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 2003
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
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(Exact name of Registrant as specified in its charter)
England
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(Jurisdiction of incorporation or organization)
Beaufort House, 15 St. Botolph Street, London EC3A 7QN, England
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(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; 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:
1,510,153,743 Ordinary Shares, nominal value 2.5p each
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. /X/ Yes / / No
Indicate by check mark which financial statement item the registrant has elected
to follow.
/ / Item 17 /X/ Item 18
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Presentation of financial information
Our Financial Statements included in this 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)," "L", "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 $1.7842 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 2003. See "Exchange Rates" in Item 3 of this report for additional
exchange rate information. On 16 April 2004, the Noon Buying Rate was $1.8004
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 as Note 25
to the Financial Statements referred to above.
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. References to other
companies and organisations in this report include their subsidiaries and
affiliates.
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 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
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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.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
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 our Financial Statements
included in this report. The audited Financial Statements at 31 December, 2001,
2002 and 2003 and for the three fiscal years then ended have been audited by
PricewaterhouseCoopers LLP, Independent Chartered Accountants, as indicated in
their report which is included in 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.
Profit and Loss Account Data
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Amounts in accordance with U.K. GAAP
Year ended 31 December
1999 2000 2001 2002 2003 2003
L'000 L'000 L'000 L'000 L'000 $'000
-------- --------- --------- ---------- ---------- ----------
Turnover 401,552 686,977 905,687 1,027,258 1,166,318 2,080,945
Gross profit (loss) 77,947 120,073 (35,983) (424,686) 194,959 347,846
Operating loss (65,321) (84,913) (359,931) (778,594) (77,047) (137,467)
Loss on ordinary activities before taxation (101,261) (116,860) (360,369) (718,282) (124,647) (222,395)
Loss for year (101,261) (116,860) (360,369) (718,282) (124,647) (222,395)
Basic and diluted loss per share L(0.16) L(0.17) L(0.48) L(0.48) L(0.08) $(0.15)
Dividends declared per share L0.00 L0.00 L0.00 L0.00 L0.00 $0.00
Weighted average number of Ordinary Shares (`000) 631,816 693,385 745,550 1,507,164 1,507,771 1,507,771
Basic and diluted loss per ADS L(0.64) L(0.67) L(1.93) L(1.91) L(0.33) $(0.59)
Dividends declared per ADS L0.00 L0.00 L0.00 L0.00 L0.00 $0.00
Weighted average number of ADSs (`000) 157,954 173,346 186,388 376,791 376,943 376,943
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Amounts in accordance with U.S. GAAP
Year ended 31 December
1999 2000 2001 2002 2003 2003
L'000 L'000 L'000 L'000 L'000 $'000
-------- --------- --------- ---------- ---------- ----------
Turnover 401,552 621,263 878,225 1,026,721 1,172,422 2,091,835
Gross profit (loss) 77,947 90,133 (49,538) (320,864) 201,732 359,930
Operating loss (69,024) (104,532) (362,586) (674,098) (86,497) (154,328)
Loss on ordinary activities before taxation (99,052) (121,924) (344,841) (611,130) (136,980) (244,400)
Loss for year (99,052) (121,924) (344,841) (611,130) (136,980) (244,400)
Basic and diluted loss per share L(0.16) L(0.18) L(0.54) L(0.41) L(0.09) $(0.16)
Dividends declared per share L0.00 L0.00 L0.00 L0.00 L0.00 $0.00
Weighted average number of Ordinary Shares (`000) 631,816 693,385 745,550 1,507,164 1,507,771 1,507,771
Basic and diluted loss per ADS L(0.63) L(0.70) L(2.16) L(1.62) L(0.36) $(0.65)
Dividends declared per ADS L0.00 L0.00 L0.00 L0.00 L0.00 $0.00
Weighted average number of ADSs (`000) 157,954 173,346 186,388 376,791 376,943 376,943
Balance Sheet Data
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Amounts in accordance with U.K. GAAP
At 31 December
1999 2000 2001 2002 2003 2003
L'000 L'000 L'000 L'000 L'000 $'000
-------- --------- --------- ---------- ---------- ----------
Total assets 2,442,181 3,352,188 3,427,792 2,588,930 2,423,038 4,323,184
Creditors falling due after more than one year
(including convertible debt) 1,205,321 1,426,307 1,318,025 1,193,899 1,144,549 2,042,105
Shareholders' equity 1,000,875 1,501,857 1,624,359 955,010 862,893 1,539,575
Amounts in accordance with U.S. GAAP
At 31 December
1999 2000 2001 2002 2003 2003
L'000 L'000 L'000 L'000 L'000 $'000
-------- --------- --------- ---------- ---------- ----------
Total assets 2,441,518 3,382,231 3,475,302 2,738,745 2,560,195 4,567,900
Creditors falling due after more than one year
(including convertible debt) 1,205,321 1,426,307 1,318,025 1,193,899 1,144,549 2,042,105
Shareholders' equity 997,260 1,513,668 1,652,127 1,086,058 982,713 1,753,537
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 $1.7842 per
L1.00, the Noon Buying Rate on 31 December 2003.
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 16 April 2004, the Noon Buying Rate was
$1.8004 per L1.00.
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Period High Low Period Average (1) Period End
- ------ ---- --- ------------------ ----------
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 1.78 1.55 1.65 1.78
2004 (to 16 April) 1.90 1.78 1.84 1.80
<FN>
(1) The average of the Noon Buying Rates on the last day of each full month during the period.
</FN>
The high and low exchange rate for each of the last 6 months was as follows:
Month High Low
----- ---- ---
October 2003 1.70 1.66
November 2003 1.72 1.67
December 2003 1.78 1.72
January 2004 1.85 1.79
February 2004 1.90 1.82
March 2004 1.87 1.79
B. Capitalisation and indebtedness
Not applicable.
C. Reason for the offer and use of proceeds
Not applicable.
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
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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 and products 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
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We have grown rapidly since incorporation as our network expanded. We
expect the growth in our revenues to continue, but the rate of that growth to
decline, as we gain greater utilisation of our existing network. 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.
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We Are Subject To Uncertain And Changing Regulation That Could Change In A
Manner Adverse To Our Business
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The telecommunications industry is highly regulated in all the countries where
we provide services. We are reliant on appropriate and fair regulation and are
required to ensure regulatory compliance to engage in our business. We need
licences, similar permits or to comply with certain conditions and requirements
to carry on our business in each country. Our ability to establish and develop
our networks also depends on such matters. Our ability to continue to provide
services depends on our licences or permissions remaining in force. We cannot
always ensure appropriate and fair regulation or that we will be able to obtain,
maintain or renew licences or permissions to provide our services, or that any
licence or pemissions requirements or related fees charged will be commercially
viable. We may also be the subject of burdensome regulatory requirements imposed
on us by regulators, e.g. including an obligation to pay money into universal
service funds. These matters could have a material adverse effect on our
business, financial condition and operating results.
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
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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 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 our competitors so cancellation of their
business reduces our revenues. These failures also represent an enhanced credit
risk exposure.
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
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Much of our business development, expansion and operation depend on our ability
to obtain licences / 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
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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
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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
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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 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.
If We Fail To Successfully Develop And Implement New Information Technology
Systems In Connection With Our Restructuring, Our Business And Operations Would
Be Negatively Affected
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The telecommunications business in general, and our business in particular, are
heavily dependent on information technology systems. Our re-structuring along
functional lines requires that we develop and implement a number of new
pan-European information technology systems. These systems are required to
enable us to effectively manage many aspects of our business. If the development
and integration of these systems is not completed on a timely basis or do not
meet the needs of our business, our performance, customer service, margin
management and ability to generate management information will be negatively
affected.
Physical Loss Or Damage To One Of Our Major Sites Could Disrupt Our Business
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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 reduce any impact. However, our protection mechanisms may prove
ineffective and our insurance may not provide adequate protection in certain
circumstances, for example the non-availability of insurance cover on damage
caused by terrorism.
Electronic Attack From Hackers Or Computer Viruses Could Disrupt Our Business
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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
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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 always ensure that we will be able to do so. In addition, a small
number of key 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
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Contract management is undertaken using both in-house lawyers and external legal
advisors. However, unduly onerous contracts negotiated with suppliers,
customers, or employees could adversely impact the business.
Failure Of Key Suppliers Could Affect Our Ability To Operate Our Business
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We are reliant on a consistent and effective supply chain to meet our business
plan commitments. Any financial instability of our telecommunications equipment
suppliers or our information technology software suppliers could lead to the
risk of:
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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
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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.
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
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FMR Corp. ("Fidelity") and certain other related persons (the "Fidelity Group")
have voting control of approximately 55.9% 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.
Under the terms of a relationship agreement between us and certain members of
the Fidelity Group, while 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. 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 and to the interests of our other shareholders. 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 Cannot Guarantee That These Will Not
Continue
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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 2003, these operating losses
totalled L79.5 million, before an exceptional operating profit of L2.5 million.
In addition, we had net cash outflow from returns on investments and servicing
of finance, from capital expenditure and financial investment and from
acquisitions and disposals of L439.3 million in 2002 and L180.3 million in 2003.
The decrease in net cash outflow was primarily as a result of reduced purchases
of tangible fixed assets, which decreased from L412.1 million in 2002 to L141.0
million in 2003.
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 may 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.
Failure To Finance Our Capital Requirements Could Adversely Affect Our Business
Plan
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We may require additional capital to finance our investment and working capital
requirements. The extent of our future capital requirements will depend on many
factors, including:
o our ability to sustain and grow profitable revenues,
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o our ability to manage costs and investments effectively,
o acquisitions,
o competition,
o government regulations, and
o exchange rate movements.
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.
Under the terms of a relationship agreement between us and certain members of
the Fidelity Group, while 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. If Fidelity's consent was necessary and we were unable to
obtain their consent, we would be unable to raise additional equity capital. At
16 April 2004, Fidelity had voting control of approximately 55.9% of our
Ordinary Shares.
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
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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 debt financing will also expose us to fluctuations because payments
of principal and interest will be made in British pounds sterling or 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
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At 31 December 2003, our total indebtedness was L1,144.6 million ($2,042.1
million), and our capital and reserves were L862.9 million ($1,540.0 million)
and on 31 March 2004 our total indebtedness was approximately L1,091 million
($2,007 million) and our capital and reserves were L822 million ($1,512
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,
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
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Our ability to meet our debt obligations will depend on the performance of the
business, as well as on 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,
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 (see Note 15
of the Financial Statements) 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 the 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 have no obligations to make any payments under the notes or to make
funds available to us so that we can make payments.
Restrictions on Distributions. 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.
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
-10-
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 sell your shares at or above
the price you paid for them. This may be due to a number of factors, including:
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 investor perception of the telecommunications sector, 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 Of 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 16 April 2004, there were
approximately 1,511 million Ordinary Shares issued of which approximately 844.8
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:
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 Become A Passive Foreign Investment Company In 2002
- --------------------------------------------------------------------------------
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 become a
passive foreign investment company for U.S. federal income tax purposes in 2002.
We believe there is a low probability we could have become a passive foreign
investment company in 2003, and we do not believe we will become one under our
current financial circumstances. We do not believe we
-11-
became a passive foreign investment company in 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.
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 any of our larger
customers, for any reason, could have an adverse impact on our results.
The Current Economic Environment May Worsen, Which Could Adversely Affect Our
Results And Our Ability to Remain In Compliance With Our Debt Covenants
- --------------------------------------------------------------------------------
Any downturn in the global economy may adversely affect our business. While our
strategic plans and budgets take account of the expected state of the global
economy, the depth or duration of any downturn may be more severe or longer in
duration than expected and as a result our financial condition could worsen, and
we could fail to remain in compliance with our financial covenants under our
debt obligations.
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, some of whom offer the
same or similar services in the geographic regions in which we operate, some of
whom have greater financial and
-12-
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 2003, 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 42
network cities and 11 internet solution centres, across Europe.
Capital expenditure was L141.0 million in 2003, compared with L412.1 million in
2002 and L804.3 million in 2001. Approximately 75% of the expenditure in 2003
was directly associated with winning new customers or selling more to existing
customers. The balance was invested in our underlying infrastructure and support
systems in support of our continued drive to further improve quality and
efficiency.
Our registered address is Beaufort House, 15 St. Botolph Street, London EC3A
7QN, England and our telephone number is +44 20 7863 5000.
B. Business Overview
We are a leading pan-European provider of high bandwidth data, internet, voice
and advanced business communications services to business and government
customers across Europe.
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, or SDH, transmission
technology, a synchronous transfer mode, or ATM, cell switched technology and
internet protocol, or 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, or 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 over our Euro-LAN network; (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.
-13-
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 42 cities where we have established
points-of-presence, or POPs.
Our Digital Subscriber Line, or 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, or ISCs, in service, each one integrated into one of our fibre optic
networks, in: Amsterdam, Barcelona, Berlin, Frankfurt, London (2), Paris (2),
Madrid, Milan 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, or 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
2003, we had some 700 customers utilising IPVPN services 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 for
corporations on a local, national and international scale, establishing internet
POPs, as well as creating an overlay network directly connecting major Internet
Service Providers, or ISPs.
-14-
During 2003, we continued to expand our service range. We launched our media
streaming service. This service, directed at the corporate, ISP and the Small to
Medium Enterprise, or SME, 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 2003, we also continued to expand our presence in the metropolitan
markets in Europe and, by the end of 2003, operated metropolitan area networks
in a total of 32 European cities across 13 countries with a further 42 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 are strongly 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 2004.
Based in London, we currently operate networks in 32 cities: Amsterdam, Antwerp,
Barcelona, Berlin, Birmingham, Brussels, Cologne, Copenhagen, Dublin,
Dusseldorf, Frankfurt, Geneva, The Hague, Hamburg, Hanover, Lisbon, London,
Lyon, Madrid, Manchester, Marseilles, Milan, Munich, Paris, Rome, Stockholm,
Stuttgart, Rotterdam, Turin, Valencia, Vienna and Zurich.
Market data in the following sections 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.
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
L372.6 million in 2003. 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 Switzerland.
As at 31 December 2003 we had 5,708 customers and carried 10.4 million
private-wire Voice-grade equivalents, or VGEs, increases of 25% and 19% over the
respective positions at 31 December 2002. During 2003 we carried approximately
1.5 billion switched minutes compared to 1.3 billion in 2002.
Central Region
The Central Region comprises the countries of Austria, Germany and Switzerland.
Our revenues in the region reached L494.4 million in 2003. 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.
As at 31 December 2003 we had 6,838 customers and carried 11.2 million
private-wire VGEs, increases of 20% and 32% over the respective positions at 31
December 2002. During 2003 we carried approximately 3.4 billion switched minutes
compared to 2.6 billion in 2002.
South Region
The South Region comprises the countries of France, Italy, Portugal and Spain.
Our revenues in the region reached L299.3 million in 2003. The total
telecommunications market in our South Region countries is approximately 35.86%
of the total telecommunications market of the E.U. plus Norway and Switzerland.
As at 31 December 2003 we had 7,019 customers and carried 4.9 million
private-wire VGEs, increases of 34% and 57% over the respective positions at 31
December 2002. During 2003 we carried approximately 1.0 billion switched minutes
compared to 0.9 billion in 2002.
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
-15-
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.
Inter-city Network
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 42 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.
-16-
Breakdown of revenues by segment
Year ended 31 December 2003
Corporate
North Region Central Region South Region and Total
eliminations
Turnover L'000 L'000 L'000 L'000 L'000 $'000
- -------- ----- ----- ----- ----- ----- -----
Switched 234,904 360,592 180,336 (73,194) 702,368 1,253,647
Non-switched 182,526 173,935 144,978 (39,035) 462,404 825,021
Other 82 742 584 (132) 1,276 2,277
Inter region
turnover (44,910) (40,866) (26,585) 112,361 -- --
-------------------------------------------------------------------------------------------------
Total 372,602 494,403 299,313 -- 1,166,318 2,080,945
-------------------------------------------------------------------------------------------------
Year ended 31 December 2002
Corporate
North Region Central Region South Region and Total
eliminations
Turnover L'000 L'000 L'000 L'000 L'000 $'000
- -------- ----- ----- ----- ----- ----- -----
Switched 213,025 309,458 164,871 (63,971) 623,383 1,112,240
Non-switched 155,963 151,317 123,427 (28,654) 402,053 717,343
Other 65 1,330 485 (58) 1,822 3,251
Inter region
turnover (37,543) (32,300) (22,840) 92,683 - -
-------------------------------------------------------------------------------------------------
Total 331,510 429,805 265,943 - 1,027,258 1,832,834
-------------------------------------------------------------------------------------------------
Year ended 31 December 2001
Corporate
North Region Central Region South Region and Total
eliminations
Turnover L'000 L'000 L'000 L'000 L'000 $'000
- -------- ----- ----- ----- ----- ----- -----
Switched 222,670 262,749 125,646 (78,418) 532,647 950,349
Non-switched 132,920 147,543 102,067 (15,825) 366,705 654,275
Other (1) 158 5,860 456 (139) 6,335 11,303
Inter region
turnover (42,822) (35,810) (15,750) 94,382 - -
-------------------------------------------------------------------------------------------------
Total 312,926 380,342 212,419 - 905,687 1,615,927
-------------------------------------------------------------------------------------------------
<FN>
(1) Central Region "Other" includes infrastructure sales of L3,829,000.
</FN>
Segmental analysis by customer type
Year ended 31 December 2003
Corporate Wholesale Total
L'000 L'000 L'000 $'000
Switched 336,980 365,658 702,638 1,253,647
Non-switched 354,794 107,610 462,404 825,021
-17-
Corporate Wholesale Total
L'000 L'000 L'000 $'000
Other 909 367 1,276 2,278
------------------------------------------------------------
Total 692,683 473,635 1,166,318 2,080,945
------------------------------------------------------------
Year ended 31 December 2002
Corporate Wholesale Total
L'000 L'000 L'000 $'000
Switched 294,757 328,626 623,383 1,112,240
Non-switched 288,962 113,091 402,053 717,343
Other 1,040 782 1,822 3,252
------------------------------------------------------------
Total 584,759 442,499 1,027,258 1,832,834
------------------------------------------------------------
Year ended 31 December 2001
Corporate Wholesale Total
L'000 L'000 L'000 $'000
Switched 231,191 301,456 532,647 950,349
Non-switched 225,673 141,032 366,705 654,275
Other 615 5,720 6,335 11,303
------------------------------------------------------------
Total 457,479 448,208 905,687 1,615,927
------------------------------------------------------------
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, regulatory
conditions 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, or 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.
-18-
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.
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 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, or 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 Synchronous Digital
Hierarchy, or 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.
-19-
COLT EuroCell. COLT EuroCell provides transport of Asynchronous Transfer Mode,
or 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, or Constant Bit Rate, and VBR-nrt, or 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.
COLT Euroframe. COLT Euroframe is a Frame Relay service for data networking
available via a user network interface, or UNI, connected by Permanent Virtual
Circuits, or 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 Internet Protocol Network, or IPN, 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 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, or ISC.
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 a Service Access Point, or SAP,
application. This service is located in our highly secure and 24 x 7 x 365
monitored ISC.
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.
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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) and 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 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
above, 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. 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
-21-
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.
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 constantly, often
resolving problems before any service interruption occurs.
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, or 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 own
-22-
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 constantly, 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.
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."
-23-
Billing and Information Systems
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.
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, 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, 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, MCI
WorldCom and SOLPA 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 in
Portugal. We also face competition in France from Cegetel, LDCom/Neuf Telecom
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 Auna, JazzTel and Uni2. In Portugal, competition is relatively limited,
but we also face competition from entrants, mainly from ONI.
Regulatory Environment
We believe we have obtained all national and local government authorities,
permits or licences or comply with all conditions 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
-24-
On 25 July 2003, the European Union, or E.U., regulatory framework for
electronic communications (a concept encompassing telecommunications, cable TV
and broadcast transmission services) came into force. The new framework
represents a complete overhaul of the previous regulatory regime and reduces the
previous legal measures from 28 to 8. It aims to create a regime that will
reflect the current state of competition and take into account developing
markets and technological change. 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 on
communications markets within the E.U., and is based on concepts that are
identical to those employed in general competition law. The main measures
include the Authorisation Directive; the Access and Interconnection Directive;
the Universal Service Directive; and an over-arching Framework Directive. The
Framework Directive identifies the "candidate" markets that the European
Commission believe may require specific regulatory attention and introduces the
concept of "Significant Market Power", or SMP. It is complimented by a separate
Recommendation listing the markets that are considered "relevant", i.e. which
the European Commission considers to be candidates for ex-ante sector-specific
regulation, on the grounds that there may be structural competition problems
("Recommendation on Relevant Product and Service Markets within the electronic
communications sector susceptible to ex ante regulation in accordance with the
Framework Directive") and by Guidelines aimed at assisting National Regulatory
Authorities, or NRAs, in the Member States in designating SMP operators
("Guidelines on market analysis and the assessment of significant market power
under the Community regulatory framework for electronic communications networks
and services"). Both instruments are soft law instruments that are not legally
binding. In the future, this package will be supplemented by non-binding
guidance (soft law) to NRAs on the remedies to impose on SMP operators.
Under the new regulatory framework, NRAs will no longer grant individual
licences. Instead, general authorisations will allow any organisation to build
networks and offer services, subject only to general conditions that are
applicable to all operators.
Moreover, NRAs in each Member State are responsible for reviewing the
competitiveness of the markets identified by the Commission, taking utmost
account of the Guidelines and the Recommendation. If they find that there is a
SMP in a market, and that competition law is not likely to be sufficient to
address any problems that result from that SMP, they will be required to impose
appropriate and proportionate obligations on the firms identified as having SMP.
In line with the principle of subsidiarity, the implementation of E.U.
directives and policy remains different in every E.U. Member State, but the
intent and spirit of liberalisation has now been broadly adopted and the new
framework has introduced additional features aimed at enhancing harmonisation.
These elements are on the one hand the setting up of the European Regulators
Group, or ERG, an advisory body bringing together all the NRAs and aiming to
consult with the Commission on best practices in implementing the new regulatory
framework; and on the other hand the so-called Article 7 Consultation and
Transparency mechanism (referring to the procedure set in place by Art. 7 of the
Framework Directive), whereby NRAs are required to notify NRAs in other Member
States and the European Commission of draft measures relating to market
definition, SMP designation and remedies if such draft measures would affect
trade between Member States. NRAs and the Commission have the opportunity to
comment within one month and the Commission even has the power to issue a veto,
where such measures seek to define markets other than those defined in the
Recommendation or in relation the designation of operators with SMP, where and
when the Commission considers that the measures would affect trade between
Member States or if the Commission has serious doubts as to its compatibility
with Community law and in particular the policy objectives listed in Article 8
of the Framework Directive.
The telecommunications regulatory regimes in each of the countries in which we
are currently operating therefore have increasingly common features. However,
although E.U. Member States were 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, many Member States did
not meet this deadline. Details of the progress towards implementation in our
major countries are given below.
-25-
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.
We are currently not subject to regulatory constraints on the retail prices we
charge to our end-user customers, although the dominant PTO may be subject to
retail price controls under each national regulatory regime, which result in a
price ceiling on the market. We are at present not subject to regulatory
constraints on the wholesale prices we charge to other operators, but this may
be subject to change, in particular as regards incoming calls on our network and
leased line terminating segments (potentially including Ethernet and other
non-switched data services). For these activities, we might in the future become
the subject of regulatory attention/scrutiny in every E.U. Member State, and
potentially obligations to publish terms and conditions, and in some cases
possibly requirements of non-discrimination and cost-based pricing. It is
however difficult to anticipate if this could result in any material adverse
change to our revenues or margins, as the implementation process is not
finalised in any Member State. Early indications are that Member States do not
intend to impose cost-based pricing on operators such as us for any service.
North Region
Belgium
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 nationwide voice
telephony licence. With the new regime, the Regulator has published two
communications to install the new authorisation regime by notification.
Currently, our infrastructure and voice telephony licence remain valid.
The Government is considering the activation of the Universal Service Obligation
Fund in Belgium.
Denmark
In Denmark, no licence, authorisation, registration or other procedure is
applicable for conducting fixed network telecommunications activities. The
European package has been implemented by Act No 450 of 10 June 2003 and entered
into force on 25 July 2003. Moreover, certain provisions of the Framework
Directive (2002/21/EC) and the Authorisations Directive (2002/20/EC) are
reflected in Act No 421 of 6 June 2002 on Radio Frequencies, which entered into
force on 1 July 2002. The regulator is late in its market analysis process, as
it is only in the first stage of data collection in order to analyse the
markets. It is therefore difficult to assess the impact in practice of the new
regulatory framework on us but little disruption is expected.
Ireland
In Ireland, we are authorised to run our network and provide services pursuant
to general conditions of entitlement issued by the Commission for Communications
Regulation on 29 August 2003. Ireland has already implemented the European
package through the Communications Regulation Act 2002 and by various other
instruments. The regulator is in the process of carrying out market reviews to
assess the scope of regulation required on players with significant market
power.
The Act has created a new regulator, ComReg (Commission for Communications
Regulation) a statutory body responsible for the regulation of the electronic
communications sector (telecommunications, radiocommunications and broadcasting
transmission) and the postal sector in Ireland.
The Netherlands
Full telecommunications liberalisation was introduced in The Netherlands in
1997. We are registered and authorised 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. The current Telecommunications Act is dated 15 December 1998. The
European package will be implemented by a new Telecom Act, which is expected
early in 2004. The market analyses will be used by the Regulator to assess the
scope of regulation required on players with SMP.
Sweden
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In Sweden, we have had to register with the NRA, PTS, to enable us to build our
network and provide services. On 5 June 2003, the Government Bill for the
transposition act (Electronic Communications Act (2003:389)) was adopted by the
Parliament. It entered into force on 25 July 2003. Data collection for the
market analyses has been completed for all markets and PTS is currently carrying
out an extensive preliminary consultation covering all markets, except markets
14 (Wholesale trunk segments of leased lines) and 17 (Wholesale international
roaming for mobile). At this stage of the process, it is difficult to assess the
impact in practice of the new regulatory framework on us. It must however be
noted that, at this consultation stage, we have been designated as having SMP in
market 9, i.e. call termination on individual public telephone networks provided
at a fixed location, but with lighter obligations then those imposed on the
incumbent operators. The final decision on this matter is expected to be taken
in week 21-23 of the year 2004.
The United Kingdom
In the United Kingdom, the European package has been implemented by the
Communications Act 2003 and by various instruments implemented under that act.
The regulator has carried out market reviews to assess the scope of regulation
required on players with SMP. The results of this have continued many of the
important aspects of the old regime resulting in little disruption to our
business. Regulation of BT at the retail level, however, is reduced. We are
entitled to run our network and provide the full range of services pursuant to
general conditions of entitlement issued by the Director General of
Telecommunications on 25 July 2003.
The Communications Act 2003 created a new regulator, OFCOM. OFCOM will be
responsible for regulating not only the telecoms sector but also all the other
media industries - TV, radio (spectrum and content) and so on. In 2004, OFOCM
began conducting a strategic review of telecoms regulation. This may involve
fundamental change to regulation in the UK, though it is not yet possible to say
what any changes might be.
Norway and Finland
In Norway and Finland, we have registered as a provider of telecommunications
services.
Central Region
Austria
In Austria, a new Telecommunications Act 2003, or TKG 2003, has been enforced on
the 20 August 2003 and transforms the new regulatory framework to national law.
The former licence regime has been replaced by a system of authorisations for
providing telecommunications services by notifying the providing of
telecommunication services to the NRA. Licences and notifications of services
under the former regulatory framework remain in force, so that we are entitled
to operate a public fixed telecommunications network, to offer leased lines and
to provide internet and data services.
Since the enforcement of the TKG 2003, a market delineation ordinance has been
issued by the NRA according to the Recommendation on Relevant Markets in the
communications sector of the European Commission (bitstream access market has
not been published as a separate market, as the NRA has initiated a separate
consultation investigating the geographic dimension of this market; is there one
nationwide market or several geographic markets?). The market analyses have been
initiated in the 2003 four quarter and first results are expected at the end of
2004 first quarter or beginning of 2004 second quarter.
Germany
The German Telecommunications Act of 25 July 1996 provides a licensing and
regulatory framework for telecommunications activities in Germany. In 1998, the
German telecommunications market was finally liberalised. The NRA, RegTP, is
tasked with advancing the development of the postal and telecommunications
markets; targets are liberalisation and deregulation. In the future RegTP will
also be responsible for energy regulation. In view of the direct impact of the
new directives from 25 July 2003, the former need of requiring licences under
ss. 6 of the Telecommunications Act is no longer valid. In consequence the
licences for the establishment and operation of public telecommunications
networks and for the provision of voice telephony services are no longer issued
under ss. 6 of the Telecommunications Act. Irrespective of the abolition of the
licencing obligation under ss. 6 of the Telecommunications Act frequency
assignment is still required for the use of frequencies.
-27-
In April 2003, the Ministry of Economics and Labour published a series of
legislative instruments to facilitate adoption of the new regulatory package.
Germany failed to implement the directives by the deadline. In consequence, the
E.U. started a claim against Germany. In 2003, RegTP started several public
consultations and market reviews to define the 18 markets of the E.U. directive.
Several hearings will follow. On 15 October 2003, the Government adopted the
bill of the New Telecommunication Act and the formal legislative procedure
started with the first reading in the Bundestag in the middle of January 2004;
two further readings will follow.
Several provisions in the bill are in breach of E.U. law and if enacted in their
current form will have a highly negative impact on our competitiveness. Some
examples are:
o additional regulatory hurdle with "functioning competition"
o "double dominance" test for wholesale regulation, and
o further financial burdens for operators, etc.
Consequently, we have started an alliance with other pan-European operators to
influence the current legislative process.
Switzerland
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 the licence as a telecommunication service provider
for fixed network, which allows the provision of telecommunication services. The
concession grants similar rights and imposes similar obligations as those in
other European countries, through the individual licencing system. However the
new regulatory framework and the relevant market analysis is not an issue in
Switzerland. 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.
