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TELEWEST COMMUNICATIONS PLC
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EXHIBIT 99.1
US GAAP FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WITH RESPECT TO THE THREE AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002.
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TELEWEST COMMUNICATIONS PLC
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PART I: US GAAP FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2002 2002 2001 2002 2002 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)
(note 2) (note 2)
- ------------------------------------------------------------------------------------------------------------------------------
REVENUE
Cable television $ 127(POUND) 81(POUND) 85(POUND) $399 254(POUND) 243(POUND)
Consumer telephony 192 122 120 586 373 362
Internet and other 36 23 11 89 57 26
--------------------------------------------------------------------------
TOTAL CONSUMER DIVISION 355 226 216 1,074 684 631
Business Services Division 110 70 66 334 213 202
--------------------------------------------------------------------------
TOTAL CABLE DIVISION 465 296 282 1,408 897 833
Content Division 42 27 30 124 79 92
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TOTAL REVENUE 507 323 312 1,532 976 925
--------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Consumer programming expenses (including(pound)13m
and(pound)9m in 2002 and 2001, respectively, to
related parties) 49 31 34 151 96 109
Business and consumer telephony expenses 81 52 57 259 165 178
Content expenses 27 17 19 75 48 57
Depreciation 198 126 117 584 372 346
--------------------------------------------------------------------------
Cost of sales 355 226 227 1,069 681 690
Selling, general, and administrative expenses 201 128 121 606 386 374
Amortization of goodwill - - 46 - - 137
--------------------------------------------------------------------------
556 354 394 1,675 1,067 1,201
--------------------------------------------------------------------------
--------------------------------------------------------------------------
OPERATING LOSS (49) (31) (82) (143) (91) (276)
--------------------------------------------------------------------------
OTHER INCOME / (EXPENSE)
Interest income (including(pound)5m and(pound)7m
in 2002 and 2001, respectively, from related
parties) 9 6 4 21 13 12
Interest expense (including amortization of debt (227) (145) (124) (623) (397) (345)
discount)
Foreign exchange gains/ net 108 69 16 240 153 7
Share of net losses of affiliates (6) (4) (7) (8) (5) (2)
Other, net (47) (30) (1) 6 4 (7)
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LOSS BEFORE INCOME TAXES (212) (135) (194) (507) (323) (611)
Income tax benefit 2 1 2 8 5 7
--------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (210) (134) (192) (499) (318) (604)
Extraordinary loss on extinguishment of debt - - - - - (15)
--------------------------------------------------------------------------
NET LOSS FOR THE PERIOD AFTER EXTRAORDINARY ITEM $ ( 210) (POUND) (POUND) $ (499) (POUND) (POUND)
(134) (192) (318) (619)
==========================================================================
BASIC AND DILUTED LOSS PER ORDINARY SHARE:
Before extraordinary loss $ (0.08) (POUND) (POUND) $ (0.17) (POUND) (POUND)
(0.05) (0.07) (0.11) (0.21)
After extraordinary loss $ (0.08) (POUND) (POUND) $ (0.17) (POUND) (POUND)
(0.05) (0.07) (0.11) (0.22)
Weighted average number of ordinary shares -
basic and diluted - (millions) 2,873 2,872 2,873 2,882
See accompanying notes to the unaudited condensed consolidated financial
statements.
1
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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SEPT 30, SEPT 30, DEC. 31,
2002 2002 2001
$M (POUND)M (POUND)M
(note 2) AUDITED
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 551 351 14
Secured cash deposits restricted for more than one year 19 12 20
Trade receivables (net of allowance for doubtful accounts of(pound)14m in
2002 and(pound)16m in 2001). 162 103 116
Other receivables 173 110 112
Prepaid expenses 64 41 33
-----------------------------------------
Total current assets 969 617 295
Investments in affiliates, accounted for under the equity method,
and related receivables 738 470 547
Property and equipment (less accumulated depreciation of(pound)
2,240m in 2002 and (pound)1,873m in 2001) 5,406 3,443 3,473
Goodwill (less accumulated amortization of(pound)382m in both 2002 and 2001) 2,970 1,892 1,892
Inventory 107 68 67
Other assets (less accumulated amortization of(pound)60m in 2002 and
(pound)47m in 2001) 147 94 58
-----------------------------------------
TOTAL ASSETS 10,337 6,584 6,332
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 180 115 109
Other liabilities 696 443 410
Deferred income 171 109 114
-----------------------------------------
Total current liabilities 1,047 667 633
Deferred tax 168 107 113
Debt 8,657 5,514 4,897
Capital lease obligations 330 210 238
-----------------------------------------
TOTAL LIABILITIES 10,202 6,498 5,881
-----------------------------------------
-----------------------------------------
o MINORITY INTERESTS (2) (1) -
-----------------------------------------
SHAREHOLDERS' EQUITY
Ordinary shares, 10 pence par value;
4,300 million authorized and 2,873 million shares issued and outstanding 451 287 287
Limited voting convertible ordinary shares, 10 pence par value;
300 million shares authorized and 82 million shares issued and 12 8 8
outstanding
Additional paid-in capital 6,632 4,224 4,224
Accumulated deficit (6,942) (4,422) (4,104)
Accumulated other comprehensive income (16) (10) 37
-----------------------------------------
137 87 452
Ordinary shares held in trust for the Telewest Restricted Share Scheme and
the - - (1)
Telewest Long-Term Incentive Plan; (1 million shares in 2001)
-----------------------------------------
TOTAL SHAREHOLDERS' EQUITY 137 87 451
-----------------------------------------
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,337 6,584 6,332
=========================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30,
2002 2002 2001
$M (POUND)M (POUND)M
(note 2)
- ------------------------------------------------------------------------------------------------------------------------------------
NET LOSS (499) (318) (619)
Adjustments to reconcile net loss to net cash (used in)/provided
by operating activities
Depreciation 584 372 346
Amortization of goodwill - - 137
Loss on revaluation of investment 47 30 -
Amortization of deferred financing costs and issue discount
on Senior Discount Debentures 128 82 75
Deferred tax credit (8) (5) (7)
Unrealized gains on foreign currency translation (240) (153) (10)
Accrued share-based compensation (credit)/cost (2) (1) 1
Extraordinary loss on extinguishment of debt - - 15
Share of net losses of affiliates 8 5 2
Loss on disposal of other assets (net) - - 4
Changes in operating assets and liabilities :
Change in receivables 5 3 (1)
Change in prepaid expenses 13 8 (8)
Change in other assets (5) (3) (52)
Change in accounts payable (31) (20) 30
Change in other liabilities (19) (12) 64
--------------------------------------
NET CASH USED IN BY OPERATING ACTIVITIES (19) (12) (23)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (561) (357) (377)
Cash paid for acquisition of subsidiaries - - (6)
Additional investments in and loans to affiliates - - (40)
Repayment of loans made to joint ventures 11 7 39
Disposal of subsidiaries 16 10 10
Cash disposed of with subsidiaries - - (2)
Disposal of affiliate 22 14 -
Other investing activities (3) (2) -
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (515) (328) (376)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of borrowings under old credit facilities - - (145)
Net proceeds from borrowings under new facilities 1,005 640 494
Net proceeds from disposal of forward contracts 119 76 -
Proceeds from issue of Accreting Convertible Notes due 2003 - - 30
Proceeds from exercise of share options 2 1 5
Repayment of other borrowings (14) (9) -
Release/(placement) of restricted deposits 12 8 (8)
Capital element of finance lease repayments (61) (39) (33)
--------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,063 677 343
--------------------------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 529 337 (56)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22 14 60
--------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 551 351 4
======================================
See accompanying notes to the unaudited condensed consolidated financial
statements
3
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHREHOLDERS' EQUITY AND COMPRENHENSIVE INCOME
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ORDINARY LIMITED SHARES ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING HELD PAID-IN COMPREHENSIVE DEFICIT
SHARES IN TRUST CAPITAL INCOME
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
(note 5)
- -----------------------------------------------------------------------------------------------------------------------------------
<s>
BALANCE AT DECEMBER 31, 2001 287 8 (1) 4,224 37 (4,104) 451
------------------------------------------------------------------------------------------
Net loss for the period - - - - - (318) (318)
Unrealized gain/(loss) on derivative
financial
instruments:
De-designation of hedges on debt
principal
amounts - - - - (53) - (53)
Current period increase in
fair value - - - - 3 - 3
Amortization of cash
flow hedges - - - - (1) - (1)
------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME - - - - (51) (318) (369)
------------------------------------------------------------------------------------------
Shares issued - - 1 - - - 1
Unrealized gain on revaluation
of an investment
- - - - 4 - 4
------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 287 8 - 4,224 (10) (4,422) 87
==========================================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITIES
The principal activities of Telewest Communications plc ("Telewest",
the "Company", "we", "our", and "us") are the provision of voice, video, data
and internet services across multiple platforms and the supply of content and
services to the United Kingdom ("UK") pay-television and on-line markets.
2. BASIS OF PRESENTATION
The unaudited, condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The preparation of
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 20-F for the year ended December
31, 2001 as filed with the Securities and Exchange Commission ("SEC") on July 1,
2002. In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited financial statements and contain
adjustments, all of which are of a normal recurring nature to present fairly its
financial position as of September 30, 2002 and its results of operations and
cash flows for the three-month and nine-month periods ended September 30, 2002
and 2001. Interim results are not necessarily indicative of results for the
financial year.
The economic environment and currency in which Telewest operates is the
UK, and hence its reporting currency is pounds sterling ((pound)). Certain
financial information as of and for the three-month and nine-month periods ended
September 30, 2002 has been translated into US dollars ($), with such US dollar
amounts being unaudited and presented solely for the convenience of the reader,
at the rate of $1.5700 = (pound)1.00, the Noon Buying Rate of the Federal
Reserve Bank of New York on September 30, 2002. The presentation of the US
dollar amounts should not be construed as a representation that the sterling
amounts could be so converted into US dollars at the rate indicated or at any
other rate.
