Wyatt --
Christopher Woodman --
- --------------------------------------------------------------------------------
(1) The number of shares listed for Mr. Jenkins includes 1,685 bonus shares
awarded under the terms of the Deferred Bonus Plan, and although such shares do
not vest until February 2004, Mr. Jenkins is deemed to have an interest in them
for purposes of this disclosure. All interests reflected above represent less
than 1% of the Ordinary Shares outstanding. For additional information on share
ownership plans, please refer our financial statements, incorporated herein by
reference from our 2002 Annual Report.
-85-
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth certain information at 2 June 2003
with respect to the beneficial ownership of our Ordinary Shares by each person
or entity known by us to beneficially own more than 5% of the outstanding share
capital:
Ordinary Shares
----------------------
Shareholder Number %
----------- ------ ----
FMR Corp. (1)
82 Devonshire Street 449,697,514 29.8
Boston, Massachusetts 02109
Fidelity Investors Limited Partnership(2)
82 Devonshire Street 313,073,111 20.8
Boston, Massachusetts 02109
Amvescap plc (3) 178,071,972 11.8
30, Finsbury Square
London, EC2A 1AG
England
Fidelity International Limited (4) 80,634,479 5.3
Pembroke Hall
42 Crow Lane
Pembroke
Bermuda HM-19
- --------------------
(1) FMR Corp.'s holding is through (a) the 203,163,521 Ordinary Shares held by
Colt, Inc. which is an indirect wholly owned subsidiary of FMR Corp.,
which is therefore also interested in the Company's Ordinary Shares, (b)
94,467,409 Ordinary Shares owned beneficially by The COLT, Inc. 2002
Annuity Trust, 86,613,815 Ordinary Shares owned beneficially by The Colt,
Inc. 2001 Annuity Trust and 2,321,627 Ordinary Shares owned beneficially
by The Colt, Inc. 2001 Charitable Trust (together, the "COLT Trusts"). The
Trustee of the COLT Trusts is a wholly-owned subsidiary of FMR Corp, (c)
Strategic Advisers, Inc., a wholly-owed subsidiary of FMR Corp., which has
sole voting power of 59,787,569 Ordinary Shares beneficially owned by
three charitable foundations managed by Strategic Advisers, Inc., Edward
C. Johnson Fund (9,715,293 Ordinary Shares), Fidelity Foundation
(9,810,218 Ordinary Shares), and Fidelity Non-Profit Management Foundation
(42,940,431 Ordinary Shares), and (d) 665,200 Ordinary Shares owned
beneficially by the COLT Incentive Shares Plan Trust, of which Colt, Inc.
is the joint trustee.
(2) Fidelity Investors Limited Partnership is a Delaware limited partnership.
(3) Amvescap PlC is a fund manager whose interest is a non-beneficial interest
held either directly or through its subsidiary companies.
(4) Fidelity International Limited, a Bermuda company, is related to FMR Corp.
-86-
Between 30 September 1999 and 25 August, 2000, we issued 11,026,827
Ordinary Shares, credited as fully paid upon the exercise of conversion rights
attaching to our 2% Senior Convertible Notes due 2005 denominated in
deutschmarks.
On 6 April 2000, we issued 1,536,686 Ordinary Shares, credited as
fully paid upon the exercise of conversion rights attaching to our 2% Senior
Convertible Notes due March 2006 denominated in Euros.
As a result of an increase in our issued share capital due primarily
to the exercise of employee share options and the exercise of warrants
associated with our 12% Senior Discount Notes due 2006, a reduction in the
interest in shares of FMR Corp, and its related entities to 49.9985% of our
issued share capital, resulted during the year. Since that time Fidelity related
entities have sold further shares reducing FMR Corp's interest to approximately
48.5% of the issued share capital.
On 14 March 2001, Fidelity Investors Partnership Limited disposed of
4,137,050 Ordinary Shares and Fidelity International Limited disposed of
1,157,327 Ordinary Shares.
On 10 December 2001, we completed the sale of 241,827,007 Ordinary
Shares at an issue price of 0.62p to FMR Corp. (which included the sale of
173,813,695 Ordinary Shares at an issue price of 0.62p to COLT, Inc. and the
sale of 48,759,510 Ordinary Shares at an issue price of 0.62p to The COLT, Inc.
2001 Annuity Trust.) for the purchase price of approximately(pound)150.0
million.
On 10 December 2001, we completed the sale of 42,787,125 Ordinary
Shares at an issue price of 0.62p to Fidelity International Limited for the
purchase price of approximately (pound)26.5 million.
On 10 December 2001 we completed the sale of 192,822,500 Ordinary
Shares of 2.5p each at an issue price of 0.62p to Fidelity Investors Limited
Partnership for the purchase price of approximately (pound)119.5 million.
As a result of the sale of these shares to the Fidelity Group on 10
December 2001 they gained an interest of approximately 54% in our ordinary
issued share capital.
On 31 January, the 2002 COLT, Inc. 2002 Annuity Trust acquired an
interest in 120,000,000 Ordinary Shares from COLT, Inc.
We have a relationship agreement with certain members of the
Fidelity Group which provides, among other things, that as long as the Fidelity
Group owns, or has voting control of, at least 50% of our Ordinary Shares, we
are restricted from issuing any Ordinary Shares or other equity securities
(including securities convertible into Ordinary Shares), subject to certain
exceptions, without the prior written consent of Fidelity. Other than as
provided in the relationship agreement, no shareholder has any special voting
rights.
-87-
B. Related Party Transactions
Please refer to that portion of Section A of Item 5 "Operating and
Financial Review and Prospects" entitled "Transactions with affiliates" and
Section A of Item 7 "Major Shareholders."
ITEM 8. FINANCIAL INFORMATION
Financial Statements
The Financial Statements are set forth in Item 18.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our Ordinary Shares are traded on the London Stock Exchange and our
ADSs, each representing four of our Ordinary Shares, are included for trading in
the Nasdaq National Market System ("Nasdaq"). The ADSs are evidenced by American
Depositary Receipts ("ADRs") issued by The Bank of New York, as Depositary under
a Deposit Agreement, dated 17 December 1996, as amended, among COLT, the
Depositary and the holders from time to time of the ADRs.
The tables below set forth, for the periods indicated (i) the
reported high and low sales prices for Ordinary Shares based on the Daily
Official List of the London Stock Exchange and (ii) the reported high and low
sales prices of the ADSs on Nasdaq.
The London Stock Exchange Nasdaq
------------------------- -----------------------
(Pounds per Share) (U.S. Dollars per ADS)
High Low High Low
---- --- ---- ---
1998 9.57 1.54 65.50 10.47
1999 31.84 8.96 210.88 60.06
2000 40.73 12.10 266.88 62.75
2001 19.21 0.62 113.00 3.57
2002 1.33 0.28 8.00 1.63
-88-
The London Stock Exchange Nasdaq
------------------------- -----------------------
(Pounds per Share) (U.S. Dollars per ADS)
High Low High Low
---- --- ---- ---
2001
First Quarter 19.21 7.35 113.00 39.94
Second Quarter 10.17 6.28 61.10 24.58
Third Quarter 5.10 0.73 29.06 4.36
Fourth Quarter 1.92 0.62 11.04 3.57
2002
First Quarter 1.33 0.37 8.00 2.06
Second Quarter 0.53 0.32 3.20 1.90
Third Quarter 0.62 0.35 4.10 2.20
Fourth Quarter 0.54 0.28 3.08 1.63
2003
First Quarter 0.46 0.34 2.95 2.03
Second Quarter 0.66 0.32 4.99 2.00
(to 31 May)
The London Stock Exchange Nasdaq
------------------------- -----------------------
(Pounds per Share) (U.S. Dollars per ADS)
High Low High Low
---- --- ---- ---
December, 2002 0.45 0.38 3.04 2.37
January, 2003 0.46 0.35 2.95 2.30
February, 2003 0.42 0.37 2.65 2.41
March, 2003 0.40 0.34 2.61 2.16
April, 2003 0.32 0.47 3.02 2.00
May, 2003 0.66 0.43 4.54 2.75
At 2 June 2003, 23,985,140 Ordinary Shares and ADRs evidencing
5,805,956 ADSs (representing 23,223,824 Ordinary Shares) were held of record in
the U.S. These Ordinary Shares and ADRs, were held by 11 and 35 record holders,
respectively, and represented 1.59% of, and evidenced ADSs representing 1.54%
of, respectively, the total number of Ordinary Shares outstanding. Since certain
of these Ordinary Shares and ADRs were held by brokers or other nominees, the
number of record holders in the U.S. may not be representative of the number of
beneficial holders or of where the beneficial holders are resident.
-89-
In 1996, we issued 314,000 units, consisting of 12% Senior Discount
Notes due 2006 and warrants to purchase Ordinary Shares. Both the Discount Notes
and the Warrants are listed on the London Stock Exchange although we do not
believe any active trading market exists for either the Discount Notes or the
Warrants. Accordingly, no price information is provided for the Discount Notes
or Warrants.
We issued (pound)50,000,000 principal amount of 10.125% Senior Notes
due November 2007 ("Sterling Senior Notes"), DM150,000,000 principal amount of
8.875% Senior Notes due November 2007 ("DM 8.875% Senior Notes"), DM600,000,000
principal amount of 2% Senior Convertible Notes due August 2005 ("DM Senior
Convertible Notes"), DM600,000,000 principal amount of 7.625% Senior Notes due
July 2008 ("DM 7.625% Senior Notes"), (euro)295,000,000 principal amount of 2%
Senior Convertible Notes due March 2006 ("Senior Convertible Notes due March
2006"), (euro)368,000,000 principal amount of 2% Senior Convertible Notes due
December 2006 ("Senior Convertible Notes due December 2006"), (euro)320,000,000
principal amount of 7.625% Senior Notes due December 2009 ("(euro)7.625% Senior
Notes") and (euro)402,500,000 principal amount of 2% Senior Convertible Notes
due April 2007 ("Senior Convertible Notes due 2007") (the Sterling Senior Notes,
DM 8.875% Senior Notes, DM Senior Convertible Notes, DM 7.625% Senior Notes,
Senior Convertible Notes due March 2006, Senior Convertible Notes due December
2006, (euro)7.625% Senior Notes and the Senior Convertible Notes due 2007 are
collectively referred to as the "Senior Notes"). The Senior Notes are listed on
the London Stock Exchange although we do not believe any active trading market
exists for the Senior Notes. Accordingly, no price information is provided for
the Senior Notes.
B. Plan of Distribution
Not Applicable.
C. Markets
See subsection A entitled "Offer and Listing Details," above.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not Applicable.
B. Memorandum and Articles of Association
We are registered with the Registrar for Companies for England and
Wales under Company No. 3232904.
Object and Purposes
Our principal objects are to carry on business as a public limited
company and to carry on any trade or business whatsoever. We have multiple
business objectives and purposes and is authorised to do such things as the
board may consider to further the Company's interests, all as provided in its
Memorandum of Association at clause 4.
-90-
Directors
(A) Subject to the provisions of the Companies Acts and of paragraph (J) of
article 94 of the Articles of Association, no director or proposed or
intending director shall be disqualified by his office from contracting
with the Company, either with regard to his tenure of any office or place
of profit or as vendor, purchaser or in any other manner whatever, nor
shall any contract in which any director is in any way interested be
liable to be avoided, nor shall any director who is so interested be
liable to account to the Company or the members for any remuneration,
profit or other benefit realised by the contract by reason of the director
holding that office or of the fiduciary relationship thereby established.
Save as otherwise provided by these articles, a director shall not vote
on, or be counted in the quorum in relation to, any resolution of the
board in respect of any contract in which he has an interest which (taken
together with any interest of any person connected with him) is to his
knowledge a material interest and, if he shall do so, his vote shall not
be counted, but this prohibition shall not apply to any resolution where
that material interest arises only from one or more of the following
matters:
(i) the giving to him of any guarantee, indemnity or security in respect
of money lent or obligations undertaken by him or by any other
person at the request of or for the benefit of the Company or any of
its subsidiary undertakings,
(ii) the giving to a third party of any guarantee, indemnity or security
in respect of a debt or obligation of the Company or any of its
subsidiary undertakings for which he himself has assumed
responsibility in whole or in part under a guarantee or indemnity or
by the giving of security,
(iii) where the Company or any of its subsidiary undertakings is offering
securities in which offer the director is or may be entitled to
participate as a holder of securities or in the underwriting or
sub-underwriting of which the director is to participate,
(iv) any contract in which he is interested by virtue of his interest in
shares or debentures or other securities of the Company or by reason
of any other interest in or through the Company,
(v) any contract concerning any other company (not being a company in
which the director owns one per cent or more) in which he is
interested directly or indirectly whether as an officer,
shareholder, creditor or otherwise howsoever,
(vi) any contract concerning the adoption, modification or operation of a
pension fund or retirement death or disability benefits scheme which
relates both to directors and employees of the Company or of any of
its subsidiary undertakings and does not provide in respect of any
director as such any privilege or advantage not accorded to the
employees to which the fund or scheme relates,
-91-
(vii) any contract for the benefit of employees of the Company or of any
of its subsidiary undertakings under which he benefits in a similar
manner to the employees and which does not accord to any director as
such any privilege or advantage not accorded to the employees to
whom the contract relates, and
(viii)any contract for the purchase or maintenance for any director or
directors of insurance against any liability.