The revision of the Telecommunication Law is still under discussion in the
national parliament and it is expected that it will not become effective before
2005 and currently the trend is against more liberalisation/regulation, e.g.
ex-ante is excluded and Unbundled Local Loop is not supported by the majority.
Changes in the Decree on Address Elements for Telecommunication, or AEFV, became
effective on 1 April 2003 with new requirements concerning mainly Value Added
Services. A new revision of the Decree on Price Announcements was published at 4
February 2004 and become effective on 1 June 2004. The changes mainly concern
the price announcement aspects of Value Added Services. OFCOM has announced that
downloadable web-diallers cannot use the Primary Reference Source numbers (090x)
of the content providers anymore; this came into force on 1 April 2004.
The Federal Communication Commission (ComCom) decided in November 2003 that the
regulated Interconnection prices of Swisscom for the years 2000 to 2003 were
about 25 - 35 % too high. Swisscom has appealed against this decision to the
Federal Court.
Swiss fixed to mobile termination rates are the highest in Europe and we have
been in negotiation with Swisscom Mobile to halve the rates. If we cannot reach
agreement on this issue, we will consider an appeal to ComCom.
South Region
France
France has not yet implemented the new E.U. directives. Legislation was adopted
in December 2003 and in January 2004 relating to universal service, retail
tariff controls, the status of France Telecom and the right for public entities
(municipalities, regional authorities, etc.) to become full-service
telecommunications operators, but the most important transposition legislation
is still pending before Parliament. On 12 February 2004, the National Assembly
adopted a draft Bill transposing the core of the new E.U. level regulatory
framework. This Bill will in due course be examined and voted on by the Senate,
and a special reconciliation procedure between the
-28-
Senate and the Assembly will thereafter be followed, with the objective of
finalising a joint text shortly after its adoption by the Senate.
In accordance with the new E.U. directives, the new French legislation will
abolish individual licensing (a partial abolishment has already occurred on 25
July 2003, by means of a joint letter of the Minister and the National
Regulatory Authority). In the meantime, we remain 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. Upon the entry into
force of the new regime, our licence will be converted into one or several
registrations with the NRA, Autorite de Reglementation des Telecommunications,
or ART.
The new legislation will also institute a market definition, market analysis and
SMP designation system, which will result in the imposition of regulatory
obligations on operators found to have SMP, and in the withdrawal of regulatory
obligations where no SMP is found. Although the law has not yet been adopted,
ART has initiated the data collection exercise which is necessary to conduct
these tasks. Current expectations are that the new regime will result, as of Q4
2004, in a tightening of certain interconnection and wholesale broadband access
obligations, especially on France Telecom and on mobile operators (who are major
suppliers to us), and in a weakening of retail price control on France Telecom.
Direct regulation of our business is a possibility under the new regime, but
this is not expected to result in major changes compared to the existing
situation.
Italy
Full telecommunications liberalisation was introduced in Italy on 1 January
1998. On 16 September 2003, the new "Electronic Communications Code" entered
into force which implemented the new E.U. Directives. Compared to the previous
Italian regulatory regime, the new Code provides for a lighter market access
regime. Under the new Code, in fact, individual licenses are no longer required,
while all electronic communications services are subject to general
authorisations that are deemed as granted upon filing of the relevant
applications. Also, the new Code provides for an allocation of powers and
competencies between the Ministry of Communications and the Italian
Communications Authority. The Ministry of Communications is mainly in charge of
the granting and the administration of the general authorisations while the
Italian Communications Authority is mainly dedicated to the adoption of sector
specific regulations.
Spain
Spain was granted with 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.
The European package has been implemented by the new Telecommunications Act
32/2003, (Ley General de Telecomunicaciones), published in the Official Gazette
on November 3rd and entering into force the following day. Four regulations will
develop the 32/2003 Telecommunications Act. The regulator has not carried out
market reviews up to now, so therefore, no assessments of SMP/remedies have been
made. Due to the large market share of Telefonica in all defined markets (by the
Framework Directive), continuation of many important aspects of the old regime
is expected. Nevertheless, last November and before the market analysis was
ended, the NRA approved an important decrease of Telefonica's price cap applied
to retail voice telephony prices and fully liberalised retail ADSL prices.
The new Telecom Act 32/2003 implements the notification system stated by the
Authorisation Directive 2002/20/CE. Accordingly, there are only two types of
authorisations: authorisation to provide electronic communications networks and
authorisation to provide electronic communication services. The new regulation
does not distinguish between national and regional authorisations.
In addition, the new act has created a new Radio Spectrum Agency. The
Telecommunications Market Commission responsibilities are currently being
discussed under a new Regulation developing the new Telecom Act. This new
regulation is expected to be enacted next spring. No relevant changes are
expected further than implementation of E.U. regulatory framework although the
Universal Service Obligation Fund could become an issue during this year.
Portugal
-29-
As well as in Spain, Portugal was granted with temporary exemptions from the
applicability of the E.U. directives by the European Commission, resulting in
full market opening in 1 January 2000.
The European package has been implemented in Portugal by Law no. 5/2004, of 10
February 2004 (Electronic Communications Law). Under this law (which has entered
into force immediately), the Portuguese telecom regulator is expected to start
carrying out market reviews to assess which are the relevant telecom markets and
the players with significant market power in such markets.
In Portugal, we have obtained two licences, one to provide a fixed telephone
service and another to establish and provide a public telecommunications
network, according to Decree-Law no. 381-A/97, of 30 December 1997. We are also
registered with Autoridade Nacional de Comunicacoes, or ANACOM, to provide a
wide number of telecommunications services that do not require a licensing
procedure (e.g., number translations, internet access, international ATM).
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.
Name Date of Incorporation Country of Incorporation
--------------------- ------------------------
COLT Telecom Holdings Limited (1) 6 December 1999 England and Wales
COLT Telecom Europe Limited (1) 28 June 1996 England and Wales
Callshop Etc. Limited *(2) 16 October 1995 England and Wales
City of London Telecommunications Limited (2) 16 August 1985 England and Wales
COLT Netherlands Holding Limited (3) 17 April 1988 England and Wales
COLT Telecom Finance Limited (1) 20 January 2002 England and Wales
COLT Telecom Finance Denmark (4)(5) 22 April 2002 England and Wales
COLT Telecom Finance Euro (4)(5) 22 April 2002 England and Wales
COLT Telecom Finance Sweden (4)(5) 22 April 2002 England and Wales
COLT Telecom Finance Switzerland (4)(5) 22 April 2002 England and Wales
COLT Telecom Limited (2) 18 October 1996 England and Wales
COLT Telecommunications Nominees Limited (6) 26 March 2002 England and Wales
COLT Telecommunications *(4)(6) 15 December 1989 England and Wales
COLT Telecom Pension Trustees Limited (2) 16 November 2000 England and Wales
COLT Telecom QUEST Trustees Limited (2) 3 February 2000 England and Wales
COLT Telecom Share Scheme Trustees Limited (2) 2 February 2001 England and Wales
COLT Telecom Austria GmbH *(3) 28 September 1998 Austria
COLT Telecom SA *(3) 16 September 1997 Belgium
COLT Telecom A/S (3) 20 November 2000 Denmark
COLT Telecom Finland Oy*(3) 19 August 2002 Finland
COLT Telecommunications France SAS *(3) 23 October 1995 France
COLT Telecom Holding GmbH *(3) 17 March 1995 Germany
COLT Telecom GmbH *(7) 22 November 2001 Germany
COLT Technology Services India Private Limited (8) 1 April 2004 India
COLT Telecom Ireland Limited *(3) 31 March 2000 Ireland
COLT Telecom SpA *(3) 4 November 1997 Italy
COLT Telecom BV *(9) 28 May 1998 The Netherlands
COLT Telecom Norway A.S. *(3) 9 January 2001 Norway
COLTEL-Servicos de Telecomunicacoes Unipessoal Lda *(3) 17 January 2001 Portugal
COLT Telecom Espana SA *(3) 2 January 1997 Spain
COLT Telecom AB *(3) 11 October 1999 Sweden
COLT Telecom AG *(3) 30 July 1997 Switzerland
COLT Telecom U.S. Corp. (3) 19 November 1996 Massachusetts USA
COLT Internet U.S. Corp. (3) 27 September 1999 Delaware USA
<FN>
Notes:
-30-
* Operating Companies.
(1) 100% owned by the company
(2) 100% owned by COLT Telecom Holdings Limited.
(3) 100% owned by COLT Telecom Europe Limited.
(4) A company incorporated with unlimited liability.
(5) 99% owned by the company and 1% owned by COLT Telecom Holdings Limited.
(6) 100% owned by COLT Telecom Limited.
(7) 100% owned by COLT Telecom Holding GmbH.
(8) 99% owned by COLT Netherlands Holding Limited and 1% by COLT Telecom Europe Limited
(9) 100% owned by COLT Netherlands Holding Limited.
</FN>
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
surrender, 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 31 December 2003, achieved reductions of approximately 56,000
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 2003, we leased an aggregate of approximately 321,495 square
metres, including the following principal locations (n.b. the figures stated in
"size" relate to the original areas in 2002 as a benchmark; "status" provides an
update to that benchmark):
Location Size Use Status
- -------- ---- --- ------
Richard-Nneutra-Gasse 10, Vienna, Austria 7,000 square metres Internet Solution Centre Fully marketed
Kartner Ring 12, Vienna, Austria 2,374 square metres Office, Node and Storage Part marketed
Paepsemlaan 16-16a, Paepsem Business Park, 1,413 square metres Internet Solution Centre Occupied
Anderlecht, Belgium
Nooderlaan 121, Antwerp, Belgium 1,727 square metres Office Node and Storage Occupied
1930 Zaventem, Brussels, Belgium 6,850 square metres Internet Solution Centre Fully marketed
Rue De Planeur, 10 Brussels, Belgium 3,665 square metres Offices, Storage Part disposed
1430 Chaussee De Haecht, Brussels, Belgium 1,100 square metres Office Node and Storage Occupied
Borgmester Christiansens Gade 55, Copenhagen, 4,963 square metres Office, Node and Storage Occupied
Denmark
-31-
Location Size Use Status
- -------- ---- --- ------
St. Stephens Street Central Gate, New Town Road, 1,645 square metres Office, Node and Storage Occupied
Birmingham, England
Chase Road, Park Royal, London, England 8,412 square metres Internet Solution Centre Occupied
Beaufort House, 7,480 square metres Offices Occupied
15 St. Botolph Street, London, England
Princes Court, Wapping Lane, London, England 5,000 square metres Internet Solution Centre Occupied
Unit F, 20/22 Wharf Road 3,470 square metres Offices and Storage Occupied
London, England
4 Norton Folgate, 3,390 square metres Office, Node and Storage Part disposed
London, England
79 Cavendish Street, London, England 3,344 square metres Offices Fully marketed
15 Marylebone Road, London, England 2,902 square metres Office, Node and Storage Part disposed
City Forum, City Road, London, England 2,330 square metres Node Occupied
Sovereign House, 1 King John Court, London, England 1,898 square metres Office, Node and Storage Occupied
126 Chapman Street, Lehman Street, London, England 1,472 square metres Storage Occupied
Poplar Business Park, Poplar High Street, Aspen 485 square metres Offices Occupied
Way, Tower Hamlets, London, England
Samuel House 185 square metres Node Occupied
St. Albans Street Haymarket,
London, England
Coriander Avenue, Clifton, Street, London, England 74 square metres Storage Occupied
One Canada Square, Canary Wharf, Isle Of Dogs, 28 square metres Node Occupied
London, England
Rue Des Teinturiers, 9 Lyon 3eme, Lyon, France 2,523 square metres Office, Node and Storage Occupied
-32-
Location Size Use Status
- -------- ---- --- ------
93 Avenue Du Prado, Marseille, France 870 square metres Office, Node and Storage Occupied
152 Avenue du Prado, Marseille, France 330 square metres Offices Fully marketed
23-27 RuePierre Valette, Malakoff, Paris, France 11,340 square metres Office, Node and Storage Occupied
Cap Horn, Les Ulis, Cortebeouf, Paris, France 9,130 square metres Internet Solution Centre Occupied
Rue De La Fontaine Au Roi, 21 Paris, France 6,131 square metres Storage Fully disposed
Rue Wattignes, 60/62, Paris, France 4,121 square metres Internet Solution Centre Part marketed and part
disposed
63 Boulevard Bessieres, Paris, France 2,941 square metres Internet Solution Centre Occupied
25 rue de Chazelles, 2,317 square metres Office, Node and Storage Occupied
Paris, France
Rue De Notre Dames Des Victoires, 46 129 Rue 1,606 square metres Offices Fully disposed
Montmartre, Paris, France
La Defense 5, Le Lafayette 2, Place Des Vosges, 272 square metres Offices Occupied
Paris, France
Wiebestrasse 49 Werk 3 Berlin, Germany 7,948 square metres Internet Solution Centre Occupied
46-49 Wieberstrasse, Berlin, Germany 2,693 square metres Office, Node and Storage Occupied
Uhlandstrasse 181 - 183, Berlin, Germany 1,800 square metres Office, Node and Storage Part marketed
Magnusstasse 13-15, Cologne, Germany 1,612 square metres Office, Node and Storage Part marketed
90 UerdingerStrausse, Dusseldorf, Germany 3,060 square metres Office, Node and Storage Occupied
4 Heriotstrasse, 21,275 square metres Offices Part marketed and part
Frankfurt, Germany disposed
-33-
Location Size Use Status
- -------- ---- --- ------
Langer Kornweg 34, Kelsterbach, 12,494 square metres Internet Solution Centre Part marketed and part
Frankfurt, Germany disposed
Bleichstrasse 52, 6,973 square metres Offices Fully marketed
Frankfurt Germany
16-22 Gervinusstrasse, Frankfurt, Germany 6,328 square metres Office, Node and Storage Part disposed
Walter Klob Strasse 13, Frankfurt, Germany 3,687 square metres Office, Node and Storage Part marketed and part
disposed
Eschersheimer Landstrasse 10, Frankfurt, Germany 3,638 square metres Office, Node and Storage Part disposed
306 Hanuaer Landerstrasse, 2,620 square metres Internet Solution Centre Occupied
Frankfurt, Germany
Schmidstrasse 12, Frankfurt, Germany 2,320 square metres Offices Occupied
Sportalle 72, 22335 Hamburg, Germany 5,603 square metres Internet Solution Centre Part marketed and part
disposed
Drebahn 1, Deutschlandhaus, Hamburg, Germany 2,048 square metres Office, Node and Storage Occupied
Wendenstrasse 255, Hamburg, Germany 1,800 square metres Office, Node and Storage Occupied
ABC Strasse, 19, Hamburg, Germany 1,239 square metres Offices Fully disposed
Calenberger Neustadt, Sheet 1389, Hanover, Germany 1,760 square metres Office, Node and Storage Part marketed
11 Nawiasky Strasse, Munich, Germany 8,108 square metres Internet Solution Centre Fully disposed
Von-der-Tann-Strasse 5,125 square metres Office, Node and Storage Part marketed
11, Munich, Germany
26 Munchner Strasse, Uterfohring, Munich, Germany 2,830 square metres Office, Node and Storage Occupied
Kronenstrasse 25, Stuttgart, Germany 1,750 square metres Office, Node and Storage Occupied
Foxes Property, Long Mile Road, Walkinstone, 6,316 square metres Internet Solution Centre Fully disposed
Dublin, Ireland
-34-
Location Size Use Status
- -------- ---- --- ------
East Wall Road, Docklands, Dublin, Ireland 1,533 square metres Office, Node and Storage Occupied
Seagrave House, 19-20 Earlsfort Terrace, Dublin, 459 square metres Offices Fully disposed
Ireland
Via Lancetti, Milan, Italy 6,735 square metres Office, Node and Storage Occupied
Viale Jennet 56, 3,162 square metres Office, Node and Storage Occupied
Milan, Italy
127-129 Via Simone 4,900 square metres Office, Node and Storage Occupied
Martini, Rome, Italy
Environment Park, Via Livorono 60, Turin, Italy 3,386 square metres Office, Node and Storage Occupied
Bouwery 71-73, Amstelveen, Amsterdam, The 9,148 square metres Internet Solution Centre Fully marketed
Netherlands
12-14 van de Madeweg, Amsterdam, The Netherlands 7,000 square metres Office, Node and Storage Occupied
Luchtvaartstraat, Amsterdam, 2,275 square metres Internet Solution Centre Occupied
The Netherlands
Groothandelsgebouw, Rotterdam, 2,653 square metres Office, Node and Storage Occupied
The Netherlands
Estrada Da Outorela, Carnaxide, Oeiras, 2,174 square metres Office, Node and Storage Occupied
Lisbon, Portugal
Calle Acero 5-9, 8,850 square metres Internet Solution Centre Part marketed
Y Motores 83-89, Barcelona, Spain
Gran Via De Les Corts Catalanes, 8-10 Hospitalet De 1,697 square metres Office, Node and Storage Occupied
Llobregat, Barcelona, Spain
Poligono Industrial Monoteras, 5,000 square metres Internet Solution Centre Occupied
Madrid, Spain
Telemaco 5, Madrid, Spain 4,250 square metres Office, Node and Storage Part marketed
Karlsrogartan 2, Solna, Stockholm, Sweden 10,726 square metres Internet Solution Centre Part marketed and part
disposed
-35-
Location Size Use Status
- -------- ---- --- ------
Oxen Mindre 33, Luntmakargatan 18, Stockholm, Sweden 1,906 square metres Office, Node and Storage Occupied
Rue De Montbrillant 36, Geneva, Switzerland 1,481 square metres Office, Node and Storage Occupied
Umbau Bardnerstrasse 820, Zurich, Switzerland 7,250 square metres Internet Solution Centre Fully marketed
Murtschenstrasse, 27 Baslerpark, Baslerstrasse 25, 3,566 square metres Office, Node and Storage Occupied
Zurich, Switzerland
Murtschenstrasse, 27 3,444 square metres Office and Storage Fully disposed
Baslerpark, 2
Baslerstrasse 25, Zurich
Switzerland
<FN>
Fully marketed = the whole property is actively being marketed
Part marketed = only a portion of the property is actively being marketed
Fully disposed = the whole property is has been sub-let / surrendered / assigned
Part disposed = only a portion of the marketed space has been sub-let /
surrendered / assigned
</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 included in this 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 2003 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 Item 10(e) of Regulation S-K 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.
Key financial data 2003 2002 2001
- ------------------
L'm L'm L'm
--- --- ---
Turnover 1,166.3 1,027.2 905.7
Infrastructure sales - - (3.8)
---------------------------------------------
Turnover excluding infrastructure sales 1,166.3 1,027.2 901.9
=============================================
Cost of sales 971.4 1,451.9 941.7
-36-
Exceptional items - (526.3) (135.8)
Costs associated with infrastructure sales - - (2.4)
---------------------------------------------
Cost of sales before exceptional items and costs associated with
infrastructure sales 971.4 925.6 803.5
=============================================
Interconnection and network costs 766.9 731.9 704.9
Exceptional items - (18.3) (62.4)
Costs associated with infrastructure sales - - (2.4)
---------------------------------------------
Interconnection and network costs before exceptional items and
costs associated with infrastructure sales 766.9 713.6 640.1
=============================================
Network depreciation 204.4 720.0 236.8
Exceptional items - 508.0 73.4
---------------------------------------------
Network depreciation before exceptional items 204.4 212.0 163.4
=============================================
Gross profit (loss) 195.0 (424.7) (36.0)
Margin on infrastructure sales - - (1.4)
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 195.0 101.6 98.4
=============================================
Operating expenses 272.0 353.9 323.9
Exceptional items 2.5 (61.9) (39.8)
---------------------------------------------
Operating expenses before exceptional items 274.5 292.0 284.1
=============================================
Selling, general and administration costs 233.5 261.0 265.0
Exceptional items 2.5 (18.9) (27.9)
---------------------------------------------
Selling, general and administration costs before exceptional items 236.0 242.1 237.1
=============================================
Other depreciation and amortisation 38.5 92.9 59.0
Exceptional items - (43.0) (12.0)
---------------------------------------------
Other depreciation and amortisation before exceptional items 38.5 49.9 47.0
=============================================
Loss for period (124.7) (718.3) (360.4)
Gross profit on infrastructure sales - - (1.4)
Exceptional interconnect and network cost of sales - 18.3 62.4
-37-
Exceptional network depreciation - 508.0 73.4
Exceptional selling general and administration costs 2.5 19.0 27.9
Exceptional other depreciation and amortisation - 43.0 12.0
Exceptional other (income) expense (7.5) (106.1) (56.0)
---------------------------------------------
Loss for period before margin on infrastructure sales and
exceptional items (134.7) (236.1) (242.1)
=============================================
We are a leading pan-European provider of high bandwidth data, internet, voice
and advanced business communications 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 2003, 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 42 other network cities and 11 Internet
Solution Centres across Europe.
Our revenues for the year ended 31 December 2003 were L1,166.3 million, an
increase of 14% on 2002. The increase in turnover was driven by continued demand
for our services from existing and new customers and new service introductions.
However, the rates of growth were affected by weak economic growth across Europe
generally.
Cost of sales decreased from L1,451.9 million in 2002 to L971.4 million in 2003,
a decrease of 33%. This decrease was principally due to the fact that the
exceptional items relating to impairment and severance that were recognized in
2002 were not repeated in 2003. Cost of sales, before exceptional items,
increased from L925.6 million in 2002 to L971.4 million in 2003, an increase of
5%, and this was mainly as a result of revenue growth.
The gross profit for 2003 was L195.0 million compared to the L424.7 million
gross profit reported in 2002. This increase was principally due to the fact
that the exceptional items relating to impairment and severance that were
recognized in 2002 were not repeated in 2003. The gross profit, before
exceptional items, for 2003 was L195.0 million compared to the L101.6 million
gross profit before exceptional items reported in 2002 reflecting the overall
growth of the business, improved mix and the benefits of our ongoing cost
containment.
Operating expenses decreased from L353.9 million in 2002 to L272.0 million in
2003, a decrease of 23%. This decrease was principally due to the fact that the
exceptional items relating to impairment and severance that were recognized in
2002 were not repeated in 2003. Operating expenses, before exceptional items,
decreased from L292.0 million in 2002 to L274.5 million in 2003, mainly as a
result of our ongoing cost containment.
In December 2003, an exceptional profit of L2.5 million was recognised on the
disposal of COLT eCustomer Solutions France SAS ("Fitec") and COLT Internet AB
(Sweden Internet).
Gains arising from the purchase of debt during 2003 amounted to L7.5 million,
compared to L101.7 million in 2002.
In 2003 we recognized exchange gains of L6.4 million compared with exchange
gains in 2002 of L12.4 million. These gains 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. Due to hedging, there were no significant exchange
gains or losses resulting from movements in the British Pound relative to the
Euro.
In 2002 and 2003, the losses on ordinary activities were L718.3 million and
L124.6 million respectively. The difference is due mainly to the exceptional
items in 2002, shown in the key financial data table above.
-38-
At 31 December 2003, we had balances of cash and investments in liquid resources
totalling L802.4 million compared with L934.9 million at 31 December 2002.
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 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.
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. In general, we enter into non-exclusive contracts with our end user
customers that typically last from one to three years 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.
-39-
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
regional and functional organisational structures.
Our organisational structure is 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
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 approximately L141.0 million in 2003.
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 included in this 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. Turnover from installation
and other up-front activities is recognised in the same period as related costs.
Under U.S. GAAP, in accordance with S.E.C. Staff Accounting Bulletin 101
"Revenue Recognition", customer installation revenues together with attributable
direct costs, up to the level of the associated revenue, are 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.
Cost of sales
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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 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, and is computed
in accordance with our accounting policy and the requirements of FRS 11
`Impairment of Fixed Assets and Goodwill'.
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 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.
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Resulting from such a review for the year ended 31 December 2003, we have made
no impairment provision for the year.
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 included in this report for disclosure of the amount of our
deferred tax asset.
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 2002, 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 2003, such provisions amounted to
L50.0 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. At 31 December 2003, provisions in respect of the cost of these
programmes amounted to L12.9 million and are expected to be utilised during
2004.
Year Ended 31 December 2003 compared to Year Ended 31 December 2002 Turnover
Turnover increased from L1,027.2 million in 2002 to L1,166.3 million in 2003, an
increase of L139.1 million or 14%. The increase in turnover was primarily driven
by continued demand for our services from existing and new customers and new
service introductions. However, the rates of growth have been affected by weak
economic growth across Europe generally. Turnover also benefited from the
weakness of the British Pound relative to the Euro. At constant exchange rates
turnover grew by 6%.
Turnover from corporate customers increased from L584.8 million in 2002 to
L692.7 million in 2003, an increase of 18%. Turnover from corporate customers
represented 59% of total turnover in 2003 compared with 57% in 2002. Switched
turnover from corporate customers in 2003 was L337.0 million, an increase of
14%. Non-switched and other turnover from corporate customers in 2003 was L355.7
million, an increase of 23%.
Turnover from wholesale customers increased from L442.5 million in 2002 to
L473.6 million in 2003, an increase of 7% and represented 41% of total turnover
compared with 43% in 2002. Switched turnover from wholesale customers in 2003
was L365.7 million, an increase of 11%. Non-switched and other turnover from
wholesale customers in 2003 was L108.0 million, a decrease of 5%.
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In 2003, 21.9 billion switched minutes were carried compared with 20.0 billion
in 2002. Average switched revenue per minute increased by 3% in 2003 over 2002.
At 31 December 2003 we had 26.6 million voice grade equivalent private wires in
service, an increase of 30% compared to 31 December 2002. Growth in non-switched
services reflected the growth in demand for local, national and international
bandwidth services, partially offset by circuit cancellations, and to a lesser
extent, the disposal of COLT eCustomer Solutions France SAS, or Fitec, towards
the end of the year. The growth in non-switched services also reflects the
growing success we are achieving in the provision of IPVPN services.
North Region
At 31 December 2003, 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 2002. Turnover increased by 12.4% to L372.6 million compared to 2002.
Growth in turnover reflected our expanded geographic reach, expanded product
range as well as our success in extending sales to existing and new customers.
Central Region
At 31 December 2003, 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 2002.
Turnover increased by 15.0% to L494.4 million compared to 2002. Growth in
turnover reflected our expanded geographic reach, expanded product range as well
as our success in extending sales to existing and new customers.
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 2002. Turnover
increased by 12.6% for the year to L299.3 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.
Cost of Sales
Cost of sales decreased from L1,451.9 million in 2002 to L971.4 million in 2003,
a decrease of 33%. This decrease was principally due to the fact that the
exceptional items relating to impairment and severance that were recognized in
2002 were not repeated in 2003. Cost of sales, before exceptional items,
increased from L925.6 million in 2002 to L971.4 million in 2003, an increase of
L45.8 million or 5%.
Interconnection and network costs before exceptional items, increased from
L713.6 million in 2002 to L766.9 million in 2003 as a result of the overall
increase in business partially offset by ongoing cost containment measures.
Network depreciation, before exceptional items, decreased from L212.0 million in
2002 to L204.4 million in 2003. The decrease was primarily attributable to the
impairment provisions recorded in September 2002, partially offset by further
investment in fixed assets to support the growth in demand for services and new
service developments.
In 2002, an exceptional charge of L18.3 million was recognised for severance
provisions related to the staff reduction programmes announced in February and
September 2002 and an impairment charge of L508.0 million was recognised to
ensure that the asset base remained aligned with the realities of the market
place. There were no exceptional charges in 2003.
Operating Expenses
Operating expenses decreased from L353.9 million in 2002 to L272.0 million in
2003, a decrease of 23%. This decrease was principally due to the fact that the
exceptional items relating to impairment and severance that were recognized in
2002 were not repeated in 2003. Operating expenses, before exceptional items,
decreased from L292.0 million in 2002 to L274.5 million in 2003.
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Selling, general and administrative expenses, before exceptional items,
decreased from L242.1 million in 2002 to L236.0 million in 2003. The reduction
in 2003 reflected ongoing cost containment measures. Selling, general and
administrative expenses before exceptional items as a proportion of turnover was
20% in 2003 compared with 24% in 2002.
Other depreciation and amortisation, before exceptional items, decreased from
L49.9 million in 2002 to L38.5 million in 2003. The reduction in 2003 reflected
the effect of the impairment provisions recorded in September 2002 and other
assets being fully depreciated, partially offset by increased investment in
customer service and support systems.
In 2002, an exceptional charge of L18.9 million was recognised for severance
provisions related to the staff reduction programmes announced in February and
September 2002 and an impairment charge of L43.0 million was recognised to
ensure that the asset base remained aligned with the realities of the market
place. There were no exceptional charges in 2003.
In December 2003, an exceptional profit of L2.5 million was recognised on
disposal of COLT eCustomer Solutions France, or Fitec, and COLT Internet AB
(Sweden Internet).
Interest receivable, interest payable and similar charges
Interest receivable decreased from L38.1 million in 2002 to L26.7 million in
2003 due to reduced average balances of cash and investments in liquid resources
and lower rates of return during the period.
Interest payable and similar charges decreased from L96.3 million in 2002 to
L88.3 million in 2003. The decrease was due primarily to a reduction in debt
levels reflecting the purchase and redemption of some of the Company's
outstanding notes during 2002 and 2003.
Interest payable and similar charges in 2003 included: L34.4 million (2002:
L36.1 million) of interest and accretion on convertible debt; L51.7 million
(2002: L57.5 million) of interest and accretion on non-convertible debt, and
L2.2 million (2002: L2.7 million) of interest and unwinding of discounts on
provisions.
Gain on purchase of debt
Gains arising on the purchase of debt during 2003 amounted to L7.6 million.
Gains arising on the purchase of debt in 2002 were L101.7 million.
Redemption of U.S. Dollar Senior Discount Notes
On 22 December 2003, all of the outstanding U.S. dollar 12% Senior Discount
Notes due 2006 were redeemed at the principal amount of the Notes plus accrued
interest for a cash consideration of L120.7 million. There was no redemption in
2002.