The unaudited, condensed consolidated financial statements include the
accounts of the Company and those of its majority-owned subsidiaries (the
"Group"). All significant inter-company accounts have been eliminated upon
consolidation.
These financial statements have been prepared on a going concern basis
and do not include any adjustments that would arise as a result of the going
concern basis of preparation being inappropriate. The Board of Directors have
confidence in the successful conclusion of a restructuring of the Company's
balance sheet (and any required amendments to our senior secured banking
facility (the "Senior Secure Facility")) and, together with and on the basis of
cash flow information that they have prepared, the directors consider that the
Group will continue to operate as a going concern for a period of at least 12
months from the date of issue of these financial statements. For additional
information concerning the proposed restructuring of the Company's balance sheet
see "Recent Developments". Any restructuring will require the approval of our
bankers and various stakeholders. Inherently, there can be no certainty in
relation to any of these matters.
We regularly monitor our ongoing ability to draw down under our bank
facilities, which is dependent on satisfying the financial covenants contained
in the loan agreement governing those facilities. We expect that as part of a
final restructuring agreement we will be required to amend the Senior Secured
Facility. Such amended facility is expected to include covenants, compliance
with which will require us to improve business performance and profitability.
Our long-term business plan anticipates that we will be able to grow at a rate
which will allow us to meet these covenants. However, this long-term plan
includes forecast information, the principal assumptions of which are clearly
subject to a degree of risk, in particular our ability to increase revenues in
accordance with our plans.
The Group faces the following significant risks and uncertainties:
o the ability to successfully complete its balance sheet
restructuring;
o the successful execution of its long-term business plan,
which in turn will affect the Group's ability to meet
financial covenants and access any available further
finance under the Senior Secured Facility (see below); and
5
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONINUED)
o the Group's ability to meet its financial covenants in
order to access any available further finance under the
Senior Secured Facility or to otherwise raise the finance
necessary to fund its operations.
We are also currently re-assessing the long-term future cash flows in
our business plan. Although this assessment is ongoing and has not been
concluded, it is expected to result in a significant impairment of the carrying
value of our property and equipment and goodwill. We expect to conclude this
assessment in the fourth quarter and will reflect non-cash impairment charges in
that quarter.
3. SEGMENTAL INFORMATION
The Company applies Statement of Financial Accounting Standard No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-making group is the Board of
Directors. The operating segments are managed separately because each operating
segment represents a strategic business unit that offers different products and
services in different markets. We operate in two main segments: Cable and
Content. The Cable segment of our business can be subdivided, for revenue
purposes only, between four product ranges: Cable Television, Consumer
Telephony, Internet and other, and Business Services. The Internet and other
unit comprises internet sales and sales of cable publications. The Content
segment provides entertainment channels to the UK pay-television broadcasting
market.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our financial
statements. The following table presents summarized financial information
relating to the reportable segments for the three and nine-month periods ended
September 30, 2002 and 2001, respectively:
UNAUDITED SEGMENTAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2002 2002 2001 2002 2002 2001
$M (POUND)M (POUND)M $M (POUND)M (POUND)M
(note 2) (note 2)
- -----------------------------------------------------------------------------------------------------------------------------------
CABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Cable television 127 81 85 399 254 243
Consumer telephony 192 122 120 586 373 362
Internet and other 36 23 11 89 57 26
-------------------------------------------------------------------------------------
Total Consumer Division 355 226 216 1,074 684 631
Business Services Division 110 70 66 334 213 202
-------------------------------------------------------------------------------------
THIRD PARTY REVENUE 465 296 282 1408 897 833
Operating costs and expenses (316) (201) (199) (965) (615) (622)
Depreciation (193) (123) (115) (573) (365) (337)
Amortization of goodwill - - (21) - - (61)
-------------------------------------------------------------------------------------
OPERATING LOSS (44) (28) (53) (130) (83) (187)
=====================================================================================
Share of net (losses)/profits of affiliates - - - - - -
Investment in affiliates 5 3 1 5 3 1
Additions to property and equipment 138 88 154 515 328 471
Goodwill 2,075 1,322 1,343 2,075 1,322 1,343
Total assets 8,302 5,288 5,222 8,302 5,288 5,222
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6
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED SEGMENTAL INFORMATION (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2002 2002 2001 2002 2002 2001
$M (POUND)M (POUND)M $M (POUND)M (POUND)M
(note 2) (note 2)
- -----------------------------------------------------------------------------------------------------------------------------------
CONTENT
- -----------------------------------------------------------------------------------------------------------------------------------
Content Division 48 31 32 141 90 100
Inter-segmental * (6) (4) (2) (17) (11) (8)
-------------------------------------------------------------------------------------
THIRD PARTY REVENUE 42 27 30 124 79 92
Operating costs and expenses (42) (27) (32) (126) (80) (96)
Depreciation (5) (3) (2) (11) (7) (9)
Amortization of goodwill - (25) - - (76)
-------------------------------------------------------------------------------------
OPERATING LOSS (5) (3) (29) (13) (8) (89)
=====================================================================================
Share of net (losses)/profits of
affiliates (6) (4) (7) (8) (5) (2)
Investment in affiliates 733 467 751 733 467 751
Additions to property and equipment 2 1 1 3 2 3
Goodwill 895 570 1,356 895 570 1,356
Total assets 2,071 1,319 2,102 2,071 1,319 2,102
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Cable television 127 81 85 399 254 243
Consumer telephony 192 122 120 586 373 362
Internet and other 36 23 11 89 57 26
-------------------------------------------------------------------------------------
Total Consumer Division 355 226 216 1,074 684 631
Business Services Division 110 70 66 334 213 202
-------------------------------------------------------------------------------------
Total Cable Division 465 296 282 1,408 897 833
Content Division 48 31 32 141 90 100
Inter-segmental * (6) (4) (2) (17) (11) (8)
-------------------------------------------------------------------------------------
TOTAL REVENUE 507 323 312 1,532 976 925
Operating costs and expenses (358) (228) (231) (1,091) (695) (718)
Depreciation (198) (126) (117) (584) (372) (346)
Amortization of goodwill - - (46) - - (137)
-------------------------------------------------------------------------------------
OPERATING LOSS (49) (31) (82) (143) (91) (276)
Other expense (163) (104) (112) (364) (232) (335)
Income tax benefit 2 1 2 8 5 7
-------------------------------------------------------------------------------------
NET LOSS (2001 BEFORE EXTRAORDINARY LOSS) (210) (134) (192) (499) (318) (604)
=====================================================================================
Share of net (losses)/profits of affiliates (6) (4) (7) (8) (5) (2)
Investments in affiliates 738 470 752 738 470 752
Additions to property and equipment 140 89 155 518 330 474
Goodwill 2,970 1,892 2,699 2,970 1,892 2,699
Total assets 10,373 6,607 7,324 10,373 6,607 7,324
- -----------------------------------------------------------------------------------------------------------------------------------
* Inter-segmental revenues are revenues from sales in our Content Division which
are costs in our Cable Division and are eliminated on consolidation.
4. SHARE-BASED COMPENSATION COST
Share-based compensation cost for employee share options is measured
over the period of the performance criteria for such options under "Accounting
for Stock Issued to Employees" ("APB 25") as the excess, if any, of the quoted
market price of a company's shares over the amount an employee must pay to
acquire the shares.
During the three and nine-month periods ended September 30, 2002 the
Company's share price decreased, resulting in no compensation charge or credit
being recorded in respect of employee share options for the three-month period
ended September 30, 2002 and a net compensation credit of (pound)0.8 million
7
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
being recorded for the nine-month period ended September 30, 2002 compared with
no charge or credit for the three-month period ended September 30, 2001 and a
net compensation charge of (pound)1.1 million for the nine-month period ended
September 30, 2001. Share-based compensation cost will continue to fluctuate
depending on the Company's share price movement.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
At January 1, 2001 the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS 137 and 138.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition at fair value of
all derivative instruments as assets or liabilities in the Company's balance
sheet. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated a hedge and if so, the type
of hedge and its effectiveness as a hedge.
For derivatives, which are not designated as hedges, changes in fair
value are recorded immediately in earnings. For derivatives designated as cash
flow hedges, changes in fair value on the effective portion of a hedge are
recorded within other comprehensive income ("OCI") until the hedged transaction
occurs and are then recorded within earnings. Changes in the ineffective portion
of a hedge are recorded immediately in earnings. For derivatives designated as
fair value hedges, changes in fair value are recorded immediately in earnings.
We did not, however, have any fair value hedges during the three-month and
nine-month periods ended September 30, 2002.
We discontinue hedge accounting for derivative financial instruments
when it is determined that the derivative instrument is no longer effective in
offsetting changes in the cash flows of the hedged item; the derivative
instrument expires or is sold; the derivative instrument is no longer designated
as a hedging instrument, because it is unlikely that a forecasted transaction
will occur; a hedged firm commitment no longer meets the definition of a firm
commitment; or our management determines that designation of the derivative
instrument as a hedging instrument is no longer appropriate. The tests for
determining the effectiveness of a cash flow hedge compare on a strict basis the
amount and timing of the underlying economic exposure with the cash flows of the
derivative instrument. We may continue to use derivative instruments to protect
our exposure to interest and currency fluctuations but be unable to meet the
tests of effectiveness set out under SFAS 133.
In the three-month period ended March 31, 2002, we determined that it
was probable that forecasted future prepayments of principal against outstanding
US dollar-denominated debt would not occur. Accordingly, the cumulative
adjustment in OCI of (pound)53 million resulting from marking to market the
derivative instruments has been reclassified from OCI to foreign exchange gains
in the Statement of Operations. Subsequent adjustments of the carrying value of
these instruments to fair value are taken directly to the Statement of
Operations as incurred.