A company shall be deemed to be one in which a director owns one per cent
or more if and so long as (but only if and so long as) he, taken together
with any person connected with him, is to his knowledge (either directly
or indirectly) the holder of or beneficially interested in one per cent or
more of any class of the equity share capital of that company or of the
voting rights available to members of that company. For the purpose of
this paragraph of this article there shall be disregarded any shares held
by the director or any such person as bare or custodian trustee and in
which he has no beneficial interest, any shares comprised in a trust in
which his, or any such person's, interest is in reversion or remainder if
and so long as some other person is entitled to receive the income of the
trust and any shares comprised in an authorised unit trust scheme in which
he, or any such person, is interested only as a unit holder.
Where a company in which a director owns one per cent or more is
materially interested in a contract, he also shall be deemed materially
interested in that contract.
If any question shall arise at any meeting of the board as to the
materiality of the interest of a director (other than the chairman of the
meeting) or as to the entitlement of any director (other than the chairman
of the meeting) to vote or be counted in the quorum and the question is
not resolved by his voluntarily agreeing to abstain from voting or not to
be counted in the quorum, the question shall be referred to the chairman
of the meeting and his ruling in relation to the director concerned shall
be conclusive except in a case where the nature or extent of his interest
(so far as it is known to him) has not been fairly disclosed to the board.
If any question shall arise in respect of the chairman of the meeting, the
question shall be decided by a resolution of the board (for which purpose
the chairman shall be counted in the quorum but shall not vote on the
matter) and the resolution shall be conclusive except in a case where the
nature or extent of the interest of the chairman (so far as it is known to
him) has not been fairly disclosed to the board.
A director who to his knowledge is in any way, whether directly or
indirectly, interested in a contract with the Company shall declare the
nature of his interest at the meeting of the board at which the question
of entering into the contract is first taken into consideration, if he
knows his interest then exists, or in any other case at the first meeting
of the board after he knows that he is or has become so interested. For
the purposes of this article, a general notice to the board by a director
to the effect that (a) he is a member of a specified company or firm and
is to be regarded as interested in any contract which may after the date
of the notice be made with that company or firm or (b) he is to be
regarded as interested in any contract which may after the date of
-92-
the notice be made with a specified person who is connected with him,
shall be deemed to be a sufficient declaration of interest under this
article in relation to any such contract; provided that no such notice
shall be effective unless either it is given at a meeting of the board or
the director takes reasonable steps to secure that it is brought up and
read at the next board meeting after it is given.
References in this article to a contract include references to any
proposed contract and to any transaction or arrangement whether or not
constituting a contract.
(B) A director shall not vote on or be counted in the quorum in relation to
any resolution of the board concerning his own appointment, or the
settlement or variation of the terms or the termination of his own
appointment, as the holder of any office or place of profit with the
Company or any other company in which the Company is interested but, where
proposals are under consideration concerning the appointment, or the
settlement or variation of the terms or the termination of the
appointment, of two or more directors to offices or places of profit with
the Company or any other company in which the Company is interested, a
separate resolution may be put in relation to each director and in that
case each of the directors concerned shall be entitled to vote and be
counted in the quorum in respect of each resolution unless it concerns his
own appointment or the settlement or variation of the terms or the
termination of his own appointment or the appointment of another director
to an office or place of profit with a company in which the Company is
interested and the director seeking to vote or be counted in the quorum
owns one per cent or more of it.
(C) The board may exercise all the powers of the Company to borrow money and
to mortgage or charge all or any part of the undertaking, property and
assets (present and future) and uncalled capital of the Company and to
issue debentures and other securities, whether outright or as collateral
security for any debt, liability or obligation of the Company or of any
third party.
(D) No person shall be disqualified from being appointed a director, and no
director shall be required to vacate that office, by reason only of the
fact that he has attained the age of seventy years or any other age nor
shall it be necessary by reason of his age to give special notice or
comply with any other special formality in connection with his appointment
or election. Where the board convenes any general meeting of the company
at which (to the knowledge of the board) a director will be proposed for
appointment or reappointment who at the date for which the meeting is
convened will have attained the age of seventy years or more, the board
shall give notice of his age in years in the notice convening the meeting
or in any document accompanying the notice, but the accidental omission to
do so shall not invalidate any proceedings, or any appointment or
reappointment of that director, at that meeting. At each Annual General
Meeting of COLT until the Annual General Meeting in 2001, as nearly as
possible, one third of the directors will retire by rotation and be
eligible for re-election. At the Annual General Meeting in 2002 and at
each annual general meeting thereafter, all directors will retire and be
eligible for re-election.
(E) No shareholding qualification for directors shall be required.
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Shares
COLT's authorised share capital consists of 2,075,000,000 Ordinary
Shares.
Ordinary Shares
Voting Rights. Subject to any special rights or restrictions
(including disenfranchisement) as to voting attached by or in accordance with
the Articles to any class of shares, every shareholder present in person at a
general meeting shall have one vote on a show of hands and on a poll every
shareholder present in person or by proxy shall have one vote for each share
held.
An annual general meeting of shareholders must be held once in every
year (within a period of not more than 15 months after the holding of the last
preceding annual general meeting). The Board of Directors may convene an
extraordinary general meeting of shareholders whenever they think fit. General
meetings may be held at such time and place as may be determined by the Board of
Directors. An annual general meeting may be convened on at least 21 clear days
written notice to shareholders entitled to receive notice. Most extraordinary
general meetings may be convened on at least 14 clear days written notice, but
extraordinary general meetings at which it is proposed to pass certain types of
special resolutions must be convened on at least 21 clear days written notice.
Except as otherwise provided by the Articles, two shareholders present in person
or by proxy and entitled to vote shall constitute a quorum for all purposes at
general meetings.
Voting at any general meeting is by a show of hands unless a poll is
properly demanded. A poll may be demanded by (i) the chairman of the meeting,
(ii) not less than five shareholders present in person or by proxy and entitled
to vote, (iii) any shareholder or shareholders present in person or by proxy and
representing in the aggregate not less than one-tenth of the total voting rights
of all shareholders having the right to attend and to vote at such meeting or
(iv) any shareholder or shareholders present in person or by proxy and holding
shares in COLT conferring a right to attend and to vote at the meeting being
shares on which an aggregate sum has been paid up equal to not less than
one-tenth of the total sum paid up on all the shares conferring that right.
Where a poll is not demanded, the interests of beneficial owners of Ordinary
Shares who hold through a nominee may not be reflected in votes cast on a show
of hands if such nominee does not attend the meeting or receives conflicting
voting instructions from different beneficial owners for whom it holds as
nominee. Since under English law voting rights are only conferred on registered
holders of shares, a person holding through a nominee may not directly demand a
poll. COLT's listing arrangements with the Nasdaq National Market require that a
poll be taken with respect to any proposed action on which the holders of the
American Depositary Receipts (ADRs) have not instructed the depositary to vote
the same way.
Unless otherwise required by law or the Articles of Association,
voting in a general meeting is by ordinary resolution. An ordinary resolution
(e.g., a resolution for the election of directors, the approval of financial
statements, the declaration of a final dividend, the appointment of auditors,
the increase of authorised share capital or the grant of authority to allot
shares) requires the affirmative vote of a majority of the shareholders entitled
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to vote and present in person, in the case of a vote by show of hands, or
present in person or by proxy and holding shares conferring in the aggregate a
majority of the votes actually cast on the ordinary resolution, in the case of a
vote by poll. A special resolution (e.g., a resolution amending the Memorandum
of Association or Articles of Association, changing the name of COLT or waiving
the statutory pre-emptive rights) or an extraordinary resolution (e.g.,
modifying the rights of any class of shares at a meeting of the holders of such
class or relating to certain matters concerning the liquidation of COLT)
requires the affirmative vote of not less than three-fourths of the shareholders
entitled to vote and present in person, in the case of a vote by show of hands,
or present in person or by proxy and holding shares conferring in the aggregate
at least three-fourths of the votes actually cast on the resolution, in the case
of a vote by poll. In the case of a tied vote, whether on a show of hands or on
a poll, the chairman of the meeting is entitled to cast a deciding vote.
Dividends. COLT may by ordinary resolution of the shareholders
declare dividends but no such dividend shall exceed the amount recommended by
the directors. If and so far as in the opinion of the directors the financial
position of COLT justifies such payments, the directors may also from time to
time pay interim dividends of such amounts and on such dates and in respect to
such periods as they think fit. Subject to the extent that rights attached to
any shares or the terms of issue thereof provide otherwise, all dividends shall
(as regards shares not fully paid throughout the period in respect of which the
dividend is paid) be apportioned and paid proportionately to the amounts paid up
during any portion of the period in respect of which the dividend is paid. No
amount paid up on a share in advance of calls shall be treated as paid up on the
share.
No dividend shall be paid otherwise than out of profits available
for distribution under the provisions of the Companies Act 1985. No dividend or
other moneys payable on or in respect of a share shall bear interest against
COLT. Any dividend unclaimed after a period of twelve years from the date on
which such dividend was declared or became due for payment shall be forfeited
and shall revert to COLT. Dividends may be declared or paid in any currency.
Sanctions imposed, in accordance with the Articles of Association, upon certain
shareholders may include the withholding of payment of all or any part of any
dividends in specified circumstances.
Distribution of Assets. Upon the winding up of COLT, the remaining
assets available for distribution will be paid to the holders of Ordinary
Shares.
If COLT commences liquidation, the liquidator may, with the sanction
of a special resolution of COLT and any other sanction required by law: (i)
divide amongst the shareholders in kind the whole or any part of the assets of
COLT (whether they shall consist of property of the same kind or not) and, for
that purpose, set such values as he deems fair upon any property to be divided
and determine how the division shall be carried out between the shareholders or
different classes of shareholders; or (ii) vest the whole or any part of the
assets in trustees upon such trusts for the benefit of the contributories as the
liquidator shall think fit; but no shareholder shall be compelled to accept any
shares or other assets in respect of which there is any liability.
Issues of Shares. Subject to the Companies Act 1985 and without
prejudice to any special rights previously conferred on the holders of any
issued shares or class of shares, any share in COLT may be issued with such
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preferred, deferred or other special rights, or subject to such restrictions,
whether as regards dividends, return of capital, voting or otherwise, as an
ordinary resolution of a general meeting of shareholders may from time to time
determine (or, in the absence of any such determination, as the Board of
Directors may determine). Subject to the provisions of the Companies Act 1985
and the rights conferred on the holders of existing shares, COLT may issue
redeemable shares.
Subject to the provisions of the Companies Act 1985 relating to
authority, pre-emptive rights and otherwise and of any resolution of COLT in
general meeting, all unissued shares shall be at the disposal of the directors
and they may allot (with or without conferring a right of renunciation), grant
options over or otherwise dispose of them to such persons, at such times and on
such terms as they think proper.
Transfer of Shares. The Ordinary Shares are eligible for trading in
CREST, a paperless settlement system enabling securities to be evidenced in
uncertificated form and transferred otherwise than by a written instrument,
which was introduced in the United Kingdom in July 1996. Any holder of
certificated shares may transfer all or any of his shares by an instrument of
transfer in any usual or in any other form which the directors may approve. The
instrument of transfer of a share shall be executed by or on behalf of the
transferor and (except in the case of fully paid shares) by or on behalf of the
transferee. The directors may in their absolute discretion and without assigning
any reason therefor refuse to register any transfer of shares (not being fully
paid shares), provided that when any such shares are admitted to the Official
List of the London Stock Exchange, such discretion may not be exercised to
prevent dealings in such shares from taking place on an open and proper basis.
The directors may also refuse to register any transfer (whether fully paid or
not) to more than four persons jointly. The directors may also refuse to
register a transfer of certificated shares unless the instrument of transfer is
both (i) in respect of only one class of share, and (ii) lodged with COLT
accompanied by the relevant share certificate(s) and such other evidence as the
directors may reasonably require to show the right of the transferor to make
such transfer. Pursuant to the Articles of Association, the Board of Directors
may decline to register a transfer of COLT's shares if a restriction notice has
been served on the shareholder unless the transfer is shown to the Board of
Directors to be pursuant to an arm's length sale (as defined in the Articles of
Association). Where the Ordinary Shares are held in uncertificated form the
directors may refuse to register the transfer only if such transfer is not in
accordance with the regulations relating to CREST or the transfer is in favour
of more than four transferees.