Exchange gain (loss)
In 2003, there were exchange gains of L6.4 million compared with exchange gains
of L12.4 million in 2002. These gains 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, there was an exceptional exchange gain of L4.8 million
from the unwinding of the British pounds forward contracts previously held as a
condition of the bank facility with us terminated in June 2002.
Tax on Loss on Ordinary Activities
In 2002 and 2003, we generated losses on ordinary activities of L718.3 million
and L124.6 million respectively and therefore did not incur a tax obligation.
Year Ended 31 December 2002 compared to Year Ended 31 December 2001 Turnover
Turnover increased from L905.7 million in 2001 to L1,027.2 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,
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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 L532.6 million in 2001 to L623.4
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 L366.7 million in 2001 to
L402.1 million in 2002. 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 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 L1.8 million
in 2002 and L6.3 million in 2001.
Turnover from other activities in 2001 included L3.8 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 5.9% to L331.5 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 L15 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-
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networks at the end of 2001. Turnover increased by 13.0% to L429.8 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.
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 L265.9 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.
Cost of Sales
Cost of sales increased from L941.7 million in 2001 to L1,451.9 million in 2002
as a result primarily of an exceptional charge of L526.3 million taken against
costs associated with the workforce reduction announced in September 2002 and
the impairment provision taken to write down the book value of fixed assets.
Cost of sales, before exceptional items and costs associated with infrastructure
sales, increased from L803.5 million in 2001 to L925.6 million in 2002, an
increase of L122.1 million or 15.2%. Interconnection and network costs, before
exceptional items and excluding costs associated with infrastructure sales,
increased from L640.1 million in 2001 to L713.6 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
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additional services on our inter-city network and the inclusion of the Fitec
results following its acquisition in July 2001.
Network depreciation increased by L483.2 million from L236.8 million in 2001 to
L720.0 million in 2002. Exceptional depreciation accounted for L434.6 million of
this increase. The increase in network depreciation before exceptional items,
from L163.4 million in 2001 to L212.0 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 L508.0 million was recognised relating to the write down of certain
parts of the network, equipment and electronics. Exceptional charges of L18.3
million associated with the announced staff reductions was recorded in 2002. In
2001, an impairment charge of L73.4 million was recognised relating to the
"mothballing" of Internet Solution Centres ("ISC") and further charges of L62.4
million were recorded relating to the write down of inventory held for sale and
provisions against mothballed ISC rental and other obligations.
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 L60 million.
Operating expenses increased from L323.9 million in 2001 to L353.9 million in
2002, primarily resulting from an exceptional charge of L61.9 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 L284.1 million in 2001 to L292.0 million in 2002, an increase of
L7.9 million or 3%.
Selling, general and administrative expenses (SG&A) decreased from L265.0
million in 2001 to L261.0 million in 2002. SG&A before exceptional items,
increased from L237.1 million in 2001 to L242.1 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 L59.0 million in 2001 to
L92.9 million in 2002. In 2002, an impairment charge of L43.0 million was
recognised compared with L12.0 million in 2001. Other depreciation and
amortisation, before exceptional items, increased from L47.0 million in 2001 to
L49.9 million in 2002.
In 2002, an impairment charge of L43.0 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 L18.9
million associated with the announced staff reductions were also recorded in
2002. In 2001 an impairment charge of L12.0 million was recorded relating to the
write down in net book value of leasehold improvements in excess leased space
and a further charge of L27.9 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 L60.7 million in 2001 to L38.1 million in
2002 due to decreased average balances of cash and investments in liquid
resources and lower rates of return.
-47-
Interest payable and similar charges were L112.0 million in 2001 compared with
L96.3 million in 2002. The decrease was due primarily to reduced debt levels
reflecting the purchase of L198.9 million of our outstanding notes during 2002.
In 2001, L143.5 million of debt was purchased.
Interest payable and similar charges in 2002 included: L36.1 million of interest
and accretion on convertible debt; L57.5 million of interest and accretion on
non-convertible debt and L2.7 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 L0.4 million relating to the revaluation of
shares held in a trust for certain compensations plans compared to a charge in
2001 of L2.8 million.
Gain on purchase of debt
We recorded a gain of L101.7 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 L58.8 million.
Exchange gain (loss)
In 2002, we had exchange gains of L12.4 million, compared with losses of L5.2
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 L4.8 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 L360.4 million and L718.3 million,
respectively, and therefore did not incur a tax obligation. The increase of
L357.9 million in the level of losses was accounted for by the increase in
exceptional items from L119.6 million in 2001 to L482.2 million in 2002.
Losses on ordinary activities in the North, Central and South regions for the
twelve months ended 31 December 2002 were L296.6 million, L146.4 million and
L242.2 million, respectively, compared to losses of L131.3 million, L201.9
million and L82.6 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 L258.0 million, L123.6 million and L175.3
million for the North, Central and South regions, respectively, compared to
L61.0 million, L108.1 million and L2.8 million, respectively, for the twelve
months ended 31 December 2001. The Central region had a margin on infrastructure
sales in 2001 of L1.4 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 L38.6 million, L22.8
million and L66.9 million for the North, Central and South regions,
respectively, compared to L70.3 million, L95.2 million and L79.8 million,
respectively, for the twelve months ended 31 December 2001. Improved financial
performance in the regions accounted for the decreased loss before exceptional
charges.
New Accounting Standards
A number of new US accounting standards were issued during 2001, 2002 and 2003
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 - Other disclosures of Note 25 in the Financial
Statements included as part of this report.
-48-
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 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.
We have entered into separate 10 year agreements with Fidelity Capital
Associates Inc. ("FCA") (a wholly owned subsidiary of FMR Corp.) under which
each of us will 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
2003.
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 2003 were approximately L127,000 (2002: L170,000).
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 2003 were approximately L1,932,000 (2002:
L1,377,000) for FMR employees and L1,095,000 (L300,000) for Fidelity
International Limited employees.
An amount of L3,194,000 was billed by us during 2003 to Fidelity International
Limited for voice, data and eBusiness services (2002: L3,880,000).
An amount of L916,000 was billed to us during 2003 by Teranua, a 100% owned
subsidiary of FMR Corp., for consultancy services (2002; Lnil).
B. Liquidity and capital resources
The costs associated with the construction and expansion of our networks,
including development, installation and initial operating expenses, have
resulted in cumulative negative cash flows. We do not expect to achieve
sustainable positive free cash flow until some time during 2005.
Net cash inflow from operating activities was L139.3 million in 2002 and L147.9
million in 2003. Changes to cash flow from operations include the effect of the
timing of stage billings and payments with telecommunications operators
associated with the construction of our inter-city network and the effects of
movements in provisions. Net cash outflow from returns on investments and
servicing of finance and from capital expenditure and financial investment
decreased from L439.3 million in 2002 to L178.3 million in 2003.
Free cash flow improved from an outflow of L300.0 million in 2002 to an outflow
of L30.4 million in 2003. Free cash flow is a non-GAAP measure but is viewed by
management as important as it is the sum of net cash inflow from operating
activities less net cash outflow from returns on investments and servicing of
finance and from capital expenditure and financial investment.
The decrease in net cash outflow was primarily a result of reduced purchases of
tangible fixed assets, which decreased from L412.1 million in 2002 to L141.0
million in 2003.
-49-
Net cash outflow from financing in 2002 was L97.2 million compared with L142.8
million in 2003. The changes were primarily as a result of the redemption of the
U.S. dollar 12% Senior Discount Notes on 22 December 2003 for L120.7 million
partially offset by reduced bond purchases, which decreased from L97.2 million
in 2002 to L23.8 million in 2003.
We had balances of cash and investments in liquid resources at 31 December 2003
of L802.4 million compared with L934.9 million at 31 December 2002.
We operate a centralised treasury function, the prime objective of which is to
optimise the return on our cash balances and to manage our working capital
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.
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
We continued to take advantage of volatile financial markets during 2003 and
purchased L31.4 (2002: L198.9 million) of our outstanding convertible and
non-convertible notes for cash consideration of L23.8 million (2002: L97.2
million). We also redeemed all of the outstanding U.S. dollar 12% Senior Notes
due 2006 for L120.7 million, including accreted interest, resulting in net
interest savings of approximately L30 million from 2004 to 2006. 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 2002 2003 2003
L'000 L'000 $'000
----- ----- -----
Repayable between one and two years
Senior convertible notes - 107,771 192,285
-50-
Repayable between two and three years
Senior convertible notes 98,283 355,732 634,697
Repayable between three and four years
Senior convertible notes 321,057 236,628 422,192
Senior discount notes 142,408 - -
Senior notes - 83,328 148,674
Repayable between four and five years
Senior convertible notes 220,489 - -
Senior notes 79,861 176,791 315,431
Repayable in more than five years
Senior notes 331,801 184,299 328,826
---------------------- ---------------------- ---------------------
1,193,899 1,144,549 2,042,105
---------------------- ---------------------- ---------------------
There are no material commitments for capital expenditure.
C. Research and development, patents and licences, etc.
We do not engage in significant research and development activities.
D. Trend information
Telecommunications Market
2004 is likely to be another challenging year and, as yet, it is too early to
determine whether the improving economic environment will lead to any
significant upturn in demand for telecom services across Europe.
Throughout 2004 we will seek revenue growth and further improvements in our cost
structure, margins and earnings. This, together with our reputation for
excellent customer service, will enable us to take advantage of any upturn in
the demand for high bandwidth data, internet and advanced telecommunications
services.
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 Item 5.B, Operating and Financial Review
and Prospects - Liquidity and Capital Resources.
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 2003, there were exchange gains, before exceptional items, of L6.4 million
compared with exchange gains of L12.4 million in 2002. These gains 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 there was an exceptional
exchange gain of L4.8 million from the unwinding of the British pounds forward
contracts previously held as a condition of the bank facility which we
terminated in June 2002.
E. Off-balance sheet arrangements
There were no off-balance sheet arrangements.
F. Tabular disclosure of contractual obligations
The following table summarises the Company's long-term commitments as at 31
December 2003, including commitments pursuant to debt agreements, lease
obligations and other long terms contracts.
Payment due by period
L'000 Total Less than 1-3 3-5 more than 5
1 year years years years
------------------------------------------------------------------------------------
-51-
Long-term debt obligations 1,144,549 - 783,459 176,791 184,299
Capital lease obligations 2,605 523 852 310 920
Operating lease obligations 320,234 35,908 88,106 22,683 173,537
------------------------------------------------------------------------------------
Total contractual cash obligations 1,467,388 36,431 872,417 199,784 358,757
---------------------------------- ------------------------------------------------------------------------------------
The Company had a Bank
Facility of up to L75,000,000
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 - - - - -
------------------------------------------------------------------------------------
- - - - -
------------------------------------------------------------------------------------
G. Safe harbor
Not applicable.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management
Chairman
Barry R. J. Bateman (58) 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.
Executive Directors
Steven P. Akin - President and Chief Executive Officer. Mr. Akin (58) 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.
-52-
On 22 April 2004, we announced that Mr. Akin would return to a new position with
Fidelity in the US later in 2004 and that it is intended he be replaced by
Jean-Yves Charlier, whose appointment at Fidelity International Limited was
announced on the same day. Mr. Charlier will be seconded from Fidelity
International Limited which he joins from BT with significant experience in
growing and operating telecommunication groups in Europe and internationally. At
BT's Global Services division, he held dual roles as Chief of Operations,
responsible for sales and marketing on a global basis, as well as President of
Europe, responsible for the company's operations in continental Europe. Prior to
his 18 months at BT, the majority of his professional career was spent at Equant
and Wang.
Non-executive Directors
Andreas Barth (59) is currently a senior adviser to General Atlantic Partners, a
private equity investment firm, Chairman of the board of BOG Management GmbH and
a member of the supervisory board of TDS Informationstechnologie AG. From 1991
to 1999 he was Senior Vice President and General Manager Europe, Middle East and
Africa with Compaq Computer Corporation and had previously held management
positions at Thomson-CSF, Texas Instruments and Ford. He was appointed to the
Board of Directors of COLT on 1 September 2003.
Paul W. Chisholm (55) 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. and Chief Executive
Officer of Mindshift Inc..
James. C. Curvey (68) is a Director and Vice Chairman of FMR Corp. He was
appointed to our Board of Directors on 29 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.
Vincenzo Damiani (64) 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.
Hans Eggerstedt (66) 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.
Robert Hawley (67) was Chief Executive of British Energy plc until 1997 and
before that until 1995 he was Chief Executive of Nuclear Electric plc. He was
the Chairman of Taylor Woodrow plc, until May 2003. He is a non-
-53-
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 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.
Timothy T. Hilton (51) 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.Frans van den Hoven (80) 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 30 September 1996. He is a member
of the supervisory board of Hunter Douglas and is a director for a number of
funds managed by Fidelity International Limited.
Senior Management
Antony Bates - Interim Chief Financial Officer until 1 May 2004 when he will be
appointed to the Board of Directors and as Chief Administrative Officer. Mr.
Bates (47) joined us in November 2003 to cover the maternity leave of Marina
Wyatt. Tony is a Chartered Accountant having qualified with Arthur Andersen in
London. His early career was spent at Philip Morris and then as Finance Director
of Habitat UK Ltd. He worked for the EMI Group between 1990 and 2002, initially
as Finance Director of the EMI Records Limited, rising through a number of roles
of increasing responsibility, to finally become both Group Finance Director of
EMI Group Plc and Executive Vice President of EMI Recorded Music.
Paul I. David - Director of Marketing. Mr. David (43) 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.
J. William Freeze - Managing Director, Multi-National Business. Mr. Freeze (49)
joined us 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.
Lakh Jemmett - Managing Director, Retail and Wholesale Business. Mr. Jemmett
(43) joined us in 1997 as Regional Director. 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.
Kenneth C. Starkey - Chief Operations Officer. Mr. Starkey (48) joined us in
2002 as Chief Network Officer, 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.
-54-
Christopher J. Woodman - Managing Director, Human Resources. Mr. Woodman (42)
joined us as Managing Director, Human Resources, in January 2003. 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.
Marina M. Wyatt (40) 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 and was a Non-Executive
director of Symbian Ltd from 1998 to 2000.
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 (19 persons)
during the financial year ended 31 December 2003 was L4,017,552. The aggregate
compensation paid or accrued by us to all Directors and executive officers as a
group during such period included L1,542,610 in bonuses.
Name Salary / Travel Bonus PPP/ Blue Pension Housing Other Total
- ---- Fee Allowance ----- Cross ------- ------- Benefits -----
-------- --------- --------- --------
Barry Bateman - - - - - - - -
Steven Akin 244,800 6,000 489,700 - 20,100 156,000 179,000 1,095,600
Andreas Barth 10,000 - - - - - - 10,000
Paul Chisholm 30,000 - - 9,600 - - - 39,600
James Curvey 15,000 - - - - - - 15,000
Vincenzo Damiani 33,750 - - - - - - 33,750
Hans Eggerstedt 17,500 - - - - - - 17,500
Robert Hawley 33,750 - - - - - - 33,750
Timothy Hilton - - - - - - - -
Frans van den Hoven 33,750 - - - - - - 33,750
Antony Bates 52,510 - - - - - - 52,510
Paul David 135,790 - 136,000 1,237 19,100 - 1,797 293,924
Ronald Duff (1) 171,387 - 122,420 8,067 6,170 24,865 - 332,909
William Freeze 193,053 - 140,119 6,094 18,754 48,000 2,228 408,248
Lakh Jemmett 170,502 - 160,000 1,926 28,800 - 1,832 363,060
Mark Jenkins (2) 96,700 - 43,500 800 15,800 - - 156,800
-55-
Kenneth Starkey 201,992 - 195,871 10,064 6,170 59,388 - 473,485
Christopher Woodman 125,000 - 80,000 970 20,000 - 1,483 227,453
Marina Wyatt 225,517 - 175,000 713 27,000 - 1,983 430,213
Total 1,791,001 6,000 1,542,610 39,471 161,894 288,253 188,323 4,017,552
<FN>
(1) Ronald Duff left the Company's employment with effect from 1st April 2004.
(2) Mark Jenkins left the Company's employment with effect from 29 February 2004.
</FN>
Share options under the Group Share Plan (see Item 6.E for further details)
- ---------------------------------------------------------------------------
Name 01-Jan-03 Granted Exercised Lapsed 16-Apr-04 Date of Market Option Usual date Usual
- ---- --------- ------- --------- ------ --------- exercise value exercise from which expiry
-------- ------ price per exercisable date
share ----------- ------
---------
- ------------------------------------------------------------------------------------------------------------------------------------
Barry Bateman Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
Steven Akin 500,000 500,000 0.4800 29 Jul 03 29 Jul 12
29 Jul 07
-------------------------------------------------------------------------------------------------------------------
150,000 150,000 0.7692 28 Jul 06 28 Jul 13
28 Jul 08
650,000
Andreas Barth Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
Paul Chisholm 5,100,000 500,000 4,600,000 25 Feb 04 1.13 0.6875 17 Dec 97 to 17 Dec 06
17 Dec 01
400,000 400,000 1.7000 15 Dec 98 to 15 Dec 07
15 Dec 02
-------------------------------------------------------------------------------------------------------------------
5,500,000 500,000 5,000,000
James Curvey Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
Vincenzo Damiani 40,000 40,000 0.4800 29 Jul 03 to 29 Jul 12
29 Jul 07
-------------------------------------------------------------------------------------------------------------------
40,000 40,000
Hans Eggerstedt Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
Robert Hawley 68,060 68,060 7.4940 25 Nov 99 to 25 Nov 08
25 Nov 03
-------------------------------------------------------------------------------------------------------------------
68,060 68,060
Timothy Hilton Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
- ------------------------------------------------------------------------------------------------------------------------------------
-56-
Name 01-Jan-03 Granted Exercised Lapsed 16-Apr-04 Date of Market Option Usual date Usual
- ---- --------- ------- --------- ------ --------- exercise value exercise from which expiry
-------- ------ price per exercisable date
share ----------- ------
---------
- ------------------------------------------------------------------------------------------------------------------------------------
Frans van den 48,000 48,000 17 Dec 96 to 17 Dec 06
Hoven 17 Dec 00
8.5000 for next
16,000
exercised
29.0000 for next
16,000
exercised
14.8600 for next
16,000
exercised
-------------------------------------------------------------------------------------------------------------------
48,000 48,000
Antony Bates Nil Nil
-------------------------------------------------------------------------------------------------------------------
Nil Nil
Paul David 40,000 40,000 19.1570 11 Aug 01 to 11 Aug 10
11 Aug 05
40,000 40,000 19.4840 10 Nov 01 to 10 Nov 10
10 Nov 05
40,000 40,000 7.1000 8 Jun 02 to 8 Jun 11
8 Jun 06
20,000 20,000 0.4125 26 Feb 03 to 26 Feb 12
26 Feb 07
25,000 25,000 0.4800 29 Jul 03 to 29 Jul 12
29 Jul 07
150,000 150,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
165,000 150,000 315,000
William Freeze 400,000 400,000 0.4800 29 Jul 03 to 29 Jul 12
29 Jul 07
90,000 90,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
400,000 90,000 490,000
Lakh Jemmett 594,000 594,000 1.7000 15 Dec 98 to 15 Dec 97
15 Dec 02
8,565 8,565 Nil 13.3700 27 Feb 04 to 27 Feb 11
27 Feb 06
75,000 75,000 13.3700 27 Feb 02 to 27 Feb 11
27 Feb 06
200,000 200,000 0.4125 26 Feb 03 to 26 Feb 12
26 Feb 07
120,000 120,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
877,565 120,000 8,565 989,000
- ------------------------------------------------------------------------------------------------------------------------------------
-57-
Name 01-Jan-03 Granted Exercised Lapsed 16-Apr-04 Date of Market Option Usual date Usual
- ---- --------- ------- --------- ------ --------- exercise value exercise from which expiry
-------- ------ price per exercisable date
share ----------- ------
---------
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Jenkins (1) 160,000 160,000 Nil 6.6000 4 Aug 99 to 4 Aug 08
4 Aug 03
20,000 20,000 Nil 13.3700 27 Feb 02 to 27 Feb 11
cliff vest
20,000 8,000 12,000 Nil 25 Mar 04 0.9525 0.4125 26 Feb 03 to 26 Feb 12
16,000 26 Feb 07
20,000 4,000 Nil 25 Mar 04 0.9525 0.4800 29 Jul 03 to 29 Jul 12
29 Jul 07
-------------------------------------------------------------------------------------------------------------------
220,000 12,000 208,000 Nil
Kenneth Starkey 250,000 250,000 0.5042 6 Aug 03 to 6 Aug 12
6 Aug 07
150,000 150,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
250,000 150,000 400,000
Christopher 200,000 200,000 0.4067 3 Mar 04 to 3 Mar 13
Woodman 3 Mar 08
70,000 70,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
200,000 70,000 270,000
Marina Wyatt 400,000 400,000 0.4359 21 Nov 03 to 21 Nov 12
21 Nov 07
70,000 70,000 0.7692 28 Jul 06 to 28 Jul 13
28 Jul 08
-------------------------------------------------------------------------------------------------------------------
400,000 70,000 470,000
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Mr. Jenkins left the Company's employment with effect from 29 February 2004.
</FN>
Share options under the Save as You Earn Purchase Plan (see Item 6.E for further details)
- -----------------------------------------------------------------------------------------
Name Date of Date of Date of Granted Exercised Lapsed Outstanding
- ----- grant vesting expiration ------- --------- ------ 16-Apr-04
------- ------- ---------- -----------
Barry Bateman Nil
Steven Akin Nil
Andreas Barth Nil
Paul Chisholm Nil
James Curvey Nil
Vincenzo Damiani Nil
Hans Eggerstedt Nil
Robert Hawley Nil
Timothy Hilton Nil
Frans van den Hoven Nil
Antony Bates Nil
-58-
Name Date of Date of Date of Granted Exercised Lapsed Outstanding
- ----- grant vesting expiration ------- --------- ------ 16-Apr-04
------- ------- ---------- -----------
Paul David Dec-01 Mar-05 Aug-05 4,703 4,703 Nil
William Freeze Nil
Lakh Jemmet Dec-01 Mar-05 Aug-05 4,703 4,703
Mark Jenkins (1) Dec-02 Mar-06 Aug-06 18,000 18,000 Nil
Kenneth Starkey Nil
Christopher Woodman Nil
Marina Wyatt Dec-02 Mar-06 Aug-06 18,000 18,000
<FN>
(1) Mr. Jenkins left the Company's employment with effect from 29 February 2004
</FN>
Share options under the Deferred Bonus Plan (see Item 6.E for further details)
- ------------------------------------------------------------------------------
Name Date of Bonus Date of Matching Exercised Lapsed Outstanding
- ---- Grant award vesting award --------- ------ 16-Apr-04
------- ----- ------- -------- -----------
Barry Bateman Nil
Steven Akin Nil
Andreas Barth Nil
Paul Chisholm Nil
James Curvey Nil
Vincenzo Damiani Nil
Hans Eggerstedt Nil
Robert Hawley Nil
Timothy Hilton Nil
Frans van den Hoven Nil
Antony Bates Nil
Paul David Nil
William Freeze 25 Feb 04 44,339 25 Feb 07 12,169 56,508
Lakh Jemmet Nil
Kenneth Starkey Nil
Christopher Woodman Nil
Marina Wyatt 25 Feb 04 26,603 25 Feb 07 13,301 39,904
C. Board practices
Directors' service agreements
-59-
Messrs. van den Hoven, Hilton, Chisholm, Hawley, Damiani, Eggerstedt, Curvey and
Barth have service contracts with us that have no minimum term and no express
right to compensation for the termination of such agreement(s). Mr. Bateman has
no specific service contracts in respect of his office of director of the Board
or as Chairman. Messrs. Bateman and Hilton do not receive any remuneration for
their services to the Company. Of the fees paid to Messrs. van den Hoven,
Chisholm, Hawley, Damiani, Eggerstedt, Curvey and Barth under the terms of their
appointment, approximately 50% is paid in shares of the Company. 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. 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.
Mr. Bates, who has been appointed a director with effect from 1 May 2004, has a
service contract that he can terminate giving six month's notice. Until 30 April
2005, we can terminate the service contract by giving notice of twenty-four
month's less the number of completed months since 1 May 2004. From 1 May 2005,
we can terminate the service contract by giving twelve month's notice. In the
event of termination, he will be entitled to receive, subject to mitigation, an
amount equal to his salary and other benefits for the period of notice plus
bonus equal to the average bonus percentage of salary achieved during the prior
two years or, if termination is before two bonus payments have been made, at
127.5% of his base salary.
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 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 Street, London, EC3A 7QN, England.
Matters reserved for the decision of the Board
The Board, which meets not less than four times each year, has a schedule of
matters reserved specifically for the decision by the Board as a whole. These
matters include the approval of Group policy, strategic plans and budgets, the
sanctioning of the disposal of an investment, asset or business, capital
expenditure, acquisition or other investments not contemplated by the Company's
strategic plan and budgets, as well as the approval of financial and accounting
matters such as the annual report and accounts and interim Financial Statements.
The issue of any securities and the adoption of any significant change in the
accounting policies or practices of the Company are also matters reserved for
the decision by the Board, as is the approval of all circulars and prospectuses
including listing arrangements.
The appointment and removal of any person as a Director or Secretary, subject to
recommendation of the Nomination Committee, is also a matter reserved for the
Board as is the determination of the remuneration or the terms of service of any
non-executive Director. Other matters may be delegated from time to time to the
Sub-Committee of the Board, or to any other Committee formed for any
specifically delegated purpose.
Board committees
The Board has established four committees as follows.
-60-
Sub-Committee
The Sub-Committee of the Board: comprising Messrs. Bateman (Chairman) and Akin
and any other director, as appropriate. The Sub-Committee oversees the
management of the business and affairs of the Company generally in accordance
with the authority delegated by the Board from time to time.
Audit Committee
The Audit Committee meets at least four times in each year and reports to the
Board. It comprises exclusively of the non-executive directors Messrs. van den
Hoven (Chairman), Damiani, Eggerstedt and Hawley. The Audit Committee meets at
least once in each year or as frequently as necessary with the external auditors
without any Company management being present.
The main duties of the Audit Committee are to keep under review the integrity of
the Financial Statements of the Company and any formal announcements relating to
the Company's financial performance as well as the effectiveness of the
Company's internal control policies and procedures for the identification,
assessment and reporting of risks.
The Audit Committee is also responsible for approving the terms of reference of
the Internal Audit function, and for reviewing and monitoring its effectiveness.
The Head of the Internal Audit function has the right of direct access to the
Chairman of the Audit Committee.
The Audit Committee considers and makes recommendations to the Board as regards
the appointment and re-appointment of the Company's external auditors and keeps
under close review the relationship with external auditors including (but not
limited to) their independence and objectivity, the effectiveness of the audit
process and the policy on the engagement of the external auditor to supply
non-audit services. The Audit Committee will additionally give consideration to
the level of audit fees as well as other fees which are payable in respect of
non-audit activities.
The Audit Committee keeps under review the consistency of accounting policies,
and examines the Company's Financial Statements where reporting decisions
require a major element of judgement, or to the extent that they are affected by
any unusual transactions. The Audit Committee also considers the clarity of
disclosures, significant adjustments resulting from the audit, the going concern
assumption, compliance with accounting standards and stock exchange and other
legal requirements. It reviews the Company's statement on internal control
systems prior to endorsement by the Board and the policies and process for
identifying and assessing business risks and the management of those risks.
The Audit Committee is responsible for the co-ordination of both the Disclosure
and the Corporate Compliance Committees and reviews the Company's procedures for
handling allegations of purported impropriety from whistle blowers.
During 2003, the Audit Committee considered a number of issues, including but
not limited to corporate governance compliance, accounting developments, the
financial control environment and risk management and control.
Nomination Committee
The Nomination Committee comprises exclusively of the non-executive Directors
Messrs. Chisholm (Chairman), Bateman, Curvey and Hawley. The Nomination
Committee nominates Directors for appointment to stand for election to the
Board, with external advice assisting it in finding candidates with the
requisite experience and knowledge. It also reviews the structure, size and
composition of each of the other Committees from time to time as part of its
responsibilities.
Compensation Committee
The Compensation Committee comprises exclusively of the non-executive Directors
Messrs. Bateman (Chairman), Barth, Curvey and Damiani. The Compensation
Committee examines and makes recommendations with regard to the compensation of
our executive Directors of the Company and for the annual bonuses of the
Company's senior management team. It is also responsible for approving the grant
of
-61-
options and shares under the COLT Telecom Group Share Plan, the COLT Performance
Share Plan, the COLT Deferred Bonus 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. No Director is
involved in setting their own remuneration.
D. Employees
At 31 December 2000, we employed 4,012 employees, at 31 December 2001 we
employed 5,345 employees and at 31 December 2002 we employed 4,684 employees.
At 31 December 2003, we had 3,866 full-time and part-time employees and a
further 178 individuals were engaged either on contract, fixed term or on
secondment. Although a small number of our employees are members of a union they
are not covered by a collective bargaining agreement. Works Councils, which have
rights to be consulted on certain employment and business issues, exist in three
of the countries in which we operate; France, Germany and The Netherlands. 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.
Employees at 31 December 2003 by geographic region were:
North Region 1,236
Central Region 1,393
South Region 932
Group / other 305
-------------
Total 3,866
-------------
The countries in each region are:
North Region - Belgium, Denmark, Ireland, The Netherlands, Sweden and the United
Kingdom;
Central Region - Austria, Germany and Switzerland; and
South Region - France, Italy, Portugal and Spain.
E. Share ownership
Group Share Plan.
On 7 November 1996, we established the Share Option Plan, also known as the COLT
Telecom Group Share Plan, or Option Plan, for the issuance to employees of the
Group and consultants to the Group of options to purchase our Ordinary Shares.