In the nine-month period ended September 30, 2002, we had the ability
to terminate in-the-money derivative contracts that fluctuate in value. Such
derivative contracts hedged our exposure to fluctuations in the US dollar/pound
sterling exchange rates on our US dollar-denominated debt. In March 2002, we
terminated certain of these derivative contracts with a nominal value of $950
million ((pound)655 million), netting (pound)74 million cash inflow to us. In
May 2002 we terminated further derivative contracts with a nominal value of $367
million ((pound)253 million) realizing an additional (pound)30 million cash
inflow. In the three-month period ended September 30, 2002, we terminated
arrangements with a nominal value of $2.3 billion (approximately (pound)1.5
billion). Contracts with a nominal value of $1 billion were settled in cash
resulting in an outflow of (pound)28 million. The remaining contracts with a
nominal value of $1.3 billion have yet to be settled for a total cost of
(pound)33 million of which (pound)19 million was due on October 1, 2002, but the
Company deferred such payment and is considering the payment in the context of
its financial restructuring.
In addition, in June 2002, we reviewed the effectiveness as hedges of
the derivative instruments hedging our exposure to fluctuations in interest
rates on our long-term bank debt. Our review concluded that continued
designation of these instruments as hedges was no longer appropriate and hedge
accounting was discontinued with immediate effect. The dedesignation of these
instruments as hedges resulted in a transfer of (pound)7 million from cumulative
OCI to interest expense within the Statement of Operations.
During the nine-month period ended September 30, 2002, we recorded a
net (pound)51 million transfer from cumulative OCI to the Statement of
Operations arising from the termination of derivative contracts as ineffective
hedges, as described above. In the nine-month period ended September 30, 2001,
we recorded a (pound)41 million gain in fair value to cumulative OCI, consisting
of a loss of (pound)9 million to short-term derivative liabilities and a
(pound)50 million gain to long- term derivative assets.
8
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company continues to hedge some of its interest rate risk on its
Senior Secured Facility through the use of interest rate swaps. The purpose of
the derivative instruments is to provide a measure of stability over the
Company's exposure to movements in sterling interest rates on its sterling
denominated bank debt.
6. ADOPTION OF SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board issued SFAS 142,
"Goodwill and Other Intangible Assets" which requires that goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized upon adoption of SFAS 142, but will
be subject to impairment testing as part of the investment to which it relates
in accordance with APB 18, "The Equity Method of Accounting for Investments in
Common Stock". Separable intangible assets that do not have indefinite lives
will continue to be amortized over their estimated useful lives and will be
subject to review for impairment in accordance with SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". For goodwill and intangible assets
acquired prior to July 1, 2001, the Group adopted SFAS 142 effective January 1,
2002. As of January 1, 2002 the Group had (pound)2,199 million of unamortized
goodwill, (pound)1,892 million of which related to business combinations and
(pound)307 million of which related to equity method investments. The adoption
of SFAS 142 had no impact on the Company's financial position or results of
operations.
As required by SFAS 142, the standard has not been retroactively
applied to the results for the period prior to adoption. A reconciliation of net
loss for the three and nine-month periods ended September 30, 2002 and 2001, as
if SFAS 142 had been adopted as of January 1, 2001, is presented below:
3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2002 2002 2001 2002 2002 2001
(IN MILLIONS EXCEPT PER SHARE DATA)
(note 2) (note 2)
- ------------------------------------------------------------------------------------------------------------------------------
NET LOSS
- ------------------------------------------------------------------------------------------------------------------------------
Reported net loss (after extraordinary loss) $ $
(210)(POUND) (134)(POUND) (192) (499)(POUND) (318) (619)(POUND)
Add back amortization of goodwill - - 46 - - 137
------------------------------------------------------------------------------
Adjusted net loss (after extraordinary loss) (210) (134) (146) (499) (318) (482)
==============================================================================
- -----------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE
- -----------------------------------------------------------------------------------------------------------------------------
Reported net loss per share
(after extraordinary loss) $ (pound) (pound) $ (pound) (pound)
(0.08) (0.05) (0.07) (0.17) (0.11) (0.22)
Add back amortization of goodwill - - 0.02 - - 0.05
------------------------------------------------------------------------------
Adjusted net loss per share
(after extraordinary loss) (0.08) (0.05) (0.05) (0.17) (0.11) (0.17)
==============================================================================
7. RECENT DEVELOPMENTS
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the "Bondholders Committee"). The agreement
provides for the cancellation of all outstanding notes and debentures issued by
the Company and Telewest Finance (Jersey) Limited (the "Notes") and certain
unsecured foreign exchange hedge contracts in exchange for new ordinary shares
representing 97% of the issued share capital of the Company immediately after
the restructuring. Existing shareholders will retain a 3% interest in the
Company post-restructuring.
Discussions with our senior lenders are continuing and we are close to
reaching an agreement with a steering committee of senior lenders and the
Bondholder Committee with respect to amended and restated bank facilities (the
"Facilities"). The agreement includes total committed amount of the Facilities;
maturity; margins; and financial covenants. It is expected that the Facilities
will provide the Company with liquidity which the Company believes will be
sufficient to meet its funding needs going forward. The provision of the
Facilities is conditional on various matters including the completion of the
restructuring on terms satisfactory to the Company's senior lenders.
Negotiations are continuing with other major stakeholders with a view
to them agreeing to vote in favour of the restructuring and the Company expects
to be able to make a further announcement on the progress of these negotiations
by the end of November.
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US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We also announced on September 30, 2002 that we were deferring payment
of interest under certain of our Notes and the settlement of certain foreign
exchange hedge contracts. In view of the continuing progress in the
restructuring process, on October 31, 2002, the Company announced that it had
determined to continue to defer the payment of interest under certain of its
Notes (including a payment that was due on November 1, 2002) and the settlement
of foreign exchange hedge contracts. Failure to pay interest on these Notes
beyond a 30-day grace period, gives the holders of 25% of each series of
affected Notes the right to demand repayment of the principal amount of, and
accrued interest on, those Notes. As anticipated, in addition to creating a
default under the affected bonds the decision to defer such payments has
resulted in defaults under the Group's bank facilities and a number of other
financing arrangements. Such defaults will result in the re-classification of
debts in default to amounts payable within one year. Based on one such default,
a creditor has filed a petition for the winding up of the Company as a result of
non-payment of amounts due ((pound)10.5 million). The Company intends to deal
with this claim as part of the overall restructuring of its unsecured debt
obligations and does not believe that the legal action will delay or
significantly impede the restructuring process. The Company expects to meet its
obligations to its suppliers and trade creditors and that this legal action will
have no impact on customer service.
On July 31, 2002 we announced that Adam Singer, Chief Executive would
be leaving the Company and had resigned as a director of the Board. Charles
Burdick, the Group Finance Director, became Managing Director with immediate
effect. In addition, on August 23, 2002 we announced that Mark Luiz had been
appointed to the role of Group Finance Director.
On September 30, 2002, the ratio of the Company's ordinary shares to
American Depositary Shares quoted on the NASDAQ National Market was changed from
10-to-1 to 200-to-1 ordinary shares per American Depositary Share.
On September 4, 2002 we received approval from our shareholders to sell
our 16.9% interest in SMG plc ("SMG"). On October 29, 2002 we repaid the
outstanding balance of approximately (pound)26 million on the loan secured by a
charge over our shares in SMG. On November 6, 2002, we sold our holding in SMG
and realized approximately (pound)20 million in proceeds net of expenses and the
loan repayment.
8. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings in the ordinary
course of business which it does not believe will result, in the aggregate, in a
material adverse effect on its financial position or results of operations.
10
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TELEWEST COMMUNICATIONS PLC
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PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Set forth below is a discussion of our financial condition and results
of operations for the three-month and nine-month periods ended September 30,
2001 and 2002 based upon financial information prepared in accordance with US
GAAP.
References in this discussion to the "Group," "we," "us," and "our,"
are to Telewest and its consolidated subsidiaries as at, or for, the specified
date or period.
CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since
December 31, 2001, as reported in our Form 20-F filed with the SEC on July 1,
2002.
RESULTS OF OPERATIONS
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2002
REVENUE
We operate in two main segments: Cable and Content. The Cable segment
of our business is subdivided, for revenue purposes only, into four units: Cable
Television, Consumer Telephony, Internet and other, and Business Services
Division. The Content segment provides entertainment channels to the UK pay-TV
broadcasting market.
Our consolidated revenue increased by (pound)11 million or 3.5% from
(pound)312 million in the three-month period ended September 30, 2001 to
(pound)323 million in the three-month period ended September 30, 2002 and by
(pound)51 million or 5.5% from (pound)925 million in the nine-month period ended
September 30, 2001 to (pound)976 million in the nine-month period ended
September 30, 2002. These increases were attributable to growth in our Consumer
Division and Business Services Division offset by a reduction in our Content
Division, mainly due to the closure or sale of non-core businesses and the
closure of ITV Digital.
RESIDENTIAL SERVICES REVENUE (CONSUMER DIVISION)
Residential services revenue represents a combination of cable
television ("CATV") revenue and consumer cable telephony revenue and internet
and other income.
Our Consumer Division revenue increased by (pound)10 million or 4.6%
from (pound)216 million for the three-month period ended September 30, 2001 to
(pound)226 million for the three-month period ended September 30, 2002 and by
(pound)53 million or 8.4% from (pound)631 million in the nine-month period ended
September 30, 2001 to (pound)684 million in the nine-month period ended
September 30, 2002. These increases were attributable primarily to increases in
average monthly revenue per household coming from the growth of our successful
broadband products, increased multi-service penetration and selected price
rises.
Total customer homes connected increased marginally by 13,622 or 0.8%
from 1,744,612 at September 30, 2001 to 1,758,234 at September 30, 2002. During
the three-month period ended September 30, 2002 net customer homes connected
fell by 12,203 mainly as a result of the continued effect of the consumer price
rises introduced earlier in the year and the more rigorous enforcement of both
our installation fee and disconnection policies in line with our objective of
focusing on more cash generative customers. Despite the customer losses during
the three-month period ended September 30, 2002, overall household penetration
increased marginally by 0.4 percentage points from 37.0% at September 30, 2001
to 37.4% at September 30, 2002.