Variation of Rights
Subject to the provisions of the Companies Acts, all or any of the
rights for the time being attached to any class of shares for the time being
issued may from time to time (whether or not the company is being wound up) be
varied either with the consent in writing of the holders of not less than
three-fourths in nominal value of the issued shares of that class or with the
sanction of an extraordinary resolution passed at a separate general meeting of
the holders of those shares. All the provisions of these articles as to general
meetings of the Company shall with any necessary modifications apply to any such
separate general meeting, but so that the necessary quorum shall be a person or
persons holding or representing by proxy not less than one-third in nominal
value of the issued shares of the class, (but so that at any adjourned meeting
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of the holders one holder present in person or by proxy (whatever the number of
shares held by him) shall be a quorum), that every holder of shares of the class
shall be entitled on a poll to one vote for every share of the class held by him
and that any holder of shares of the class present in person or by proxy may
demand a poll.
General Meetings and Extraordinary General Meetings
Any general meeting of the Company other than an annual general
meeting shall be called an extraordinary general meeting. The board shall
convene and the Company shall hold general meetings as annual general meetings
in accordance with the requirements of the Companies Act. The board may convene
an extraordinary general meeting whenever it thinks fit.
Two members present in person or by proxy and entitled to vote shall
constitute a quorum for all purposes, save as otherwise provided by the Articles
of Association. If a quorum is not present within five minutes after the
commencement time of the meeting, the meeting will be adjourned to another day,
being not less than three and not more than twenty eight days later. At that
reconvened meeting, one member present in person or by proxy shall constitute a
quorum.
The board may direct that persons wishing to attend any general
meeting should submit to such searches or other security arrangements or
restrictions as the board shall consider appropriate in the circumstances and
shall be entitled in its absolute discretion to, or to authorise some one or
more persons who shall include a director, the secretary or the chairman of the
meeting to, refuse entry to, or to eject from, such general meeting any person
who fails to submit to such searches or to otherwise comply with such security
arrangements or restrictions.
Limitations on Rights to own Shares
Shareholders with registered addresses outside the United Kingdom
are not entitled to receive notices from COLT unless they have given COLT an
address within the United Kingdom at which such notices may be served. There are
no limitations in the Articles of Association on the rights of non United
Kingdom citizens or residents to hold or exercise voting rights attached to the
Ordinary Shares.
Change in Control
None.
Notification of Shareholding
There are no provisions in the Memorandum of Association or Articles
of Association governing the ownership threshold above which shareholder
ownership must be disclosed.
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Electronic Communications with Shareholders.
Certain shareholder documents, which the Companies Act 1985
previously required a company to transmit to its members in writing, may be sent
(where the shareholder concerned has expressly agreed) to an electronic address
nominated by the shareholder for that purpose. We may also post communications
on our website where they will be accessible by shareholders and, subject to
various safeguards, receive proxies electronically. The procedures are not
mandatory - they enable the Company and those of its shareholders who wish to do
so to communicate electronically only if both the Company and shareholder
concerned expressly agree. Members will not be obliged to receive electronic
communications if they do not wish to do so.
Differences from law in host country
With respect to the items discussed above, applicable U.K. law is
not materially different from applicable U.S. law, except that the U.S.
threshold for shareholder ownership disclosure is 5% whereas the U.K. threshold
for shareholder ownership disclosure is 3%.
Changes in Capital
The provisions in the Memorandum and Articles of Association in
respect of changes in the Company's capital are no more stringent than required
by English law. Thus, the Company may by ordinary resolution increase,
consolidate, consolidate and then divide, sub-divide its shares or any of them
(subject to the Companies Acts), or cancel any shares which, at the date of the
resolution, have not been taken or agreed to be taken by any person. The Company
may, subject to the Companies Act, by special resolution reduce its share
capital, any capital redemption reserve, any share premium account or any other
undistributable reserve.
C. Material Contracts
We have not entered into any material contracts other than in the
ordinary course of business in the past two years.
D. Exchange Controls
There are currently no U.K. foreign exchange control restrictions on
remittances of dividends on Ordinary Shares or on the conduct of our operations.
Under English Law persons who are neither residents nor nationals of
the U.K. may freely hold, vote and transfer their Ordinary Shares in the same
manner as U.K. residents or nationals.
E. Taxation
General
In this section we summarise U.K. tax consequences and U.S. federal
income tax consequences to U.S. holders, as defined below, of the acquisition,
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ownership and disposition of senior notes, units, discount notes, convertible
notes, warrants, Ordinary Shares and Ordinary Shares represented by ADSs, or,
collectively, the "instruments." This summary is not a comprehensive description
of all of the tax consequences that may be relevant to holders of these
instruments, and you should consult your professional advisor as to the tax
consequences of the acquisition, ownership and disposition of the instruments.
In particular, the summary does not address your tax treatment if you are
subject to special tax rules under income tax law, for example, if you are
o a bank, life insurance company, regulated investment company or
other financial institution,
o a broker or dealer in securities or foreign currency,
o a person that has a functional currency other than the U.S. dollar,
o a person who acquires an instrument in connection with employment or
other performance of services,
o a person subject to alternative minimum tax,
o a person who owns an instrument as part of a straddle, hedging
transaction, conversion transaction, constructive sale transaction
or constructive ownership transaction,
o a tax-exempt entity, or
o an expatriate of the United States.
If you hold 10% or more in voting power or value of our Ordinary Shares,
including through ownership of outstanding ADSs, you could be subject to
additional rules for shareholders of controlled foreign corporations that we do
not discuss in this summary.
In addition, the following summary of U.K. tax consequences does
not, except where specifically discussed, address the tax consequences to you if
you are a U.S. holder
o that is resident, or, in the case of an individual, ordinarily
resident, in the U.K. for U.K. tax purposes,
o whose holding of any instruments is effectively connected with a
permanent establishment in the U.K. through which you carry on
business activities or, if you are an individual who performs
independent personal services, with a fixed base situated in the
U.K., or
o that is a corporation which, alone or together with one or more
associated corporations, directly or indirectly controls 10% or more
of COLT.
For purposes of this summary, a U.S. holder is
o a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States
or meets the substantial presence residency test under U.S. federal
income tax laws,
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o a corporation, partnership or other entity treated as a corporation
or partnership for U.S. federal income tax purposes, that is created
or organised in or under the laws of the United States, any of its
states or the District of Columbia, unless otherwise provided by
Treasury regulations,
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or electing trusts in existence
on August 20, 1996 to the extent provided in Treasury regulations,
or
o any person otherwise subject to U.S. federal income tax on a net
income basis in respect of any of the instruments,
and if your status as a U.S. holder is not overridden pursuant to the provisions
of an applicable tax treaty.
This summary applies only to U.S. holders who hold instruments as
capital assets, which generally are assets held for investment rather than as
inventory or as property used in a trade or business. In addition, except where
specifically discussed, this summary applies to you only if you purchased a
unit, senior note, discount note, or convertible note pursuant to its initial
offering at the applicable issue price described below. Further, with respect to
the discount notes and convertible notes, except where we make reference
specifically to the book-entry interests or the definitive registered
securities, this summary applies to both forms of ownership. This summary is
based upon:
o current U.K. law and current U.S. federal income tax law and the
practices of the U.K. Inland Revenue and the U.S. Internal Revenue
Service, and is subject to subsequent changes to those laws and
practices, which could have retroactive effect,
o to the extent it is still applicable, the 1975 U.S.-U.K. tax treaty
relating to income taxes (the "1975 Treaty")
o the New Income Tax Convention (as defined below), and
o the U.S.-U.K. tax treaty relating to estate and gift taxes that is
currently in effect.
The following summary does not address the tax consequences to
holders of instruments under state, local or other (e.g., non-U.S. federal
income, non-U.K.) tax laws.
U.S. holders of ADSs will be treated as owners of the Ordinary
Shares underlying the ADSs evidenced by ADRs. Accordingly, unless otherwise
noted, the U.S. federal income and U.K. tax consequences discussed below apply
commensurately to U.S. holders of ADSs and Ordinary Shares.
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For purposes of discussing the tax consequences of investments in
notes, we refer to the (euro) senior convertible notes and the DM senior
convertible notes together as convertible notes. In this summary the senior
notes are a separate category of notes that do not have a conversion feature.
Holders of instruments should note that the U.S. and the U.K. signed
a new version of the Income Tax Convention on 24 July 2001 (the "New Income Tax
Convention") which entered into force on 31 March 2003. For U.K. taxes withheld
at source, the New Income Tax Convention is effective from 1 May 2003.
Holders of instruments should also note that any person who is or
would have been entitled to greater benefits under the 1975 Treaty than that
person is under the New Income Tax Convention may elect to have the provisions
of the 1975 Treaty apply in their entirety for a period of 12 months from the
date on which the New Income Tax Convention otherwise would have effect. Holders
of Instruments are advised to consult their own tax advisers with respect to the
overall tax implications of the New Income Tax Convention, including
specifically the implications of making the above mentioned election.
U.K. Tax Consequences
We are resident in the U.K. for U.K. tax purposes. The statements
regarding U.K. tax consequences set forth below relate only to the position of
persons who are the absolute beneficial owners of the relevant notes, units,
warrants or shares and may not apply to some classes of holders, such as dealers
in securities.
If you are considering the acquisition, ownership or disposition of
the instruments, you should consult your own tax advisor concerning the U.K. tax
consequences in light of your particular situation.
Taxation of the Senior Notes, the Convertible Notes and the Discount Notes
Payment on the Notes. Provided the senior notes, the convertible
notes and the discount notes continue to be listed on the London Stock Exchange,
or some other stock exchange recognised by the U.K. Inland Revenue, payments of
interest to you may be made without withholding or deduction for U.K. income
tax.
In other cases, interest will generally be paid after deduction of
U.K. income tax at the lower rate, currently 20%. If you reside in a
jurisdiction other than the U.K., you may be entitled to a refund of all or part
of any tax withheld or to make a claim for interest on your senior notes,
convertible notes and discount notes to be paid without, or subject to a reduced
rate of, deduction or withholding under the provisions of an applicable tax
treaty. A refund of all or part of any tax withheld may also be available,
depending on your individual circumstances, if you are a Commonwealth citizen or
otherwise entitled to a U.K. personal allowance.
You will not generally be assessed for U.K. income tax on the
discount or interest on the note. If you are, you may be able to make a claim
under an appropriate tax treaty for an exemption from, or a reduction of, any
U.K. tax liability that would otherwise arise.
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Original Issue Discount. You will be paid original issue discount
without withholding for U.K. income tax.
Sale or Disposal, including Conversion or Redemption. You will not
be liable for U.K. tax on gains realised on the sale or other disposal,
including conversion or redemption, of your notes.
Taxation of the Warrants
You will not be liable for U.K. tax on the exercise, disposal or
abandonment of your warrants.
Taxation of Ordinary Shares or ADSs
Taxation of Dividends. We do not currently anticipate paying
dividends within the foreseeable future.
There is no U.K. withholding tax on dividends. A shareholder
resident for U.K. tax purposes in the United Kingdom who receives a dividend
from us may generally claim a tax credit in an amount equal to one-ninth of the
dividend. The 1975 Treaty, if it is still applicable by virtue of any election
made under the New Income Tax Convention, provides for you to claim a similar
tax credit, but also provides for a deduction to be withheld from it of an
amount equal to 15% of the aggregate of the dividend and of the credit; the
deduction so withheld accordingly eliminates your tax credit claim.
Under the New Income Tax Convention, U.S. Holders are no longer
entitled to a payment in respect of any U.K. tax credit received, nor are
dividends subject to a notional U.K. withholding tax.
Disposition of the Ordinary Shares or ADSs. You will not be liable
for U.K. tax on gains realised on the sale or other disposal of your Ordinary
Shares or ADSs.
Inheritance and Gift Taxes
If you are an individual domiciled in the U.S. for the purposes of
the U.S.-U.K. estate tax treaty and you are not a national of the U.K. for the
purposes of the U.S.-U.K. estate tax treaty, you will generally not be subject
to U.K. inheritance tax in respect of the instruments on your death or upon a
gift of any of the instruments during your lifetime provided that you have paid
any applicable U.S. federal gift or estate tax liability. If you have placed any
instruments you acquired in a trust when you were a U.S. holder, those
instruments will generally not be subject to U.K. inheritance tax if, at the
time you placed them in a trust, you were domiciled in the U.S. and you were not
a U.K. national. In the exceptional case where you are subject to U.K.
inheritance tax and U.S. federal gift or estate tax with respect to any of the
instruments you hold or previously acquired, the U.S.-U.K. estate tax treaty
generally provides that the tax you pay in the U.K. may be credited against
federal tax you pay in the U.S. and federal tax you pay in the U.S. may be
credited against tax you pay in the U.K. based on priority rules set out in the
U.S.-U.K. estate tax treaty.