At 16 April 2004 options to subscribe for our Ordinary Shares under the Option
Plan were as follows:
Date of Exercise Date of Number of Ordinary Shares under option
grant price Dates of vesting expiration --------------------------------------
from to Granted Exercised Lapsed Outstanding
---- -- ------- --------- ------ -----------
Dec 96 L0.6880 Dec 97 Dec 01 Dec 06 25,824,000 12,712,036 6,089,964 7,022,000
Jan 97 L0.7790 Jan 98 Jan 02 Jan 07 396,000 226,400 149,600 20,000
Apr 97 L0.7060 Apr 98 Apr 02 Apr 07 1,280,000 675,000 377,600 227,000
Aug 97 L0.9560 Aug 98 Aug 02 Aug 07 2,488,000 726,000 846,000 916,000
Nov 97 L1.2850 Nov 98 Nov 02 Nov 07 3,196,000 1,418,362 1,073,794 703,844
Dec 97 L1.7000 Dec 98 Dec 02 Dec 07 4,204,000 1,104,400 1,128,800 1,970,800
Feb 98 L2.7380 Feb 99 Feb 03 Feb 08 140,000 56,000 84,000 -
Feb 98 L2.7430 Feb 99 Feb 03 Feb 08 900,000 530,220 369,780 -
May 98 L4.7560 May 99 May 03 May 08 830,000 207,750 289,696 332,554
Aug 98 L6.6000 Aug 99 Aug 03 Aug 08 2,906,000 591,544 1,663,712 650,744
Nov 98 L7.4940 Nov 99 Nov 03 Nov 08 1,408,075 113,215 980,400 314,460
Dec 98 L7.8770 Dec 99 Dec 03 Dec 08 100,000 - 100,000 -
Mar 99 L11.300 Mar 00 Mar 04 Mar 09 990,000 122,500 540,692 326,808
Apr 99 L10.934 Apr 00 Apr 04 Apr 09 1,000,000 150,000 850,000 -
-62-
Date of Exercise Date of Number of Ordinary Shares under option
grant price Dates of vesting expiration --------------------------------------
from to Granted Exercised Lapsed Outstanding
---- -- ------- --------- ------ -----------
May 99 L12.254 May 00 May 04 May 09 585,000 58,000 295,000 232,000
Aug 99 L12.744 Aug 00 Aug 04 Aug 09 930,000 15,000 654,000 261,000
Nov 99 L21.000 Nov 00 Nov 04 Nov 09 800,500 - 556,572 243,928
Dec 99 L24.394 Dec 00 Dec 04 Dec 09 740,000 - 363,771 376,229
Feb 00 L36.177 Feb 01 Feb 05 Feb 10 745,000 - 422,500 322,500
May 00 L22.610 May 01 May 05 May 10 792,500 - 359,696 432,804
Jun 00 L26.660 Jun 01 Jun 05 Jun 10 846,000 - 361,375 484,625
Aug 00 L19.157 Aug 01 Aug 05 Aug 10 1,181,500 - 637,934 543,566
Aug 00 L17.727 Aug 01 Aug 05 Aug 10 317,500 - 150,000 167,500
Nov 00 L19.484 Nov 01 Nov 05 Nov 10 800,000 - 281,922 518,078
Dec 00 L15.184 Dec 01 Dec 05 Dec 10 757,321 - 300,287 457,034
Feb 01 L13.370 Feb 02 Feb 06 Feb 11 2,401,040 - 1,390,292 1,010,748
Feb 01 L20.055 Feb 02 Feb 06 Feb 11 400,000 - 400,000 -
Feb 01 L26.740 Feb 02 Feb 06 Feb 11 750,000 - 750,000 -
May 01 L8.437 May 02 May 06 May 11 866,500 - 520,000 346,500
May 01 L12.656 May 02 May 06 May 11 250,000 - 200,000 50,000
May 01 L16.874 May 02 May 06 May 11 250,000 - 200,000 50,000
Jun 01 L7.100 Jun 02 Jun 06 Jun 11 2,688,750 - 1,065,800 1,622,950
Aug 01 L3.2170 Aug 02 Aug 06 Aug 11 1,464,500 - 832,000 632,500
Nov 01 L1.7240 Nov 02 Nov 06 Nov 11 231,000 - 16,000 215,000
Dec 01 L1.5610 Dec 02 Dec 06 Dec 11 1,410,500 - 296,500 1,114,000
Feb 02 L0.4125 Feb 03 Feb 07 Feb 12 4,688,500 85,000 2,469,000 2,134,500
May 02 L0.4475 May 03 May 07 May 12 72,500 6,000 51,500 15,000
Jul 02 L0.4800 Jul 03 Jul 07 Jul 12 5,602,300 117,260 1,007,000 4,478,040
Aug 02 L0.5042 Aug 03 Aug 07 Aug 12 250,000 - - 250,000
Oct 02 L0.3234 Oct 03 Oct 07 Oct 12 250,000 50,000 180,000 20,000
Nov 02 L0.4359 Nov 03 Nov 07 Nov 12 400,000 - - 400,000
Mar 03 L0.4067 Mar 04 Mar 08 Mar 13 200,000 - - 200,000
Apr 03 L0.4550 Apr 04 Apr 08 Apr 13 32,500 - - 32,500
May 03 L0.4675 May 04 May 08 May 13 150,000 - - 150,000
May 03 L0.4925 May 04 May 08 May 13 50,000 - - 50,000
Jul 03 L0.7690 Jul 06 Jul 08 Jul 13 7,161,000 - 490,000 6,671,000
Oct 03 L1.0120 Oct 06 Oct 08 Oct 13 60,000 - - 60,000
Feb 04 L1.1283 Feb 07 Feb 09 Feb 14 60,000 - - 60,000
----------------------------------------------------------------
83,846,486 18,964,687 28,795,187 36,086,612
----------------------------------------------------------------
In addition to options granted under the Option Plan, options to subscribe for
80,000 Ordinary Shares were granted to 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
option was L0.6875; the exercise price for the 16,000 option vesting on 17
December 1997, 1998, 1999 and 2000 is L1.65875, L8.50, L29.00 and L14.86 per
share respectively. He exercised 16,000 options with an exercise price of
L0.6875 and 16,000 with an exercise price of L1.65875 on 13 August 1999 and 5
June 2000, respectively. These Options are included in the Group Share Plan
options table in Item 6.B above.
For additional information relating to the Option Plan, please refer to our
Financial Statements included as part of this report.
Save as You Earn Purchase Plan.
The COLT Save as You Earn Purchase Plan, also known as the Savings-Related Share
Option Plan, or 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 16 April 2004, outstanding options to subscribe for our Ordinary
Shares under the SAYE Scheme were as follows:
-63-
Date of Grant Option Price Date of Vesting Options Exercised Lapsed Outstanding
- ------------- ------------ --------------- ------- --------- ------ -----------
19 Dec. 1997 L 1.1900 1 Mar. 2001 2,289,244 1,919,819 369,425 -
18 Dec. 1998 L 6.0100 1 Mar. 2002 592,929 - 592,929 -
17 Dec. 1999 L 16.6560 1 Mar. 2003 441,124 - 441,124 -
15 Dec. 2000 L 11.7840 1 Mar. 2004 804,128 - 794,578 9,550
28 Dec. 2001 L 1.6150 1 Mar. 2005 6,986,000 - 6,170,172 815,828
18 Dec. 2002 L 0.4000 1 Mar. 2006 18,409,635 127,104 2,462,517 15,820,014
4 Dec. 2003 L 1.0270 1 Mar. 2007 58,323* - - 58,323
4 Dec. 2003 L 0.9950 1 Mar. 2007 1,560,919 - 14,833 1,546,086
-----------------------------------------------------------------------
31,142,302 2,046,923 10,845,578 18,249,801
-----------------------------------------------------------------------
<FN>
* each option holder entered into a four year savings contract.
</FN>
Of the options outstanding under the SAYE Scheme on 16 April 2004, 22,703 were
held by our directors and senior management and are included in the Save as You
Earn Purchase Plan options table in Item 6.B above.
For additional information relating to the SAYE Scheme, please refer to our
Financial Statements included within this 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 lapsed. At 31 December 2003,
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. Under the Plan selected senior
employees may be entitled to receive an award of shares representing a
proportion of the amount of their annual cash bonus. At 16 April 2004,
outstanding options to subscribe for our Ordinary Shares under this part of the
Deferred Bonus Plan were as follows:
Date of grant Price Date of vesting Number of shares Lapsed Outstanding
- ------------- ----- --------------- ---------------- ------ -----------
27 Feb 2001 L13.370 Feb 2004 24,182 8,099 Nil
Employees may also be invited to defer a proportion of the annual cash bonuses
which they would otherwise have received by investing in Ordinary Shares.
Individuals who do so are entitled to receive an additional matching award in
the form of an option to acquire an additional Ordinary Share for every two
Ordinary Shares purchased. These awards are made in accordance with the terms of
the Option Plan. Receipt of the matching award is subject to the achievement of
performance targets. Awards will vest after a period set by the Compensation
Committee, normally three years. At 16 April 2004, outstanding options to
subscribe for our Ordinary Shares under this part of the Deferred Bonus Plan
were as follows:
Date of grant Date of vesting Matching award Lapsed Outstanding
- ------------- --------------- -------------- ------- -----------
25 Feb 2004 Feb 2007 156,519 Nil 156,519
Of the share awards outstanding under this plan 25,470 are held by our directors
and senior management and are included in the Deferred Bonus options table in
Item 6.B above.
For additional information relating to the Deferred Bonus Plan, please refer to
our Financial Statements included within this report.
-64-
Shareholdings
The interests of Directors and Officers in our Ordinary Shares (all of which are
beneficial interests) at 16 April 2004 are shown below:
Barry Bateman -
Steven Akin -
Andreas Barth 16,109
Paul Chisholm 4,179,813
James Curvey 288,338
Vincenzo Damiani 42,162
Hans Eggerstedt 19,206
Robert Hawley 58,654
Timothy Hilton 46,080
H. F. van den Hoven 82,413
Antony Bates -
Paul David -
Jane Forrest -
J. William Freeze -
Lakh Jemmett 272,138
Kenneth Starkey -
Christopher Woodman -
Marina M. Wyatt -
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 included as part of this report.
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
The following table sets forth certain information at 16 April 2004 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 450,908,245 29.8
Boston, Massachusetts 02109
Fidelity Investors Limited Partnership (2)
82 Devonshire Street 313,073,111 20.7
Boston, Massachusetts 02109
Amvescap plc (3) 150,163,486 9.9
30, Finsbury Square
London, EC2A 1AG
England
Fidelity International Limited (4) 80,807,457 5.3
Pembroke Hall
42 Crow Lane
Pembroke
Bermuda HM-19
(1) FMR Corp.'s holding is through
-65-
(a) the holding by Colt, Inc. of 52,402,867 Ordinary Shares, which is an
indirect wholly owned subsidiary of FMR Corp., which is therefore also
interested in our Ordinary Shares.
(b) 172,215,436 Ordinary Shares owned beneficially by the COLT Inc. 2003 Annuity
Trust, 82,723,580 Ordinary Shares owned beneficially by the Colt Inc. 2002
Annuity Trust, 78,113,593 Ordinary Shares owned beneficially by the Colt Inc.
2001 Annuity Trust and 1,575,038 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 63,212,531 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 (43,687,020 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 is a Bermuda company.
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 L150.0 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 L26.5 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 L119.5 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.
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.
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
The Financial Statements are set forth in Item 18.
Item 9. The Offer and Listing
A. Offer and Listing Details
-66-
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
---- --- ---- ---
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
2003 1.16 0.30 7.50 2.00
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 0.77 0.30 4.99 2.00
Third Quarter 1.16 0.59 7.49 4.18
Fourth Quarter 1.11 0.89 7.50 6.02
2004
First Quarter 1.31 0.89 10.00 6.59
The London Stock Exchange Nasdaq
(Pounds per Share) (U.S. Dollars per ADS)
High Low High Low
---- --- ---- ---
October 2003 1.11 0.89 7.50 6.02
November 2003 1.05 0.91 7.04 6.11
December 2003 1.05 0.90 7.26 6.50
January 2004 1.20 0.94 8.60 6.73
February 2004 1.31 1.05 10.00 7.79
March 2004 1.12 0.89 8.45 6.59
At 16 April 2004, 21,887,186 Ordinary Shares and ADRs evidencing 7,842,099 ADSs
(representing 31,368,396 Ordinary Shares) were held of record in the U.S. These
Ordinary Shares and ADRs, were held by 15 and 31 record holders, respectively,
and represented 1.45% of, and evidenced ADSs representing 2.08% of,
respectively, the total number of Ordinary Shares outstanding. Since certain of
these Ordinary Shares and
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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.
In 1996, we issued 314,000 units, consisting of 12% Senior Discount Notes due
2006 and warrants to purchase Ordinary Shares. On 22 December 2003 all of the
outstanding Discount Notes were redeemed at their principal amount plus accrued
interest for a cash consideration of L120.7 million.
Between November 1997 and April 2000 we issued L50,000,000 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.
D. Selling shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.
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 are authorised to do such things as the
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board may consider to further the Company's interests, all as provided in its
Memorandum of Association at clause 4.
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 the 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,
(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
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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 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 the articles 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
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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 all directors retire and are eligible for re-election.
(E) No shareholding qualification for directors is required.
Shares
COLT's authorised share capital consists of 2,075,000,000 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 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
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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 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
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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 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.
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.
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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, ownership
and disposition of senior 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 directly or indirectly (considering applicable constructive
ownership rules) 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
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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,
o a corporation, or other entity treated as a corporation 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,
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,
whose status as a U.S. holder is not overridden pursuant to the provisions of an
applicable tax treaty. If an entity treated as a partnership for U.S. federal
income tax purposes holds instruments, the tax treatment of each partner will
depend upon the status of the partner and the activities and the status of the
partnership under both U.S. and U.K. law. If you are a partner in a partnership
that holds instruments, you should consult your tax advisor.
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
senior note or convertible note pursuant to its initial offering at the
applicable issue price described below. Further, with respect to the 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 the Income Tax Convention and the Protocol (together, the "Treaty")
between the United States and the United Kingdom dated July 24, 2001
and in force as of March 31, 2003,
o to the extent it is still applicable, the 1975 U.S.-U.K. tax treaty
relating to income taxes (the "1975 Treaty"), 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.
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.
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Holders of instruments should note that any person who would have been entitled
to greater benefits under the 1975 Treaty than under the Treaty may elect to
continue to take advantage of the provisions of the 1975 Treaty for a period of
12 months from the date on which the Treaty otherwise would have effect. With
respect to taxes withheld at source, the Treaty applies in both the U.S. and
U.K. for amounts paid or credited on or after May 1, 2003. For all other taxes,
the effective date for the U.K. is April 6, 2003, and for the U.S., January 1,
2004.
Holders of instruments are advised to consult their own tax advisers with
respect to the overall tax implications of the Treaty, 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, 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 and the Convertible Notes
Payment on the Notes. Provided the senior notes and the convertible 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 on account 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 and
convertible 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.
Original Issue Discount. Original issue discount is not subject to 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
Treaty, 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 Treaty, 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.
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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 both 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.
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 or convertible 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 L5 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 at any time 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 the fair market rate of exchange available to the public for currency
under a spot contract in a free market and involving representative amounts. A
spot contract is a contract to buy or sell a currency on or before two business
days following the
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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.
Taxation of the Senior 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 received, 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.
If you are required to accrue interest income on a senior note prior to receipt,
unless you have made a spot rate convention election described below, 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.
Interest on the Convertible Notes. For the reasons discussed below, the
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
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 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 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.
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The amount of OID with respect to each convertible note is equal to the excess
of its stated redemption price at maturity over its issue price. 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 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. 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 convertible note attributable to each
accrual period is the product of its adjusted issue price at the beginning of
the accrual period multiplied by its yield to maturity, less any qualified
stated interest for that accrual period. Your 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 convertible note,
produces an amount equal to its issue price. The adjusted issue price of your
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 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.
Election to Treat all Interest as OID. If you hold 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 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 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
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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 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 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 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 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 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.
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 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 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.
Under the market discount rules, you must treat any gain on the sale, exchange,
redemption, or other taxable disposition of a senior 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 or convertible note. The senior 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 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 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, such as 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
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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
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. You generally may elect to amortise bond premium over the
remaining term of the senior 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 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 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 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 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 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 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 or convertible notes
will generally be treated as foreign tax eligible for credit against your U.S.
federal income tax. For foreign tax credit
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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 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 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 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 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 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 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
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 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:
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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
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.
Tax Treatment of Warrants
Original Issue Price. Each warrant was originally issued as part of a unit
comprised of one discount note and one warrant. We redeemed the discount notes
in December 2003. For U.S. federal income tax purposes, we allocated the issue
price of a unit 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 determined that 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
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challenges our allocation of the issue price, then the amount of gain or loss on
the taxable disposition of your warrants would be different from those resulting
under our allocation.
Our determination of the issue price of the warrant is binding on you, unless
you disclosed the use of a different issue price on the applicable form attached
to your timely filed U.S. federal income tax return for the taxable year that
includes your acquisition of a unit. If you intend to use an issue price
different from what we determined, you should consult your tax advisor as to the
consequences.
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. 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. A distribution you receive from us with respect to your Ordinary
Shares or ADSs will constitute a dividend 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 generally 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% if
you are a noncorporate U.S. holder. Because our ADSs trade on NASDAQ, any
dividends we pay to you during that period should constitute qualified dividend
income to you, provided that you meet the minimum holding period requirement,
unless we are or become a foreign personal holding company or a passive foreign
investment company, which are circumstances described below. You generally will
meet the holding period requirement if you held the stock for more than 60 days
during the 121 day period that begins 60 days before the ex-dividend date; the
ex-dividend date is the first date following the declaration of the dividend on
which the buyer of the stock will not receive the next dividend payment.
The amount that you must include in income will be the U.S. dollar value of any
distribution we make to you in British pounds sterling or other foreign
currency, or other property you receive, on the date of distribution. The U.S.
dollar value of a distribution paid in British pounds sterling or other foreign
currency will be based on the
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exchange rate on the date of your receipt, or, in the case of the ADSs, on 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 and will not be a dividend.
For U.S. federal income tax purposes, dividends we distribute will be income
from foreign sources, and 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. 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
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
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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
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 are owned, directly or indirectly, by five or fewer U.S. citizen or
resident individuals, taking into account applicable constructive
ownership rules, and
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, Finland, and India, 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, Finnish, and Indian
operating entities, which income 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 become a PFIC in 2002. We believe there is a low
probability we could have become a PFIC in 2003, and we do not believe we will
become a PFIC under our current financial circumstances. We do not believe we
became a PFIC in any period prior to 2002. If we are classified as a PFIC during
your holding period in our Ordinary Shares, ADSs, warrants, or convertible
notes, then you could be subject to additional taxes and an interest charge.
This adverse consequence of becoming a PFIC could be reduced provided you 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.
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.
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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 that 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 were at risk of having become a PFIC in 2002 because the average
percentage of our passive assets (cash and short-term investments) might have
equaled or exceeded 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 become a PFIC during 2002. However, if our assets were properly
valued by considering the company's indebtedness at its book value, we believe
we would not have become a PFIC during 2002. Neither U.S. Treasury regulations
nor the PFIC statute's legislative history establishes a method of valuing
traded debt for this purpose. As a result of increases in our market
capitalisation in 2003, we think there is little risk that we became a PFIC
during 2003.
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, and such changes could be retroactively
effective.
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 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.
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Under the default regime's special tax calculation, you must prorate your gain
over every day of your holding period for the disposed Ordinary Shares or ADSs.
Then you must sum 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 each 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.
If we become a PFIC during your holding period in our Ordinary Shares, ADSs,
warrants, or convertible notes, 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 year that 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.
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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 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 in which we did not qualify as a PFIC under the income and asset
tests, whereas a QEF election would otherwise relieve you from having to treat
us as a 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 had
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 only
to the extent of 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 U.S. 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 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 the year 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, convertible note, warrant, Ordinary Share or ADS,
payments to you of interest, OID, dividends, or gross proceeds from dispositions
may be subject to information reporting to the IRS and to possible backup
withholding of U.S. federal income tax, currently at a 28% rate. 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
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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, OID, 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 generally 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 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
optimise the return on our cash balances and to manage our working capital
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 invested in marketable government securities or placed on short-term deposit
prior to being invested in our operating companies to fund operations. In
addition to the financial instruments issued to finance our operations, 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.
-90-
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 our 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 were 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 during 2003 but on 22 December 2003 redeemed all of the
outstanding U.S. 6% 2006 dollar senior discount notes.
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 2003, 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 L50.1 million. A 10% change in interest rates across all
maturities would lead to a corresponding change in our earnings of approximately
L6.2 million based on the interest bearing assets and liabilities held during
2003.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable.
Item 15. Controls and Procedures
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
-91-
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.
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 16A. Audit committee financial expert
The Board has determined that at least one audit committee financial expert
serves on our Audit Committee. The named audit committee financial expert is
Hans Eggerstedt.
Item 16B. Code of Ethics
We have adopted a Code of Business Conduct that applies to the President and
Chief Executive Officer, to the Chief Financial Officer and to our principal
accounting officer. We expect to extend the code to apply to all employees of
the group by the end of July 2004.
The Code of Business Conduct is available free of charge by writing to the
Corporate Secretary, COLT Telecom Group plc, Beaufort House, 15 St. Botolph's
Street, London, EC3A 7QN, England.
Item 16C. Principal Accountant Fees and Services
The remuneration paid to our auditors during the previous two fiscal years
ending 31 December was:
2002 2003
L'000 L'000
----- -----
Audit Fees 878 920
Audit-Related Fees (1) 123 88
Tax Fees (2) 476 854
All Other Fees (3) 537 40
(1) These are services that are outside the agreed scope of the statutory
audit but are consistent with the role of auditor and include the
statutory audits of our non-UK subsidiaries and services performed in
connection with the preparation of this report.
(2) These are tax based services that the auditors are best placed to
provide and include advice on tax return preparation, tax compliance and
tax planning.
(3) These are services undertaken that do not fall into the categories above
and which do not impair the independence of the auditor and include
advice on International Accounting Standards and the Sarbanes-Oxley Act.
In 2002,(pound)520,000 of the fees were in relation to Highberry
Limited's (a hedge fund) unsuccessful petition to appoint an
administrator.
Our audit committee has established policies and procedures which are intended
to control the services provided by our auditors and to monitor their continuing
independence. Under these policies, no services may be undertaken by our
auditors unless the engagement is specifically approved by our audit committee
or the services are included within a category which has been pre approved by
our audit committee. The maximum charge for services is established by the audit
committee when the specific engagement is approved or the category of services
pre approved. Management is required to notify the audit committee of the nature
and value of pre approved services undertaken.
Our audit committee will not approve engagements relating to, or pre approve
categories of, non-audit services to be provided by our auditors (i) if such
services are of a type the performance of which would cause our auditors to
cease to be independent within the meaning of applicable SEC or Nasdaq rules,
and (ii) without consideration, among other things, of whether our auditors are
best situated to provide the required services and whether the required services
are consistent with their role as auditor.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
-92-
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
PART III
Item 17. Financial Statements
We have responded to Item 18 in lieu of responding to this Item.
Item 18. Financial Statements
The Financial Statements described below are set forth on pages F-1 through F-51
of this report and are incorporated herein by reference.
Index to Financial Statements Page
- ----------------------------- ----
Report of Independent Accountants F-1
Group Profit and Loss Account F-2
Group Statement of Total Recognised Gains and Losses F-3
Group Reconciliation of Changes in Equity Shareholders' Funds F-3
Group Cash Flow Statement F-4
Group Balance Sheet F-5
Note 1 Basis of Presentation and Principal Accounting Policies F-6
Note 2 Segmental Analysis F-8
Note 3 Loss on Ordinary Activities Before Taxation F-12
Note 4 Directors' Emoluments F-13
Note 5 Employee Information F-14
Note 6 Interest Payable and Similar Charges F-15
Note 7 Exceptional Items F-16
Note 8 Taxation F-17
Note 9 Loss per Share F-18
Note 10 Intangible Fixed Assets F-19
Note 11 Tangible Fixed Assets F-20
Note 12 Debtors - Amounts falling due within one year F-22
Note 13 Capital and Reserves F-23
Reserves F-23
Note 14 Creditors - Amounts falling due within one year F-27
Note 15 Creditors - Amounts falling due after more than one year F-28
Note 16 Provisions for liabilities and charges F-31
Note 17 Cash Flow Reconciliations F-32
Note 18 Analysis of Net Debt F-33
Note 19 Capital Commitments F-34
Note 20 Financial Commitments F-34
Note 21 Financial Instruments F-35
Note 22 Pension Arrangements F-38
Note 23 Transactions with Related Entities F-38
Note 24 Company Balance Sheet F-39
Note 25 Summary of differences between U.K. Generally Accepted
Accounting Principles ("GAAP") and U.S. GAAP
F-42
Note 26 Subsidiary Undertakings F-49
2003 Operating Statistics (Unaudited) F-50
2003 Quarterly Group Financial Results (Unaudited) F-51
Five Year Summary F-52
Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts
-93-
L'000 Balance at Balance at
beginning of Charged to costs end of
Description period and expenses Deduction* period
- ----------- ------------ ---------------- ---------- ----------
Allowance for doubtful debts
2003 43,883 5,052 (5,549) 43,386
2002 22,884 22,464 (1,465) 43,883
2001 11,558 12,222 (896) 22,884
Deferred tax valuation allowance
2003 373,599 124,044 - 497,643
2002 206,528 167,071 - 373,599
2001 101,514 105,014 - 206,528
<FN>
* Amounts written off as uncollectable, net of recoveries
</FN>
Item 19. Exhibits
Exhibit
Number Exhibit
- ------ -------
1.1 Memorandum of Association (Incorporated by reference to the Company's
Annual Report on Form 20-F for the year ended December 31, 1996.)
1.2 Articles of Association, as amended (Incorporated by reference to the
Company's Annual report on Form 20-F for the year ended December 31,
2002)
2.1 Indenture, dated November 26, 1997, relating to the L50,000,000 10 1/8%
Senior Notes including the Form of Note (Incorporated by reference to
the Company's Annual Report on Form 20-F for the year ended December
31, 1997.)
2.2 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 Company's Annual Report on Form 20-F for the year ended December
31, 1997.)
2.3 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 Company's Annual Report on Form 20-F for the year ended December
31, 1998.)
2.4 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
for the year ended December 31, 1998.)
2.5 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 Company's Annual Report on Form 20-F for the year
ended December 31, 1998.)
2.6 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 Company's Annual Report on Form 20-F for the year
ended December 31, 1999.)
2.7 Indenture, dated December 16, 1999, relating to the(euro)320,000,000
7.625% Senior Notes including the Form of Note (Incorporated by
reference to the Company's Registration Statement on Form F-4 filed
April 26, 2000.)
2.8 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 Company's Annual Report on Form 20-F for the year
ended December 31, 1999.)
-94-
Exhibit
Number Exhibit
- ------ -------
2.9 Deposit Agreement, dated November 26, 1997, relating to the L50,000,000
10 1/8% Senior Notes and the DM150,000,000 8 7/8% Senior Notes
(Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1997.)
2.10 Deposit Agreement, dated December 17, 1996, including Form of American
Depository Receipt (Incorporated by reference to the Company's Annual
Report on Form 20-F for the year ended December 31, 1996.)
2.11 Deposit Agreement, dated July 28, 1998, relating to the DM600,000,000
7.625% Senior Notes and DM600,000,000 2% Senior Convertible Notes
(Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1998.)
2.12 Deposit Agreement, dated March 29, 2003, relating to the
(euro)295,000,000 Senior Convertible Notes (Incorporated by reference
to the Company's Annual Report on Form 20-F for the year ended December
31, 1998.)
2.13 Deposit Agreement, dated December 16, 1999, relating to the
(euro)368,000,000 2% Senior Convertible Notes (Incorporated by
reference to the Company's Annual Report on Form 20-F for the year
ended December 31, 1999.)
2.14 Deposit Agreement, dated December 16, 1999, relating to the
(euro)320,000,000 7.625% Senior Notes (Incorporated by reference to the
Company's Registration Statement on Form F-4 filed April 26, 2000.)
2.15 Deposit Agreement, dated April 3, 2000, relating to the
(euro)402,500,000 2% Senior Convertible Notes (Incorporated by
reference to the Company's Annual Report on Form 20-F 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 Company's Annual Report on Form 20-F
for the year ended December 31, 2001.)
4.2 The COLT Performance Share Plan* (Incorporated by reference to the
Company's Annual Report on Form 20-F for the year ended December 31,
2002.)
4.3 The COLT Deferred Bonus Plan* (Incorporated by reference to the
Company's Annual Report on Form 20-F for the year ended December 31,
2002.)
8.1 List of Subsidiaries (Filed herewith.)
11.1 Code of Business Ethics (Filed herewith.)
12.1 Certification Required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Furnished herewith.)
12.2 Certification Required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Furnished herewith.)
13.1 Certification required by 18 U.S.C. Sec. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002) (Furnished herewith.)
14.1 Consent of PricewaterhouseCoopers LLP (Filed herewith.)
* Compensatory plan or arrangement applicable to management and/or employees.
-95-
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)
By: /s/ Jane Forrest
-----------------------------
Jane Forrest
Company Secretary
Dated: 30 April 2004
-96-
Report of Independent Accountants
PricewaterhouseCoopers LLP
1 Embankment Place
London
England
To the Directors and Shareholders of COLT Telecom Group plc
In our opinion, the accompanying consolidated balance sheets and the related
consolidated profit and loss accounts, consolidated statements of total
recognised gains and losses, consolidated statements of cash flows, consolidated
reconciliations of changes in equity shareholders' funds and the related notes
listed in the index appearing under Item 18 on page 93, present fairly, in all
material respects, the financial position of COLT Telecom Group plc and its
subsidiaries at 31 December 2003 and 31 December 2004, and the results of their
operations and their cash flows for the three years ended 31 December 2003, in
conformity with accounting principles generally accepted in the United Kingdom.