Average monthly revenue per household increased by (pound)1.01 or 2.5%
from (pound)40.29 in the three-month period ended September 30, 2001 to
(pound)41.30 for the three-month period ended September 30, 2002 and by
(pound)2.10 or 5.3% from (pound)39.49 in the nine-month period ended September
30, 2001 to (pound)41.59 in the nine-month period ended September 30, 2002. The
increase in average monthly revenue per subscriber is attributable to an
increase in dual or triple penetration (i.e. the proportion of homes subscribing
to any two or all three of our CATV, residential telephony and high-speed
internet services), higher subscriber revenues generated by Active Digital
versus analogue television services and retail price increases in our basic CATV
price in April 2002, offset in part by lower call volumes in residential
telephony. Dual or triple penetration, which results from the continued market
11
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acceptance of combined CATV, telephony and high-speed internet packages, grew by
1.8 percentage points to 69.6% at September 30, 2002 from 67.8% at September 30,
2001. As at September 30, 2002, "triple play" customers totaled 154,828 and
accounted for 8.8% of our total customer base compared with 35,832 customers and
2.1% at September 30, 2001. This triple play customer base has grown by 19.8% in
the three-month period ended September 30, 2002. Average monthly revenue per
household for the three-month period ended September 30, 2002 decreased by
(pound)0.65 from (pound)41.95 for the three-month period ended June 30, 2002
mainly due to falls in average CATV revenue per subscriber and a slightly
changed subscriber mix. The three-month period ended June 30, 2002 benefited
from approximately (pound)2 million received in "walled garden" termination fees
from content suppliers who withdrew from our interactive service and, following
the price rises earlier in the year, fewer customers subscribing to our top
basic package.
The competitive nature of the markets in which the Consumer Division
operates will continue to restrict our ability to increase retail prices.
Nevertheless, following price rises by our competitors, we introduced selected
price rises across our CATV, telephony and internet product range in April 2002.
For example, the "starter" digital TV pack, which includes a telephone line, has
risen by (pound)2.00 to (pound)11.49. Other digital basic TV packages have risen
by (pound)1.50 and the monthly price of our unmetered dial-up internet service,
SurfUnlimited, has risen by (pound)2.00 to (pound)12.00. Our 512kb broadband
internet service, blueyonder, remains at (pound)25.00 per month, if subscribed
to in addition to our Active Digital or residential telephony services. We
believe that our bundled offerings still remain competitive when compared with
those offered by other operators.
CABLE TELEVISION REVENUE
Cable television revenue decreased by (pound)4 million or 4.7% from
(pound)85 million for the three-month period ended September 30, 2001 to
(pound)81 million for the three-month period ended September 30, 2002 due to net
CATV disconnections of 28,248 subscribers during the period. Cable television
revenue increased by (pound)11 million or 4.5% from (pound)243 million for the
nine-month period ended September 30, 2001 to (pound)254 million in the
nine-month period ended September 30, 2002. The increase was principally
attributable to retail price increases introduced in July 2001 and April 2002,
offset by higher churn rates experienced in the twelve-month period ended
September 30, 2002 and lower subscriber revenues, particularly in the
three-month period ended September 30, 2002.
Total CATV subscribers connected decreased by 13,144 or 1.0% from
1,317,979 at September 30, 2001 to 1,304,835 at September 30, 2002. Increase in
CATV subscribers in the six-month period ended March 31, 2002 were more than
offset by disconnections in the six-month period ended September 30, 2002
following price rises introduced in April 2002 and changes in our retention
policy as discussed above. CATV subscriber growth was also impacted by targeted
marketing towards broadband rather than digital TV. Marketing of our TV services
increased towards the end of the three-month period ended September 30, 2002 as
we introduced our digital TV services to the former Eurobell franchises in the
Southwest of the UK.
As at September 30, 2002 we had an installed base of 829,196 digital
subscribers, an increase of 187,702 or 29.3% compared with 641,494 as at
September 30, 2001. Active Digital, comprised of a wide array of TV and radio
channels, pay-per-view movies, interactive services and TV e-mail, has been
rolled out in all franchise areas, excluding the Eurobell Southeast areas and
our Cabletime areas where we currently offer only analogue services. We began
rolling out Active Digital into our Eurobell Southwest areas in the three months
ended 30 September 2002 and by that date we had attracted 944 subscribers.
At September 30, 2002, 63.5% of all customer homes connected for CATV
subscribed to Active Digital and 36.5% subscribed to our analogue TV product.
This compares with 48.7% and 51.3%, respectively, at September 30, 2001.
Excluding the Eurobell areas, our Active Digital services are taken by 66.8% of
our CATV subscribers compared with 33.2% for analogue subscribers. The migration
of analogue customers to digital has slowed during the three-month period ended
September 30, 2002 compared with the corresponding period in the previous year
due to our focus on cash and cost control. Only 10,416 Active Digital customers
were added during the three-month period ended September 30, 2002 compared with
77,061 customers during the three-month period ended September 30, 2001.
Average monthly revenue per CATV subscriber (combined digital and
analogue), decreased by (pound)1.29 or 6.1% from (pound)21.31 for the
three-month period ended September 30, 2001 to (pound)20.02 for the three-month
period ended September 30, 2002 due partially to an increased percentage of
subscribers choosing lower-priced service offerings. Average monthly revenue per
CATV subscriber increased marginally by (pound)0.18 or 0.9% from (pound)20.61
for the nine-month period ended September 30, 2001 to (pound)20.79 for the
nine-month period ended September 30, 2002, due to the increase in the number of
our Active Digital subscribers, and price rises across our basic packages which
were introduced in July 2001 and April 2002 offset by an increased percentage of
subscribers choosing lower-priced service offerings. Average monthly revenue for
digital CATV subscribers was (pound)23.12 for the nine-month period ended
12
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September 30, 2002 compared with (pound)23.21 for the nine-month period ended
September 30, 2001, which reflects the actively managed change in the mix
between premium and basic packages. For example, approximately 75% of our Active
Digital subscribers at September 30, 2002 were taking "basic only" packages
compared to approximately 71% at September 30, 2001. Due to the higher cost of
the premium channels this increase in "basic only" packages reflects in higher
margins being achieved for our CATV products. Average monthly revenue for
digital CATV subscribers at (pound)23.12 for the nine-month period ended
September 30, 2002 compared with (pound)17.39 for analogue CATV subscribers for
the same period. From August 2002, the monthly price of the digital starter pack
was raised from (pound)11.49 to (pound)15 for new acquisitions as we focus on
improving the package mix of our subscribers. There has been no price change for
existing subscribers. We are taking steps to offer better value for our
customers and have recently enhanced our channel line-up with the introduction
of Sky One, the Hallmark Channel, UK Gold +1 and Living +1 to our digital
Essential package. We have also introduced Sky Sports News and UK History to our
digital starter pack.
Product penetration decreased marginally by 0.2 percentage points from
28.0% at September 30, 2001 to 27.8% at September 30, 2002 as a result of net
subscriber disconnections discussed above. Average CATV subscriber churn
increased 2.7 percentage points from 18.7% in the twelve-month period ended
September 30, 2001 to 21.4% in the twelve-month period ended September 30, 2002.
CONSUMER TELEPHONY REVENUE
Consumer telephony revenue increased by (pound)2 million or 1.7% from
(pound)120 million for the three-month period ended September 30, 2001 to
(pound)122 million for the three-month period ended September 30, 2002 and by
(pound)11 million or 3.0% from (pound)362 million for the nine-month period
ended September 30, 2001 to (pound)373 million for the nine-month period ended
September 30, 2002. The increase in consumer telephony revenue was primarily due
to increases in the number of residential telephony customers and lines and
selected price rises.
The number of residential telephony subscribers increased by 23,524
or 1.5% from 1,591,666 at September 30, 2001 to 1,615,190 at September 30, 2002.
The number of residential lines decreased by 18,523 or 1.1% from 1,744,427 at
September 30, 2001 to 1,725,904 at September 30, 2002. The increase in the
number of residential telephony subscribers resulted from the impact of the
take-up of Talk Unlimited leading to higher product penetration, offset in part
by a decrease in second line penetration at September 30, 2002 compared with a
year earlier.
Talk Unlimited, which was launched in May 2001, is the only 24-hour 7
day-a-week flat-rate unmetered residential voice service available for local and
national calls in the UK and accounted for 346,285 subscribers or 21.4% of our
total telephony subscribers at September 30, 2002 an increase of 270,135 from
76,150 subscribers at September 30, 2001. This service, charged at a flat rate
of (pound)25.00 per month including digital television, is successful in
attracting new subscribers to our products and is available in all of our
franchise areas.
Residential telephony subscribers decreased by 10,815 during the
three-month period ended September 30, 2002 (adding to the decrease of 9,510
subscribers during the three-month period ended June 30, 2002) following price
rises in April 2002, and average subscriber churn increased by 0.5 percentage
points from 16.7% for the twelve-month period ended September 30, 2001 to 17.2%
for the twelve-month period ended September 30, 2002.
Consumer telephony product penetration increased to 34.4% as at
September 30, 2002 compared with 33.8% as at September 30, 2001. Second line
penetration decreased to 6.9% as at September 30, 2002 from 9.6% as at September
30, 2001, due to the price increases for second lines during the twelve-month
period ended September 30, 2002 and the migration of dial-up internet
subscribers to our blueyonder broadband internet service.
