Appendix K - Poptel Annual Report

FOR THE YEAR ENDED 30 NOVEMBER 2001

FOR THE SIX MONTH PERIOD ENDED 31 MAY 2002

FOR THE YEAR ENDED 30 NOVEMBER 2001

Company Registration Number :  3867789

The financial year ended November 2001 has been very eventful for Poptel.

The previous year had seen Poptel grow rapidly following the investment by Sum International totalling £2.5m. The task for this year was to consolidate that expansion and to continue development of the most promising parts of the business.

In November 2000, Poptel had won the nominal right to act as registry operator for the planned “.coop” top–level domain (TLD) from ICANN, the body that regulates Internet domains. The bid was made together with NCBA of the USA in the role of sponsor of the new domain. This provided Poptel with the opportunity to develop a substantial new source of recurring revenue provided that sufficient investment funds could be secured.

The cooperative adopted the strategy of diverting resources from other activities to the TLD development: there would be no overall expansion. Plans for the “PAM” consumer–owned Internet service, and other potential developments were shelved. Discussions began with potential investors with a view to securing the necessary funding to develop the TLD and members of the cooperative voted to accept voluntary salary deferrals to ease pressure on finances.

In April 2001 Baxi Partnership Limited (owned by the Baxi Trust) agreed to inject a total of £1.5m into Poptel in such a way that the company would remain majority owned by its employees. Baxi invested £750,000 directly in Poptel and made a loan of £750,000 to the Soft Solution Employee Benefit Trust which then bought equity in Poptel.

Poptel and NCBA agreed to form a new jointly–owned company called Dot Cooperation International (DCI) which would be licensed to use TLD information to promote value–added services to “.coop” registrants. Both parties recognise that there could be very significant value in this company.

Despite initial indications from ICANN, it became clear that there would be significant delays before a contract would be signed and Baxi accordingly agreed to invest a further £500,000.

A “pre–registration” system was launched in June allowing members of “Founder” cooperative organisations to reserve names before the domain went live. But by August little or no progress had been made with ICANN and that there was the real possibility of a significant dispute about some provisions of the contract. Pre–registration volumes were encouraging, and considerable progress had been made in building the non–TLD side of the business, but the company was not making a monthly profit. Reluctantly the board agreed to a small number of compulsory redundancies to reduce costs in the medium term.

A new project was started to streamline delivery of ISP services: together with the TLD and the consolidation of the website production business, this forms the “third leg” in the strategy for developing the company.

In October Sum International and Baxi agreed to make further funds available mostly in the form of loan guarantees which could be converted into a maximum 25% equity in the planned value–added service company, DCI.

The ICANN contract was signed in November 2001 and the board agreed that with modest support from investors if needed, it would be possible to launch the TLD at the end of January 2002.

Since the close of the year, a new interim Managing Director, Ivor Share, has been seconded to the company by Sum International, greatly strengthening management expertise at the top of the company and enabling Stuart Marsden to concentrate on the TLD project. The public launch of the “.coop” domain took place at 5pm precisely on 30 January 2002, exactly as planned. Any cooperative out of the estimated 1 million or more in the world can now visit the www.coop website and register a domain.

During 2001 the company has successfully grown its core business activities so that monthly operations are now becoming profitable. Recognised revenues are 73% higher than the previous year, with no growth in staff numbers. At the same time it has designed and delivered most of a purpose–built domain registry and operated a pre–registration system for 5 months without significant failure. Baxi Partnership – which shares many of the values and principles of Poptel – has shown its confidence by making a significant new investment. This has broadened the ownership base of the company and strengthened its status as a cooperative. At the same time the company has been buffeted by a number of difficult problems, not least the failure of ICANN to meet its own commitments to complete contract negotiations in a timely manner.

As we complete the first quarter of the new financial year all of us in the cooperative are hopeful and confident that we can make the TLD a big success, while ensuring that the other parts of the business continue to grow.

On behalf of the cooperative I extend my thanks to our investors Sum International and Baxi Partnership for their continued support. I offer my sympathy to those who were made redundant. And I thank and congratulate all cooperative members for their continued commitment during a challenging year.

P S Fensom

Chairman

1 May 2002
The directors present their report together with the audited financial statements for the year ended 30 November 2001.

Principal activity

The principal activity of the company is that of an internet service provider.