In addition, in our opinion, the financial statement schedules appearing under
Item 18 on page 93 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These consolidated financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
of these consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of the loss for the period for each of the three years in the
period ended 31 December 2003 and the determination of equity shareholders'
funds at 31 December 2003 and 2002 to the extent summarized in Note 25 to the
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
London
England
24 February 2004
20-F 2004 Financial Statements -F 1-
Group Profit and Loss Account
2001 2001 2001 2002 2002 2002
Before After Before After
Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional
Items Items Items Items Items Items
Notes L'000 L'000 L'000 L'000 L'000 L'000
-------- -------- -------- -------- -------- -------- --------
Turnover 2 905,687 -- 905,687 1,027,258 -- 1,027,258
Cost of sales
Interconnect and network (642,524) (62,382) (704,906) (713,615) (18,320) (731,935)
Network depreciation (163,393) (73,371) (236,764) (212,009) (508,000) (720,009)
-------- -------- -------- -------- -------- --------
(805,917) (135,753) (941,670) (925,624) (526,320) (1,451,944)
-------- -------- -------- -------- -------- --------
Gross profit (loss) 99,770 (135,753) (35,983) 101,634 (526,320) (424,686)
Operating expenses
Selling, general and administrative (237,111) (27,870) (264,981) (242,095) (18,934) (261,029)
Other depreciation and amortisation (47,012) (11,955) (58,967) (49,879) (43,000) (92,879)
-------- -------- -------- -------- -------- --------
(284,123) (39,825) (323,948) (291,974) (61,934) (353,908)
-------- -------- -------- -------- -------- --------
Operating loss (184,353) (175,578) (359,931) (190,340) (588,254) (778,594)
Other income (expense)
Interest receivable 60,727 -- 60,727 38,108 -- 38,108
Gain on purchase of debt 7 -- 58,774 58,774 -- 101,668 101,668
Amounts written off investment
in own shares 7 -- (2,757) (2,757) -- (409) (409)
Interest payable and similar charges 6 (111,952) -- (111,952) (96,300) -- (96,300)
Exchange gain (5,230) -- (5,230) 12,401 4,844 17,245
-------- -------- -------- -------- -------- --------
(56,455) 56,017 (438) (45,791) 106,103 60,312
-------- -------- -------- -------- -------- --------
Profit (loss) on ordinary activities
before taxation 3 (240,808) (119,561) (360,369) (236,131) (482,151) (718,282)
Taxation 8 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Profit (loss) for period (240,808) (119,561) (360,369) (236,131) (482,151) (718,282)
======== ======== ======== ======== ======== ========
Basic and diluted profit (loss) per share 9 L(0.32) L(0.16) L(0.48) L(0.16) L(0.32) L(0.48)
======== ======== ======== ======== ======== ========
2003 2003 2003 2003
Before After After
Exceptional Exceptional Exceptional Exceptional
Items Items Items Items
Notes L'000 L'000 L'000 $'000
-------- ----------- ----------- ----------- -----------
Turnover 2 1,166,318 -- 1,166,318 2,080,945
Cost of sales
Interconnect and network (766,942) -- (766,942) (1,368,378)
Network depreciation (204,417) -- (204,417) (364,721)
-------- -------- -------- --------
(971,359) -- (971,359) (1,733,099)
-------- -------- -------- --------
Gross profit (loss) 194,959 -- 194,959 347,846
Operating expenses
Selling, general and administrative (235,928) 2,453 (233,475) (416,566)
Other depreciation and amortisation (38,531) -- (38,531) (68,747)
-------- -------- -------- --------
(274,459) 2,453 (272,006) (485,313)
-------- -------- -------- --------
Operating loss (79,500) 2,453 (77,047) (137,467)
Other income (expense)
Interest receivable 26,718 -- 26,718 47,670
Gain on purchase of debt 7 -- 7,589 7,589 13,540
Amounts written off investment
in own shares 7 -- -- -- --
Interest payable and similar charges 6 (88,295) -- (88,295) (157,536)
Exchange gain 6,388 -- 6,388 11,398
-------- -------- -------- --------
(55,189) 7,589 (47,600) (84,928)
-------- -------- -------- --------
Profit (loss) on ordinary activities
before taxation 3 (134,689) 10,042 (124,647) (222,395)
Taxation 8 -- -- -- --
-------- -------- -------- --------
Profit (loss) for period (134,689) 10,042 (124,647) (222,395)
======== ======== ======== ========
Basic and diluted profit (loss) per share 9 L(0.09) L0.01 L(0.08) $(0.15)
======== ======== ======== ========
There is no difference between the loss on ordinary activities before taxation
and the retained loss for the periods stated above and their historical cost
equivalents.
All of the Group's activities are continuing.
Details of exceptional items are provided in note 7.
20-F 2004 Financial Statements -F 2-
Group Statement of Total Recognised Gains and Losses
Year ended 31 December
---------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Loss for period (360,369) (718,282) (124,647) (222,395)
Exchange differences (23,590) 49,030 31,002 55,314
-------- -------- -------- --------
Total recognised losses (383,959) (669,252) (93,645) (167,081)
======== ======== ======== ========
Group Reconciliation
of Changes in Equity Shareholders' Funds
Year ended 31 December
------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
----------- ----------- ----------- -----------
Loss for period (360,369) (718,282) (124,647) (222,395)
Issue of share capital (note 13) 510,064 170 1,767 3,153
Shares to be issued (note 13) (3,565) (267) (239) (426)
Charges related to share schemes (note 13) (38) -- -- --
Exchange differences (23,590) 49,030 31,002 55,314
---------- ---------- ---------- ----------
Net changes in equity shareholders' funds 122,502 (669,349) (92,117) (164,354)
Opening equity shareholders' funds 1,501,857 1,624,359 955,010 1,703,929
---------- ---------- ---------- ----------
Closing equity shareholders' funds 1,624,359 955,010 862,893 1,539,575
========== ========== ========== ==========
20-F 2004 Financial Statements -F 3-
Group Cash Flow Statement
Year ended 31 December
----------------------------------------------------
2001 2002 2003 2003
Notes L'000 L'000 L'000 $'000
------ ---------- ---------- ---------- ----------
Net cash inflow from operating activities 17 39,682 139,279 147,866 263,823
Returns on investments and servicing of finance
Interest received 81,020 39,227 26,526 47,328
Interest paid, finance costs and similar charges (54,671) (71,268) (63,849) (113,919)
Cancellation of forward foreign currency contracts 7 -- 4,844 -- --
-------- -------- -------- --------
Net cash outflow from returns on investments
and servicing of finance 26,349 (27,197) (37,323) (66,591)
Capital expenditure and financial investment
Purchase of tangible fixed assets (804,251) (412,115) (140,973) (251,524)
-------- -------- -------- --------
Net cash outflow from capital expenditure and financial investment (804,251) (412,115) (140,973) (251,524)
Acquisitions and disposals
Sale of subsidiary undertakings (2,676) -- 912 1,627
Net cash sold with subsidiary undertakings (232) -- (2,944) (5,253)
-------- -------- -------- --------
Net cash outflow from acquisitions and disposals (2,908) -- (2,032) (3,626)
Management of liquid resources 18 330,164 400,390 187,765 335,010
Financing
Issue of ordinary shares 498,885 110 1,630 2,908
Purchase of convertible debt 18 (59,946) (55,573) (9,606) (17,139)
Purchase of non-convertible debt 18 (24,705) (41,704) (134,869) (240,633)
-------- -------- -------- --------
Net cash outflow from financing 414,234 (97,167) (142,845) (254,864)
-------- -------- -------- --------
Increase in cash 18 3,270 3,190 12,458 22,228
======== ======== ======== ========
20-F 2004 Financial Statements -F 4-
Group Balance Sheet
At 31 December
---------------------------------------------------
2002 2003 2003
Notes L'000 L'000 $'000
------- ---------- ---------- ----------
Fixed assets
Intangible fixed assets 10 10,639 9,493 16,937
Tangible fixed assets 11 1,378,809 1,344,285 2,398,473
Investment in own shares 13 206 195 348
---------- ---------- ----------
Total fixed assets 1,389,654 1,353,973 2,415,758
Current assets
Trade debtors 12 189,788 199,849 356,571
Prepaid expenses and other debtors 12 74,606 66,834 119,245
Investments in liquid resources 18 889,590 742,143 1,324,132
Cash at bank and in hand 18 45,292 60,239 107,478
---------- ---------- ----------
Total current assets 1,199,276 1,069,065 1,907,426
---------- ---------- ----------
Total assets 2,588,930 2,423,038 4,323,184
========== ========== ==========
Capital and reserves 13
Called up share capital 37,688 37,754 67,361
Share premium 2,314,335 2,315,904 4,132,036
Merger reserve 27,227 27,359 48,814
Shares to be issued 454 215 384
Profit and loss account (1,424,694) (1,518,339) (2,709,020)
---------- ---------- ----------
Equity shareholders' funds 955,010 862,893 1,539,575
Provisions for liabilities and charges 16 87,368 62,860 112,155
Creditors
Amounts falling due within one year 14 352,653 352,736 629,349
Amounts falling due after more than one year: 15
Convertible debt 639,829 700,131 1,249,174
Non-convertible debt 554,070 444,418 792,931
---------- ---------- ----------
Total amounts falling due after more than one year 1,193,899 1,144,549 2,042,105
---------- ---------- ----------
Total creditors 1,546,552 1,497,285 2,671,454
---------- ---------- ----------
Total liabilities, capital and reserves 2,588,930 2,423,038 4,323,184
========== ========== ==========
Approved by the Board of Directors on 24 February 2004 and signed on its behalf
by:
Barry Bateman, Chairman of the Board of Directors
Steve Akin, President, Chief Executive Officer and Director
20-F 2004 Financial Statements -F 5-
1. Basis of Presentation and Principal Accounting Policies
COLT Telecom Group plc ("COLT" or the "Company") together with its subsidiaries
is referred to as the "Group". The Group financial statements consolidate the
financial statements of the Company and its subsidiaries up to 31 December 2003.
Accounting policies
The principal accounting policies, which have been applied
consistently for all years, are set out below.
As permitted by paragraph 3 (3) of Schedule 4 of the Companies Act 1985, the
Directors have adapted the prescribed profit and loss format in a manner
appropriate to the nature of the Group's business.
Certain British pound amounts in the financial statements have been translated
into U.S. dollars at 31 December 2003 and for the year then ended at the rate of
$1.7842 to the British pound, which was the noon buying rate in the City of New
York for cable transfers in British pounds as certified for customs purposes by
the Federal Reserve Bank on such date. Such translations should not be construed
as representations that the British pound amounts have been or could be
converted into U.S. dollars at that or any other rate.
Basis of accounting
The financial statements have been prepared in accordance with applicable
Accounting Standards in the United Kingdom, under the historical cost
convention.
The preparation of financial statements requires management to make estimates
and assumptions that affect; reported amounts of assets and liabilities,
disclosure and valuation of contingent assets and liabilities and the reported
amounts of income and expenditure. Estimates are used principally when
accounting for provisions for doubtful debts and the lengths of fixed asset
lives. These estimates could differ from the actual results.
Turnover
Turnover represents amounts earned for services provided to customers (net of
value added tax and inter-company revenue).
Contracted income invoiced in advance for fixed periods is recognised as
turnover in the period of actual service provision. Turnover from installation
and other up-front set-up activities is recognised in the same period as related
costs.
Turnover attributable to infrastructure sales in the form of indefeasible
rights-of-use ("IRUs") with characteristics which qualify the transaction as an
outright sale, or transfer of title agreements is recognised at the time of
delivery and acceptance by the customer. Proceeds from the sale of
infrastructure qualify as turnover where the infrastructure was designated as
built for resale at the outset and the associated costs of construction have
been classified as inventory for future sale. Where the infrastructure was not
designated for resale and was classified as tangible fixed assets, the proceeds
from these infrastructure sales are recorded net of costs as gains or losses or
on the disposals of fixed assets.
Charges to customers attributable to non-telephony services, provided through
the Group network where the Group is deemed to be acting as agent, are reported
net of the service providers' charges to the Group.
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.
Operating leases
Costs in respect of operating leases are charged on a straight-line basis over
the lease term.
Goodwill
Goodwill arising on all acquisitions since 1 January 1998 is capitalised in the
year in which it arises and is amortised through the profit and loss account on
a straight-line basis over its useful economic life.
Goodwill arising on the acquisition of ImagiNet is being amortised over 10 years
(see note 10). Goodwill arising on the acquisition of Fitec was fully amortised
following an impairment review during 2002.
Goodwill arising on all acquisitions prior to 1 January 1998 remains written off
against reserves. This goodwill has been written off as a matter of accounting
policy and would be taken to the profit and loss account on disposal of the
relevant business.
Tangible fixed assets
Tangible fixed assets are recorded at historical cost. Network infrastructure
and equipment comprises assets purchased and built, at cost, together with
capitalised labour which is directly attributable to the cost of construction.
Depreciation is calculated to write off the cost, less estimated residual values
of tangible fixed assets, on a straight-line basis over their expected economic
lives as follows:
Network infrastructure and equipment 5%-20% per annum
Office computers, equipment, fixtures
and fittings and vehicles 10%-33% per annum
Depreciation of network infrastructure and equipment commences from the date it
becomes operational. No depreciation is provided for payments on account and
assets under construction.
Impairment
Tangible and intangible fixed 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 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.
20-F 2004 Financial Statements -F 6-
Investments
The Company's investment in subsidiaries is restated at cost less provision for
impairment.
Licences
Annual amounts payable for telecommunications licences have been expensed as
incurred.
Deferred taxation
Deferred tax is provided on all timing differences which result in an obligation
at the balance sheet date, to pay more tax, or a right to pay less tax, at a
future date, at rates that are expected to apply when they crystallise, based on
current tax rates and laws enacted or substantially enacted at the balance sheet
date. Timing differences arise from the inclusion of items of income and
expenditure in taxation computations in periods different from those in which
they are included in the financial statements. Deferred tax assets and
liabilities are recognised to the extent that it is regarded as more likely than
not that they will be recovered in the foreseeable future. Deferred tax is
measured on a non-discounted basis.
Property provisions
The group provides for obligations relating to excess leased space in offices
and ISCs. The provisions represent the net present value of the future estimated
costs and the unwinding of the discount is included within the interest charge
for the year.
Finance costs
Costs incurred in raising debt finance are deducted from the amount raised and
amortised over the life of the debt facility on a constant yield basis. Costs
incurred in raising equity finance are deducted from the premium arising on the
issue of shares.
Pension schemes
The Group operates a number of defined contribution pension schemes through its
subsidiaries. Pension costs are charged to the profit and loss account on an
accruals basis in the period in which contributions are payable to the schemes.
Foreign currencies and derivative financial instruments
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
re-translation 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 the Group's 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. No other derivative instruments are used by the Group.
All other exchange differences are taken to the profit and loss account.
Liquid resources
Liquid resources include surplus cash which is placed on short term deposit
which is disposable without curtailing or disrupting the business and are either
readily convertible into known amounts of cash at or close to their carrying
values or traded in an active market. At 31 December 2003, all of the Group's
liquid resources comprised short term money market deposits.
20-F 2004 Financial Statements -F 7-
2. Segmental Analysis
Factors used to identify reporting segments
The Group operates in a single business segment, telecommunications, and in
geographical areas as shown below.
In 2001, the Group reported its segments as UK, Germany, France, South Region
and North Region, which reflected the manner in which the Group was managed at
the time. In February 2002, the Group 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. In 2003
eBusiness ceased to be monitored separately, prior years have been restated on
this basis. North Region comprises Belgium, Denmark, Ireland, The Netherlands,
Sweden and the U.K. Central Region comprises Austria, Germany and Switzerland
and South Region comprises France, Italy, Portugal and Spain. Country activities
and local business are managed by local management teams. These local management
teams are co-ordinated across the Group through a regional and functional
organisational structure.
Products and services within each reportable segment
Turnover from the single business segment is attributed within geographical
areas and is classified as Switched, Non-switched, and Other, as shown below.
Turnover by destination is not materially different from turnover by origin.
Switched turnover comprises services that involve the transmission of voice,
data or video through a switching centre. Non-switched turnover includes managed
and non-managed network services and bandwidth services.
Turnover has also been classified by customer type with wholesale turnover
comprising services to other telecommunications carriers, resellers and internet
service providers (ISPs). Corporate turnover includes services to corporate and
government accounts.
Measurement of segment performance
Accounting policies adopted by the single business segment and for each
geographical area are described in note 1. Management evaluates performance
based upon profit or loss on ordinary activities before taxation and exceptional
items.
Segmental analysis for the year ended 31 December 2003:
North Central South Corporate &
Region Region Region eliminations Total
------------------------
Turnover L'000 L'000 L'000 L'000 L'000 $'000
---------- ---------- ---------- ---------- ---------- ----------
Switched 234,904 360,592 180,336 (73,194) 702,638 1,253,647
Non-switched 182,526 173,935 144,978 (39,035) 462,404 825,021
Other 82 742 584 (132) 1,276 2,277
Inter region turnover (44,910) (40,866) (26,585) 112,361 -- --
---------- ---------- ---------- ---------- ---------- ----------
372,602 494,403 299,313 -- 1,166,318 2,080,945
========== ========== ========== ========== ========== ==========
Depreciation and amortisation
(including impairment charges) 63,020 86,308 53,679 39,941 242,948 433,468
========== ========== ========== ========== ========== ==========
Net interest (payable) receivable (43,263) (48,470) (38,731) 68,887 (61,577) (109,866)
========== ========== ========== ========== ========== ==========
Profit (loss) on ordinary activities
before taxation and exceptional items (60,187) (52,472) (35,473) 13,443 (134,689) (240,312)
========== ========== ========== ========== ========== ==========
Profit (loss) on ordinary activities before
taxation and after exceptional items (43,738) 45,963 (35,456) (91,416) (124,647) (222,395)
========== ========== ========== ========== ========== ==========
Expenditure on fixed assets 41,182 43,325 37,392 6,173 128,072 228,506
========== ========== ========== ========== ========== ==========
Tangible fixed assets 359,749 564,994 408,349 11,193 1,344,285 2,398,473
========== ========== ========== ========== ========== ==========
Total assets 458,642 674,196 523,144 767,056 2,423,038 4,323,184
========== ========== ========== ========== ========== ==========
Equity shareholders' funds 332,810 535,454 404,917 (410,288) 862,893 1,539,575
========== ========== ========== ========== ========== ==========
20-F 2004 Financial Statements -F 8-
Segmental analysis for the year ended 31 December 2002:
North Central South Corporate &
Region Region Region eliminations Total
------------------------
Turnover L'000 L'000 L'000 L'000 L'000 $'000
---------- ---------- ---------- ---------- ---------- ----------
Switched 213,025 309,458 164,871 (63,971) 623,383 1,112,240
Non-switched 155,963 151,317 123,427 (28,654) 402,053 717,343
Other 65 1,330 485 (58) 1,822 3,251
Inter region turnover (37,543) (32,300) (22,840) 92,683 -- --
---------- ---------- ---------- ---------- ---------- ----------
331,510 429,805 265,943 -- 1,027,258 1,832,834
========== ========== ========== ========== ========== ==========
Depreciation and amortisation
(including impairment charges) (279,368) (190,889) (216,871) (125,760) (812,888) (1,450,355)
========== ========== ========== ========== ========== ==========
Net interest (payable) receivable (34,286) (48,718) (45,469) 70,281 (58,192) (103,826)
========== ========== ========== ========== ========== ==========
Profit (loss) on ordinary activities
before taxation and exceptional items (38,614) (22,791) (66,910) (107,816) (236,131) (421,305)
========== ========== ========== ========== ========== ==========
Profit (loss) on ordinary activities
before taxation and after exceptional items (296,599) (146,407) (242,243) (33,033) (718,282) (1,281,559)
========== ========== ========== ========== ========== ==========
Expenditure on fixed assets 93,341 90,327 127,064 3,636 314,368 560,895
========== ========== ========== ========== ========== ==========
Tangible fixed assets 384,222 580,701 400,368 13,518 1,378,809 2,460,071
========== ========== ========== ========== ========== ==========
Total assets 476,751 679,445 524,512 908,222 2,588,930 4,619,169
========== ========== ========== ========== ========== ==========
Equity shareholders' funds 333,636 550,913 401,526 (331,065) 955,010 1,703,929
========== ========== ========== ========== ========== ==========
20-F 2004 Financial Statements -F 9-
Segmental analysis for the year ended 31 December 2001:
North Central South Corporate &
Region Region Region eliminations Total
------------------------
Turnover L'000 L'000 L'000 L'000 L'000 $'000
---------- ---------- ---------- ---------- ---------- ----------
Switched 222,670 262,749 125,646 (78,418) 532,647 950,349
Non-switched 132,920 147,543 102,067 (15,825) 366,705 654,275
Other (i) 158 5,860 456 (139) 6,335 11,303
Inter region turnover (42,822) (35,810) (15,750) 94,382 -- --
---------- ---------- ---------- ---------- ---------- ----------
312,926 380,342 212,419 -- 905,687 1,615,927
========== ========== ========== ========== ========== ==========
Depreciation and amortisation
(including impairment charges) (109,948) (110,654) (47,994) (27,135) (295,731) (527,643)
========== ========== ========== ========== ========== ==========
Net interest (payable) receivable (23,527) (50,782) (33,380) 56,464 (51,225) (91,395)
========== ========== ========== ========== ========== ==========
Profit (loss) on ordinary activities
before taxation and exceptional items (i), (ii) (70,300) (93,833) (79,811) 3,136 (240,808) (429,650)
========== ========== ========== ========== ========== ==========
Equity Shareholders' funds
before taxation and after exceptional
items (i), (ii) (131,251) (201,916) (82,645) 55,443 (360,369) (642,970)
========== ========== ========== ========== ========== ==========
Expenditure on fixed assets 275,079 231,710 271,944 30,532 809,265 1,443,891
========== ========== ========== ========== ========== ==========
Tangible fixed assets 618,910 647,981 504,079 22,107 1,793,077 3,199,208
========== ========== ========== ========== ========== ==========
Total assets 712,088 786,323 641,746 1,287,635 3,427,792 6,115,867
========== ========== ========== ========== ========== ==========
Equity Shareholders' funds 532,923 618,666 512,817 (40,047) 1,624,359 2,898,181
========== ========== ========== ========== ========== ==========
<FN>
(i) Central Region "Other" turnover includes infrastructure sales of
L3,829,000 which had associated cost of sales of L2,415,000.
(ii) Results for the North Region include a charge of L2,195,000 under the
Company's Share Symmetry Scheme and results for the South Region include a
charge of L1,132,840 under the same scheme. These charges are eliminated
upon consolidation.
</FN>
Segmental analysis by customer type for the year ended 31 December 2003:
Total
Corporate Wholesale -----------------------
L'000 L'000 L'000 $'000
--------- --------- --------- ---------
Switched 336,980 365,658 702,638 1,253,647
Non-switched 354,794 107,610 462,404 825,021
Other 909 367 1,276 2,277
--------- --------- --------- ---------
Total 692,683 473,635 1,166,318 2,080,945
========= ========= ========= =========
20-F 2004 Financial Statements -F1 0-
Segmental analysis by customer type for the year ended 31 December 2002:
Total
Corporate Wholesale -----------------------
L'000 L'000 L'000 $'000
--------- --------- --------- ---------
Switched 294,757 328,626 623,383 1,112,240
Non-switched 288,962 113,091 402,053 717,343
Other 1,040 782 1,822 3,251
--------- --------- --------- ---------
Total 584,759 442,499 1,027,258 1,832,834
========= ========= ========= =========
Segmental analysis by customer type for the year ended 31 December 2001:
Total
Corporate Wholesale -----------------------
L'000 L'000 L'000 $'000
--------- --------- --------- ---------
Switched 231,191 301,456 532,647 950,349
Non-switched 225,673 141,032 366,705 654,275
Other 615 5,720 6,335 11,303
--------- --------- --------- ---------
Total 457,479 448,208 905,687 1,615,927
========= ========= ========= =========
20-F 2004 Financial Statements -F 11-
3. Loss on Ordinary Activities Before Taxation
Loss on ordinary activities before taxation is stated after charging:
Year ended 31 December
--------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Employee costs (note 5) 177,250 205,805 224,085 399,812
Depreciation of tangible fixed assets 207,830 259,109 240,832 429,693
Impairment of tangible fixed assets 85,326 541,474 -- --
Amortisation and impairment of intangible fixed assets 2,575 12,305 2,116 3,775
Operating lease rentals-- property 32,845 25,716 27,688 49,401
-- other 42,593 59,406 68,164 121,618
Remuneration of auditors
Statutory audit - (CompanyL115,000 (2002:L110,000, 2001:L85,000)) 620 878 920 1,641
Non-statutory assurance services 48 123 88 157
Taxation services 311 476 854 1,524
Other services 7 537 40 71
In addition to the above, the auditors received L145,000 in 2001 for
services in connection with the equity and debt offerings described in notes 13
and 15. These costs have been deducted from the proceeds of the offerings.
Other services in 2002 included fees of L520,000 in relation to Highberry
Limited's (a hedge fund) unsuccessful petition to appoint an administrator.
20-F 2004 Financial Statements -F 12-
4. Directors' Emoluments
Aggregate emoluments for Directors of COLT for their period of directorship:
Year ended 31 December
-----------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
----- ------ ------- ------
Salaries, fees and bonuses 952 1,343 1,049 1,872
Long term incentive plan 19 38 -- --
Other benefits 32 84 351 626
----- ----- ----- -----
Aggregate emoluments 1,003 1,465 1,400 2,498
Pension contributions 65 100 36 64
----- ----- ----- -----
1,068 1,565 1,436 2,562
===== ===== ===== =====
Gain on exercise of options 3,220 -- -- --
===== ===== ===== =====
Loss of office -- 915 -- --
===== ===== ===== =====
20-F 2004 Financial Statements -F 13-
5. Employee Information
The average monthly number of persons employed by the Group during the period
was:
Year ended 31 December
-----------------------------
2001 2002 2003
----- ----- -----
By category:
Engineering and operations 2,669 2,820 2,292
Sales and marketing 1,139 1,118 1,141
Administration 1,081 1,067 852
----- ----- -----
4,889 5,005 4,285
===== ===== =====
Year ended 31 December
------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Employee costs (for the above persons):
Wages and salaries 193,947 203,513 196,593 350,761
Social security costs 35,028 34,514 36,643 65,379
Other pension costs 8,510 12,477 11,087 19,781
-------- -------- -------- --------
237,485 250,504 244,323 435,921
Less: employee costs capitalised (60,235) (44,699) (20,238) (36,109)
-------- -------- -------- --------
177,250 205,805 224,085 399,812
======== ======== ======== ========
Capitalised employee costs are included in fixed asset additions within the
appropriate asset category.
Long term Incentive Plan ("Incentive Plan")
COLT Inc. (a wholly owned subsidiary of FMR Corp.) established, effective 1
December 1995, an Incentive Plan providing for the issuance, to key employees of
the Group, of incentive deferred compensation in the form of interests in the
appreciation in the value of the Company's ordinary shares over a specified base
amount ("Incentive Units"). The Incentive Plan was not assumed by COLT in the
Group's reorganisation prior to its initial public offering, and remains the
obligation of COLT Inc. There have been no additional Incentive Units awarded
under the Incentive Plan.
COLT Inc.'s obligations to employees holding Incentive Units have been satisfied
by the creation of an irrevocable trust for the benefit of such holders, and the
funding by COLT Inc. of the trust with ordinary shares of COLT. As each holder
becomes entitled to a payment, the trust sells ordinary shares and transfers an
approximately equivalent amount of cash to such holder in retirement of such
holder's units. Included in the table above are charges to the extent that the
Group continues to be responsible for employer taxes related to Incentive Plan
employee payments. For the year ended 31 December 2003 these charges/(credits)
were L2,000 (2002: L54,000, 2001: L(175,000)).
20-F 2004 Financial Statements -F 14-
6. Interest Payable and Similar Charges
Year ended 31 December
-----------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
------- ------- ------- -------
Interest and similar charges on senior convertible notes 43,294 36,132 34,444 61,455
Accretion and similar charges on senior discount notes 26,392 20,631 15,352 27,391
Interest and similar charges on senior notes 41,266 36,844 36,319 64,800
Charges payable in respect of bank facility 297 145 -- --
Unwinding of discounts (note 16) -- 1,934 1,133 2,021
Other interest payable and similar charges 703 614 1,047 1,869
------- ------- ------- -------
111,952 96,300 88,295 157,536
======= ======= ======= =======
20-F 2004 Financial Statements -F 15-
7. Exceptional Items
Gain on purchase of debt
During 2003, the Group purchased some of its convertible and non-convertible
debt for a cash outlay of L144,475,000 (2002:L97,277,000, 2001:L84,651,000)
resulting in an exceptional gain of L7,589,000 (2002:L101,668,000,
2001:L58,774,000).
Disposal of subsidiaries
In December 2003 the Group sold COLT eCustomer Solutions France SAS ("Fitec")
and COLT Internet AB (Sweden Internet) for a consideration of L912,000 and
L300,000 respectively, which gave rise to a profit on disposal of L2,153,000 on
Fitec and L300,000 on Sweden Internet. In the period to December 2003, Fitec's
turnover was L9,244,000 and its loss after tax was L3,322,000.
Severance
On 21 February 2002, the Group announced an operational effectiveness review
programme to reduce staff levels by approximately 500. On 27 September 2002, the
Group further announced a move to a pan-European organisational structure
following the completion of the construction of its core network infrastructure
enabling the reduction of employee numbers by up to a further 800. The
operational exceptional charge of L18,320,000 included in the total interconnect
and network charges for the twelve months ended 31 December 2002, together with
the operational exceptional charge of L18,934,000 included in the selling,
general and administration charges for the same period, represent the provisions
in respect of the cost of these programmes.