Average monthly revenue per line increased by 3.0% from (pound)22.43
for the three-month period ended September 30, 2001 to (pound)23.11 for the
three-month period ended September 30, 2002 and increased by 2.5% from
(pound)22.59 for the nine-month period ended September 30, 2001 to (pound)23.15
for the nine-month period ended September 30, 2002. Although average call
volumes increased by approximately 2.5% year on year, our average revenue per
minute only increased by approximately 1.5% over the same period. While we
benefited from our simplified tariff known as "3-2-1-Free" and a growing number
of calls made to mobile operators, boosting telephony revenue per minute, these
factors were offset by the effects of price competition on our telephony charges
and a change in the mix of calls made by our telephony subscribers, particularly
the approximately 15% increase in the percentage of calls made to Internet
Service Providers ("ISPs") at lower rates (or at no charge, in the case of our
own SurfUnlimited subscribers). Residential telephony revenues remain under
pressure due to the effect of subscribers substituting mobile calls for fixed
line telephone calls and also the migration of dial-up internet subscribers to
broadband services.
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TELEWEST COMMUNICATIONS PLC
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INTERNET AND OTHER REVENUE
Internet and other revenue, which arises wholly in our Consumer
Division, increased by (pound)12 million or 109% from (pound)11 million in the
three-month period ended September 30, 2001 to (pound)23 million in the
three-month period ended September 30, 2002 and by (pound)31 million or 119%
from (pound)26 million in the nine-month period ended September 30, 2001 to
(pound)57 million in the nine-month period ended September 30, 2002. These
increases are due to increases in internet income which increased by (pound)13
million to (pound)22 million in the three-month period ended September 30, 2002
from (pound)9 million in the three-month period ended September 30, 2001 and by
(pound)34 million to (pound)53 million in the nine-month period ended September
30, 2002 from (pound)19 million in the nine-month period ended September 30,
2001.
We began marketing our 512kb high-speed internet service for home
personal computers, "blueyonder broadband internet," on a national basis from
the start of 2001, and on June 17, 2002 we announced the launch of our new
1,024kb (i.e. 1Mb) blueyonder broadband internet service. The number of
blueyonder broadband internet subscribers increased by 38,779 or 21.9% from
177,394 to 216,173 for the three-month period ended September 30, 2002 and by
163,039 from 53,134 at September 30, 2001 to 216,173 (including 20,956
subscribers to our 1Mb service launched in June 2002) at September 30, 2002.
With the exception of our Eurobell South-East areas and our Cabletime areas, we
now have full coverage across all of our regions. We began rolling out
blueyonder broadband internet in our Eurobell South-West areas during the
three-month period ending September 30, 2002 and attracted 1,247 subscribers in
those areas at that date.
We charge (pound)29.99 per month for our 512kb and (pound)39.99 for our
1Mb blueyonder broadband internet services on a stand-alone basis or
(pound)25.00 and (pound)35.00, respectively, if purchased in addition to our
CATV and/or telephony services. As such, our blueyonder broadband internet
customers significantly contribute to the growth in our average monthly revenue
and 154,828 customers or 71.6% of our blueyonder broadband internet customers
also take both cable television and telephony services from us. Blueyonder
broadband internet churn increased in the three-month period ended September 30,
2002 from 9.5% to 11.7% as our subscriber base grew and also due to the churn of
some customers who were initially attracted by promotions earlier in the year
offering free trials and discounted installation fees.
Dial-up internet subscribers to our blueyonder SurfUnlimited product,
the UK's first un-metered internet access service, together with our blueyonder
pay-as-you-go metered internet service decreased by 6,874 or 2.4% from 291,044
at September 30, 2001 to 284,170 at September 30, 2002 as subscribers migrated
to our blueyonder broadband internet service. Consequently, as at September 30,
2002 we had 500,343 internet subscibers in total, compared with 344,178 as at
September 30, 2001, an increase of 156,165 or 45.4%.
Other revenues are derived from the sales of cable publications and
contributed (pound)1 million of revenue in the three-month period ended
September 30, 2002 compared with (pound)2 million in the three-month period
ended September 30, 2001 and (pound)4 million in the nine-month period ended
September 30, 2002 compared with (pound)7 million in the nine-month period ended
September 30, 2001.
BUSINESS SERVICES REVENUE
Business Services Division revenue increased by (pound)4 million or
6.1% from (pound)66 million for the three-month period ended September 30, 2001
to (pound)70 million for the three-month period ended September 30, 2002 and by
(pound)11 million or 5.4% from (pound)202 million for the nine-month period
ended September 30, 2001 to (pound)213 million for the nine-month period ended
September 30, 2002. These increases resulted from the increased sales of voice
and data services, primarily to Small to Medium-sized Enterprises ("SMEs") and
increased revenues contributed by our Carrier Services Unit, offset in part by a
decrease in average monthly revenue per line from our business customers.
Excluding our Carrier Services Unit, revenues increased by (pound)4 million or
7.4% from (pound)54 million for the three-month period ended September 30, 2001
to (pound)58 million for the three-month period ended September 30, 2002 and by
(pound)8 million or 5.0% from (pound)161 million for the nine-month period ended
September 30, 2001 to (pound)169 million for the nine-month period ended
September 30, 2002.
The increase in the sale of voice and data services resulted primarily
from an increase in the number of business customers accounts using these
services and the number of lines used by those accounts. Business customer
accounts increased by 3,299 accounts or 4.7% from 70,753 at September 30, 2001
to 74,052 at September 30, 2002. Business telephony lines increased by 27,414
lines or 6.4% from 430,974 at September 30, 2001 to 458,388 at September 30,
2002.
The Business Division continues to benefit from growth in the provision
of data services across all market segments with the launch of IPVPN (Internet
Protocol Virtual Private Network) - a secure and scalable private network
solution that enables companies to send voice, video and data through one
single, efficient connection.
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Our Carrier Services Unit, which provides our fiber optic National
Network to other carriers and operators, thereby exploiting our fixed network
investment by providing new revenues at higher margins, contributed (pound)12
million of revenue for both the three-month period ended September 30, 2002 and
for the corresponding period in 2001 and (pound)44 million for the nine-month
period ended September 30, 2002 compared with (pound)41 million for the
corresponding period in 2001. Revenue in the nine-month period ended September
30, 2002 benefited from the recognition of (pound)8 million from an Atlantic
Telecommunications contract, previously deferred and being recognized over 20
years. Atlantic Telecommunications was placed in administration and therefore
this contract was released from its terms, allowing us to credit the deferred
revenue in the current period. Revenues from this unit tend to be derived from a
relatively small number of high value, short and long-term contracts and can
therefore fluctuate from period to period. Over recent periods our Carrier
Services Unit has been negatively impacted by a general weakness in the market
in which it operates.
Average monthly revenue per line decreased marginally from (pound)43.32
for the three-month period ended September 30, 2001 to (pound)43.14 for the
three-month period ended September 30, 2002 and by (pound)2.53 or 5.6% from
(pound)44.86 for the nine-month period ended September 30, 2001 to (pound)42.33
for the nine-month period ended September 30, 2002, due to increased competition
in the marketplace.
CONTENT DIVISION REVENUE
The net revenue of Flextech, our Content Division decreased by (pound)3
million or 10.0% from (pound)30 million for the three-month period ended
September 30, 2001 to (pound)27 million for the three-month period ended
September 30, 2002 and by (pound)13 million or 14.1% from (pound)92 million for
the nine-month period ended September 30, 2001 to (pound)79 million for the
nine-month period ended September 30, 2002. These revenues are after eliminating
inter-divisional trading between Flextech and Telewest of (pound)2 million and
(pound)8 million for the three and nine-month periods ended September 30, 2001,
respectively, and (pound)4 million and (pound)11 million for the three and
nine-month periods ended September 30, 2002, respectively. Before elimination of
this inter-divisional trading, the Content Division's revenue decreased by
(pound)1 million or 3.1% from (pound)32 million for the three-month period ended
September 30, 2001 to (pound)31 million for the three-month period ended
September 30, 2002 and by (pound)10 million or 10% from (pound)100 million for
the nine-month period ended September 30, 2001 to (pound)90 million for the
nine-month period ended September 30, 2002.
The nine-month period ended September 30, 2001 included revenues from
HSNDI and Screenshop, which were either closed down or sold during 2001. The
period also included a substantial Government grant payment in respect of the
set-up of Living Health, our broadband interactive TV health service and was the
last period before BSkyB's analogue switch-off, which has affected revenues from
the sale of spare analogue transponder capacity. The revenue from all these
items was (pound)14 million for the nine-month period ended September 30, 2001
compared to (pound)1 million for the nine-month period ended September 30, 2002.
Our Content Division's subscription revenue remained the same for the
three-month period ended September 30, 2002 as the corresponding period in 2001
and increased by (pound)1 million for the nine-month period ended September 30,
2002 compared with the nine-month period ended September 30, 2001, and its share
of the revenue of UKTV (our joint venture with BBC Worldwide) remained at
(pound)15 million for the three-month period ended September 30, 2002 and
increased by (pound)1 million or 2.1% from (pound)47 million for the nine-month
period ended September 30, 2001 to (pound)48 million for the nine-month period
ended September 30, 2002. These increases resulted primarily from an increase in
the number of homes which were receiving programming from our Content Division
until the closure of ITV Digital on April 30, 2002 (see below), offset in part
by lower subscription rates from Sky Digital subscribers. As at September 30,
2002, due particularly to the closure of ITV Digital, the number of homes
receiving programming from our Content Division had fallen to 9.6 million from
10.3 million at September 30, 2001.
The closure of ITV Digital on April 30, 2002 has negatively affected
the revenues of UKTV. The effect of the closure on the Content Division's share
of revenue is approximately (pound)1.5 million per quarter. As a result of the
closure of ITV Digital, UKTV closed one of its channels, Play UK, on September
30, 2002. None of the Content Division's wholly owned channels were carried on
the ITV Digital platform.