Results and dividends

There was a loss for the year of £1,674,020 (2000 : £1,561,171).  The directors do not recommend the payment of a dividend (2000 : £Nil) leaving the loss to be transferred to reserves.

Directors

The present membership of the Board is set out below.  All directors served throughout the period unless otherwise indicated.

P S Fensom 

M K Corbett

Y Amiga

S Marsden

D Erdal (appointed 5 April 2001)

L Davis (appointed 12 July 2001)

Dr J Sampler (appointed 19 October 2001)

R Dearden (resigned 12 July 2001)

G L R Kagan (resigned 19 September 2001)

None of the directors had any interests in the issued share capital of the company.   However, P S Fensom, M K Corbett, S Marsden and L Davis are members of Soft Solution Limited, a company limited by guarantee, which at the balance sheet date held 76% of the issued nominal share capital of Poptel Limited.

Directors’ responsibilities for the financial statements

Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.  In preparing those financial statements, the directors are required to :

§                     select suitable accounting policies and then apply them consistently

§                     make judgements and estimates that are reasonable and prudent

§                     state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements

§                     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping proper accounting records, for safeguarding the assets of the company and for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Auditors

Grant Thornton offer themselves for re–appointment as auditors in accordance with Section 385 of the Companies Act 1985.

Small company exemption

This report has been prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies.

ON BEHALF OF THE BOARD

P S Fensom

Director

1 May 2002

We have audited the financial statements of Poptel Limited which comprise the profit and loss account, the balance sheet and notes 1 to 15.  These financial statements have been prepared under the accounting policies set out therein.

Respective responsibilities of the directors and auditors

The directors' responsibilities for preparing the directors' report and the financial statements in accordance with applicable law and United Kingdom accounting standards are set out in the statement of directors' responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom auditing standards.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985.  We also report to you if, in our opinion, the directors' report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and transactions with the company is not disclosed.

We read other information contained in the Chairman's statement and the directors' report, and consider whether it is consistent with the audited financial statements.  We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.  Our responsibilities do not extend to other information.

Basis of opinion

We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board.  An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.  It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error.  In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial statements give a true and fair view of the state of the company's affairs at 30 November 2001 and of its loss for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
MANCHESTER

Basis of preparation

The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards. 

The directors, having considered the trading losses for the year to 30 November 2001 and the trading and cash flow forecasts for the next 12 months, have a reasonable expectation that the trading cash flows, borrowing facilities currently under negotiation and continued shareholder support will be sufficient to meet the requirements indicated by those forecasts.

On this basis, the directors consider that that it is appropriate to prepare the financial statements on the going concern basis. The financial statements do not include any adjustments that would result if future trading cash flows are insufficient, if shareholder support was withdrawn or if alternative sources of funding were not available.

The principal accounting policies of the company have remained unchanged during the year and are set out below.

Turnover

Turnover is the total amount receivable by the company for services provided, excluding VAT and trade discounts.

Research and development

Development costs incurred on specific projects are capitalised when recoverability can be assessed with reasonable certainty and amortised in line with the expected sales arising from the projects.  All other research and development costs are written off in the year of expenditure.

Goodwill

Purchased goodwill, representing the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired, is capitalised and is amortised on a straight line basis over its useful economic life.

Tangible fixed assets and depreciation

Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost of each asset by equal annual instalments over its expected useful economic life. The rates generally applicable are as follows :

Operational equipment                 25%

Furniture, fittings and office equipment                             25%

Computer equipment and software                                 25%

Leased assets

Assets held under finance leases and hire purchase contracts are capitalised and depreciated over their estimated useful economic lives.  The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the profit and loss account over the year of the lease.

All other leases are regarded as operating leases and the payments made under them are charged to the profit and loss account on a straight line basis over the lease term.

Deferred taxation

Deferred tax is recognised on all timing differences where the transactions or events that give the company an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered.  Deferred tax is measured using rates of tax that have been enacted or substantially enacted by the balance sheet date.

Pensions

The company operates a group personal pension plan.  The pension costs charged against profits represent the amount of contributions payable in respect of the accounting year.

Foreign currencies

Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date.  Exchange differences are dealt with through the profit and loss account.

There were no recognised gains or losses other than the loss for the financial year.

These financial statements have been prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies and with the Financial Reporting Standard for Smaller Entities (effective March 2000).

The financial statements were approved by the Board of Directors on 1 May 2002.

P S Fensom                                           Director