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Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty or stamp duty reserve tax is payable on the
issue, transfer, conversion or redemption of your senior notes, convertible
notes or discount notes, or on the issue of warrants.
There will generally be a liability to stamp duty on a transfer of
warrants, or Ordinary Shares acquired upon exercise of the warrants, at the rate
of 0.5 percent of the amount or value of the consideration given for the
transfer, rounded up to the nearest (pound)5 where necessary. Stamp duty is
normally a liability of the purchaser.
There will also generally be a liability to stamp duty reserve tax
on an agreement to transfer your warrants, or Ordinary Shares acquired on
exercise of the warrants, at the rate of 0.5 percent of the amount or value of
the agreed consideration. However, the stamp duty reserve tax liability is
cancelled, and the tax will be refunded if already paid, if the agreement is
completed by a duly stamped instrument of transfer within six years of the date
on which the agreement was made, or, if the agreement was conditional, the date
on which the condition is satisfied.
You may be charged stamp duty or stamp duty reserve tax at the
higher rate of 1.5 percent of the amount or value of the consideration, or in
some circumstances, the value of the Ordinary Shares transferred or issued to
you, your nominee, or your agent, if you are a person whose business is or
includes the provision of clearance services or the issuance of depositary
receipts. If your business is or includes clearance services, you may elect,
with the U.K. Inland Revenue's approval in some circumstances, to be subject to
stamp duty reserve tax at the normal rate on transactions within the service,
instead of at the higher rate, on the issue or transfer of shares into the
clearance service.
Deposit Agreement
No stamp duty reserve tax is chargeable on an agreement for the
transfer of an ADR or beneficial ownership of an ADR; and no stamp duty is
payable on the acquisition or transfer of an ADS evidenced by an ADR or
beneficial ownership of an ADR, provided that any instrument of transfer or
written agreement to transfer is not executed in or brought into the U.K.
U.S. Federal Income Tax Consequences
The following summary is based upon the U.S. Internal Revenue Code
of 1986, as amended, applicable Treasury regulations promulgated and proposed
under the Internal Revenue Code, judicial authority and current administrative
rulings and practices. All of these are subject to change, possibly with
retroactive effect, or different interpretations. We have not sought any ruling
from the Internal Revenue Service with respect to any matter described in the
following summary, and we cannot provide any assurance that the IRS or a court
will agree with the statements we make in this summary.
For purposes of this summary, the spot rate generally means a rate
that reflects a fair market rate of exchange available to the public for
currency under a spot contract in a free market and involving representative
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amounts. A spot contract is a contract to buy or sell a currency on or before
two business days following the date of the execution of the contract. If a spot
rate cannot be demonstrated in this manner, the IRS has the authority to
determine the spot rate.
Taxation of COLT
In general, we will be subject to U.S. federal income tax only to
the extent we have income which has its source in the U.S. or is effectively
connected with a U.S. trade or business. We anticipate that we will derive
substantially all of our income from foreign sources and that none of our income
will be effectively connected with a U.S. trade or business, except for the
modest amounts of income from our two U.S. subsidiaries. In addition, we
anticipate that any U.S. source investment income we derive will come from
investments the interest on which will be exempt from U.S. federal income
taxation. In sum, we should be subject to little or no U.S. federal income
taxation.
The Units
Each unit is comprised of one discount note and one warrant. For
U.S. federal income tax purposes, the issue price of a unit is allocated between
the discount note and warrant components based on the relative fair market value
of each component to the fair market value of both components taken together as
a unit. Under the original issue discount regulations provided by the U.S.
Treasury, the issue price of the unit is equal to the offering price to the
public, not including any bond house, broker or similar person or organisation
acting in the capacity of an underwriter, placement agent or wholesaler, at
which a substantial number of the units is sold. Based on this method, we have
determined that each discount note was originally issued with an issue price of
$540.67 per $1,000 principal amount at maturity, and each warrant was originally
issued with an issue price of $18.08. This allocation reflects our best
judgement as to the relative values of the components at the time of original
issuance, but we cannot assure you that the IRS will not challenge our
allocation. If the IRS successfully challenges our allocation of the issue
price, then the amount of OID accrual, as explained below, and the amount of
gain or loss on the taxable disposition of your discount notes or warrants,
would be different from that resulting under our allocation.
Our determination of the issue price allocation between the discount
notes and warrants is binding on you, unless you disclose the use of a different
issue price allocation on the applicable form attached to your timely filed U.S.
federal income tax return for the taxable year that includes your acquisition of
the unit. If you acquire a unit at a price different from that on which our
allocation is based, you may be treated as having acquired your discount notes
for an amount greater or lesser than the amount we allocated to the discount
notes, thereby resulting in acquisition premium or market discount, as explained
below. If you intend to use an issue price allocation different from our
allocation, you should consult your tax advisor as to the consequences.
One consequence of allocating issue price to the warrant portion of
a unit is that the issue price of the discount note is lower than the issue
price of the unit. As a result, even though the discount notes have by their own
terms already accreted discount to reach their fully accreted principal amount,
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for U.S. federal income tax purposes there is still additional OID to be
accrued, as described below, so that U.S. holders of discount notes will
generally continue to accrue OID in excess of cash payments on the discount
notes until maturity or earlier redemption.
Taxation of the Senior Notes, the Discount Notes and the Convertible Notes
Interest on the Senior Notes. If you use the accrual method of
accounting for U.S. federal income tax purposes, you generally will be required
to include interest in income as the interest accrues on the senior notes. If
instead you use the cash basis method of accounting, you generally will be
required to include interest in income when you receive interest payments on the
senior notes. This interest generally is treated as foreign source passive
income or financial services income for U.S. foreign tax credit purposes. Based
upon applicable Treasury regulations, the senior notes are not treated as having
been issued with OID, as explained below.
If you are a cash basis holder, the amount you are required to
include in income upon receipt of a payment on your senior notes is the U.S.
dollar value of the amount paid, determined on the basis of the spot rate on the
date you receive the payment, regardless of whether the payment is in fact
converted into U.S. dollars. You will not recognise exchange gain or loss upon
receipt of the interest payment.
Unless you have made a spot rate convention election described
below, if you are required to accrue interest income on a senior note prior to
receipt, then you will be required to include in income for each taxable year
the U.S. dollar value of the interest that has accrued during that year,
determined by translating the accrued interest at the average rate of exchange
for the period, or partial period if the period spans two taxable years, during
which the interest has accrued. The average rate of exchange for an interest
accrual period is the simple average of the exchange rates for each business day
of that period, or some other average that you have reasonably derived and
consistently applied. Upon receipt of an interest payment in foreign currency,
you will recognise ordinary gain or loss in an amount equal to the difference
between the U.S. dollar value of the foreign currency you receive, determined on
the basis of the spot rate on the date you receive the payment, and the U.S.
dollar value of the interest income that you have previously included in income
with respect to that interest payment. Generally, this gain or loss will be
treated as ordinary income or loss and will not be treated as interest income or
expense, except as any IRS administrative pronouncements provide otherwise.
You may make a spot rate convention election to translate accrued
interest into U.S. dollars at the spot rate on the last day of an accrual
period, or, in the case of an accrual period that spans two taxable years and is
thus treated as two partial periods, at the spot rates on the last day of the
taxable year and on the last day of the accrual period. Additionally, if you
receive a payment of interest within five business days of the last day of the
accrual period, you may instead translate the accrued interest into U.S. dollars
at the spot rate on the day of receipt. If you make a spot rate convention
election, then you must apply it consistently to all debt instruments from year
to year, and you cannot change the election without the consent of the IRS. You
should consult your tax advisor regarding this election.
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Interest on the Discount Notes and Convertible Notes. For the
reasons discussed below, the discount notes and convertible notes are deemed to
have been issued with original issue discount (OID) for U.S. federal income tax
purposes. Accordingly, if you hold a discount note or convertible note, then,
regardless of whether you are a cash or accrual basis taxpayer, you are required
to include in income in each taxable year, in advance of your receipt of cash
payments on the discount notes or convertible notes, that portion of the OID,
computed on a constant interest rate basis, attributable to each day of the year
during which you held the discount notes or convertible notes. The amounts of
OID are determined in the foreign currency in which the notes are denominated
and are then translated into U.S. dollars. The OID generally is treated as
foreign source passive income or financial services income for U.S. foreign tax
credit purposes.
The amount of OID with respect to each discount note and convertible
note is equal to the excess of its stated redemption price at maturity over its
issue price. The issue price for a discount note is the amount of the unit issue
price that we allocated to the discount note or another issue price that you
determined in the manner discussed above. The issue price for a convertible note
is equal to the offering price to the public, not including any bond house,
broker or similar person or organisation acting in the capacity of an
underwriter, placement agent or wholesaler, at which a substantial number of the
convertible notes is sold, which in the case of the July 1998 offering of
convertible notes was 1,000DM, and in each of the March 1999, December 1999 and
March 2000 offerings was (euro)1,000.
The stated redemption price at maturity of each discount note and
convertible note includes all payments to be made in respect of the note, other
than payments of qualified stated interest. Qualified stated interest is
interest that is unconditionally payable in cash or property, except additional
debt of the debtor, at least annually at a single fixed rate. Because no
interest was paid on the discount notes prior to 2002, none of the stated
interest actually paid on the discount notes will constitute qualified stated
interest unless the discount notes are deemed reissued for purposes of computing
OID. Your discount notes are deemed reissued if we exercise our unconditional
option to make payments on the discount notes under an alternative schedule or
schedules. So, in the absence of a deemed reissuance, the stated redemption
price at maturity of a discount note equals the sum of all cash payments
required to be made on the discount note, including both principal and stated
interest. By contrast, convertible notes pay interest annually at a stated
percentage of the issue price, followed by a receipt of a redemption price
higher than the issue price. The convertible notes' stated interest constitutes
qualified stated interest, and thus their stated redemption price at maturity
consists only of the redemption price.
Taxation of OID. If you hold a debt instrument issued with OID, in
each taxable year you are required to include in gross income for federal income
tax purposes an amount equal to the sum of the daily portions of the OID for all
days during the taxable year on which you hold the debt instrument, including
the purchase date but excluding the disposition date. The daily portions of OID
required to be included in your gross income in a taxable year are determined on
a constant interest rate basis by allocating to each day during the taxable year
on which you hold the debt instrument a pro rata portion of the OID on the debt
instrument which is attributable to the accrual period in which that day is
included. The amount of the OID on your discount note or convertible note
attributable to each accrual period is the product of its adjusted issue price
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at the beginning of the accrual period multiplied by its yield to maturity, less
any qualified stated interest for that accrual period. Your discount note's or
convertible note's yield to maturity is that discount rate which, when used in
computing the present value of all principal and stated interest payments to be
made on a discount note or convertible note, produces an amount equal to its
issue price. The adjusted issue price of your discount note or convertible note
at the beginning of an accrual period is its issue price plus the aggregate
amount of OID that accrued in all prior accrual periods, determined without
regard to the rules described below concerning acquisition premium and bond
premium, less any cash payments you receive on the discount note or convertible
note other than qualified stated interest.
Unless you have made a spot rate convention election, you will be
required to include in gross income for each taxable year the U.S. dollar value
of the OID that has accrued during that year, determined by translating the
accrued OID at the average rate of exchange for the period during which the OID
has accrued, or partial period if the OID accrual period spans two taxable
years. The average rate of exchange for an accrual period is the simple average
of the exchange rates for each business day of the period, or some other average
that you have reasonably derived and consistently applied. Upon receipt of a
payment of OID in a foreign currency, you will recognise ordinary gain or loss
in an amount equal to the difference between the U.S. dollar value of the
foreign currency you received, determined on the basis of the spot rate on the
date the payment is received, and the U.S. dollar value of the OID that you have
previously included in income with respect to the payment. Generally, this gain
or loss will be treated as ordinary income or loss and will not be treated as
interest income or expense, except as any IRS administrative pronouncements
provide otherwise.
If you have made a spot rate convention election, then you must
translate OID into U.S. dollars at the spot rate on the last day of the accrual
period for the OID. In the case of an accrual period that straddles the last day
of your taxable year and is thus treated as two partial periods, you must
translate OID into U.S. dollars at the spot rates on the last day of your
taxable year and on the last day of the accrual period. Additionally, if you
receive a payment of OID within five business days of the last day of the
accrual period, you may instead translate the OID into U.S. dollars at the spot
rate on the day of receipt.
Options Which Affect the Discount Notes' Yield to Maturity. We have
unconditional options that, if exercised, would cause payments on the discount
notes to be made under an alternative payment schedule or schedules. As a
result, we are deemed to exercise or not exercise these options in the manner
and in the combinations that minimise the yield to maturity on the discount
notes. For purposes of choosing among these alternate calculations, the
alternate yields to maturity on the discount note are determined by using any
date on which the discount note may be redeemed or repurchased as the maturity
date and the applicable amount payable on that date as the principal amount
payable at maturity.