Advertising revenue, within total Content Division's revenue and
including our share of UKTV's advertising revenue, increased by 20% during the
three-month period ended September 30, 2002 over the three-month period ended
September 30, 2001 and by 9.3% during the nine-month period ended September 30,
2002 over the nine-month period ended September 30, 2001. Our share of total
United Kingdom television national advertising revenues increased from 3.2% for
the nine-month period ended September 30, 2001 to 3.4% for the nine-month period
ended September 30, 2002, an increase during a period which was marked by an
overall decline in UK television national advertising revenue of 2.3% compared
to the previous year. Our share of basic pay-television viewing decreased from
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21.1% in the nine-month period ended September 30, 2001 to 19.8% in the
nine-month period ended September 30, 2002 due to increased competition in the
multi-channel market.
Flextech and UKTV have recently announced that they will provide
general entertainment channels as part of the line-up for Freeview a new digital
terrestrial television service launched by the BBC and Crown Castle
International on October 30, 2002. Flextech and UKTV will jointly fill one of
the 24-hour general entertainment slots on the new Freeview platform. It will
consist of two separate channels with distinct 12-hour offerings. Flextech's new
channel called "f tn" will broadcast daily between 6pm and 6am and UKTV's new
channel, UK Homes will ultimately broadcast between 6am and 6pm.
Flextech and UKTV have also recently extended their brands by launching
two new time-shifted versions of their most popular channels, UK Gold +1 and
Living +1. UKTV has also launched a completely new channel, UK History which
will be available on all multi-channel platforms.
OPERATING COSTS AND EXPENSES
Our operating costs and expenses before depreciation and amortization
decreased by (pound)3 million or 1.3% from (pound)231 million in the three-month
period ended September 30, 2001 to (pound)228 million in the three-month period
ended September 30, 2002 and by (pound)23 million or 3.2% from (pound)718
million in the nine-month period ended September 30, 2001 to (pound)695 million
in the nine-month period ended September 30, 2002, due to reduced consumer
programming expenses, business and consumer telephony expenses, and content
expenses partially offset by increases in selling, general and administrative
costs principally caused by higher payroll costs due to our current redundancy
program.
Consumer programming expenses decreased by (pound)3 million or 8.8%
from (pound)34 million for the three-month period ended September 30, 2001 to
(pound)31 million for the three-month period ended September 30, 2002
representing 13.6% of total operating costs before depreciation and amortization
for the three-month period ended September 30, 2002, compared with 14.7% for the
three-month period ended September 30, 2001. Consumer programming expenses
decreased by (pound)13 million or 11.9% from (pound)109 million for the
nine-month period ended September 30, 2001 to (pound)96 million for the
nine-month period ended September 30, 2002 representing 13.8% of total operating
costs before depreciation and amortization for the nine-month period ended
September 30, 2002, compared with 15.2% for the nine-month period ended
September 30, 2001. Decreased consumer programming expenses were principally the
result of lower programming costs resulting from an increase in the number of
our television subscribers choosing to subscribe to packages with fewer or no
premium channels, and favorable renegotiations with certain programmers for
content contracts, offset by increased costs of programming for our digital
packages, which have more channels than their analogue counterparts.
Business and consumer telephony expenses decreased by (pound)5 million
or 8.8% from (pound)57 million for the three-month period ended September 30,
2001 to (pound)52 million for the three-month period ended September 30, 2002,
representing 22.8% of total operating costs before depreciation and amortization
for the three-month period ended September 30, 2002, compared with 24.7% for the
three-month period ended September 30, 2001. Business and consumer telephony
expenses decreased by (pound)13 million or 7.3% from (pound)178 million for the
nine-month period ended September 30, 2001 to (pound)165 million for the
nine-month period ended September 30, 2002, representing 23.7% of total
operating costs before depreciation and amortization, for the nine-month period
ended September 30, 2002, compared with 24.8% for the nine-month period ended
September, 2001. These decreases resulted principally from reductions in
termination rates and re-routing of traffic to the least-cost provider.
The Content Division's cost of sales decreased by (pound)2 million or
10.5% from (pound)19 million for the three-month period ended September 30, 2001
to (pound)17 million for the three-month period ended September 30, 2002,
representing 7.5% of total operating costs before depreciation and amortization
for the three-month period ended September 30, 2002 compared with 8.2% for the
three-month period ended September 30, 2001. The Content Division's cost of
sales decreased by (pound)9 million or 15.8% from (pound)57 million for the
nine-month period ended September 30, 2001 to (pound)48 million for the
nine-month period ended September 30, 2002, representing 6.9% of total operating
costs before depreciation and amortization for the nine-month period ended
September 30, 2002 compared with 7.9% for the nine-month period ended September
30, 2001. The Content Division's cost of sales consists principally of
amortization costs of programming shown on its TV channels, direct costs
associated with its advertising revenues, and costs of products sold through its
web and transactional services. The Content Division's cost of sales was 63.0%
of the Content Division's revenues for the three-month period ended September
30, 2002 compared with 63.3% for the three-month period ended September 30, 2001
and 60.8% of the Content Division's revenues for the nine-month period ended
September 30, 2002 compared with 62.0% for the nine-month period ended September
30, 2001.
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Depreciation expense increased by (pound)9 million or 7.7% from
(pound)117 million for the three-month period ended September 30, 2001 to
(pound)126 million for the three-month period ended September 30, 2002 and by
(pound)26 million or 7.5% from (pound)346 million for the nine-month period
ended September 30, 2001 to (pound)372 million for the nine-month period ended
September 30, 2002. These increases are primarily attributable to the increased
capital expenditure associated with the roll-out of our Active Digital and
high-speed internet products and write off of certain cancelled capital
projects.
Selling, general and administrative expenses ("SG&A") which include,
among other items, salary and marketing costs, increased by (pound)7 million or
5.8% from (pound)121 million for the three-month period ended September 30, 2001
to (pound)128 million for the three-month period ended September 30, 2002 and by
(pound)12 million or 3.2% from (pound)374 million in the nine-month period ended
September 30, 2001 to (pound)386 million in the nine-month period ended
September 30, 2002. On May 2, 2002, we announced that we were reducing our
staffing levels by approximately 1,500. This is part of a group reorganization,
which aims amongst other things to streamline management and flatten reporting
lines. The increases in SG&A primarily reflected the net increase in employment
costs due to redundancy charges following our announcement on May 2, 2002
(partially offset by reductions in payroll costs from decreasing numbers of
employees), and increased expense associated with the marketing of our broadband
and digital products and was partially offset by decreases in other overhead
expenses as we continue to achieve cost efficiencies across the Group.
Redundancy costs incurred during the three and nine-month periods ended
September 30, 2002 were approximately (pound)11 million and (pound)20 million,
respectively. We do not anticipate that there will be further significant costs
in the fourth quarter of 2002 as we complete the redundancy consultation period.
Excluding redundancy costs, SG&A would have decreased by (pound)4 million and
(pound)8 million for the three-month and nine-month periods ended September 30,
2002, respectively. SG&A decreased as a percentage of total operating costs,
before depreciation and amortization from 56.3% for the three-month period ended
September 30, 2001 to 56.1% for the three-month period ended September 30, 2002
and increased from 52.1% for the nine-month period ended September 30, 2001 to
55.5% for the nine-month period ended September 30, 2002. After capitalization
to related property and equipment, staff costs increased to (pound)75 million
for the three-month period ended September 30, 2002 from (pound)74 million for
the three-month period ended September 30, 2001 and to (pound)210 million for
the nine-month period ended September 30, 2002 from (pound)200 million for the
nine-month period ended September 30, 2001, reflecting the redundancy costs
offset by decreased ongoing payroll costs as we reduced headcount by some 1,600
employees from a base of approximately 11,300 as at September 30, 2001.
Total labor and overhead costs capitalized in connection with new
subscriber installations and enhancements to our networks decreased by (pound)7
million or 14.0% from (pound)50 million for the three-month period ended
September 30, 2001 to (pound)43 million for the three-month period ended
September 30, 2002 and decreased by (pound)5 million or 3.4% from (pound)146
million for the nine-month period ended September 30, 2001 to (pound)141 million
for the nine-month period ended September 30, 2002.
Under SFAS 142, effective from January 1, 2002, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized under SFAS 142 but will be subject
to impairment testing as part of the investment to which it relates in
accordance with APB 18. Accordingly, there was no charge for amortization of
goodwill in the three and nine-month periods ended September 30, 2002 compared
to charges of (pound)46 million and (pound)137 million for the three and
nine-month periods ended September 30, 2001, respectively. No impairment
resulted from the initial adoption of SFAS 142 on January 1, 2002. We are
currently re-assessing the long-term future cash flows in our business plan.
Although this assessment is ongoing and has not been concluded, it is expected
to result in a significant impairment of the carrying value of our property and
equipment and goodwill. We expect to conclude this assessment in the fourth
quarter and will reflect non-cash impairment charges in that quarter.
OTHER INCOME/(EXPENSE)
Other expense, net of income, decreased by (pound)8 million or 7.1%
from (pound)112 million for the three-month period ended September 30, 2001 to
(pound)104 million for the three-month period ended September 30, 2002 and by
(pound)103 million or 30.7% from (pound)335 million for the nine-month period
ended September 30, 2001 to (pound)232 million for the nine-month period ended
September 30, 2002. This consisted primarily of increased net foreign exchange
gains offset by increased interest expense.
Interest expense increased by (pound)21 million or 16.9% from
(pound)124 million for the three-month period ended September 30, 2001 to
(pound)145 million for the three-month period ended September 30, 2002 and by
(pound)52 million or 15.1% from (pound)345 million for the nine-month period
ended September 30, 2001 to (pound)397 million for the nine-month period ended
September 30, 2002. These increases were primarily as a result of the additional
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interest expense incurred under our bank facilities with respect to additional
borrowing to fund the continued roll-out of digital television and high-speed
internet products and general working capital.