Impairment
During 2002, the Group announced that given the downturn in the
telecommunications industry and overall economic environment it was prudent to
take further action to ensure that its asset base remained aligned with the
realities of the market. As a result "Network depreciation" included an
exceptional charge of L508,000,000 and "Other depreciation and amortisation"
included an exceptional charge of L43,000,000, representing an impairment
provision to write down the book value of fixed assets (including L9,526,000
relating to intangible assets).
In 2001, the Group made provisions for the write down of the book value of
certain assets including Internet Solution Centre capacity, equipment and
electronics, selected IT software developments and leasehold improvements in
excess leased space. Network depreciation included an exceptional charge of
L73,371,000 and other depreciation and amortisation included an
exceptional charge of L11,955,000 reflecting these write-downs.
These non-cash charges were computed in accordance with the requirements of FRS
11 "Impairment of fixed assets and goodwill".
Investment in own shares
In 2002 the Group recognised a charge of L409,000 relating to the revaluation of
shares held in the COLT Qualifying Share Ownership Trust for certain
compensation plans as described in note 13.
Foreign exchange gain
In 2002 the Group realised an exceptional exchange gain of L4,844,000 from the
unwinding of forward foreign currency contracts previously held as a condition
of its bank facility which the Group terminated in June 2002.
Property
During 2001, the Group made provisions against future rents, services and
reinstatement costs in the Internet Solution Centres and excess leased space.
"Interconnect and network" and "Selling general and administrative" included
provisions of L33,536,000 and L27,870,000 respectively, reflecting
these provisions, (note 16).
Inventory
In 2001, Interconnect and network included a charge of L28,846,000 reflecting
the write down of inventory held for future sale to nil.
20-F 2004 Financial Statements -F 16-
8. Taxation
There is no tax charge arising in the years ended 31 December 2001, 2002 and
2003 as the Group had no taxable profits.
Net tax losses carried forward amounted to:
At 31 December
---------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
--------- --------- --------- ---------
North region 274,761 369,544 457,894 816,974
Central region 179,061 271,498 448,453 800,130
South region 100,547 79,140 112,812 201,279
--------- --------- --------- ---------
554,369 720,182 1,019,159 1,818,383
========= ========= ========= =========
These amounts are not time limited, but must be utilised in the country in which
they arose. The losses carried forward remain subject to legislative provisions
and to agreements with the various tax authorities in jurisdictions where the
Group operates.
No deferred tax asset has been recognised in the financial statements. The
unprovided potential deferred tax asset is as follows:
At 31 December
-------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
--------- --------- --------- ---------
Capital allowances less depreciation 4,786 (101,265) (126,591) (225,864)
Short term timing differences (15,164) (22,972) (22,971) (40,985)
-------- -------- -------- --------
Potential deferred tax asset (10,378) (124,237) (149,562) (266,849)
Add losses available (196,150) (249,362) (348,081) (621,046)
-------- -------- -------- --------
Total potential deferred tax asset after addition of losses (206,528) (373,599) (497,643) (887,895)
======== ======== ======== ========
At the end of 2002 there was a further potential deferred tax asset of
L4,382,000 (2001: 4,382,000) which related to timing differences on the
accretion of the senior discount notes. These notes were redeemed in December
2003 and the tax losses have been crystallised.
20-F 2004 Financial Statements -F 17-
9. Loss per Share
Basic loss per share is based upon the loss after tax for each period and the
weighted average ordinary shares issued for the period. All potential ordinary
shares issuable have an anti-dilutive effect on basic loss per share for each
financial year presented and therefore these potential shares have been excluded
in the calculation of diluted loss per share.
Year ended 31 December
-----------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
--------- --------- --------- ----------
Loss for period (360,369) (718,282) (124,647) (222,395)
========= ========= ========= ==========
Weighted average ordinary shares issued (`000) 745,550 1,507,164 1,507,771 1,507,771
========= ========= ========= ==========
Basic and diluted loss per share L(0.48) L(0.48) L(0.08) $ (0.15)
========= ========= ========= ==========
20-F 2004 Financial Statements -F 18-
10. Intangible Fixed Assets
Total Total
L'000 $'000
------- -------
Cost
At 1 January 2001 19,219 34,291
Addition 10,945 19,528
Exchange differences (488) (871)
------- -------
At 31 December 2001 29,676 52,948
Disposal (174) (311)
Exchange differences 1,187 2,118
------- -------
At 31 December 2002 30,689 54,755
Disposal (11,053) (19,720)
Exchange differences 1,762 3,143
------- -------
At 31 December 2003 21,398 38,178
======= =======
Accumulated amortisation
At 1 January 2001 4,828 8,614
Charge for the year 2,575 4,594
Exchange differences (144) (256)
------- -------
At 31 December 2001 7,259 12,952
Charge for the year 2,779 4,958
Impairment charge 9,526 16,996
Exchange differences 486 867
------- -------
At 31 December 2002 20,050 35,773
Charge for the year 2,116 3,775
Disposal (11,053) (19,720)
Exchange differences 792 1,413
------- -------
At 31 December 2003 11,905 21,241
======= =======
Net book value
At 31 December 2001 22,417 39,996
======= =======
At 31 December 2002 10,639 18,982
======= =======
At 31 December 2003 9,493 16,937
======= =======
Intangible fixed assets as at 31 December 2003 comprise purchased goodwill
arising on the acquisition of Planet SA and its subsidiary Imaginet SA (together
"ImagiNet") on 15 July 1998. Purchased goodwill is being amortised over 10 years
for ImagiNet. The goodwill is attributable to the market position and business
development of ImagiNet at the date of acquisition and the amortisation term
reflects the period during which the Directors estimate the value of the
underlying business will exceed the value of the underlying assets.
Goodwill has also arisen on the purchase of Fitec SA and its subsidiaries Apogee
Communications SA and Asthea Ingenerie SARL (together "Fitec"). The total
purchase price of Fitec was L11,252,000 and included some deferred shares
to be issued and deferred consideration to be paid over the 2 years ending 3
July 2003 subject to certain criteria being met. In July 2003 the final tranche
of 182,228 deferred shares was issued. The issue of these ordinary shares during
the year represents a non-cash transaction.
The Fitec goodwill was being amortised over 10 years up to September 2002, at
which point the remaining goodwill was considered fully impaired. In December
2003 the Group sold its interest in Fitec, resulting in the disposal of goodwill
and accumulated amortisation of L11,053,000.
20-F 2004 Financial Statements -F 19-
11. Tangible Fixed Assets
Computers,
Network equipment,
infrastructure fixtures &
and fittings and
equipment vehicles Total Total
L'000 L'000 L'000 $'000
---------- ---------- ---------- ----------
Cost
At 31 January 2001 1,366,975 155,771 1,522,746 2,716,883
Additions 739,996 69,269 809,265 1,443,891
Disposals (6,150) (8,123) (14,273) (25,466)
Exchange differences (30,191) (2,818) (33,009) (58,895)
---------- ---------- ---------- ----------
At 31 December 2001 2,070,630 214,099 2,284,729 4,076,413
Additions 271,824 42,544 314,368 560,895
Disposals (24,759) (726) (25,485) (45,470)
Exchange differences 116,185 5,702 121,887 217,471
---------- ---------- ---------- ----------
At 31 December 2002 2,433,880 261,619 2,695,499 4,809,309
Additions 113,595 14,477 128,072 228,506
Disposals (39,998) (11,286) (51,284) (91,500)
Exchange differences 149,412 12,804 162,216 289,425
---------- ---------- ---------- ----------
At 31 December 2003 2,656,889 277,614 2,934,503 5,235,740
========== ========== ========== ==========
Accumulated depreciation
At 31 January 2001 175,008 38,213 213,221 380,429
For the year 163,393 44,437 207,830 370,810
Disposals (5,067) (5,274) (10,341) (18,450)
Impairment charge 73,371 11,955 85,326 152,238
Exchange differences (3,350) (1,034) (4,384) (7,822)
---------- ---------- ---------- ----------
At 31 December 2001 403,355 88,297 491,652 877,205
For the year 212,009 47,100 259,109 462,302
Disposals (10,967) (673) (11,640) (20,768)
Impairment charge 508,000 33,474 541,474 966,098
Exchange differences 31,058 5,037 36,095 64,401
---------- ---------- ---------- ----------
At 31 December 2002 1,143,455 173,235 1,316,690 2,349,238
Charge for the year 204,417 36,415 240,832 429,693
Disposals (39,447) (9,674) (49,121) (87,642)
Exchange differences 71,774 10,043 81,817 145,978
---------- ---------- ---------- ----------
At 31 December 2003 1,380,199 210,019 1,590,218 2,837,267
========== ========== ========== ==========
Net book value
At 31 December 2001 1,667,275 125,802 1,793,077 3,199,208
========== ========== ========== ==========
At 31 December 2002 1,290,425 88,384 1,378,809 2,460,071
========== ========== ========== ==========
At 31 December 2003 1,276,690 67,595 1,344,285 2,398,473
========== ========== ========== ==========
20-F 2004 Financial Statements -F 20-
Included in network infrastructure and equipment are payments on account and
assets under construction ofL30,072,000 at 31 December 2003 (2002:L39,603,000,
2001:L124,188,000).
The impairment charges taken in 2001 and 2002 are described in note 7.
20-F 2004 Financial Statements -F 21-
12. Debtors - Amounts falling due within one year
Trade debtors: At 31 December
----------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Trade debtors 233,671 245,235 437,549
Provision against doubtful accounts (43,883) (45,386) (80,978)
-------- -------- --------
189,788 199,849 356,571
======== ======== ========
Prepaid expenses and other debtors: At 31 December
----------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Other debtors 27,922 34,468 61,498
Prepayments and accrued income 21,755 13,493 24,074
VAT recoverable 24,929 18,873 33,673
-------- -------- --------
74,606 66,834 119,245
======== ======== ========
20-F 2004 Financial Statements -F 22-
13. Capital and Reserves
Capital
Ordinary shares of 2.5p each
No'000 L'000
--------- ---------
Authorised share capital 2,075,000 51,875
========= =========
Called up share capital:
At 31 December 2000 700,951 17,524
Issued in 2001 804,174 20,104
Shares issued upon acquisition (see note 10) 1,816 45
Exercise of warrants 300 8
--------- ---------
At 31 December 2001 1,507,241 37,681
Issued in 2002 160 4
Shares issued upon acquisition (see note 10) 136 3
--------- ---------
At 31 December 2002 1,507,537 37,688
Issued in 2003 2,435 61
Shares issued upon acquisition (see note 10) 182 5
--------- ---------
At 31 December 2003 1,510,154 37,754
========= =========
At 31 December 2003 ($'000) 67,361
========= =========
Warrants
In December 1996, the Company issued US$314,000,000 aggregate principal amount
at maturity of senior discount notes in the form of 314,000 units, each unit
consisting of one 12% senior discount note and one warrant to purchase 31.2
ordinary shares from the Company at an exercise price of L0.7563 per
share. The warrants may be exercised at any time prior to the close of business
on 31 December 2006. Warrants that are not exercised by such date will expire.
In accordance with the terms of the warrants, following the completion of the
Company's sale of ordinary shares in December 2001, the number of shares
underlying each outstanding warrant and the warrant exercise price were adjusted
to 45.323 ordinary shares and L0.5206 per ordinary share, respectively. At
31 December 2003, warrants to purchase 881,770 (2002:881,770) ordinary shares
were outstanding. The Company has authorised and has reserved for issuance such
number of ordinary shares as will be issuable upon the exercise of all
outstanding warrants.
COLT Telecom Group Share Plan ("Option Plan")
The Option Plan was adopted on 7 November 1996, for the issuance to key
employees of the Group of incentive compensation related to the public market
performance of the Company's ordinary shares. The Option Plan is divided into
two parts; the "Approved Part" approved by the U.K. Inland Revenue for the
purposes of the Income and Corporation Taxes Act 1988, and the "Unapproved Part"
which is not so approved. Options may be granted by the Compensation Committee
to Directors and employees of the Group under either part of the Option Plan.
Individuals who provide services to COLT may also be permitted to participate in
the Unapproved Part.
Options granted under the Approved Part will not normally be exercisable until
the third anniversary of the date of grant. Options granted under the Unapproved
Part may become exercisable earlier than the third anniversary. Options may be
exercised early on death (or in certain other limited circumstances). Unless the
Compensation Committee agrees otherwise, options lapse when an option holder
ceases to be an employee. The Compensation Committee, at its discretion, may
determine in connection with each grant of options, the terms of vesting and
whether or not vesting will be accelerated upon a change of control event.
Options are not transferable.
Option Plan awards are based on an employee's level of responsibility,
performance and term of service. Options will be granted at an option price
which is not less than the market value of the ordinary shares on the date of
grant and will normally only be granted within six weeks of the announcement of
COLT's results for any period. The grant of options to subscribe for new shares
under each of the plans is limited so that new shares in respect of which
options to subscribe are granted may not, when added to the shares issued or
remaining issuable under any share option scheme, or issued under any share
incentive scheme, in the previous 10 years, exceed 10% of the then issued equity
share capital of the Company.
20-F 2004 Financial Statements -F 23-
At 31 December 2003, options outstanding under the Option Plan, together with
their exercise prices and dates, 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 L0.688 Dec 97 to Dec 01 Dec-06 25,824,000 12,148,036 6,089,964 7,586,000
Jan-97 L0.779 Jan 98 to Jan 02 Jan-07 396,000 226,400 149,600 20,000
Apr-97 L0.706 Apr 98 to Apr 02 Apr-07 1,280,000 675,000 377,600 227,400
Aug-97 L0.956 Aug 98 to Aug 02 Aug-07 2,488,000 722,000 798,000 968,000
Nov-97 L1.285 Nov 98 to Nov 02 Nov-07 3,196,000 1,418,362 1,067,869 709,769
Dec-97 L1.700 Dec 98 to Dec 02 Dec-07 4,204,000 1,104,400 728,800 2,370,800
Feb-98 L2.738 Feb 99 to Feb 03 Feb-08 140,000 56,000 84,000 -
Feb-98 L2.743 Feb 99 to Feb 03 Feb-08 900,000 530,220 369,780 -
May-98 L4.756 May 99 to May 03 May-08 830,000 207,750 136,000 486,250
Aug-98 L6.600 Aug 99 to Aug 03 Aug-08 2,906,000 591,544 1,473,712 840,744
Nov-98 L7.494 Nov 99 to Nov 03 Nov-08 1,408,075 113,215 973,200 321,660
Dec-98 L7.877 Dec 99 to Dec 03 Dec-08 100,000 - 100,000 -
Mar-99 L11.300 Mar 00 to Mar 04 Mar-09 990,000 122,500 533,346 334,154
Apr-99 L10.934 Apr 00 to Apr 04 Apr-09 1,000,000 150,000 850,000 -
May-99 L12.254 May 00 to May 04 May-09 585,000 58,000 255,000 272,000
Aug-99 L12.744 Aug 00 to Aug 04 Aug-09 930,000 15,000 644,000 271,000
Nov-99 L21.000 Nov 00 to Nov 04 Nov-09 800,500 - 539,072 261,428
Dec-99 L24.394 Dec 00 to Dec 04 Dec-09 740,000 - 338,771 401,229
Feb-00 L36.177 Feb 01 to Feb 05 Feb-10 745,000 - 415,000 330,000
May-00 L22.610 May 01 to May 05 May-10 792,500 - 345,870 446,630
Jun-00 L26.660 Jun 01 to Jun 05 Jun-10 846,000 - 320,000 526,000
Aug-00 L19.157 Aug 01 to Aug 05 Aug-10 1,181,500 - 625,434 556,066
Aug-00 L17.727 Aug 01 to Aug 05 Aug-10 317,500 - 146,250 171,250
Nov-00 L19.484 Nov 01 to Nov 05 Nov-10 800,000 - 270,961 529,039
Dec-00 L15.184 Dec 01 to Dec 05 Dec-10 757,321 - 284,310 473,011
Feb-01 L13.370 Feb 02 to Feb 06 Feb-11 2,401,040 - 1,326,292 1,074,748
Feb-01 L20.055 Feb 02 to Feb 06 Feb-11 400,000 - 400,000 -
Feb-01 L26.740 Feb 02 to Feb 06 Feb-11 750,000 - 750,000 -
May-01 L8.437 May 02 to May 06 May-11 866,500 - 509,500 357,000
May-01 L12.656 May 02 to May 06 May-11 250,000 - 200,000 50,000
May-01 L16.874 May 02 to May 06 May-11 250,000 - 200,000 50,000
Jun-01 L7.100 Jun 02 to Jun 06 Jun-11 2,688,750 - 997,300 1,691,450
Aug-01 L3.217 Aug 02 to Aug 06 Aug-11 1,464,500 - 576,435 888,065
Nov-01 L1.724 Nov 02 to Nov 06 Nov-11 231,000 - 16,000 215,000
Dec-01 L1.561 Dec 02 to Dec 06 Dec-11 1,410,500 - 259,500 1,151,000
Feb-02 L0.413 Feb 03 to Feb 07 Feb-12 4,688,500 42,000 2,397,000 2,249,500
May-02 L0.448 May 03 to May 07 May-12 72,500 6,000 51,500 15,000
Jul-02 L0.480 Jul 03 to Jul 07 Jul-12 5,602,300 56,460 712,900 4,832,940
Aug-02 L0.504 Aug 03 to Aug 07 Aug-12 250,000 - - 250,000
Oct-02 L0.323 Oct 03 to Oct 07 Oct-12 250,000 50,000 180,000 20,000
Nov-02 L0.436 Nov 03 to Nov 07 Nov-12 400,000 - - 400,000
Mar-03 L0.407 Mar 04 to Mar 08 Mar-13 200,000 - - 200,000
Apr-03 L0.455 Apr 04 to Apr 08 Apr-13 32,500 - - 32,500
May-03 L0.468 May 04 to May 08 May-13 150,000 - - 150,000
May-03 L0.493 May 04 to May 08 May-13 50,000 - - 50,000
Jul-03 L0.769 Jul 06 to Jul 08 Jul-13 7,161,000 - 190,000 6,971,000
Oct-03 L1.012 Oct 06 to Oct 08 Oct-13 60,000 - - 60,000
-----------------------------------------------------------------
Total 83,786,486 18,292,887 26,682,966 38,810,633
=================================================================
In addition to options granted under the Option Plan, options to subscribe for
160,000 ordinary shares were granted to certain Directors of the Company, 32,000
of which vested on each of 17 December 1996, 1997, 1998, 1999 and 2000. The
exercise price for the options which vested in 1996, 1997, 1998, 1999 and 2000
were L0.6875, L1.65875, L8.50, L29.00 and L14.86 per share, respectively. At 31
December 2003, 96,000 options had been exercised.
COLT Savings-Related Share Option Scheme ("SAYE Scheme")
The SAYE Scheme was adopted on 17 June 1997, allowing for eligible employees to
apply for an option to acquire ordinary shares under a three or four year
savings contract. The aggregate monthly contribution payable by an employee
under the savings contract may not exceed an amount established by the U.K.
Inland Revenue for the purposes of the Income and Corporation Taxes Act 1988,
currently L250 or the local currency equivalent. The option exercise price
per ordinary share may not be less than the higher of (a) 80% of the average of
the middle market quotations of an ordinary share for either three consecutive
dealing days in the period of 30 days prior to the date of grant or the dealing
day prior to the date on which the exercise price is set and (b) the nominal
value of an ordinary share on the date of grant.
The Group has taken advantage of the exemption, provided by UITF 17 "Employee
Share Schemes", from charging the profit and loss account with the differences
between fair value of the options on the date of grant and any consideration
payable by the employees on exercise.
In normal circumstances, an option may only be exercised while the participant
remains employed within the Group and then only during the six months starting
at the date on which the savings contract matures. At the expiry of that period,
the option will lapse. Earlier exercise is permitted in certain circumstances
where the participant's employment terminates or in the event of change of
control, reorganisation or amalgamation of the
20-F 2004 Financial Statements -F 24-
Company. During the year ended 31 December 2003, 25,520 shares with a maturity
date of 1 March 2006 were exercised early. No other options were exercised
during the year.
Options outstanding under the SAYE Scheme are as follows:
Number of options at 31 December 2003
Exercise price
Date of grant (L per ordinary share) Date of Vesting Granted Outstanding
- ------------- ---------------------- --------------- ----------- -----------
December 2000 11.784 1 March 2004 804,000 17,563
December 2001 1.615 1 March 2005 6,986,000 922,860
December 2002 0.40 1 March 2006 18,410,000 16,783,378
December 2003 1.027 1 March 2007 58,323* 58,323
December 2003 0.995 1 March 2007 1,560,919 1,560,919
----------- -----------
27,819,242 19,343,043
=========== ===========
<FN>
*each option holder entered into a four year savings contract.
</FN>
COLT Qualifying Share Ownership Trust ("QUEST")
In March 2000, the Group established a QUEST to acquire, inter alia, shares in
the Company to satisfy existing options granted under the Group's SAYE Scheme.
The shares held by the trust are reported as "Investments in own shares" at a
carrying value based on their exercise price. The difference between the market
price of the shares, on their date of issue, and the exercise price of the
options reflected in an increase in share premium is offset by a corresponding
transfer from the profit and loss account. The remaining shares held in the
QUEST will be utilised in full to part satisfy the options granted in December
2003 under the SAYE Scheme. At 31 December 2003, the QUEST held 270,559 shares
(2002: 297,059) with a carrying value of L0.40 per share, being the price at
which the options are expected to be exercised. The shares had a market value of
L256,355 (2002: L135,162).
COLT Free Share Scheme ("Free Share Scheme")
The Free Share Scheme was adopted on 17 June 1997, allowing for eligible
individuals who started employment with the Group before 1 September 1998 and
remained an employee of the Group for two years from the date of grant, to
receive 400 ordinary shares in the Company. Eligible individuals who started
employment after 1 September 1998 and remain an employee of the Group for two
years from the date of grant have or will receive 100 ordinary shares in the
Company. Individuals who received options under the Option Plan or cash
incentive awards at the time of the Company's initial public offering or
thereafter were generally not awarded shares under the Free Share Scheme. No
payment is required from the employee.
On 22 March 1999 an Employee Benefit Trust ("EBT") was established to purchase
and hold shares due for distribution under the Free Share Scheme. On 26 March
1999 the EBT purchased 440,000 ordinary shares at their nominal value of 2.5p
each. On 13 December 2001, the EBT subscribed for its pro rata share of the
Company's offering, purchasing 104,144 ordinary shares at L0.62 per share. This
investment is recorded within investment in own shares. At 31 December 2003 the
EBT held 217,344 shares (2002: 217,344) with a carrying value of L0.40 per
share, being the price at which the options are expected to be exercised. The
shares had a market value of L205,933 (2002: L98,892).
Deferred Bonus Plan
A Deferred Bonus Plan was adopted on 25 May 2000. Under this plan, 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.
At 31 December 2003, share awards outstanding under the Deferred Bonus Plan,
together with dates, were as follows:
Number of ordinary shares
---------------------------------------------------
Date of Grant Date of vesting Date of expiration Granted Exercised Lapsed Outstanding
- ------------- ---------------- ------------------ ------- --------- ------ -----------
Feb-01 Feb-04 to Feb-06 Feb-11 24,182 -- 8,099 16,083
In addition participants may also be invited to defer all or a portion of their
annual cash bonus and receive a matching award in the form of an option to
acquire shares with a market value equal to twice the amount of the deferred
bonus. Receipt of the matching award may be subject to the achievement of
performance targets. Options awarded under this plan are included in the totals
in Option Plan above.
20-F 2004 Financial Statements - F 25 -
Reserves
Share Merger Shares to Profit and
premium reserve be issued loss
L'000 L'000 L'000 L'000
-------- -------- -------- --------
At 31 December 2000 (i) 1,833,320 14,845 4,286 (368,118)
Premium on shares issued (iv) 480,909 12,325 -- --
Shares to be issued (see note 10) -- -- (3,565) --
Charges related to the Free Share Scheme (iii) -- -- -- (38)
Loss for period -- -- -- (360,369)
Loss on share symmetry arrangements -- -- -- (3,327)
Exchange differences (includingL5,294,000 profit on
net foreign currency borrowings) -- -- -- (23,590)
-------- -------- -------- --------
At 31 December 2001 (i) 2,314,229 27,170 721 (755,442)
Premium on shares issued (iv) 106 57 -- --
Shares to be issued (see note 10) -- -- (267) --
Loss for period -- -- -- (718,282)
Exchange differences (includingL28,359,000 profit on
net foreign currency borrowings) -- -- -- 49,030
-------- -------- -------- --------
At 31 December 2002 2,314,335 27,227 454 (1,424,694)
Premium on shares issued (ii) 1,569 132 -- --
Shares to be issued (see note 10) -- -- (239) --
Loss for period -- -- -- (124,647)
Exchange differences (includingL86,465,000 loss on
net foreign currency borrowings) -- -- -- 31,002
-------- -------- -------- --------
At 31 December 2003 2,315,904 27,359 215 (1,518,339)
======== ======== ======== ========
At 31 December 2003 ($'000) 4,132,036 48,814 384 (2,709,020)
======== ======== ======== ========
<FN>
(i) Cumulative goodwill relating to acquisitions made prior to 1 January 1998, which has been eliminated against reserves,
amounted toL38,401,000 (2002:L38,401,000).
(ii) The Group has taken merger relief under the provisions of section 131 of the Companies Act 1985 on shares issued in respect
of the acquisition of ImagiNet and Fitec (see note 10). All premium on the issue of those shares has been taken directly to
the merger reserve.
(iii) The Company operates a Free Share Scheme as a method of remunerating certain employees. The difference between the market
price of the shares at the date of the grant and any price paid is charged to the profit and loss account over the period
over which the shares are earned, with the credit taken directly to the profit and loss reserve.
(iv) The Company has taken merger relief under the provisions of section 131 of the Companies Act 1985 on shares issued in
respect of the acquisition of ImagiNet and Fitec (see note 10). All premium on the issue of those shares has been taken
directly to the merger reserve.
</FN>
20-F 2004 Financial Statements - F 26 -
14. Creditors - Amounts falling due within one year
At 31 December
-----------------------------------------------------
2002 2003 2003
L'000 L'000 L'000
-------- -------- --------
Trade creditors 96,834 89,621 159,902
Amounts due to related parties (note 23) 1,677 1,563 2,789
Other taxation and social security 47,658 37,229 66,424
Other creditors 15,769 29,303 52,281
Accruals and deferred income 163,885 171,004 305,105
Interest accrual 12,511 12,592 22,466
Network infrastructure 14,319 11,424 20,382
-------- -------- --------
352,653 352,736 629,349
======== ======== ========
20-F 2004 Financial Statements - F 27 -
15. Creditors - Amounts falling due after more than one year
At 31 December
------------------------------------------------------
2002 2003 2003
L'000 L'000 $'000
--------- --------- ---------
Repayable between one and two years
Senior convertible notes -- 107,771 192,285
Repayable between two and three years
Senior convertible notes 98,283 355,732 634,697
Repayable between three and four years
Senior convertible notes 321,057 236,628 422,192
Senior discount notes 142,408 -- --
Senior notes -- 83,328 148,674
Repayable between four and five years
Senior convertible notes 220,489 -- --
Senior notes 79,861 176,791 315,431
Repayable in more than five years
Senior notes 331,801 184,299 328,826
--------- --------- ---------
1,193,899 1,144,549 2,042,105
========= ========= =========
Senior convertible notes
In August 1998, COLT issued Deutschmark denominated senior convertible notes
("1998 Senior Convertible Notes") in the initial principal amount of DM
600,000,000. A total of L204,332,000 was raised before issuance costs of
L5,232,000. These costs have been deducted from the principal amount of
the 1998 Senior Convertible Notes and have been charged to the profit and loss
account over three years. The notes bear interest at the rate of 2% of the
initial principal amount per annum, payable in cash annually beginning 6 August
1999. The 1998 Senior Convertible Notes mature on 6 August 2005 and any
outstanding notes will then be redeemed at a price of 117.907% of the initial
principal amount. The notes are also redeemable at the option of the Group, in
whole or in part, at any time on or after 6 August 2001 at an accreted principal
amount plus any accrued interest. The accreted principal amount is that amount
determined so as to provide a gross yield at redemption (including any accrued
interest and any cash interest previously paid) of 4.25%. The 1998 Senior
Convertible Notes are convertible at any time, at the option of the holder,
unless previously redeemed, repurchased or cancelled, into ordinary shares of
COLT. At issue, the conversion price of the notes was L9.3438 per ordinary
share with a fixed exchange rate of DM2.9392 per L1.00. In accordance with
the terms of the notes, following the completion of the Company's sale of
ordinary shares in December 2001, the conversion price of the notes was adjusted
to L7.9039 per ordinary share with a fixed exchange rate of DM 2.9392 per
L1.00. During 2003, DM 3,300,000 aggregate initial principal amount of the
notes was purchased (2002: DM 5,000,000). At 31 December 2003, 11,336,506
ordinary shares are reserved for issuance upon conversion of the remaining 1998
Senior Convertible Notes (2002: 11,478,557). The notes rank pari passu in right
of payment with all other unsubordinated unsecured indebtedness of the Company
and are senior in right of payment to all subordinated indebtedness of the
Company. On 31 December 2001, the 1998 Senior Convertible Notes were
redenominated from Deutschmarks to Euros at a rate of DM1.95583 per (euro)1.00.
In March 1999, COLT issued Euro denominated senior convertible notes ("March
1999 Senior Convertible Notes") in the initial principal amount of
(euro)295,000,000. A total of L199,594,000 was raised before issuance
costs of L5,094,000. These costs have been deducted from the principal
amount of the March 1999 Senior Convertible Notes and are charged to the profit
and loss account over three years. The notes bear interest at the rate of 2% of
the initial principal amount per annum, payable in cash annually beginning 29
March 2000. The March 1999 Senior Convertible Notes mature on 29 March 2006 and
any outstanding notes will then be redeemed at a price of 117.907% of the
initial principal amount. The notes are also redeemable at the option of the
Group, in whole or in part, at any time on or after 29 March 2002 at an accreted
principal amount plus any accrued interest. The accreted principal amount is
that amount determined so as to provide a gross yield at redemption (including
any accrued interest and any cash interest previously paid) of 4.25%. The March
1999 Senior Convertible Notes are convertible at any time, at the option of the
holder, unless previously redeemed, repurchased or cancelled, into ordinary
shares of COLT. At issue, the conversion price of the notes was L14.6460
per ordinary share with a fixed exchange rate of (euro)1.4780 per L1.00.