If the exercise of an option actually occurs or does not occur
contrary to the baseline assumption described in the preceding paragraph, then,
except to the extent that a portion of your discount note is repaid as a result
of the change in circumstances, the yield to maturity of your discount note is
redetermined, solely for purposes of computing the accrual of OID, by treating
your discount note as reissued on the date of the change in circumstances for an
amount equal to the discount note's adjusted issue price on that date.
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Election to Treat all Interest as OID. If you hold a discount note,
a convertible note or a senior note, then you may be eligible to elect to
include in gross income for U.S. federal income tax purposes all interest that
accrues on the discount note, the convertible note or the senior note by
accruing daily portions of interest on a constant interest rate basis as
described above. For purposes of the election, interest includes stated and
unstated interest, acquisition discount, OID, de minimis OID, market discount
and de minimis market discount, as adjusted by any amortisable bond premium or
acquisition premium. If you make this election in respect of a discount note, a
convertible note or a senior note with market discount or bond premium, you will
be deemed to have made an election to currently include market discount in
income or to amortise bond premium, as the case may be. You should consult your
tax advisor regarding this election.
Acquisition Premium. If you acquire a discount note or convertible
note and immediately after acquisition your income tax basis in the note,
usually your purchase price for the note exclusive of any amounts paid allocable
to prior accrued qualified stated interest,
o exceeds the discount note's or convertible note's adjusted issue
price, but
o is less than or equal to the sum of all amounts that are still
payable on the discount note or convertible note after the
acquisition date, other than any qualified stated interest,
then the excess over adjusted issue price is acquisition premium. The daily
portion of the OID that you are required to include in income will be reduced by
an amount equal to the OID multiplied by the fraction obtained by taking the
acquisition premium and dividing it by the amount of OID for the period
remaining after your purchase to the maturity date of the discount note or
convertible note. As with the OID itself, the amount of acquisition premium is
determined in the foreign currency in which the note is denominated.
Market Discount. Generally, the market discount rules discussed
below will not apply to the senior notes, discount notes or convertible notes
that you acquire in an original issuance of these notes. However, you can
acquire a note at market discount if you acquire a note and immediately after
acquisition your income tax basis in the note, usually your purchase price for
the note exclusive of any amounts paid allocable to prior accrued qualified
stated interest,
o is less than its stated principal amount, in the case of a senior
note, or
o is less than its revised issue price, as defined below, in the case
of a convertible note or a discount note.
For federal income tax purposes you will not be treated as having purchased a
note with market discount if the amount of market discount is less than a de
minimis threshold amount.
The revised issue price of a discount note or convertible note
generally equals the sum of its issue price, plus the total amount of OID
includible in the gross income of all holders for periods before you acquired
the discount note or convertible note, without regard to any reduction in that
income resulting from acquisition premium or amortisable bond premium, and minus
any cash payments on the note in those periods other than qualified stated
interest.
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Under the market discount rules, you must treat any gain on the
sale, exchange, redemption, or other taxable disposition of a senior note,
discount note or convertible note, or any appreciation in a note in the case of
a nontaxable disposition such as a gift, as ordinary income to the extent that
market discount has accrued on the note. You are also generally required to
defer, until the maturity of the note or earlier taxable disposition, the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry the senior note, discount note or
convertible note. The senior notes, the discount notes and the convertible notes
provide that they may be redeemed, in whole or in part, before maturity. If some
or all of the senior notes, discount notes or convertible notes are redeemed and
you have acquired those notes with market discount, then you will be required to
treat the principal payment as ordinary income to the extent of accrued market
discount on all of your senior notes, discount notes or convertible notes.
Any market discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of the note, unless you
elect to accrue the market discount on a constant interest rate method. You may
also elect to include market discount in income currently as it accrues, on
either a ratable or constant interest rate method, and your basis in the note
will increase by the amounts included in your income. If you make this election,
the rules described above regarding ordinary income on dispositions and deferral
of interest deductions will not apply. This current inclusion election, once
made, applies to all market discount obligations you acquire on or after the
first day of the first taxable year to which the election applies, and you may
not revoke the election without the consent of the IRS. You should consult your
tax advisor regarding these market discount elections.
In the case of a debt instrument denominated in a foreign currency -
for example, the senior notes and the convertible notes - market discount is
computed in the applicable foreign currency. If you do not elect current
inclusion of market discount, accrued market discount is translated into U.S.
dollars at the spot rate on the date of payment or disposition. No part of this
accrued market discount is treated as exchange gain or loss. If you elect
current inclusion of market discount, the amount of market discount currently
includible in income for a taxable year is the U.S. dollar value of the market
discount that has accrued during the year, determined by translating the accrued
market discount at the average rate of exchange for the accrual period or
periods, including, if applicable, the two partial periods in the case of an
accrual period that straddles your taxable year. Accordingly, you will recognise
exchange gain or loss with respect to this accrued market discount under the
same rules that apply to accrued interest you receive on a senior note or
convertible note if you are on the accrual basis or to OID you receive on a
discount note or convertible note.
Amortisable Bond Premium. If you acquire a senior note and
immediately after acquisition your income tax basis in the note, usually your
purchase price for the note exclusive of any amounts paid allocable to prior
accrued qualified stated interest, exceeds its stated principal amount, then you
will be considered to have acquired the senior note with bond premium in an
amount equal to that excess. Similarly, if you acquire a discount note and
immediately after acquisition your income tax basis in the note, usually your
purchase price for the note exclusive of any amounts paid allocable to prior
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accrued qualified stated interest, is greater than its stated redemption price
at maturity, then you will be considered to have acquired the discount note with
bond premium in an amount equal to that excess. However, because your discount
notes will never pay any qualified stated interest unless deemed reissued with
qualified stated interest payments, as discussed above, it is unlikely a
discount note would ever be acquired with bond premium. You generally may elect
to amortise bond premium over the remaining term of the senior note or discount
note on a constant interest rate method, and the amount amortised in any year
will be treated as a reduction of your interest income from the note for that
year. If the bond premium amortisation would be lower if calculated based on an
earlier optional redemption date and price than the amount of amortisation
calculated through that date based on the note's maturity date and its stated
principal amount, then you must calculate the amount and timing of the bond
premium amortisation deductions assuming that the senior note or discount note
will be redeemed on that earlier date at the optional redemption price. You may
generally recalculate your bond premium amortisation amount and schedule of
deductions to the extent your note is not actually redeemed on the optional
redemption date. If you elect to amortise bond premium, you must reduce your tax
basis in the related senior note or discount note by the aggregate amount of
bond premium amortised. If you do not elect to amortise bond premium, then the
bond premium on your note will decrease the gain or increase the loss that you
otherwise recognise on a disposition of that note. Any election to amortise bond
premium applies to all debt obligations, other than debt obligations the
interest on which is excludable from gross income, that you hold at the
beginning of the first taxable year to which the election applies and that you
thereafter acquire. You may not revoke an election to amortise bond premium
without the consent of the IRS. You should consult with your tax advisor
regarding this election.
The amortisable bond premium rules also apply to your acquisition of
a convertible note, but only after first determining the amount of your income
tax basis that is amortisable under these rules. For these purposes, your income
tax basis in your convertible note immediately after acquisition, usually your
purchase price for the note exclusive of any amounts paid allocable to prior
accrued qualified stated interest, is reduced by any value attributable to your
option to convert the note into Ordinary Shares of COLT. If your income tax
basis in the note as adjusted is still greater than the convertible note's
stated redemption price at maturity, then the excess over the stated redemption
price at maturity, if you so elect, is subject to the rules governing the
deduction of amortisable bond premium as described above.
With respect to a discount note or convertible note, if you acquire
the note with amortisable bond premium, then you are not required to include any
amounts of OID in income with respect to the note because there is no discount
between your cost basis and the note's stated redemption price at maturity.
With respect to your senior notes, discount notes and convertible
notes, amortisable bond premium is calculated in the currency in which the note
is denominated. The amortisation deduction calculated reduces the interest
income received so that the net amount of interest less the amortisation
deduction in the applicable foreign currency is the amount translated into U.S.
dollars and reported in your gross income. You will recognise ordinary gain or
loss in an amount equal to the difference between the U.S. dollar value of
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the amortisation deduction at the time of the deduction and the U.S. dollar
value of that portion of the bond premium upon acquisition of the note. This
gain or loss generally will not be treated as interest income or expense, except
as any IRS administrative pronouncements provide otherwise. Each reduction of
your interest income by amortisable bond premium also reduces your income tax
basis in the note by the U.S. dollar value of that portion of amortisable bond
premium as of your acquisition of the note.
Additional Amounts. If you receive any additional amounts with
respect to your senior notes, discount notes or convertible notes, those
payments will be taxed as ordinary income in accordance with your method of
accounting. U.K. withholding tax, if any, imposed on payments you receive on
your senior notes, discount notes or convertible notes will generally be treated
as foreign tax eligible for credit against your U.S. federal income tax. For
foreign tax credit purposes, additional amounts should generally be treated as
foreign source passive income, or, in the case of some holders, financial
services income.
Disposition. In general, you will recognise gain or loss upon the
sale, exchange, redemption or other taxable disposition of a senior note, a
discount note, or a convertible note equal to your amount realised in the
disposition less your adjusted income tax basis in the note. Your amount
realised is the amount of cash and the fair market value of property received,
or the U.S. dollar value at the spot rate on the date of the disposition of the
amount realised in foreign currency, less any amount attributable to accrued
qualified stated interest, which will be taxed as interest in the manner
described above. Your adjusted income tax basis in a note will generally be
equal to:
o your purchase price for the note exclusive of any amounts paid
allocable to prior accrued qualified stated interest,
o plus any amounts of OID that you include in your gross income
through the day preceding the day of disposition,
o plus the accrual of market discount, if any, that you elect to
include in gross income on a current basis,
o minus the amount of any cash payments you receive on the note other
than qualified stated interest and
o minus any reductions in income tax basis related to amortisable bond
premium if you elect to deduct it on a current basis.
If you hold a senior note, a discount note or a convertible note purchased with
foreign currency, your adjusted income tax basis will be determined by
translating the purchase price, excluding any amounts paid for prior accrued
qualified stated interest, at the spot rate on the date of purchase.
Gain or loss recognised upon the sale, exchange, redemption or other
taxable disposition of a senior note, discount note, or convertible note will
generally be capital gain or loss. The gain or loss will be ordinary and not
capital to the extent of any gain or loss attributable to changes in exchange
rates, described in the next paragraph, and any gain attributable to any market
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discount. If you are an individual, then your net capital gain will generally be
subject to U.S. federal income tax at a maximum rate of 20% if you have held the
senior note, discount note or convertible note more than one year on the date
you sell or dispose of the note. This maximum rate of 20% has been reduced to
15% for gains properly taken into account during the period beginning on 6 May
2003 and ending with the end of your taxable year that begins in 2008. Ordinary
or capital gain will generally be treated as U.S. source income for U.S. foreign
tax credit purposes. You should consult your tax advisor regarding the source of
loss recognised on the sale, exchange, redemption or other taxable disposition
of a note.
Gain or loss that you realise on the sale, exchange, redemption or
other taxable disposition of a senior note, discount note or convertible note
attributable to changes in exchange rates will be treated as ordinary income or
loss and generally will not be treated as interest income or expense except as
any IRS administrative pronouncements provide otherwise. However, this ordinary
gain or loss is only included in gross income to the extent of your total gain
or loss on the sale, exchange, redemption or other taxable disposition.
Your income tax basis in purchased foreign currency generally will
be its U.S. dollar value at the spot rate on the date of purchase. Your income
tax basis in foreign currency received on the sale, exchange or retirement of a
senior note, discount note or convertible note will be the foreign currency's
U.S. dollar value at the spot rate at the time the foreign currency is received.
The amount of gain or loss you will recognise on a sale, exchange or other
disposition of foreign currency will be equal to the difference between the
number of U.S. dollars received, the U.S. dollar value at the spot rate of the
foreign currency received, or the fair market value in U.S. dollars of the
property received, as the case may be, and your income tax basis in the disposed
of foreign currency. Accordingly, if you purchase a senior note, discount note
or convertible note with foreign currency, you will recognise gain or loss in an
amount equal to the difference, if any, between your tax basis in the foreign
currency and the U.S. dollar value at the spot rate of the foreign currency on
the date of purchase of the note. Generally, this exchange gain or loss will be
ordinary income or loss and will not be treated as interest income or expense,
except as any IRS administrative pronouncements provide otherwise.