Foreign exchange gains, net, increased by (pound)53 million from
(pound)16 million in the three-month period ended September 30, 2001 to
(pound)69 million in the three-month period ended September 30, 2002 and by
(pound)146 million from (pound)7 million in the nine-month period ended
September 30, 2001 to (pound)153 million in the nine-month period ended
September 30, 2002. These gains were primarily the result of the US dollar
significantly weakening against the pound sterling during the three and
nine-month periods ended September 30, 2002. In previous periods our
dollar-denominated debt was substantially hedged. Following the termination of
all of our derivative arrangements (see "Liquidity and Capital Resources"
below), we now have a significantly higher proportion of unhedged
dollar-denominated liabilities that have been translated at period-end exchange
rates contributing to higher foreign exchange gains as the US dollar has
weakened against the pound sterling.
Interest income was (pound)6 million for the three-month period ended
September 30, 2002 compared with (pound)4 million for the three-month period
ended September 30, 2001 and (pound)13 million for the nine-month period ended
September 30, 2002 compared with (pound)12 million for the nine-month period
ended September 30, 2001. Interest income was generated from the higher cash
balances held by us during the three and nine-month periods ended September 30,
2002 as a result of unwinding certain foreign exchange contracts and drawing
down under our existing senior secured facility (the "Existing Facility") in
advance of funding requirements.
Our share of net losses of our affiliated companies, accounted for
under the equity method of accounting, was a (pound)4 million loss for the
three-month period ended September 30, 2002 and a (pound)5 million loss for the
nine-month period ended September 30, 2002 compared with a (pound)7 million loss
for the the three-month period ended September 30, 2001 and a (pound)2 million
loss for the nine-month period ended September 30, 2001. Our principal
affiliated companies at September 30, 2002 include UK Gold Holdings Limited, UK
Channel Management Limited, SMG and Blueyonder Workwise Limited.
Other profits/losses, net, amounted to a loss of (pound)30 million in
the three-month period ended September 30, 2002 compared with a loss of (pound)1
million in the three-month period ended September 30, 2001 and a net profit of
(pound)4 million in the nine-month period ended September 30, 2002 compared with
a net loss of (pound)7 million in the nine-month period ended September 30,
2001. The net profit of (pound)4 million arose primarily as a result of gains
totaling (pound)33 million arising on the disposal of our investments in our
subsidiary The Way Ahead Group Limited and in an affiliated company, TV Travel
Group Limited offset by a write off of (pound)30 million in the three-month
period ended September 30, 2002 against our investment in SMG. At an
Extraordinary General Meeting of the Company on September 4, 2002, shareholder
approval was received to dispose of the Company's shareholding in SMG within 12
months of September 4, 2002. As a result, the investment in SMG has been
re-classified from fixed assets to current assets and has been valued at market
value. This resulted in a (pound)30 million write off to the carrying value of
the investment. The sale was completed on November 6, 2002, resulting in
approximately (pound)20 million in proceeds net of expenses and repayment of
indebtedness secured by the shares.
Following the replacement of our old senior secured credit facility and
the Flextech facility during the three-month period ended March 31, 2001, we
recorded an extraordinary loss of (pound)15 million in the nine-month period
ended September 30, 2001 due to the write-off of the bank facility fees which
were being deferred and amortized over the life of those facilities.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the "Bondholders Committee"). The agreement
provides for the cancellation of all outstanding notes and debentures issued by
the Company and Telewest Finance (Jersey) Limited (the "Notes") and certain
unsecured foreign exchange hedge contracts in exchange for new ordinary shares
representing 97% of the issued share capital of the Company immediately after
the restructuring (for further disclosure relating to the restructuring, see
"Recent Developments").
Notwithstanding the expected completion of the restructuring, over the
next twelve months, the margin of our available financing over requirements is
not large and consistent delivery of budget is necessary to ensure continued
compliance with the terms of the financial covenants of the Existing Facility
relating to our financial and operational performance. We anticipate that in
order to obtain the required approval of our senior lenders to any final
restructuring agreement, we will be required to amend these covenants and/or
agree to additional covenants by entering into an amended and restated senior
secured facility (the "Amended Facility"). We expect that any amended or
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additional covenants will continue to require our consistent delivery of budget.
Prior to reaching final agreement with the senior lenders as to the Amended
Facility, we will not be able to access further funding from the senior lenders.
However, the Company had (pound)351 million of available cash as at September
30, 2002 that, subject to certain restrictions agreed with its senior lenders,
could be used for operational purposes.
In 2002, we had the opportunity to terminate in-the-money foreign
exchange derivative contracts that fluctuate in value. In March 2002, we
terminated certain of these derivative contracts, netting (pound)74 million cash
inflow to us, and in May 2002, we realized an additional (pound)30 million cash
inflow. In addition, in July 2002, we terminated further hedging arrangements
that resulted in a cash outflow of (pound)28 million. In the three-month period
ended September 30, 2002, we terminated all our remaining hedging arrangements
with a nominal value of $2.3 billion (approximately (pound)1.5 billion).
Contracts with a nominal value of $1 billion were settled in cash resulting in
an outflow of (pound)28 million. On September 30, 2002, our Board of Directors
announced that it was deferring the settlement of our remaining foreign exchange
hedge contracts. These remaining contracts have a nominal value of $1.3 billion
and aggregate settlement costs of (pound)33 million.
On November 6, 2002 we sold our 16.9% holding in SMG and realized
approximately (pound)20 million in proceeds net of expenses and the repayment of
a loan which had been secured by a charge over our shareholding (see "Recent
Developments").
Since our initial public offering in 1994, we have financed the capital
costs of our network construction, our operations and our investments in General
Cable PLC ("General Cable"), Birmingham Cable Corporation Limited ("Birmingham
Cable"), Cable London PLC ("Cable London"), Flextech, Eurobell and in affiliated
companies, primarily from:
o the proceeds of the initial public offering of our
ordinary shares ((pound)414 million, net of fees);
o the issuance in September 1998 of ordinary shares as
partial funding for the General Cable merger ((pound)241
million);
o the issuance in November 1999 of ordinary shares under a
rights issue to fund the Cable London acquisition
((pound)416 million);
o the issuance to Deutsche Telekom ("DT") in November 2000,
January 2001 and May 2001, respectively, of an aggregate
of(pound)254 million Accreting Convertible Notes due 2003
as consideration for its 100% interest in Eurobell;
o the issuance in October 1995 of $300 million principal
amount of Senior Debentures due 2006 and $1,537 million
principal amount at maturity of Senior Discount Debentures
due 2007;
o the issuance in November 1998 of $350 million principal
amount of Senior Notes due 2008;
o the issuance in February 1999 of(pound)300 million
principal amount of Senior Convertible Notes due 2007;
o the issuance in April 1999 of(pound)325 million principal
amount at maturity and $500 million principal amount at
maturity of Senior Discount Notes due 2009;
o the issuance in January 2000 of $450 million principal
amount at maturity of Senior Discount Notes due 2010
and(pound)180 million principal amount and $350 million
principal amount of Senior Notes due 2010;
o the issuance in July 2000 of $500 million Senior
Convertible Notes due 2005;
o borrowings under the Senior Secured Facility and
Institutional Tranche (as described below), (an aggregate
of (pound)1,840 million outstanding at June 30, 2002);
o the raising of a loan secured by a charge over our
shareholding in SMG and following repayment of the loan,
the sale of our shares on 6 November, 2002 (the total
financing raised in respect of these transactions was
approximately (pound)47 million, see "Recent
Developments"); and
o cash from operations.
Where appropriate, we have also used leasing and vendor financing. At
September 30, 2002, obligations under these financing arrangements amounted to
(pound)221 million, (pound)210 million in respect of finance leasing to fund the
purchase of certain equipment and (pound)11 million of finance provided by
vendor companies, respectively, compared with (pound)242 million and (pound)44
million, respectively, at September 30, 2001. Until we have reached final
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agreement with our bank lenders concerning the Amended Facility and completed
our restructuring, we will not be able to incur further leasing and vendor
financing.
We face the following significant risks and uncertainties:
o the ability to successfully complete our balance sheet
restructuring;
o successful execution of our long-term business plan, which
in turn will affect our ability to raise further finance
under the Existing or Amended Facility as applicable; and
o the ability to meet financial covenants necessary to
secure further finance under the Existing or Amended
Facility as applicable or to otherwise raise the finance
necessary to fund our operations.
For the nine-month period ended September 30, 2002, we had a net cash
outflow from operating activities of (pound)12 million compared with (pound)23
million for the nine-month period ended September 30, 2001.
We incurred a net cash outflow from investing activities of (pound)328
million for the nine-month period ended September 30, 2002 compared with
(pound)376 million for the nine-month period ended September 30, 2001, a
decrease of (pound)48 million or 12.9%. Capital expenditure accounted for
(pound)357 million of the total in 2002 compared with (pound)377 million in
2001. See "Capital Expenditure" below.
Net cash provided by financing activities totalled (pound)677 million
for the nine-month period ended September 30, 2002 compared with (pound)343
million for the nine-month period ended September 30, 2001. For the nine-month
period ended September 30, 2002, net cash provided by financing activities
consisted primarily of (pound)640 million in drawdowns from our Existing
Facility and a net (pound)76 million realized on termination of certain US
dollar/pound sterling exchange rate hedging arrangements. Net cash provided by
financing activities for the nine-month period ended September 30, 2001 included
the repayment on March 16, 2001 of (pound)810 million and (pound)122 million
under our old senior secured credit facility and the Flextech facility,
respectively, with a drawdown from our Existing Facility.