In accordance with the terms of the notes, following the completion of the
Company's sale of ordinary shares in December 2001, the conversion price of the
notes was adjusted to L12.2351 per ordinary share with a fixed exchange
rate of (euro)1.4780 per L1.00. During 2003, no initial principal amount
of the notes was purchased (2002: (euro)25,350,000). At 31 December 2003,
9,210,009 ordinary shares are reserved for issuance upon conversion of the March
1999 Senior Convertible Notes (2002: 9,210,009). The notes rank pari passu in
right of payment to all unsubordinated unsecured indebtedness of the Company and
are senior in right of payment to all subordinated indebtedness of the Company.
In December 1999, COLT issued Euro denominated senior convertible notes
("December 1999 Senior Convertible Notes") in the initial principal amount of
(euro)368,000,000. A total of L230,389,000 was raised before issuance
costs of L9,289,000. These costs have been deducted from the principal
amount of the December 1999 Senior Convertible Notes and are charged to the
profit and loss account over three years. The notes bear interest at the rate of
2% of the initial principal amount per annum, payable in cash annually beginning
16 December 2000. The December 1999 Senior Convertible Notes mature on 16
December 2006 and any outstanding notes will then be redeemed at a price of
126.664% of the initial
20-F 2004 Financial Statements - F 28 -
principal amount. The notes are also redeemable at the option of the Group, in
whole or in part, at any time on or after 16 December 2002 at an accreted
principal amount plus any accrued interest. The accreted principal amount is
that amount determined so as to provide a gross yield at redemption (including
any accrued interest and any cash interest previously paid) of 5.25%. The
December 1999 Senior Convertible Notes are convertible at any time, at the
option of the holder, unless previously redeemed, repurchased or cancelled, into
ordinary shares of COLT. At issue, the conversion price of the notes was
L35.5550 per ordinary share with a fixed exchange rate of (euro)1.5974 per
L1.00. In accordance with the terms of the notes, following the completion of
the Company's sale of ordinary shares in December 2001, the conversion price of
the notes was adjusted to L30.0760 per ordinary share with a fixed exchange rate
of (euro)1.5974 per L1.00. During 2003, (euro)3,560,000 aggregate initial
principal amount of the notes was purchased (2002: (euro)47,595,000). At 31
December 2003, 5,788,412 ordinary shares are reserved for issuance upon
conversion of the December 1999 Senior Convertible Notes (2002: 5,862,512). The
notes rank pari passu in right of payment with all other unsubordinated
unsecured indebtedness of the Company and are senior in right of payment to all
subordinated indebtedness of the Company.
In April 2000, COLT issued Euro denominated senior convertible notes ("2000
Senior Convertible Notes") in the initial principal amount of (euro)402,500,000.
A total of L245,696,000 was raised before issuance costs of
L5,596,000. These costs have been deducted from the principal amount of
the 2000 Senior Convertible Notes and are charged to the profit and loss account
over three years. The notes bear interest at the rate of 2% of the initial
principal amount per annum, payable in cash annually beginning 3 April 2001. The
2000 Senior Convertible Notes mature on 3 April 2007 and any outstanding notes
will then be redeemed at a price of 131.238% of the initial principal amount.
The notes are also redeemable at the option of the Group, in whole or in part,
at any time on or after 3 April 2003 at an accreted principal amount plus any
accrued interest. The accreted principal amount is that amount determined so as
to provide a gross yield at redemption (including any accrued interest and any
cash interest previously paid) of 5.75%. The 2000 Senior Convertible Notes are
convertible at any time, at the option of the holder, unless previously
redeemed, repurchased or cancelled, into ordinary shares of COLT. At issue, the
conversion price of the notes was L50.076 per ordinary share with a fixed
exchange rate of (euro)1.6372 per L1.00. In accordance with the terms of
the notes, following the completion of the Company's sale of ordinary shares in
December 2001, the conversion price of the notes was adjusted to L42.3593
per ordinary share with a fixed exchange rate of (euro)1.6372 per L1.00.
During 2003, (euro)15,000,000 aggregate initial principal amount of the notes
was purchased (2002: (euro)46,599,000). At 31 December 2003, 4,195,217 ordinary
shares are reserved for issuance upon conversion of the 2000 Senior Convertible
Notes (2002: 4,411,509). The notes rank pari passu in right of payment with all
other unsubordinated unsecured indebtedness of the Company and are senior in
right of payment to all subordinated indebtedness of the Company.
Senior discount notes
In December 1996, COLT issued US$314,000,000 aggregate principal amount at
maturity of senior discount notes due 15 December 2006. The senior discount
notes were issued in the form of 314,000 units, each unit consisting of one 12%
senior discount note and one warrant to purchase ordinary shares. The units had
an initial accreted amount at the date of issue of US$175,446,000 allocated
US$169,769,000 to the senior discount notes and US$5,677,000 to the warrants.
Issuance costs of L4,432,000 have been deducted from the initial accreted
amount of the senior discount notes and charged to the profit and loss account
over the accretion period. The senior discount notes accrued from the initial
accreted amount (after deducting expenses) of US$162,476,000 to US$314,000,000
on 15 December 2001 at an effective rate of 13.636% per annum compounded
semi-annually. Beginning 15 June 2002, interest on the senior discount notes
will be paid semi-annually in cash at a rate of 12% per annum. During 2002,
US$64,470,000 aggregate initial principal amount of the notes was purchased
(2001: US$20,325,000).
The senior discount notes rank pari passu in right of payment with all other
unsubordinated unsecured indebtedness of the Company and are senior in right of
payment to all subordinated indebtedness of the Company. The notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after 15 December 2001, at 106% of their principal amount at maturity, plus
accrued interest, declining to 100% of their principal amount at maturity, plus
accrued interest, on or after 15 December 2003. On 22 December 2003 all of the
outstanding U.S. dollar 12% Senior Discount Notes due 2006 were redeemed early
at the principal amount of the Notes for a cash consideration of L120.7
million.
Senior notes
In November 1997, COLT issued Sterling and Deutschmark denominated senior notes
("1997 Senior Notes") with aggregate principal amounts at maturity of
L50,000,000 and DM 150,000,000, respectively. A total of
L100,661,000 was raised before issuance costs of L3,300,000. These
costs have been deducted from the principal amount of the 1997 Senior Notes and
are charged to the profit and loss account over five years. The British pound
notes bear interest at the rate of 10.125% per annum and the Deutschmark notes
bear interest at 8.875% per annum, both payable semi-annually beginning 31 May
1998. The 1997 Senior Notes mature on 30 November 2007. The 1997 Senior Notes
rank pari passu in right of payment with all other unsubordinated unsecured
indebtedness of the Company and are senior in right of payment to all
subordinated indebtedness of the Company. The 1997 Senior Notes are redeemable
at the option of the Group, in whole or in part, at any time on or after 30
November 2002, initially at 105.0625% of their principal amount at maturity,
plus accrued interest, in the case of the British pound notes and 104.4375% of
their principal amount at maturity, plus accrued interest, in the case of the
Deutschmark notes, declining in each case to 100% of their principal amount at
maturity, plus accrued interest, on or after 30 November 2004. During 2003, no
initial principal amount of the notes was purchased (2002: DM18,955,000 and
L11,812,000). On 31 December 2001, the Deutschmark denominated 1997 Senior
Notes were redenominated from Deutschmarks to Euros at a rate of DM1.95583 per
(euro)1.00.
In July 1998, COLT issued Deutschmark denominated senior notes ("1998 Senior
Notes") with aggregate principal amount at maturity of DM 600,000,000. A total
of L204,332,000 was raised before issuance costs of L5,875,000.
These costs have been deducted from the principal amount of the 1998 Senior
Notes and are charged to the profit and loss account over five years. The 1998
Senior Notes bear interest at the rate of 7.625% per annum, payable
semi-annually beginning 31 January 1999. The 1998 Senior Notes mature on 28 July
2008. The 1998 Senior Notes rank pari passu in right of payment with all other
unsubordinated unsecured indebtedness of the Company and are senior in right of
payment to all subordinated indebtedness of the Company. The 1998 Senior Notes
are redeemable at the option of the Group, in whole or in part, at any time on
or after 31 July 2003, initially at 103.8125% of their principal amount at
maturity, plus accrued interest, declining to 100% of their principal amount at
maturity, plus accrued interest, on or after 31 July 2005. During 2003, no
initial principal amount of the notes was repurchased (2002: DM83,755,000). On
31 December 2001, the 1998 Senior Notes were redenominated from Deutschmarks to
Euros at a rate of DM1.95583 per (euro)1.00.
20-F 2004 Financial Statements - F 29 -
In December 1999, COLT issued Euro denominated senior notes ("1999 Senior
Notes") with aggregate principal amount at maturity of (euro)320,000,000. A
total of L200,338,000 was raised before issuance costs of
L4,838,000. These costs have been deducted from the principal amount of
the 1999 Senior Notes and are charged to the profit and loss account over five
years. The 1999 Senior Notes bear interest at the rate of 7.625% per annum,
payable semi-annually beginning 15 June 2000. The 1999 Senior Notes mature on 15
December 2009. The 1999 Senior Notes rank pari passu in right of payment with
all other unsubordinated unsecured indebtedness of the Company and are senior in
right of payment to all subordinated indebtedness of the Company. The 1999
Senior Notes are redeemable at the option of the Group, in whole or in part, at
any time on or after 15 December 2004, initially at 103.8125% of their principal
amount at maturity, plus accrued interest, declining to 100% of their principal
amount at maturity, plus accrued interest, on or after 15 December 2007. During
2003, no initial principal amount of the notes was repurchased (2002:
(euro)46,750,000).
Fair value of financial instruments
The fair values of the Group's financial instruments noted above are disclosed
in note 21.
20-F 2004 Financial Statements - F 30 -
16. Provisions for liabilities and charges
Property Severance Total Total
L'000 L'000 L'000 $'000
-------- -------- -------- --------
At 1 January 2003 59,268 28,100 87,368 155,883
Unwinding of discount 1,133 -- 1,133 2,021
Utilised in the year (14,066) (13,121) (27,187) (48,507)
Sale of subsidiary -- (2,567) (2,567) (4,580)
Exchange difference 3,647 466 4,113 7,338
-------- -------- -------- --------
At 31 December 2003 49,982 12,878 62,860 112,155
======== ======== ======== ========
In 2001, the Group made provision against future rents, services, and
reinstatement costs associated with ISCs being closed or "mothballed" and excess
lease pace. Such provisions will be utilised over the next 13 years and
represent the net present value of the future estimated costs.
In 2002, the Group made provision for staff reduction programmes, which is
expected to be utilised over the next 12 months.
At 31 December
-----------------------------------------------------
Maturity profile of property provision 2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Payable in less than one year 18,274 13,356 23,830
Payable between one and two years 8,975 9,580 17,093
Payable between two and five years 16,436 14,447 25,776
Payable in more than five years 15,583 12,599 22,479
-------- -------- --------
59,268 49,982 89,178
======== ======== ========
20-F 2004 Financial Statements - F 31 -
17. Cash Flow Reconciliations
Reconciliation of operating loss to net cash inflow from operating activities
Year ended 31 December
-------------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Operating loss (359,931) (778,594) (77,047) (137,467)
Depreciation of tangible fixed assets 293,156 800,583 240,832 429,693
Amortisation of goodwill 2,575 12,305 2,116 3,775
Profit on sale of subsidiaries -- -- (2,453) (4,377)
Exchange differences (962) 540 387 691
Decrease in inventories 31,051 -- -- --
Decrease in debtors 10,243 56,881 20,681 36,899
Increase (decrease) in creditors 2,144 24,948 (9,463) (16,884)
Movement in provision for liabilities and charges (note 16) 61,406 22,616 (27,187) (48,507)
-------- -------- -------- --------
Net cash inflow from operating activities 39,682 139,279 147,866 263,823
======== ======== ======== ========
20-F 2004 Financial Statements - F 32 -
18. Analysis of Net Debt
Accretion and
amortisation Gain on
At 31 Exchange of finance purchase
December Cash flow gain (loss) on notes of debt At 31 December
-------- -------- -------- -------- -------- -------- --------
2002 2003 2003
L'000 L'000 L'000 L'000 L'000 L'000 $'000
-------- -------- -------- -------- -------- -------- --------
Investments in liquid resources 889,590 (187,765) 40,318 -- -- 742,143 1,324,132
Cash at bank and in hand 45,292 12,458 2,489 -- -- 60,239 107,478
Senior convertible notes (639,829) 9,606 (54,049) (22,047) 6,188 (700,131) (1,249,174)
Senior discount notes (142,408) 134,869 6,138 -- 1,401 -- --
Senior notes (411,662) -- (31,324) (1,432) -- (444,418) (792,931)
-------- -------- -------- -------- -------- -------- --------
Total net funds (debt) (259,017) (30,832) (36,428) (23,479) 7,589 (342,167) (610,495)
======== ======== ======== ======== ======== ======== ========
Analysed in the Balance Sheet:
Investments in liquid resources 889,590 742,143 1,324,132
Cash at bank and in hand 45,292 60,239 107,478
Creditors amounts falling due
after more than one year (1,193,899) (1,144,549) (2,042,105)
-------- -------- --------
Total net debt (259,017) (342,167) (610,495)
======== ======== ========
Accretion and
amortisation Gain on
At 31 Exchange of finance purchase
December Cash flow gain (loss) on notes of debt At 31 December
-------- -------- -------- -------- -------- -------- --------
2001 2002 2002
L'000 L'000 L'000 L'000 L'000 L'000 $'000
-------- -------- -------- -------- -------- -------- --------
Investments in liquid resources 1,259,080 (400,390) 30,900 -- -- 889,590 1,587,206
Cash at bank and in hand 45,397 3,190 (3,295) -- -- 45,292 80,810
Senior convertible notes (657,417) 31,811 (39,849) (24,380) 50,006 (639,829) (1,141,583)
Senior discount notes (201,936) 27,138 15,901 -- 16,489 (142,408) (254,084)
Senior notes (458,672) 38,328 (24,063) (2,428) 35,173 (411,662) (734,487)
-------- -------- -------- -------- -------- -------- --------
Total net funds (debt) (13,548) (299,923) (20,406) (26,808) 101,668 (259,017) (462,138)
======== ======== ======== ======== ======== ======== ========
Analysed in the Balance Sheet:
Investments in liquid resources 1,259,080 889,590 1,587,206
Cash at bank and in hand 45,397 45,292 80,810
Creditors amounts falling due
after more than one year (1,318,025) (1,193,899) (2,130,154)
-------- -------- --------
Total net debt (13,548) (259,017) (462,138)
======== ======== ========
20-F 2004 Financial Statements - F 33 -
Management of liquid resources
Cash inflows from liquid resources for the year were L189,395,000 (2002:
L400,500,000), while cash outflows to liquid resources were L1,630,000 (2002:
L110,000).
Finance costs
There were no costs of issue of ordinary shares in the Group Cash Flow Statement
in 2003 and 2002 (2001:L3,217,000).
19. Capital Commitments
At 31 December
-----------------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Future capital expenditure contracted but not provided for 47,832 23,371 41,700
======== ======== ========
20. Financial Commitments
The Group has annual commitments under non-cancellable operating leases as
follows:
At 31 December
-----------------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Land and buildings
Expiring within one year 1,437 1,305 2,328
Expiring between two and five years 6,906 12,530 22,356
Expiring in over five years 29,492 20,340 36,291
-------- -------- --------
37,835 34,175 60,975
======== ======== ========
Other
Expiring within one year 1,552 535 955
Expiring between two and five years 1,966 1,162 2,073
Expiring in over five years 92 37 66
-------- -------- --------
3,610 1,734 3,094
======== ======== ========
Forward currency contracts
In 2002, COLT terminated its bank facility and its conditional requirement to
hold a series of British pound forward contracts to purchase U.S. $94,200,000.
The Group had no outstanding contracts at 31 December 2003.
20-F 2004 Financial Statements - F 34 -
21. Financial Instruments
The Group's treasury objectives, policies and strategies are outlined within the
Financial Review on pages 22 and 23 of the Annual Report under the heading
"Treasury Policy" excluding the paragraph titled "Sensitivity analysis". Except
for disclosures under currency exposure below, the following financial
information excludes the Group's short term debtors and creditors.
Interest rate and currency profile of financial liabilities
At 31 December 2003
----------------------------------------------------------------------------
Weighted Weighted Total Total
average average financial financial
interest period for liabilities liabilities
rate which rate
is fixed
Currency: % Years L'000 $'000
-------- -------- -------- --------
Non-convertible debt
British pound 10.1 4 38,188 68,135
Euro 7.8 5 406,230 724,796
-------- -------- -------- --------
Total 7.9 5 444,418 792,931
======== ======== ======== ========
Convertible debt
Euro 5.1 3 700,131 1,249,174
======== ======== ======== ========
At 31 December 2002
----------------------------------------------------------------------------
Weighted Weighted Total Total
average average financial financial
interest period for liabilities liabilities
rate which rate
is fixed
Currency: % Years L'000 $'000
-------- -------- -------- --------
Non-convertible debt
British pound 10.1 5 38,211 68,176
Euro 7.8 6 373,451 666,311
U.S. dollar 13.6 4 142,408 254,084
-------- -------- -------- --------
Total 9.4 6 554,070 988,571
======== ======== ======== ========
Convertible debt
Euro 5.1 4 639,829 1,141,583
======== ======== ======== ========
Additional details, including a maturity profile, of the financial liabilities
are set out in note 15. All financial liabilities shown in the table are at
fixed rates of interest.
Provisions
All financial assets as at 31 December 2003 are floating rate assets bearing
interest at market rates, fixed in advance. In addition, the Group's provision
of L49,982,000 (2002: L59,268,000) for vacant leasehold properties
(note 16) meet the definition of financial liabilities. These financial
liabilities are considered to be floating rate financial liabilities. This is
because in establishing the provision the cash flows have been discounted and
the discount rate is re-appraised at each half yearly reporting date to ensure
that it reflects current market assessments of the time value of money and the
risks specific to the liability.
20-F 2004 Financial Statements - F 35 -
Interest rate and currency profile of financial assets
At 31 December
-----------------------------------------------------
Total Total Total
assets assets assets
2002 2003 2003
Currency: L'000 L'000 $'000
-------- -------- --------
British pound 389,571 238,514 425,557
Euro 500,771 557,889 995,385
U.S. dollar 39,502 1,502 2,680
Other 5,038 4,477 7,988
-------- -------- --------
Total 934,882 802,382 1,431,610
======== ======== ========
Currency exposure
The following table shows the Group's net currency exposures that give rise to
those exchange gains and losses which are taken to the profit and loss account.
Such exposures comprise monetary assets and liabilities of the Group that are
not denominated in the operational or functional currency of the operating
company involved.
Net foreign currency monetary assets (liabilities)
Functional currency: At 31 December 2003
------------------------------------------------------------------------------------------------
British
pound U.S. dollar Euro Other Total Total
L'000 L'000 L'000 L'000 L'000 $'000
-------- -------- -------- -------- -------- --------
British pound -- 971 (1,330) 1,197 838 1,495
Euro (110) (5,752) -- (89) (5,951) (10,618)
Other (41) (403) 2,568 (14) 2,110 3,765
-------- -------- -------- -------- -------- --------
Total (151) (5,184) 1,238 1,094 (3,003) (5,358)
======== ======== ======== ======== ======== ========
Net foreign currency monetary assets (liabilities)
Functional currency: At 31 December 2002
--------------------------------------------------------------------------
British
pound U.S. dollar Euro Other Total Total
L'000 L'000 L'000 L'000 L'000 $'000
-------- -------- -------- -------- -------- --------
British pound -- (103,612) (4,815) 11 (108,416) (193,436)
Euro (359) (1,181) -- (193) (1,733) (3,092)
Other (264) (368) 1,351 7 726 1,296
-------- -------- -------- -------- -------- --------
Total (623) (105,161) (3,464) (175) (109,423) (195,232)
======== ======== ======== ======== ======== ========
20-F 2004 Financial Statements - F 36 -
Fair value of financial instruments
The following table shows the carrying amounts and the fair values of the
Group's financial instruments at 31 December 2002 and 2003. The carrying amounts
of the non-derivatives are included in the Group balance sheet under indicated
headings. The fair values of the financial instruments are the amounts at which
the instruments could be exchanged in a transaction between willing parties,
other than in a forced or liquidation sale.
Carrying amount Fair value
At 31 December At 31 December
----------------------------------- ------------------------------------
2002 2003 2003 2002 2003 2003
L'000 L'000 $'000 L'000 L'000 $'000
-------- -------- -------- -------- -------- --------
Non-derivatives
Assets
Investments in liquid resources (i) 889,590 742,143 1,324,132 889,590 742,143 1,324,132
Cash at bank and in hand (i) 45,292 60,239 107,478 45,292 60,239 107,478
Liabilities
Euro senior convertible notes (ii) 639,829 700,131 1,249,174 267,536 660,266 1,178,047
U.S. dollar senior discount notes (ii) 142,408 -- -- 95,413 -- --
Euro senior notes (ii) 373,451 406,230 724,796 211,862 404,620 721,923
British pound senior notes (ii) 38,211 38,188 68,135 23,677 38,570 68,817
Derivatives
Warrants (iii) -- -- -- 852 1,051 1,875
<FN>
(i) The carrying amount of cash at bank and in hand and investments in liquid resources approximated to their fair values due to
the short maturity of the instruments held.
(ii) The fair values of the Company's senior convertible, senior discount and senior notes have been estimated on the basis of
market prices.
(iii) The Group has received warrants from certain suppliers in the ordinary course of business.
</FN>
20-F 2004 Financial Statements - F 37 -
22. Pension Arrangements
The Group operates a number of defined contribution pension schemes in its
subsidiaries.
Pension costs are charged to the profit and loss account on an accruals basis in
the period in which contributions are payable to the scheme. The pension cost
for 2003 amounted to L11,087,000 (2002: L12,477,000, 2001:
L8,510,000).
COLT Telecom AG, the Group's Swiss operating company, entered into a defined
contribution pension scheme in December 2002. Under Swiss law, employees are
guaranteed a minimum return on the assets of the scheme. COLT Telecom AG has an
arrangement with a Switzerland based insurance company to insure the minimum
commitment in full. If the insurance company was unable to meet the minimum
guaranteed commitment, then COLT Telecom AG would be required to fund any
deficit. The Directors consider the likelihood of such a situation arising as
remote. At 31 December 2003, the pension scheme had assets and liabilities of
L7,700,000 (2002: L11,500,000) and prepaid contributions of
L30,000 (2002: nil).
23. Transactions with Related Entities
The UK pension scheme is administered by Fidelity Pensions Management Limited, a
subsidiary of Fidelity Investments Management Limited ("FIML"), a wholly owned
subsidiary of Fidelity International Limited ("FIL"). The fees for the above
services for the year ended 31 December 2003 were approximately L127,000
(2002: L170,000, 2001: L88,000).
The Group has certain agreements with Fidelity Capital Associates Inc. ("FCA"),
a wholly owned subsidiary of Fidelity Management & Research Corp. ("FMR Corp."),
which allow, under certain circumstances, for the Group to obtain consulting
services from, or provide consulting services to, FCA. Compensation under the
agreements is at prevailing market rates set each year. No services were
provided by the Group or to the Group in 2003 or 2002.
Pursuant to a contract with the Group, certain FMR Corp. and FIL employees
provide consulting and other services to the Group at agreed rates. The fees for
these services for the year ended 31 December 2003 were approximately
L1,932,000, (2002: L1,377,000, 2001: L110,000), for FMR
employees and L1,095,000 for FIL employees (2002: L300,000, 2001:
Lnil). At 31 December 2003 there were creditor balances outstanding to FMR
and FIL of L822,000 and L741,000 respectively.
An amount of L3,194,000 was billed during 2003 to FIL for voice, data and
eBusiness services (2002:L3,880,000, 2001:L1,059,000).
An amount of L916,000 was billed during 2003 by Teranua, a 100% owned subsidiary
of FMR Corp, for consultancy services (2002:Lnil, 2001:Lnil).
20-F 2004 Financial Statements - F 38 -
24. Company Balance Sheet
At 31 December
-----------------------------------------------------
2002 2003 2003
Notes L'000 L'000 $'000
-------- -------- -------- --------
Fixed assets
Tangible fixed assets b 14,044 17,149 30,597
Investments c 1,744,330 1,785,331 3,185,388
-------- -------- --------
Total fixed assets 1,758,374 1,802,480 3,215,985
Current assets
Prepaid expenses and other debtors d 6,663 5,923 10,568
Investments in liquid resources 424,980 237,349 423,478
Cash at bank and in hand 6 9 16
-------- -------- --------
Total current assets 431,649 243,281 434,062
-------- -------- --------
Total assets 2,190,023 2,045,761 3,650,047
======== ======== ========
Capital and reserves
Called up share capital 37,688 37,754 67,361
Share premium 2,314,335 2,315,904 4,132,036
Merger reserve 27,227 27,359 48,814
Shares to be issued (note 13) 454 215 384
Profit and loss account e (1,424,694) (1,518,339) (2,709,020)
-------- -------- --------
Equity shareholders' funds 955,010 862,893 1,539,575
Provisions for liabilities and charges 3,611 4,401 7,851
Creditors
Amounts falling due within one year f 37,503 33,918 60,516
Amounts falling due after more than one year: g
Convertible debt 639,829 700,131 1,249,174
Non-convertible debt 554,070 444,418 792,931
-------- -------- --------
Total amounts falling due after more than one year 1,193,899 1,144,549 2,042,105
-------- -------- --------
Total creditors 1,231,402 1,178,467 2,102,621
-------- -------- --------
Total liabilities, capital and reserves 2,190,023 2,045,761 3,650,047
======== ======== ========
Approved by the Board of Directors on 24 February 2003 and signed on its behalf
by:
Barry Bateman, Chairman of the Board of Directors
Steve Akin, President, Chief Executive Officer and Director
Notes to the company balance sheet
a) Profit and Loss account
As permitted by Section 230 of the Companies Act of 1985, the parent company's
profit and loss account has not been included in these financial statements. The
parent company's loss for the period was L174,697,000 (2002: loss of
L1,594,442,000).
20-F 2004 Financial Statements - F 39 -
b) Tangible fixed assets Computers,
equipment,
fixtures & Systems
fittings and under
vehicles development Total Total
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Cost
At 1 January 2002 11,496 22,878 34,374 61,330
Additions 326 20,682 21,008 37,482
Transfers 13,145 (30,514) (17,369) (30,990)
-------- -------- -------- --------
At 31 December 2002 24,967 13,046 38,013 67,822
Additions 50 12,728 12,778 22,799
Transfers 10,876 (14,573) (3,697) (6,596)
-------- -------- -------- --------
At 31 December 2003 35,893 11,201 47,094 84,025
======== ======== ======== ========
Accumulated depreciation
At 1 January 2002 7,764 5,343 13,107 23,386
For the year 4,129 -- 4,129 7,367
Transfers 5,110 (5,343) (233) (416)
Impairment charge 6,966 -- 6,966 12,429
-------- -------- -------- --------
At 31 December 2002 23,969 -- 23,969 42,766
For the year 5,976 -- 5,976 10,662
-------- -------- -------- --------
At 31 December 2003 29,945 -- 29,945 53,428
======== ======== ======== ========
Net book value
At 31 December 2002 998 13,046 14,044 25,057
======== ======== ======== ========
At 31 December 2003 5,948 11,201 17,149 30,597
======== ======== ======== ========
c) Investments L'000 $'000
-------- --------
At 1 January 2002 330,717 590,065
Reclassified loans to subsidiary undertakings 1,322,994 2,360,486
Additions 1,763,431 3,146,314
Impairment (1,773,758) (3,164,739)
Foreign exchange difference 100,946 180,108
-------- --------
At 31 December 2002 1,744,330 3,112,234
Additions 193,974 346,088
Disposals (15,068) (26,884)
Impairment (305,422) (544,934)
Foreign exchange difference 167,517 298,884
-------- --------
At 31 December 2003 1,785,331 3,185,388
======== ========
See note 26 for additional subsidiary information.
20-F 2004 Financial Statements - F 40 -
d) Prepaid expenses and other debtors At 31 December
-------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Other debtors 5,305 4,628 8,258
Prepayments 1,358 1,295 2,310
-------- -------- --------
6,663 5,923 10,568
======== ======== ========
e) Profit and loss account
L'000 $'000
-------- --------
At 1 January 2002 102,256 182,445
Retained profit (loss) for the period (1,594,442) (2,844,803)
Exchange differences (includingL33,453,000 loss on net foreign currency borrowings) 67,492 120,419
-------- --------
At 31 December 2002 (1,424,694) (2,541,939)
Retained profit (loss) for the period (174,697) (311,694)
Exchange differences (includingL86,465,000 loss on net foreign currency borrowings) 81,052 144,613
-------- --------
At 31 December 2003 (1,518,339) (2,709,020)
======== ========
f) Creditors - amounts falling due within one year
At 31 December
-------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Accrued expenses 35,356 33,918 60,516
Amounts owed to group undertakings 2,147 -- --
-------- -------- --------
37,503 33,918 60,516
======== ======== ========
g) Creditors - amounts falling due after more than one year
At 31 December
-------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Repayable between one and two years
Senior convertible notes -- 107,771 192,285
Repayable between two and three years
Senior convertible notes 98,283 355,732 634,697
Repayable between three and four years
Senior convertible notes 321,057 236,628 422,192
Senior notes -- 83,328 148,674
Senior discount notes 142,408 -- --
Repayable between four and five years
Senior convertible notes 220,489 -- --
Senior notes 79,861 176,791 315,431
Repayable in more than five years
Senior notes 331,801 184,299 328,826
-------- -------- --------
1,193,899 1,144,549 2,042,105
======== ======== ========
20-F 2004 Financial Statements - F 41 -
25. Summary of differences between U.K. Generally Accepted Accounting Principles
and U.S. Generally Accepted Accounting Principles ("GAAP")
The consolidated financial statements have been prepared in accordance with U.K.