Conversion of Convertible Notes in Exchange for Ordinary Shares. You
generally will not recognise any income, gain or loss upon conversion of a
convertible note into Ordinary Shares except:
o to the extent the Ordinary Shares you receive are considered
attributable to interest and OID accrued but not previously included
in income, in which case the value of those shares is taxable as
interest and OID, respectively, in the manner described above,
o to the extent of any accrued market discount which you have not
previously included in income, if you have elected to include market
discount in gross income on a current basis,
o with respect to cash, if any, you received in lieu of a fractional
share of the Ordinary Shares, and
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o with respect to foreign currency gain or loss you realised upon the
conversion, as described below.
Your income tax basis in the Ordinary Shares that you receive on the conversion
of your convertible note generally will be the same as your adjusted tax basis
in the convertible note just prior to the time of conversion, increased by any
qualified stated interest and OID you have accrued but not previously included
in income upon conversion to the extent the Ordinary Shares you receive are
considered attributable to that accrued interest and OID, increased by any
accrued market discount includible in income due to conversion, reduced by any
basis allocable to a fractional share interest, and adjusted to take into
account the amount of any foreign currency gain or loss realised upon the
conversion as described below. Except to the extent of Ordinary Shares treated
as received in respect of accrued qualified stated interest you have not
previously included in income, your holding period for the Ordinary Shares you
receive on conversion will generally include the holding period of the
convertible note converted.
Any cash you receive in lieu of fractional Ordinary Shares upon
conversion will be treated as a payment in exchange for the fractional Ordinary
Shares. Accordingly, your receipt of cash in lieu of fractional Ordinary Shares
generally will result in capital gain or loss, measured by the difference
between the cash you receive for the fractional Ordinary Shares and your
adjusted tax basis attributable to the fractional Ordinary Shares. Any gain
would be ordinary and not capital gain to the extent of any accrued market
discount on the notes that you had not previously included in income.
Upon the conversion of a convertible note into Ordinary Shares, you
will recognise foreign currency gain or loss in respect of the convertible
note's principal amount and any interest, OID or market discount that you
accrued and included in income but have not yet received, but only to the extent
of the total gain or loss realised on the conversion of the convertible note.
This foreign currency gain or loss will generally be ordinary income or loss and
will generally not be treated as interest income or expense, except as any IRS
administrative pronouncements provide otherwise.
If you acquired a convertible note at a market discount, did not
elect to include that market discount in gross income on a current basis, and
have elected to convert the convertible note into Ordinary Shares, then the
amount of accrued market discount at the time of conversion is not includible in
your income upon conversion, but is transferred as a tax attribute to the
Ordinary Shares you receive, except to the extent of any gain on disposition of
a fractional share that you report as attributable to accrued market discount.
Any gain upon the subsequent disposition of Ordinary Shares or ADSs you receive
as a result of the conversion would be ordinary gain to the extent of the
accrued market discount transferred to your Ordinary Shares.
Passive Foreign Investment Company Status. If we were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would apply to holders of convertible notes. These special rules are
discussed below.
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Tax Treatment of Warrants
Sale or Redemption. You will recognise gain or loss on a sale or
other taxable disposition of a warrant in an amount equal to the difference
between the amount realised and your income tax basis in the warrant, which we
computed to be equal to $18.08 per warrant for warrants purchased at original
issue. A sale or other taxable disposition of a warrant will result in a capital
gain or loss, and this capital gain or loss will be long-term capital gain or
loss if you have held the warrant for more than one year at the time of
disposition. If you are an individual, any long-term capital gain will generally
be subject to U.S. federal income tax at a maximum rate of 20% (15% for gains
properly taken into account during the period beginning on 6 May 2003 and ending
with the end of your taxable year that begins in 2008). Gain on disposition of a
warrant will generally be treated as U.S. source income. You should consult your
tax advisor regarding the source of loss recognised on the sale, exchange,
redemption or other taxable disposition of a warrant.
Exercise. You will not recognise gain or loss on the purchase of
Ordinary Shares or ADSs for cash upon exercise of your warrant, except to the
extent you receive cash in lieu of fractional shares less allocable basis from
the warrant. Your adjusted initial basis of the Ordinary Shares or ADSs you
acquire will be equal to your adjusted basis of the warrant you exercised plus
the exercise price, less basis allocable to any cash you receive in lieu of
fractional shares. Your holding period in the Ordinary Shares or ADSs you
acquire upon the exercise of a warrant will not include the holding period of
that warrant.
Lapse. If you do not exercise your warrant and allow it to expire,
the warrant will be deemed to have been sold or exchanged on the expiration
date. As a result, you will recognise a capital loss equal to your tax basis in
the warrant. That capital loss will be long-term if you have held the warrant
for more than one year at the time of the expiration of the warrant.
Passive Foreign Investment Company Status. If we were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would apply to holders of warrants. These special rules are discussed
below.
Tax Treatment of Ordinary Shares or ADSs
Distributions. Distributions you receive from us with respect to
your Ordinary Shares or ADSs, including any related withheld tax by the U.K.,
will constitute dividends for U.S. federal income tax purposes to the extent
paid out of our current or accumulated earnings and profits as determined for
U.S. federal income tax purposes. To the extent that a distribution exceeds our
available earnings and profits, it will be treated as a nontaxable return of
capital to the extent of your adjusted tax basis in the Ordinary Shares or ADSs
and thereafter as capital gain. Dividends you receive generally will be treated
as foreign source dividend income and will not be eligible for the
dividends-received deduction allowed to corporate shareholders under the
Internal Revenue Code.
For a temporary period beginning with taxable years beginning in
2003 and ending with taxable years beginning after 31 December 2008, qualified
dividend income will generally be subject to a maximum U.S. federal income tax
rate of 15%. Because our ADSs trade on NASDAQ, any dividends we pay to you
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during that period should generally constitute qualified dividend income to you,
unless we are or become a foreign personal holding company or a passive foreign
investment company, which are circumstances described below.
The amount of any distribution we make to you will equal the fair
market value in U.S. dollars of the British pounds sterling or other foreign
currency or other property you receive, including the amount of any related
withheld tax, on the date of distribution, which, in the case of a distribution
paid in British pounds sterling or other foreign currency will be based on the
exchange rate on the date of your receipt, or, in the case of the ADSs, the date
of receipt by the Depositary. For U.S. federal income tax purposes, you will
have a basis in any British pounds sterling or other foreign currency you
receive equal to the dollar value of that currency on the date of payment. Any
gain or loss that you recognise upon a subsequent disposition of these British
pounds sterling or other foreign currency will generally be ordinary income or
loss.
The 15% U.K. withholding tax will generally be treated for U.S.
federal income tax purposes as a foreign tax that you may claim as a foreign tax
credit against your U.S. federal income tax liability, subject to limitations
generally applicable to foreign tax credits. For example, dividends distributed
by us will generally be categorised as passive income or, in the case of some
holders, as financial services income, for purposes of computing allowable
foreign tax credits for U.S. federal income tax purposes. In general, you may
not claim a foreign tax credit with respect to a category of income in excess of
the U.S. federal income tax otherwise payable with respect to that category of
income. For purposes of this determination you would be required to adjust the
amount of any qualified dividend income we pay to you, while such dividends are
subject to the 15% maximum tax rate described above, to account for the
difference between the 15% maximum tax rate and ordinary U.S. federal income tax
rates. You may carry back any excess foreign taxes to the two preceding tax
years and then carry any remaining excess foreign taxes forward five subsequent
tax years to reduce your U.S. federal income tax payable on foreign source
income in the same category that is not otherwise offset by a foreign tax
credit. The consequences of the separate limitation calculation will depend on
the nature and sources of your income and the deductions allocable to that
income. You should consult with your tax advisor regarding the use of foreign
tax credits.
In lieu of claiming a credit, you may claim all foreign tax that you
paid during a particular taxable year as an itemised deduction. A deduction does
not reduce your U.S. federal income tax on a dollar for dollar basis like a tax
credit. The deduction, however, is not subject to the category limitations
described above regarding foreign tax credits.
Sale or Other Taxable Disposition of Ordinary Shares or ADSs. Upon
the sale, exchange or other taxable disposition of an Ordinary Share or an ADS,
you will recognise gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the fair market value of property you
receive in exchange for the Ordinary Share or ADS and your adjusted tax basis in
the Ordinary Share or ADS. Except to the extent of any accrued market discount
in respect of an Ordinary Share or ADS accounted for upon conversion of a
convertible note, this gain or loss will be a capital gain or loss, and will be
long-term capital gain or loss if you held the Ordinary Share or ADS for more
than one year. If you are an individual, the long-term capital gain will
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generally be subject to U.S. federal income tax at a maximum rate of 20% (15%
for gains properly taken into account during the period beginning on 6 May 2003
and ending with the end of your taxable year that begins in 2008). Under most
circumstances, the gain or loss from the sale or exchange of Ordinary Shares or
ADSs will be treated as U.S. source income or loss for U.S. foreign tax credit
purposes.
The surrender of ADSs in exchange for Ordinary Shares will not be a
taxable event for U.S. federal income tax purposes. Accordingly, you will not
recognise any gain or loss upon that surrender and exchange.
Passive Foreign Investment Company Status. If we were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would apply to holders of Ordinary Shares or ADSs. These special rules are
discussed below.
Constructive Distributions
Section 305 of the Internal Revenue Code generally treats as a
taxable distribution actual or constructive distributions of stock with respect
to stock, and for this purpose stock includes warrants to purchase stock or
convertible securities. If you hold a convertible note, Treasury regulations
will generally treat you as having received a constructive distribution when the
conversion price of the notes is adjusted to reflect taxable distributions with
respect to the class of stock into which the notes are convertible. Similarly,
you may be treated as receiving a taxable constructive distribution with respect
to a warrant as a result of an adjustment in the exercise price of your warrant,
or in the number of shares of Ordinary Shares or ADSs purchasable upon exercise
of that warrant. In addition, our failure to adjust fully the conversion prices
of convertible notes or warrants, or the shares purchasable by those warrants,
to reflect distributions of stock with respect to Ordinary Shares and ADSs, may
give rise to a deemed taxable stock distribution of Ordinary Shares and ADSs. In
sum, an adjustment or lack of adjustment in the conversion prices of the
convertible notes or warrants may give rise to a deemed taxable stock
distribution in respect of either the convertible notes, the warrants, the
Ordinary Shares or the ADSs.
Foreign Personal Holding Company
We believe that neither we nor any of our subsidiaries will be
classified as a foreign personal holding company under U.S. federal income tax
laws. If we or one of our subsidiaries were so classified, you generally would
be required to include in income as a dividend each year your proportionate
share of our or our subsidiary's undistributed foreign personal holding company
income. We or one of our subsidiaries will be classified as a foreign personal
holding company if:
o Ordinary Shares or ADSs representing more than 50% of the total
voting power of all classes of our stock entitled to vote, or more
than 50% of the total value of our stock,
o is owned, directly or indirectly, by five or fewer U.S. citizens or
residents, taking into account applicable constructive ownership
rules, and
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o at least 60% of our gross income or the gross income of one of our
subsidiaries consists of foreign personal holding company income.
Foreign personal holding company income generally includes dividends, interest,
rents, royalties and gains from the sale of stocks, securities or commodities.
We believe that we and our subsidiaries may meet the above ownership
requirement, but that we will fail the above income requirement for the reasons
discussed in more detail below. Accordingly, we expect that we and our
subsidiaries will not be treated as foreign personal holding companies for U.S.
federal income tax purposes.
Our principal subsidiaries and affiliates that are conducting
business operations in the U.K., Germany, France, Austria, the Netherlands,
Sweden, Norway, Ireland, Portugal and Finland, as well as intervening holding
companies, are classified as branches for U.S. federal income tax purposes. We
will thus be treated for U.S. federal income tax purposes as directly
recognising 100% of the income of these principal U.K., German, French,
Austrian, Dutch, Swedish, Norwegian, Irish, Portuguese and Finnish operating
entities, which we believe has consisted and will predominantly consist of
active business income. Accordingly, we believe that we will fail to meet the
foreign personal holding company income requirement, and so we will not be
treated as a foreign personal holding company for U.S. federal income tax
purposes.
Our subsidiaries that are classified as branches for U.S. federal
income tax purposes are not classified as corporations and hence cannot be
foreign personal holding companies. As to each of our subsidiaries which is not
classified as a branch but rather is classified as a corporation for U.S.
federal income tax purposes, we believe that each of these subsidiaries has not
met the foreign personal holding company income requirement described above, and
that each of these subsidiaries will not meet that requirement in the future.
However, we cannot provide any assurance that applicable tax law or other
relevant circumstances will not change in a manner which adversely affects the
determination of foreign personal holding company status.
Passive Foreign Investment Company
Summary
Special U.S. federal income tax rules apply to U.S. holders that own
shares of a passive foreign investment company, commonly known by its acronym,
PFIC. We believe that we might have been a PFIC for 2002, and that there is a
possibility that we may be classified as a PFIC for 2003. We do not believe we
were a PFIC for any period prior to 2002. If we are classified as a PFIC, U.S.
holders of our Ordinary Shares, ADSs, warrants and convertible notes at any time
during the taxable year could be subject to additional taxes and an interest
charge. This adverse consequence of becoming a PFIC could be reduced provided
U.S. holders elect one of two alternative tax regimes as described below and we
agree to provide the required financial information. However, holders of our
warrants and convertible notes are limited in their ability to elect the two
alternative tax regimes.
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The PFIC rules are particularly complex and we suggest that you
consult your tax advisor regarding the PFIC rules and their U.S. tax
consequences to holders of Ordinary Shares, ADSs, warrants and convertible
notes.
Discussion
We will be considered a PFIC for any taxable year in which 75% or
more of our gross income is passive income or in which 50% or more of the
average value of our assets is attributable to what are considered passive
assets. Passive income generally consists of interest, dividends, rents, and
royalties. Passive assets are assets that produce passive income or that we hold
for the production of passive income. The asset test is applied by determining
the percentage of passive assets for each quarter of our tax year and then
averaging those percentages. Our tax year is the calendar year. While the U.S.
holder ultimately makes the determination concerning our PFIC status,
legislative history to the PFIC rules indicates that determining whether we are
a PFIC under the asset test can generally be done by assuming the value of our
assets equals the market capitalisation of our equity plus the value of our
liabilities. However, there are no regulations or other guidance from the IRS on
the subject, and we cannot provide any assurance that the IRS will not challenge
this method.
We believe we are at risk of being a PFIC in 2002 and 2003 because
the average percentage of our passive assets (cash and short-term investments)
might have equalled or exceeded (and might equal or exceed) 50% of the value of
all of our assets. If we use the general method described above and value our
traded debt at its market price, we believe the average percentage of passive
assets would have exceeded 50% and therefore we would have been a PFIC for 2002
and that we might be a PFIC for 2003. However, if we use the book value of our
traded debt instead of its market price, we believe we would not have been a
PFIC for 2002, and probably would not be one for 2003. It might be proper to use
the book value of our traded debt because the value of our common stock has
arguably been reduced by the book value and not market value of our liabilities,
and because the legislative history that describes the general method does not
indicate whether or not to use book value or market price of any traded
liabilities.
Whether or not we have been or will be a PFIC is a factual
determination that must be made separately for each calendar year, and we cannot
guarantee that the IRS will agree with our methodology for ascertaining PFIC
status or with our ultimate determination. In addition, the calculation to
determine whether we are classified as a PFIC for the calendar year cannot be
made until after the close of the year, when the financial information for the
year ended December 31 has been finalised. Also, we cannot provide any assurance
that the applicable tax law or other relevant circumstances will not change in a
manner which affects our PFIC status determinations.
If we are a PFIC, then one or more of our subsidiaries could also
become a PFIC if the subsidiary is treated as a corporation for U.S. federal
income tax purposes, rather than as an entity disregarded from its sole owner,
and the subsidiary itself meets either the income or asset test for PFIC status.
We believe that none of our current subsidiaries is a PFIC and that none of the
subsidiaries we establish in the future will be PFICs. However, if that were
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to change, additional, special rules would apply, and we would attempt to inform
you which of our subsidiaries has in our estimation become a PFIC.
If we are a PFIC for a taxable year, then each of the direct and
certain indirect shareholders holding our Ordinary Shares or ADSs at any time
during that taxable year could be subject to an increased tax liability,
possibly including an interest charge, under the default U.S. federal income tax
regime for PFICs. Alternatively, you might avoid some of the increased tax
liability if you elect to be treated under one of two alternative elective tax
regimes. These three different tax regimes for PFIC shareholders are discussed
in more detail below.
Under the PFIC rules, holders of our warrants and convertible notes
are treated as holders of options to purchase Ordinary Shares or ADSs. Under
proposed Treasury regulations, the default tax regime governing PFIC
shareholders applies to holders of options to acquire our Ordinary Shares and
ADSs with respect to dispositions of options to purchase stock, and to
dispositions of stock acquired upon exercise of an option. Treasury regulations
deny option holders the ability to use the elective Qualified Electing Fund tax
regime discussed below, and it is not clear to what extent option holders could
make use of the elective mark to market tax regime discussed below. If you hold
our warrants or convertible notes, you should consult your tax advisor about the
consequences of holding our warrants or convertible notes if we become a PFIC.
The following discussion focuses on the consequences for holders of our Ordinary
Shares and ADSs that did not acquire these interests by exercise of a warrant,
convertible note, or other option.
Default Tax Regime. If we are a PFIC and you do not elect out of
being taxed under the default tax regime, then you will be subject to a special
tax calculation if you sell or dispose of your Ordinary Shares or ADSs at a
gain.
Under the default regime's special tax calculation, you must take
your gain and prorate it over every day of your holding period for the disposed
Ordinary Shares or ADSs. Then you must sum up the daily portions of prorated
gain for each of your taxable years during the holding period. Amounts allocated
to the year of disposition and to years prior to the first year in which we
became a PFIC would then be taxed as ordinary income in the year of your
disposition. For amounts allocated to years prior to the year of disposition and
during or after the year we first became a PFIC, the gain would not be taxable
as income received in the year of disposition. Instead, you would be required to
apply the highest ordinary income tax rate possibly applicable to you in that
earlier year to the amount of gain allocated to that year, and then you would
accrue interest on that tax amount as if it were an item of unpaid income tax
from that prior year. You would then add the tax and interest charge for all of
the affected, earlier years to the rest of your income tax for the year of
disposition. The interest charge relates to a debt to pay U.S. federal income
tax, so if you are not a corporation, your interest expense would be personal
interest expense, and not deductible for U.S. federal income tax purposes. This
special tax regime also applies to distributions you receive from us with
respect to Ordinary Shares or ADSs that exceed a formula threshold amount, but
we do not discuss those rules in any detail here because at this time we do not
anticipate making any such distributions.
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If we become a PFIC, then under the default tax regime you would be
required to continue to treat us as a PFIC even if in a later tax year we no
longer met the asset or income test that originally made us a PFIC. To terminate
the effect of the default tax regime if we cease to be a PFIC, it would be
necessary for you to elect to recognise gain as of the last day of the last year
in which we were still a PFIC.
Through statute and proposed regulations, "disposition" with respect
to stock of a PFIC has been defined under the default tax regime to include
transactions that are normally not income or gain recognition events for U.S.
federal income tax purposes. One rule is that a pledge of your Ordinary Shares
or ADSs as collateral for a loan is considered a disposition for the amount of
the loan. The rules and exceptions to these PFIC rules are complex, and you
would have to consult your tax advisor as to whether you have effected a taxable
deemed disposition of our Ordinary Shares or ADSs if we become a PFIC and you do
not make either election discussed below.
Qualified Electing Fund Election. If we are a PFIC, then with our
cooperation you can elect, generally with your timely filed income tax return,
to treat your investment in our Ordinary Shares or ADSs as an investment in a
qualified electing fund, commonly referred to as a QEF, for the year of your
election and for all subsequent years. Under a QEF election you must for each of
your taxable years report as gross income your pro rata share of our net capital
gain (which is the excess of net long-term capital gain over any net short-term
capital loss), but not more than our earnings and profits, for our taxable year
that ends within or with your taxable year. If our earnings and profits for that
taxable year exceed net capital gain, you must also report as gross income your
pro rata share of earnings and profits for the year less any net capital gain.
You would report any net capital gain as long-term capital gain and any earnings
and profits in excess of net capital gain as ordinary income. If we do not have
earnings and profits in a given year we are a PFIC, a U.S. holder who has made a
timely QEF election would not be required to include any amount in income. If it
appears that we will be classified as a PFIC for the year, we will, upon
request, provide the annual information statement and provide access to and
copies of our financial records in order to establish that we have properly
calculated your pro rata shares of ordinary earnings and net capital gain in
accordance with U.S. federal income tax principles. You would generally increase
your income tax basis in your Ordinary Shares or ADSs by the amounts required to
be included in income under the QEF election. A QEF election would remain
effective even if we ceased to be a PFIC and then became a PFIC again in a later
tax year, although the QEF inclusion rules would not apply for any year in which
we were not a PFIC. Once you make a QEF election you can revoke it only with the
consent of the IRS.
In conjunction with your QEF election, you can also elect to defer
payment of your resulting marginal federal income tax on the excess of the
amounts you must include in income pursuant to the election over the
distributions, if any, you receive. You generally must make this election on a
timely filed U.S. federal income tax return for the year in which these
conditions apply. In addition, there are certain situations where your election
with respect to a deferred tax would generally be terminated.
If you made a timely QEF election with respect to either the first
year in which you acquired our Ordinary Shares or ADSs or the first year in
which we became a PFIC, then the default tax regime for PFICs discussed above
would not apply to a disposition of your Ordinary Shares or ADSs. If for any
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portion of your holding period we were a PFIC but your QEF election was not yet
effective, then the default regime would still apply to any dispositions, and to
any distributions, all as discussed above. In addition, you would still be
required to treat us as a PFIC in years for which we were not otherwise too
passive under the PFIC income and asset tests, whereas a QEF election would
otherwise allow you to treat us as a non-PFIC for years in which we did not meet
those tests. If you make a QEF election for a taxable year which is not the
first year of your holding period and we became a PFIC before the year for which
you make this election, then to avoid the default tax regime in the future, you
generally must report any gain you have in Ordinary Shares or ADSs under the
default tax regime as if you sold them for their fair market value on the first
day of the first year in which your QEF election becomes effective.
Mark to Market Election. An alternative to the QEF election
discussed above is an election to recognise gain and, under limited
circumstances, loss as if you had disposed of your Ordinary Shares or ADSs on
the last day of each taxable year. You can make this election only if our
Ordinary Shares and ADSs are considered marketable stock, which is stock
regularly traded on a national securities exchange in the United States or in
any other exchange which has rules and standards to prevent manipulation of
stock prices so that the quoted prices for our Ordinary Shares or ADSs represent
a legitimate and sound fair market value. We believe that our Ordinary Shares
and ADSs regularly trade on such markets so that they would constitute
marketable stock, although we cannot guarantee that the IRS will agree with our
determination.
Under the mark to market election, you would compare the value of
your Ordinary Shares or ADSs at the end of your tax year to your adjusted tax
basis in the Ordinary Shares or ADSs. If the fair market value exceeds basis,
you must include the excess as ordinary income on your U.S. federal income tax
return for that year, regardless of whether you received any distributions on or
disposed of your Ordinary Shares or ADSs. In addition, if you actually sell or
otherwise dispose of your stock during the year, any gain you realise is taxable
as ordinary income. "Disposition" for this purpose might include a gift, a
transfer by reason of death, or a pledge of the Ordinary Shares or ADSs, and you
should consult your tax advisor about whether you have disposed of our Ordinary
Shares or ADSs for this purpose. If your tax basis exceeds the value, then you
can report that loss as an ordinary loss on your federal income tax return, but
limited to any cumulative mark to market gains (net of allowed mark to market
losses) reported in prior tax years under this election. Your tax basis in your
Ordinary Shares or ADSs is increased by the amount of gain you must report and
reduced by losses allowed under this election. Special rules apply if you were
to recognise gain or loss on Ordinary Shares or ADSs you own indirectly or if
you became a U.S. holder in the year in which you make the election. Your gain
or loss allowed would be sourced as domestic or foreign source income as if you
had actually sold your Ordinary Shares or ADSs. By electing to mark your
Ordinary Shares or ADSs to market, you would avoid being taxed under the default
tax regime for PFICs upon an actual disposition of the Ordinary Shares or ADSs
or for any distributions received on them, except as discussed below.
You would make the mark to market election with your U.S. federal
income tax return for the first year you desire it to apply to your Ordinary
Shares or ADSs. The election would apply to that year and to all subsequent
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tax years while you hold our Ordinary Shares or ADSs until the earlier of the
year in which our Ordinary Shares and ADSs cease to be marketable stock or for
which you request to revoke the election, which requires the consent of the IRS.
Special rules apply if you make this election for a tax year which is not the
first year of your holding period.
Backup Withholding and Information Reporting
If you hold a senior note, unit, discount note, convertible note,
warrant, Ordinary Share or ADS, you may be subject to information reporting and
backup withholding of U.S. federal income tax, currently at a 28% rate with
respect to cash payments in respect of OID, interest, dividends or the gross
proceeds from dispositions. However, you will not be subject to backup
withholding if you properly execute, under penalties of perjury, an IRS Form W-9
or a substantially similar form in which you provide your correct taxpayer
identification number, certify that it is correct, certify that you are a U.S.
person, and certify as to one of the following conditions: (1) you are not
subject to backup withholding because you are a corporation or come within
another enumerated exempt category, (2) you have not been notified by the IRS
that you are subject to backup withholding, or (3) you have been notified by the
IRS that you are no longer subject to backup withholding.