GAAP and on the basis of presentation as set out in Note 1, which differs in
certain respects from U.S. GAAP. The main differences between U.K. GAAP and U.S.
GAAP which affect the Group's consolidated net losses and net equity are set out
below.
a. Effects of conforming to U.S. GAAP - impact on net loss
Year ended 31 December
-----------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Loss for period under U.K. GAAP (360,369) (718,282) (124,647) (222,395)
U.S. GAAP adjustments:
Amortisation of intangibles (i) (x) 905 1,076 2,116 3,775
Capitalised interest, net of depreciation (ii) 13,159 3,662 (3,082) (5,499)
Deferred compensation (i) (iii) (1,991) (1,946) (1,012) (1,806)
Payroll taxes on employee share schemes (iv) (611) (68) 385 687
Profit on sale of IRUs (v) (900) 1,044 1,044 1,863
Installation revenue (vi) (23,436) (3,172) 3,469 6,189
Direct costs attributable to installation revenue (vi) 23,436 3,172 (4,231) (7,549)
Warrants (vii) 1,843 (991) 199 355
Amount written off investment in own shares (viii) 2,757 409 -- --
Gain on forward foreign exchange contracts (ix) 424 (424) -- --
Impairment (x) (xi) -- 104,390 (11,221) (20,020)
Payments by COLT Inc./FMR Corp (xii) (58)
-------- -------- -------- --------
Loss for period under U.S. GAAP (344,841) (611,130) (136,980) (244,400)
======== ======== ======== ========
Ordinary shares used in calculation of basic and diluted loss per share (`000) 745,550 1,507,164 1,507,771 1,507,771
======== ======== ======== ========
Basic and diluted loss per share L(0.46) L(0.41) L(0.09) $(0.16)
======== ======== ======== ========
<FN>
(i) On 15 July 1998, the Group completed the acquisition of ImagiNet. A total of 1,395,292 ordinary shares were issued at
completion. An additional 476,208 remained to be issued during 1999 and 2000 subject to certain criteria being met.
On 3 July 2001, the Group acquired all the share capital of Fitec. A total of 1,518,792 ordinary shares and 4,040,000 Euros
was paid at completion with an additional 317,784 ordinary shares and 1,200,000 Euros paid over the two year period ended
June 2003, subject to certain criteria being met.
Under U.K. GAAP, the deferred shares and payments have been included in the purchase consideration. The excess purchase
consideration over the fair value of assets and liabilities acquired is attributed to goodwill and is being amortised over
its estimated economic life.
Under U.S. GAAP these deferred shares and payments are excluded from the purchase consideration and recognised as
compensation expense in the profit and loss accounts over the period in which the payments vest. The total compensation
charge for 2003 was L301,000 (2002: L1,154,000, 2001: L853,000). The goodwill which arose on acquisition for U.S. purposes
was L13,281,000 (2002: L20,594,000, 2001: L20,594,000).
(ii) Adjustment to reflect interest amounts capitalised under U.S. GAAP, less depreciation for the period.
(iii) The Group operates an Inland Revenue approved Savings-Related Share Option Scheme ("SAYE" Scheme). Under this scheme,
options may be granted at a discount of up to 20%. Under U.K. GAAP no charge is taken in relation to the discount. Under
U.S. GAAP, the difference between the market value of the shares on the date of grant and the price paid for the shares is
charged as a compensation cost to the profit and loss account over the period over which the shares are earned.
Also under U.S. GAAP, an employer's offer to enter into a new SAYE contract at a lower price causes variable accounting for
all existing awards subject to the offer. Variable accounting commences for all existing awards when the offer is made, and
for those awards that are retained by
20-F 2004 Financial Statements - F 42 -
employees because the offer is declined, variable accounting continues until the awards are exercised, are forfeited, or
expire unexercised. New awards are accounted for as variable to the extent that the previous, higher priced options are
cancelled.
The total expected compensation cost is recorded within equity shareholders' funds as unearned compensation and additional
paid in share capital respectively, with the compensation being charged to the profit and loss account over the vesting
period. The charge for the year ended 31 December 2003 under the SAYE scheme was L711,000 (2002: L792,000, 2001:
L1,138,000). At 31 December 2003 there were 3,097,000 variable SAYE options outstanding.
(iv) The Group operates a number of employee share schemes on which it incurs employer payroll taxes. Under U.K. GAAP, the cost
of the employer taxes is recognised over the period from the date of grant to the end of the performance period. Under U.S.
GAAP, the cost is recognised when the tax obligation arises.
(v) In 2000 and 2001 the Group concluded a number of infrastructure sales in the form of 20-year indefeasible rights-of-use
("IRU") with characteristics, which qualify the transaction as outright sales for U.K. GAAP. Under U.S. GAAP these sales are
treated as a 20 year operating lease. There were no infrastructure sales in 2003 or 2002 hence the adjustment represents the
recognition of profit under U.S. GAAP on the sale of IRUs concluded in prior years.
(vi) In accordance with SAB 101 "Revenue Recognition in Financial Statements", for the year ended 31 December 2003, customer
installation revenues together with attributable direct costs, up to the level of the associated revenue, are recognised
over the expected customer relationship period. The relationship period for wholesale customers was reduced from five to
three years during 2002 and resulted in additional release of L11.4 million under U.S. GAAP in 2002. At 31 December 2003,
the cumulative impact on net losses under SAB 101 was L0.8 million, representing cumulative deferred installation revenues
of L54.2 million and costs of L53.4 million.
(vii) The Group has received warrants from certain suppliers in the ordinary course of business. Under U.K. GAAP, warrants are
treated as financial assets and recorded at the lower of cost or fair value. Hence for U.K. GAAP purposes the warrants have
been recognised at nil.
At 31 December 2000, under U.S. GAAP, the warrants were recorded at fair value with unrecognised gains included in "Other
Comprehensive Income" within equity shareholders' funds. As required by FAS 133 "Accounting for Derivative Instruments"
("FAS 133"), as amended by FAS 137 and FAS 138, which came into effect on 1 January 2001, the unrealised gain at 31 December
2000 and subsequent changes in fair value are reflected in the profit and loss account.
(viii) Under U.K. GAAP, shares held by a QUEST and similar employee share trusts, are recorded as fixed asset investments at cost
less amounts written off. Under U.S. GAAP, these shares are recorded at historical cost in the balance sheet as a deduction
from shareholders' funds.
(ix) The Group entered into forward foreign exchange contracts for payments relating to its U.S. dollar denominated senior
discount notes, a portion of which were purchased during the 12 months ended 31 December 2001. As a result, the Group
recognised an unrealised gain on that ineffective portion of the hedge attributable to the purchased notes. The adjustment
of L424,000 in 2002 is to reverse the unrealised gain recognised in 2001. There were no open forward contracts at the end of
2003.
(x) The Group has adopted FAS 141 Business Combinations and FAS 142, Goodwill and Other Intangible Assets. FAS 142 requires that
goodwill and intangible assets with indefinite useful lives not be amortised but should be tested for impairment annually.
Goodwill on acquisitions made before 1 July 2001 continued to be amortised until 31 December 2001. Hence prior to 1 January
2002, the Group amortised the goodwill arising on the acquisition of ImagiNet over its useful economic life of 10 years.
Other intangibles assets of L2.5 million were identified by management upon the acquisition of Fitec on 3 July 2001.
At 30 September 2002, as set out in note (xi), the Group completed an impairment review of its reporting units. As a result
the goodwill and other intangible assets attributable to Fitec were considered fully impaired and written off. These were
also written off in full for U.K. GAAP purposes. In December 2003 the Group disposed of its interest in Fitec.
The Group had unamortised goodwill of L8.5 million at December 2003, which is no longer amortised under U.S. GAAP but will
be assessed for impairment annually in accordance with FAS 142. Amortisation expense related to goodwill, under U.K. GAAP,
was L2.1 million in 2003. The adjustment represents the writeback of this amortisation.
(xi) FAS 144 requires long-lived assets 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 asset's 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. The cash flow calculations are based on management's best
estimates, using appropriate assumptions and projections at the time.
During the third quarter of 2002, the Group recorded charges of L443.8 million under U.S. GAAP to reflect the impairment of
goodwill, other intangible assets, network and non-network fixed assets, resulting in a GAAP difference of L107.2 million.
The charge for the year ended 31 December 2003, represents the charge for depreciation in respect of the assets that had not
been impaired for U.S. GAAP purposes. The adjustment for the year ended 31 December 2002, reflects the lower impairment
charge for U.S. GAAP purposes, net of associated depreciation.
(xii) On 27 December 1996, COLT Inc. sold 7,200,000 ordinary shares it owned in COLT to James P. Hynes and Paul W. Chisholm for
total consideration of US$1,867,500. COLT Inc made no payments relating to this transaction during 2003, 2002 and 2001.
Pursuant to a contract with the Company, certain FMR Corp. employees provided consulting and other services to the Company
at agreed rates. FMR Corp. also provided additional compensation and benefits to these employees related to services to the
Company. No payments were made in 2003 (2002: nil, 2001: L58,000).
20-F 2004 Financial Statements - F 43 -
Under U.K. GAAP, the payments are recorded as related party transactions while under U.S. GAAP, the payments are reflected
as an expense and a capital contribution by the relevant entity.
</FN>
20-F 2004 Financial Statements - F 44 -
b. Effects of conforming to U.S. GAAP - impact on net equity
At 31 December
-----------------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Equity shareholders' funds under U.K. GAAP 955,010 862,893 1,539,575
U.S. GAAP adjustments:
Shares to be issued (i) (82) _ _
Deferred compensation (i) (iii) (9,754) (10,766) (19,209)
Unearned compensation (i) (iii) (3,667) (1,510) (2,694)
Additional paid in share capital (i) (iii) 13,421 12,276 21,903
Amortisation of intangibles (i) (x) 3,900 6,016 10,734
Own shares held in trust (xii) (see note 13) (206) (195) (348)
Warrants (vii) 852 1,051 1,875
Deferred profit on sale of IRUs (v) (18,767) (17,723) (31,621)
Capitalised interest, net of depreciation (ii) 40,961 37,879 67,584
Impairment (xi) 104,390 93,169 166,231
Deferred profit on installations (vi) -- (762) (1,360)
Payroll taxes on employee share schemes (iv) -- 385 687
-------- -------- --------
Approximate equity shareholders' funds under U.S. GAAP 1,086,058 982,713 1,753,357
======== ======== ========
<FN>
(i) to (xii) see note (a) for description of adjustments.
(xiii) Under UK. GAAP, shares held by a QUEST and similar employee schemes are recorded as fixed asset investments at cost less
amounts written off.
Under U.S. GAAP, these shares are recorded at historical cost in the balance sheet as a deduction from shareholders' funds. The
adjustment reflects the net impact on U.S. GAAP equity after the U.K. GAAP write-off recorded in 2002.
</FN>
c. Income taxes
Under U.K. GAAP, deferred income taxes are accounted for to the extent that it
is considered probable that a liability or asset will materialise in the
foreseeable future.
Under U.S. GAAP, deferred taxes are accounted for on all temporary differences
between book income and tax income and a valuation allowance is established to
reduce deferred tax assets to the amount which are more likely than not to be
realised in future tax returns.
The deferred tax asset is reconciled to the U.S. GAAP net deferred tax asset as
follows:
At 31 December
-----------------------------------------------------
2002 2003 2003
L'000 L'000 $'000
-------- -------- --------
Deferred tax asset in financial statements (U.K. GAAP) -- -- --
Tax effects of timing differences:
Tax losses:
North region 117,147 127,617 227,694
Central region 104,352 182,468 325,559
South region 27,863 37,996 67,793
Capital allowances and other timing differences 124,237 149,562 266,849
-------- -------- --------
Gross deferred tax assets under U.S. GAAP 373,599 497,643 887,895
Deferred tax valuation allowance (373,599) (497,643) (887,895)
-------- -------- --------
Net deferred tax assets under U.S. GAAP -- -- --
======== ======== ========
d. Cash flow statement
The Group's financial statements present cash flow statements prepared using the
principles of U.K. Accounting Standards FRS 1 (Revised), "Cash Flow Statements".
The statement prepared under FRS 1 (Revised) presents substantially the same
information as that required under U.S. Statement of Financial Accounting
Standard No. 95 ("FAS 95"). Under FRS 1 (Revised) cash flows are presented for
(i) operating activities; (ii) returns on investments and servicing of finance;
(iii) taxation; (iv) capital expenditure and financial investment; (v)
acquisitions and disposals; (vi) equity dividends paid; (vii)
20-F 2004 Financial Statements - F 45 -
management of liquid resources; and (viii) financing. FAS 95 requires
presentation of cash flows from operating, investing and financing activities.
The following statements summarise the statement of cash flows for the Group as
if they had been presented in accordance with U.S. GAAP.
20-F 2004 Financial Statements - F 46 -
Year ended 31 December
-----------------------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Net cash inflow from operating activities 66,031 112,082 110,543 197,231
Net cash used in investing activities (476,995) 846,965 (143,005) (255,150)
Net cash provided by financing activities 414,234 (97,167) (142,845) (254,864)
Effects of exchange differences on cash and cash equivalents (1,434) 27,605 42,807 76,376
-------- -------- -------- --------
Net increase in cash and cash equivalents 1,836 889,485 (132,500) (236,407)
Cash and cash equivalents at beginning of period 43,561 45,397 934,882 1,668,017
-------- -------- -------- --------
Cash and cash equivalents at end of period 45,397 934,882 802,382 1,431,610
======== ======== ======== ========
Cash and cash equivalents at end of period 45,397 934,882 802,381 1,431,609
Liquid resources 1,259,080 -- -- --
-------- -------- -------- --------
1,304,477 934,882 802,381 1,431,609
======== ======== ======== ========
e. Equity shareholders' funds
The significant components of equity shareholders' funds under U.S. GAAP are as
follows:
Ordinary shares
--------------------- Total
Paid in Retained shareholders'
Shares Par capital earnings Other funds
No'000 L'000 L'000 L'000 L'000 L'000
-------- -------- -------- -------- -------- --------
At 1 January 2001 700,951 17,524 1,836,202 (352,821) 12,763 1,513,668
Loss for period (344,841) (344,841)
Stock issuance 806,290 20,157 489,907 510,064
Additional paid in capital 3,430 3,430
Unearned compensation (1,118) (1,118)
Capital contribution 58 58
Shares held in trust 1,121 1,121
Warrants (12,763) (12,763)
Forward foreign exchange contracts 6,098 6,098
Exchange differences (23,590) (23,590)
-------- -------- -------- -------- -------- --------
At 31 December 2001 1,507,241 37,681 2,330,718 (722,370) 6,098 1,652,127
Loss for period -- -- -- (611,130) -- (611,130)
Stock issuance 296 7 163 -- -- 170
Additional paid in capital -- -- 1,031 -- -- 1,031
Unearned compensation -- -- -- 928 -- 928
Forward foreign exchange contracts -- -- -- -- (6,098) (6,098)
Exchange differences -- -- -- 49,030 -- 49,030
-------- -------- -------- -------- -------- --------
At 31 December 2002 1,507,537 37,688 2,331,912 (1,283,542) -- 1,086,058
Loss for period -- -- -- (136,980) -- (136,980)
Stock issuance 2,617 66 1,701 -- -- 1,767
Additional paid in capital -- -- (1,145) -- -- (1,145)
Unearned compensation -- -- -- 2,011 -- 2,011
Exchange differences -- -- -- 31,002 -- 31,002
-------- -------- -------- -------- -------- --------
At 31 December 2003 1,510,154 37,754 2,332,468 (1,387,509) -- 982,713
======== ======== ======== ======== ======== ========
At 31 December 2003 ($'000) 67,361 4,161,589 (2,475,593) -- 1,753,357
======== ======== ======== ======== ========
20-F 2004 Financial Statements - F 47 -
f. Other disclosures
New accounting standards
FAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived
Assets, was issued in July 2001. This standard was effective for the Group's
fiscal year beginning 1 January 2003. The standard provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. The standard requires that the obligation associated with the retirement
of tangible long-lived assets be capitalised into the asset cost at the time of
initial recognition. The liability is then discounted to its fair value at the
time of recognition using the guidance provided by that standard. The
requirements of this standard will be reflected as a cumulative effect
adjustment to income. Management has assessed the impact of the adoption of SFAS
143 on its consolidated financial statements and believes the impact is not
material.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables". EITF
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which the vendor will perform multiple revenue generating activities. EITF
00-21 will be effective for interim periods beginning after 15 June 2003.
Management has assessed the impact of adoption of EITF 00-21 on its consolidated
financial statements and believes the impact is not material.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This standard
requires the classification of certain freestanding financial instruments as
liabilities measured at their fair value. Financial instruments within the scope
of this standard include mandatorily redeemable shares, instruments that
constitute an obligation to repurchase equity shares, or certain instruments
that constitute an obligation that may be settled by issuing a variable number
of equity shares. SFAS 150 is effective for financial instruments entered into
or modified after 31 May 2003, or otherwise at the beginning of the first
interim period beginning after 15 June 2003. Management has assessed the impact
of adoption of SFAS No. 150 on its consolidated financial statements and
believes the impact is not material.
FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, was
issued in November 2002. The primary objective of FIN 45 is to elaborate in the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognise, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after 31 December 2002. The provisions of the disclosure
requirements are effective for financial years ending after 15 December 2002.
Management has assessed the impact of the adoption of FIN 45 on its consolidated
financial statements and believes the impact will not be material.
FASB Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of
Variable Interest Entities, an interpretation of ARB 51 was issued in January
2003. The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. For any variable interest entities created
after 31 January 2003, FIN 46 is effective immediately. This Interpretation will
be effective for the Group's fiscal year beginning 1 January 2004. Management
believes the adoption of FIN 46 will have no impact on its consolidated
financial statements.
g. Share option plans
At 31 December 2003, the Group had certain options outstanding under its share
plans. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation",
the Group elected not to adopt the recognition provisions of the standard and to
continue to apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its share options
and awards. Had compensation expense for share options and awards been
determined in accordance with SFAS No.123, the Group's loss for period and basic
and diluted loss per share would have been as follows:
Year ended 31 December
---------------------------------------------
2001 2002 2003 2003
L'000 L'000 L'000 $'000
-------- -------- -------- --------
Loss for period after exceptional items:
As reported (344,841) (611,130) (136,980) (244,400)
Add compensation charge in respect of SAYE scheme charged
to the profit and loss account 1,138 792 711 1,269
Less: Share based compensation charge
calculated under the Black-Scholes model (27,654) (16,870) (16,777) (29,932)
-------- -------- -------- --------
Adjusted pro forma loss for the period (371,357) (627,208) (153,046) (273,063)
======== ======== ======== ========
Basic and diluted loss per share
As reported L(0.46) L(0.41) L(0.09) $(0.16)
As adjusted L(0.50) L(0.42) L(0.10) $(0.18)
Solely for the purposes of providing the disclosures required by SFAS No. 123,
the fair value of each grant was estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions: volatility
40%, risk free interest rate prevailing at the time of grant (2.7% - 6.7%),
expected lives of options 6 years and dividend yield 0%.
20-F 2004 Financial Statements - F 48 -
26. Subsidiary Undertakings
The Company is the holding company of the Group and has the following principal
operating subsidiary undertakings, each of which is a private company registered
in its country of operation. The Company holds 100% of the allotted capital of
all of its operating subsidiaries through intermediate holding companies and
their results are included in the consolidated financial statements.
Name Country of operation Principal activities
- -------------------------------------- ------------------ ----------------------------------------
COLT Telecommunications (unlimited company) United Kingdom Telecommunications and internet services provider
COLT Telecom GmbH Germany Telecommunications and internet services provider
COLT Telecommunications France SAS France Telecommunications and internet services provider
COLT Telecom AG Switzerland Telecommunications and internet services provider
COLT Telecom SpA Italy Telecommunications and internet services provider
COLT Telecom Espana SA Spain Telecommunications and internet services provider
COLT Telecom BV The Netherlands Telecommunications and internet services provider
COLT Telecom SA Belgium Telecommunications and internet services provider
COLT Telecom Austria GmbH Austria Telecommunications and internet services provider
COLT Telecom AB Sweden Telecommunications services provider
COLT Internet U.S. Corp. USA Intragroup internet services provider
COLT Telecom U.S. Corp. USA Intragroup telecommunications services provider
COLT Telecom A/S Denmark Telecommunications and internet services provider
COLT Telecom A/S Norway Telecommunications and internet services provider
COLTEL - Servicos de Telecommunicoes, Portugal Telecommunications and internet services provider
Unipessoal Lda
COLT Telecom Ireland Limited Ireland Telecommunications and internet services provider
COLT Telecom Finland OY Finland Telecommunications and internet services provider
20-F 2004 Financial Statements - F 49 -
2003 Operating Statistics (Unaudited)
Q1 Q2 Q3 Q4
-------- -------- -------- --------
Customers (at end of period) (i)
North Region 4,799 5,287 5,334 5,708
Central Region 6,070 6,385 6,466 6,838
South Region 5,447 5,662 5,605 7,019
-------- -------- -------- --------
Total 16,316 17,334 17,405 19,565
Customers (at end of period) (i)
Corporate 15,387 16,363 16,410 18,581
Wholesale 929 971 995 984
-------- -------- -------- --------
Total 16,316 17,334 17,405 19,565
Switched minutes (million) (for quarter)
North Region 1,444 1,490 1,519 1,541
Central Region 2,717 2,784 2,969 3,480
South Region 931 971 1,010 1,041
-------- -------- -------- --------
Total 5,092 5,245 5,498 6,062
Private wire VGEs (000) (at end of quarter) (ii)
North Region 9,104 9,526 10,125 10,433
Central Region 9,012 9,964 10,621 11,274
South Region 3,643 3,857 4,432 4,906
-------- -------- -------- --------
Total 21,759 23,347 25,178 26,613
Headcount (at end of quarter) (iii)
North Region 1,398 1,356 1,282 1,236
Central Region 1,550 1,519 1,461 1,393
South Region 1,198 1,150 1,114 932
Group/Other 296 292 315 305
-------- -------- -------- --------
Total 4,442 4,317 4,172 3,866
<FN>
South Region comprises France, Italy, Portugal and Spain. North Region comprises U.K., Ireland, The Netherlands, Belgium, Denmark,
and Sweden. Central Region comprises Germany, Austria and Switzerland
(i) Customers represent the number of customers who purchase network and data solutions products. The categorisation of some
customers between corporate and wholesale is reviewed periodically and may change. Where possible changes are reflected in
prior period comparatives.
(ii) Non-switched circuits are measured in Voice Grade Equivalents (VGEs). VGEs are the comparable number of voice circuits, of
64 kilobits per second, each approximately equivalent in capacity to the non-switched circuit being measured.
(iii) Headcount comprises active employees excluding temporary and contract workers.
</FN>
20-F 2004 Financial Statements - F 50 -
2003 Quarterly Group Financial Results (Unaudited)
Group Profit and Loss Account
(after exceptional items) Q1 Q2 Q3 Q4 Total
L'000 L'000 L'000 L'000 L'000
-------- -------- -------- -------- --------
Turnover 271,720 292,967 295,368 306,263 1,166,318
Cost of sales
Interconnect and network (180,466) (195,477) (193,322) (197,677) (766,942)
Network depreciation (48,446) (51,616) (53,977) (50,378) (204,417)
-------- -------- -------- -------- --------
(228,912) (247,093) (247,299) (248,055) (971,359)
-------- -------- -------- -------- --------
Gross profit 42,808 45,874 48,069 58,208 194,959
Operating expenses
Selling, general and administrative (57,235) (59,564) (58,790) (57,886) (233,475)
Other depreciation and amortisation (9,594) (9,897) (9,756) (9,284) (38,531)
-------- -------- -------- -------- --------
(66,829) (69,461) (68,546) (67,170) (272,006)
-------- -------- -------- -------- --------
Operating loss (24,021) (23,587) (20,477) (8,962) (77,047)
Other income (expense)
Interest receivable 7,471 6,705 6,010 6,532 26,718
Gain on purchase of debt 349 7,240 -- -- 7,589
Interest payable and similar charges (22,444) (22,724) (22,139) (20,988) (88,295)
Exchange gain (loss) (1,936) 5,115 880 2,329 6,388
-------- -------- -------- -------- --------
(16,560) (3,664) (15,249) (12,127) (47,600)
-------- -------- -------- -------- --------
Loss on ordinary activities before taxation (40,581) (27,251) (35,726) (21,089) (124,647)
Taxation -- -- -- -- --
-------- -------- -------- -------- --------
Loss for period (40,581) (27,251) (35,726) (21,089) (124,647)
-------- -------- -------- -------- --------
Basic and diluted loss per share L(0.03) L(0.02) L(0.02) L(0.01) L(0.08)
======== ======== ======== ======== ========
Other data:
Turnover growth
Year-to-year 10% 13% 14% 16% 14%
Quarter-to-quarter 3% 8% 1% 4% n/a
Gross profit (loss) margin (i) 16% 16% 16% 19% 17%
<FN>
(i) Gross profit (loss) includes exceptional charges and provisions.
</FN>
For further information on exceptional items see note 7.
20-F 2004 Financial Statements - F 51 -
Five Year Summary
Year Ended 31 December
--------------------------------------------------------------------------
Group Profit and Loss Account
(after exceptional items) 1999 2000 2001 2002 2003
L'000 L'000 L'000 L'000 L'000
-------- -------- -------- -------- --------
Turnover (i) 401,552 686,977 905,687 1,027,258 1,166,318
Cost of sales
Interconnect and network (273,166) (478,215) (704,906) (713,935) (766,942)
Network depreciation (50,439) (88,689) (236,764) (720,009) (204,417)
-------- -------- -------- -------- --------
(323,605) (566,904) (941,670) (1,451,944) (971,359)
-------- -------- -------- -------- --------
Gross profit (loss) 77,947 120,073 (35,983) (424,686) 194,959
Operating expenses
Selling, general and administrative (129,072) (181,674) (264,981) (261,029) (233,475)
Other depreciation and amortisation (14,196) (23,312) (58,967) (92,879) (38,531)
-------- -------- -------- -------- --------
(143,268) (204,986) (323,948) (353,908) (272,006)
-------- -------- -------- -------- --------
Operating loss (65,321) (84,913) (359,931) (778,594) (77,047)
Other income (expense)
Interest receivable 32,649 80,500 60,727 38,108 26,718
Gain on purchase of debt -- -- 58,774 101,668 7,589
Amounts written off investment in own shares -- -- (2,757) (409) --
Interest payable and similar charges (66,055) (104,794) (111,952) (96,300) (88,295)
Exchange gain (loss) (2,534) (7,653) (5,230) 17,245 6,388
-------- -------- -------- -------- --------
(35,940) (31,947) (438) 60,312 (47,600)
-------- -------- -------- -------- --------
Loss on ordinary activities before taxation (101,261) (116,860) (360,369) (718,282) (124,647)
Taxation -- -- -- -- --
-------- -------- -------- -------- --------
Loss for period (101,261) (116,860) (360,369) (718,282) (124,647)
======== ======== ======== ======== ========
Basic and diluted loss per share L(0.16) L(0.17) L(0.48) L(0.48) L(0.08)
======== ======== ======== ======== ========
Operating loss after exceptional items (65,321) (84,913) (359,931) (778,594) (77,047)
Exceptional items:
Interconnect and network -- -- 62,382 18,320 --
Network depreciation -- -- 73,371 508,000 --
Selling, general and administrative -- -- 27,870 18,934 (2,453)
Other depreciation and amortisation -- -- 11,955 43,000 --
-------- -------- -------- -------- --------
Operating loss before exceptional items (65,321) (84,913) (184,353) (190,340) (79,500)
Gross profit on infrastructure sales (i) -- (18,990) (1,414) -- --
Operating loss before exceptional items ________ ________ ________ ________ ________
and infrastructure sales (65,321) (103,903) (185,767) (190,340) (79,500)
======== ======== ======== ======== ========
<FN>
(i) Turnover in 2001 includes infrastructure sales ofL3,829,000, (2000:L46,212,000) which had associated cost of sales
ofL2,415,000, (2000:L27,222,000). There were no infrastructure sales in 2002 or 2003.
</FN>
20-F 2004 Financial Statements - F 52 -
Group Balance Sheet At 31 December
--------------------------------------------------------------------------------
1999 2000 2001 2002 2003
L'000 L'000 L'000 L'000 L'000
-------- -------- -------- -------- --------
Fixed assets 723,594 1,328,408 1,816,109 1,389,654 1,353,973
Current assets 1,718,587 2,023,780 1,611,683 1,199,276 1,069,065
-------- -------- -------- -------- --------
Total assets 2,442,181 3,352,188 3,427,792 2,588,930 2,423,038
======== ======== ======== ======== ========
Equity shareholders' funds 1,000,875 1,501,857 1,624,359 955,010 862,893
Creditors 1,441,306 1,850,331 1,742,027 1,546,552 1,497,285
Provisions for liabilities and charges -- -- 61,406 87,368 62,860
-------- -------- -------- -------- --------
Total liabilities, capital and reserves 2,442,181 3,352,188 3,427,792 2,588,930 2,423,038
======== ======== ======== ======== ========
Operating Statistics (unaudited) 2000 2001 2001 2002 2003
-------- -------- -------- -------- --------
Customers (at end of year) 4,264 7,388 11,386 15,523 19,565
Switched minutes for year (M) 7,837 15,758 20,248 20,040 21,897
Private wire VGEs (at end of year) (`000) 3,661 8,486 15,312 20,423 26,613
Headcount (at end of year) 2,494 4,012 5,345 4,684 3,866
20-F 2004 Financial Statements - F 53 -