If you do not provide your correct taxpayer identification number on
the IRS Form W-9 or a substantially similar form, you may be subject to
penalties imposed by the IRS. Unless you have established on a properly executed
IRS Form W-9 or a substantially similar form that you are a corporation or come
within another enumerated exempt category, interest, dividends and other
payments paid to you during the taxable year, and the amount of tax withheld, if
any, will be reported to you and to the IRS.
Amounts withheld under backup withholding are generally not an
additional tax and may be refunded or credited against your U.S. federal income
tax liability, provided you furnish the required information to the IRS. You
should be exempt from backup withholding with respect to cash payments in
respect of OID, interest, dividends or the gross proceeds from the disposition
of any instruments you hold if, for example, you are a corporation or financial
institution. You should consult your tax advisor as to your qualification for
exemption from backup withholding and the procedure for obtaining that
exemption.
F. Dividends And Paying Agents
Not Applicable.
G. Statement By Experts
Not Applicable.
H. Documents on Display
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and file reports and other information with the
Securities and Exchange Commission. You may examine the reports and other
information filed by us, without charge, at the public reference facilities
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maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also receive copies of these materials by mail from the SEC's Public Reference
Branch at 450 Fifth Street, N.W., Washington, D.C., 20549. For more information
on the public reference rooms, call the SEC at 1-800-SEC-0330 or visit their web
site at www.sec.gov.
I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We operate a centralised treasury function, the prime objective of
which is to manage both our working capital and capital expenditure
requirements. In addition to liquidity risks, the principal financial risks to
which we are exposed arise from volatility in foreign currency exchange rates
and interest rates. Our Board regularly reviews these risks and approves
associated risk management policies, including treasury strategy.
Liquidity Risk
We have financed our operations through a mixture of issued share
capital and long term convertible and non-convertible debt. The proceeds from
these issues are placed on short term deposit prior to being invested in the our
operating companies to fund operations and expansion. During 2002, we cancelled
our (pound)75 million bank facility. In addition to the financial instruments
issued to finance our operations and expansion, we hold other financial
instruments in the normal course of business such as instruments representing
trade debt and trade credit.
Other than as discussed below, we do not use, and have no current
intention to use, any other derivative financial instruments.
Foreign currency risk
We are exposed to fluctuations in foreign currencies as our
revenues, costs, assets and liabilities are, for the most part, denominated in
local currencies. To manage this exposure, our strategy is to raise financing in
a combination of British pounds and Euro denominated instruments to the extent
possible in proportion to its existing net investment and committed capital
expenditure in those currencies, offsetting currency differences arising with
similarly denominated borrowings.
In addition to the financing raised in British pounds and Euros, we
hold U.S. dollars as a result of issuing shares and senior discount notes in the
United States. We remain exposed to currency fluctuations between British pounds
and the U.S. dollar on relative balances of outstanding senior discount notes
and U.S. dollar denominated cash and liquid resources.
Under our bank facility agreement, we were required to maintain
financial hedging instruments to offset exchange rate risk with respect to
payments required on U.S. dollar denominated senior discount notes during the
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term of the facility. The financial hedge instruments were disposed of following
cancellation of this facility. From time to time, we have entered into forward
contracts to purchase foreign currencies to fund a portion of our capital
expenditure in those currencies. At 31 December 2002, no such contracts were
outstanding.
Interest rate risk
We have managed risks associated with fluctuating interest rates by
raising debt at fixed rates. Furthermore, by raising some debt as convertible
debt, interest exposure on debt is further reduced. While fixed rate debt
removes the cash flow risks associated with changing interest rates it does
expose us to a level of market risk if rates alter significantly. As interest is
earned on cash deposits and liquid resources at variable as well as fixed rates,
changes in interest rates will have an impact on the amount of interest income
earned.
Concentration of credit risk
Financial instruments which potentially subject us to concentration
of credit risk consist principally of accounts receivable and cash and
investments in liquid resources. Management believes the concentration of credit
risk associated with accounts receivable is minimised due to distribution over
many customers and different industries and risks associated with our cash are
mitigated by the fact that these amounts are placed in what management believes
to be high quality financial institutions. We have not experienced any losses to
date on our deposited cash.
Sensitivity Analysis
As a result of the procedures we have implemented to manage foreign
currency exchange and interest rate risk as described above, a 10% change in the
value of British pounds relative to other currencies would lead to a
corresponding change in the fair value of its foreign currency denominated
financial instruments of approximately (pound)3.0 million. A 10% change in
interest rates across all maturities would lead to a corresponding change in our
earnings of approximately (pound)6.4 million based on the interest bearing
assets and liabilities held during 2002.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
PROCEEDS
Not applicable.
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ITEM 15. CONTROLS AND PROCEDURES
a) Within the 90 days prior to the date of this report, our
management carried out an evaluation, under the supervision and with the
participation of our President and Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based
upon that evaluation, our President and Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC filings.
b) There have been no significant changes in our internal controls
or in other factors that could significantly affect those controls since our
evaluation of these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 16. RESERVED
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
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FINANCIAL STATEMENTS
ITEM 18. Financial Statements
2002
Annual Report
Pages
Incorporated by reference from the 2002 Annual Report
Group Profit and Loss Account for the years ended 31 December
2000, 31 December 2001 and 31 December 2002 47
Group Balance Sheet at 31 December 2001, and 31 December
2002 49
Group Cash Flow Statement for the years ended 31 December
2000, 31 December 2001 and 31 December 2002 50
Group Statement of Total Recognised Gains and Losses for the
years ended 31 December 2000, 31 December 2001 and 31
December 2002 48
Group Reconciliation of Changes in Equity Shareholders' Funds
for the years ended 31 December 2000, 31 December 2001
and 31 December 2002 48
Notes to Financial Statements 51 to 84
The Financial Statements listed in the above index, which are included in
the 2002 Annual Report of COLT Telecom Group plc, are hereby incorporated by
reference. With the exception of the pages listed in the above index (a subset
of which are also incorporated by reference in Items 5 and 6 of this Report),
the 2002 Annual Report is not deemed filed as part of this Report.
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Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts
(thousands of pounds sterling)
Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deduction (a) period
- -------------------------------------------------------------------------------------------------------------------
Year 2002
Allowance for doubtful debts (pound)22,884 (pound)22,464 (pound)(1,465) (pound)43,883
Year 2001
Allowance for
Doubtful debts (pound)11,558 (pound)12,222 (pound) (896) (pound)22,884
Year 2000
Allowances for doubtful debts (pound) 7,654 (pound) 4,774 (pound) (870) (pound)11,558
Year 2002
Deferred tax
valuation allowance (pound)206,528 (pound)167,071 -- (pound)373,599
Year 2001
Deferred tax
valuation allowance (pound)101,514 (pound)105,014 -- (pound)206,528
Year 2000
Deferred tax
valuation allowance (pound)55,444 (pound)46,070 -- (pound)101,514
<FN>
(a) Amounts written off as uncollectable, net of recoveries
</FN>
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ITEM 19. EXHIBITS
Exhibit
Number Exhibit
- ------- -------
1.1 Memorandum of Association (Incorporated by reference to the Exhibits to
the Company's Annual Report on Form 20-F (No. 0-28970) for the year
ended December 31, 1996.)
1.2 Articles of Association, as amended (Filed herewith.)
2.1 Indenture, dated December 17, 1996, relating to Senior Discount Notes
due 2006, including the Form of 1996 Discount Note (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1996.)
2.2 Indenture, dated November 26, 1997, relating to the(pound)50,000,000 10
1/8% Senior Notes including the Form of Note (Incorporated by reference
to the Exhibits to the Company's Annual Report on Form 20-F (No.
0-28970) for the year ended December 31, 1997.)
2.3 Indenture, dated November 26, 1997, relating to the DM150,000,000 8
7/8% Senior Notes including the Form of Note (Incorporated by reference
to the Exhibits to the Company's Annual Report on Form 20-F (No.
0-28970) for the year ended December 31, 1997.)
2.4 Indenture, dated July 28, 1998, relating to the DM600,000,000 7.625%
Senior Notes including the Form of Note (Incorporated by reference to
the Exhibits to the Company's Annual Report on Form 20-F (No. 0-28970)
for the year ended December 31, 1998.)
2.5 Indenture, dated August 6, 1998, relating to the DM600,000,000 2%
Senior Convertible Notes including the Form of Note (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1998.)
2.6 Indenture, dated March 29, 2003, relating to the(euro)295,000,000
Senior Convertible Notes including the Form of Note (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1998.)
2.7 Indenture, dated December 16, 1999, relating to the(euro)368,000,000 2%
Senior Convertible Notes including the Form of Note (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1999.)
2.8 Indenture relating to the(euro)320,000,000 7.625% Senior Notes
including the Form of Note (Incorporated by reference to the Exhibits
to the Company's Annual Report on Form 20-F (No. 0-28970) for the year
ended December 31, 1999.)
2.9 Indenture, dated April 3, 1999, relating to the(euro)402,500,000 2%
Senior Convertible Notes including the Form of Note (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1999.)
2.10 Deposit Agreement, dated December 17, 1996, relating to the Senior
Discount Notes due 2006 (Incorporated by reference to the Exhibits to
the Company's Annual Report on Form 20-F (No. 0-28970) for the year
ended December 31, 1996.)
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Exhibit
Number Exhibit
- ------- -------
2.11 Deposit Agreement, dated November 26, 1997, relating to the 10 1/8% and
8 7/8% Senior Notes (Incorporated by reference to the Exhibits to the
Company's Annual Report on Form 20-F (No. 0-28970) for the year ended
December 31, 1997.)
2.12 Deposit Agreement, dated December 17, 1996, including Form of American
Depository Receipt (Incorporated by reference to the Exhibits to the
Company's Annual Report on Form 20-F (No. 0-28970) for the year ended
December 31, 1996.)
2.13 Deposit Agreement, dated July 28, 1998, relating to the DM600,000,000
7.625% Senior Notes (Incorporated by reference to the Exhibits to the
Company's Annual Report on Form 20-F (No. 0-28970) for the year ended
December 31, 1998.)
2.14 Deposit Agreement, dated July 28, 1993, relating to the DM600,000,000
2% Senior Convertible Notes (Incorporated by reference to the Exhibits
to the Company's Annual Report on Form 20-F (No. 0-28970) for the year
ended December 31, 1998.)
2.15 Deposit Agreement, dated March 29, 2003, relating to
the(euro)295,000,000 Senior Convertible Notes (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1998.)
2.16 Deposit Agreement, dated December 16, 1999, relating to
the(euro)368,000,000 2% Senior Convertible Notes (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1999.)
2.17 Deposit Agreement relating to the(euro)320,000,000 7.625% Senior Notes
(Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 20-F (No. 0-28970) for the year ended December 31,
1999.)
2.18 Deposit Agreement, dated April 13, 2000, relating to
the(euro)402,500,000 2% Senior Convertible Notes (Incorporated by
reference to the Exhibits to the Company's Annual Report on Form 20-F
(No. 0-28970) for the year ended December 31, 1999.)
4.1 Registration Rights Agreement, dated as of December 12, 2001, by and
among COLT Telecom Group plc and the Investors named therein
(Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 20-F (No. 0-28970) for the year ended December 31,
2001.)
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Exhibit
Number Exhibit
- ------- -------
4.2 The COLT Performance Share Plan* (Filed herewith.)
4.3 The COLT Deferred Bonus Plan* (Filed herewith.)
8.1 List of Subsidiaries (Filed herewith.)
12.1 Consent of PricewaterhouseCoopers LLP (Filed herewith.)
12.2 Report of PricewaterhouseCoopers LLP (Filed herewith.)
12.3 COLT's 2002 Annual Report (Incorporated by reference to the Company's
Report of Foreign Issuer on Form 6-K filed June 20, 2003, to the
limited extent set forth in Items 5, 6 and 18.)
12.4 Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Furnished herewith.)
12.5 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Furnished herewith.)
* Compensatory plan or arrangement applicable to management and/or employees.
-130-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act 1934, the Registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this annual report to
be signed on its behalf by the undersigned thereunto duly authorised.
COLT Telecom Group plc
(Registrant)
Dated: 27 June 2003 By: /s/ MARK A. JENKINS
Mark A. Jenkins
Legal Services Director
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CERTIFICATIONS
I, Steven P. Akin, certify that:
1. I have reviewed this annual report on Form 20-F of COLT Telecom Group
plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: 25 June 2003
/s/ Steven P. Akin
Steven P. Akin
President and Chief Executive Officer
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CERTIFICATIONS
I, Marina M. Wyatt, certify that:
1. I have reviewed this annual report on Form 20-F of COLT Telecom Group
plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: 27 June 2003
/s/ Marina M. Wyatt
Marina M. Wyatt
Chief Financial Officer
-133-