We anticipate that our principal uses of cash in the future will be to
fund our operations (including operating losses), capital expenditure and to
service debt. Although we expect to continue to incur operating losses, we
anticipate that they will reduce as we continue to realize the benefits of our
roll-out of digital television and high-speed internet services which we believe
will continue to increase product penetration, increase revenue per customer in
our residential and business markets, and achieve the cost-efficiencies of
delivering these services over our owned broadband network. Notwithstanding that
we expect our capital expenditure requirements to continue to decrease in 2003,
we also expect to continue to have significant capital needs in the future. With
the majority of our network construction complete and substantially all network
upgrades necessary for delivery of telephony and digital services complete, we
anticipate that our capital expenditure will be largely driven by the costs
associated with the connection of new subscribers (which will vary depending
upon the take-up of our services) and of the replacement of network assets at
the end of their useful lives. In May 2002, we announced a plan to reduce
operating costs through such measures as divisional reorganization and head
count reductions (now largely completed) and to reduce capital expenditures by
delaying or cancelling non-core projects such as video-on-demand. This plan is
ongoing.
We anticipate that our principal sources of funds in the future will be
proceeds from bank facilities, additional vendor financing, if available, the
strategic sale of assets, cash in hand and cash flow from operating activities.
Our future actual funding requirements could exceed currently anticipated
requirements. Differences may result from higher-than-anticipated costs or
capital expenditure and/or lower than anticipated revenues. Our actual costs,
capital expenditure and revenues will depend on many factors, including, inter
alia, consumer demand for voice, video, data and internet services, the impact
on our business of new and emerging technologies, the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment, the development of the interactive e-commerce market, consumer
acceptance of cable telephony as a viable alternative to British
Telecommunications plc's ("BT") telephony services, and the continued downward
pressure on telephony margins.
As of September 30, 2002, we had cash balances of (pound)351 million
(excluding (pound)12 million that is restricted as to use to providing security
for leasing obligations). However, we are currently unable to access further
funding until such time as the Amended Facility is agreed with the senior
lenders. Our cash balances have increased by (pound)337 million during the
nine-month period ended September 30, 2002 mainly as a result of drawdowns from
our senior bank facility (see below), (pound)76 million of cash realized on the
termination of certain foreign exchange contracts and (pound)29 million received
in respect of the disposal of our shareholdings in TV Travel Group Limited and
The Way Ahead Group Limited.
Following the Flextech merger in April 2000, we had two separate bank
facilities:
o we were party to a(pound)1.5 billion senior secured credit
facility; and
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o Flextech and its subsidiaries were party to a(pound)200
million senior secured credit facility.
On March 16, 2001, we entered into the Existing Facility with a
syndicate of banks for (pound)2.25 billion. The terms of the loan agreement
governing the Senior Secured Facility allowed us to raise (pound)250 million
from institutional investors (the "Institutional Tranche") and raise a further
(pound)500 million of vendor financing. The first drawdown under this new
facility was used to repay our old senior secured credit facility and the
Flextech facility, noted above. On October 17, 2001, GE Capital Structured
Finance Group Limited, an affiliate of GE Capital, lent us (pound)125 million as
part of the (pound)250 million Institutional Tranche. Additionally, on March 12,
2002, we announced that we had secured a further (pound)20 million of
institutional funding from Newcourt Capital (UK) Ltd., a subsidiary of CIT Group
Inc. As at September 30, 2002, (pound)221 million of leasing and vendor
financing had been incurred.
As part of the negotiations with our senior lenders in respect of a
restructuring, on August 21, 2002 and September 27, 2002, the Company and its
senior lenders amended certain provisions of the Existing Facility restricting
the level of our permitted borrowings, investments, encumbrances and disposals.
On October 31, 2002 we announced that we were close to reaching an agreement
with a steering committee of our senior lenders and the Bondholders' Committee
with respect to the Amended Facility. The agreement includes total committed
amount of the facilities; maturity; margins; and financial covenants. We expect
that the Amended Facility will provide us with liquidity which we believe will
be sufficient to meet our funding needs going forward. This agreement is
conditional on various matters including the completion of the restructuring on
terms satisfactory to our senior lenders.
Until a final agreement is reached with our senior lenders we continue
to operate under the Existing Facility, as amended on August 21 and September
27, 2002. Borrowings under the Existing Facility are secured on our assets,
including partnership interests and shares of subsidiaries, and, except for the
Institutional Tranche, bear interest at between 0.5% and 2.25% above LIBOR
(depending on the ratio of borrowings to quarterly annualized consolidated net
operating cash flow). Borrowings under the Institutional Tranche bear interest
at up to 4% above LIBOR. The terms of the facility restrict transfers or
disposals of assets from certain subsidiary companies. These restrictions relate
to the type and value of the consideration that can be accepted. Currently our
ability to borrow under the Existing Facility is restricted by amendments agreed
with our senior lenders on August 21 and September 27, 2002 referred to above.
When a final agreement is reached with our senior lenders our ability to borrow
under the Amended Facility will be subject to, among other things, our
compliance with the financial and other covenants set forth in the loan
agreement governing that facility and failure to comply with those covenants
could result in all amounts outstanding thereunder becoming immediately due and
payable. We anticipate that a final agreement with our senior lenders will
include amendments to existing covenants and/or the addition of new covenants
relating to our financial and operational performance. We expect to be in
compliance with our financial covenants for at least 12 months from the date of
issue of these financial statements.
As anticipated, the decision to defer payment of interest under certain
of our Notes and the settlement of certain foreign exchange hedge contracts has
resulted in defaults under the Existing Facility. A default under the Existing
Facility generally allows a group of our senior lenders, representing not less
than two thirds in value of amounts borrowed under that facility, to declare all
amounts owed to be immediately payable. Given progress reached to date in
respect of amending our Existing Facility as part of a restructuring agreement,
we do not expect our senior lenders to demand repayment on account of any
default under the Existing Facility. There can be no assurance, however, that
our senior lenders will not demand repayment of all amounts outstanding under
the Existing Facility based on a now existing or future default.
We regularly monitor our ongoing ability to draw down under our bank
facilities, which is dependent on satisfying the financial covenants contained
in the loan agreement governing those facilities. We expect that when agreed the
Amended Facility will include covenants, compliance with which will require us
to improve business performance and profitability. Our long-term business plan
anticipates that we will be able to grow at a rate which will allow us to meet
these covenants. However, this long-term plan includes forecast information, the
principal assumptions of which are clearly subject to a degree of risk, in
particular our ability to increase revenues in accordance with our plans. If we
were unable to remain compliant with our covenants (or to meet our debt service
obligations), we could attempt to further restructure or refinance some or all
of our existing indebtedness or to seek additional funding. We cannot assure
you, however, that we would be able to do so on satisfactory terms, if at all.
We believe we have adequate resources to continue in operational
existence for a period of at least 12 months from the date of issue of these
financial statements. This belief assumes the successful conclusion of a
restructuring of our balance sheet (and any required amendments to the Existing
Facility).
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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments as of September
30, 2002 are summarized in the table below. See "Recent Developments" for a
description of the re-classification of certain of our long-term debt post
September 30, 2002.
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CONTRACTUAL OBLIGATIONS
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PAYMENTS DUE BY PERIOD
TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
- ---------------------------------------------------- ------------- ----------------- ---------------- --------------- --------------
Long-term debt.......................................... 5,514 39 903 2,051 2,521
Capital lease obligations................................ 210 44 72 57 37
Operating leases.......................................... 149 13 23 21 92
Unconditional purchase obligations.................. 607 607 - - -
Other long-term obligations............................ 6 6 - - -
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Total contractual obligations........................... 6,486 709 998 2,129 2,650
==================================================== ============= ================= ================ =============== ==============
The following table includes information about our commercial
commitments as of September 30, 2002. Commercial commitments are items that we
could be obligated to pay in the future. They are not required to be included in
the balance sheet.
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OTHER COMMERCIAL COMMITMENTS
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AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL AMOUNTS LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5
COMMITTED YEARS
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
- ------------------------------------------------ ----------------- ------------------ ---------------- ---------------- ------------
Guarantees........................................... 17 5 - 12 -
================================================ ================= ================== ================ ================ ============
We have no other contractual or commercial commitments.
CAPITAL EXPENDITURE
Additions to property and equipment in the nine-month period ended
September 30, 2002 totaled (pound)330 million, a decrease of (pound)144 million
or 30.4% from (pound)474 million for the nine-month period ended September 30,
2001. Our capital expenditure has primariLY funded the construction of local
distribution networks and our National Network, capital costs of installing
customers, and enhancements to our network for new product offerings. The
additions in the nine-month period ended September 30, 2002 were principally a
result of network upgrades and new subscriber installations in connection with
our roll-out of digital television and high-speed internet services. At
September 30, 2002 our broadband network was capable of providing 77.6% of the
homes in our franchises with both cable television and cable telephony services.
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We have substantially completed all network upgrades necessary for
delivery of our digital television and high-speed internet services.
Consequently, we anticipate that capital expenditures associated with our
services will be largely driven by the connection of new subscribers (which will
depend on the take-up of our services) and of the replacement of network assets
at the end of their useful lives, Capital expenditure in the nine-month period
ended September 30, 2002 at (pound)330 million is in line with management's
stated aim of reducing capital expenditure to below (pound)500 million for the
the full year to December 31, 2002. In 2003, management will continue to focus
on reducing capital expenditure.
Included in the table of contractual obligations shown above is a total
of (pound)7 million relating to capital expenditure authorized by us for which
no provision has been made in the consolidated financial statements. This amount
includes subscriber installations (e.g., set-top boxes) for customer growth,
network enhancements and computer projects necessary for the maintenance of the
infrastructure of our business. In addition, and also included in the table, we
have contracted to buy (pound)20 million of programming rights for which the
license period has not yet started. These commitments will be funded when
required from operating cash flow and available bank facilities. Both of these
amounts are shown as being payable in less than 1 year.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The principal market risks to which we were exposed during the
nine-month period ended September 30, 2002 (and which have not changed from
previous periods) were:
o interest rate changes on variable-rate, long-term bank
debt; and
o foreign exchange rate changes, generating translation and
transaction gains and losses on our US dollar-denominated
debt instruments.
From time to time we use derivative financial instruments solely to
reduce our exposure to these market risks and we do not enter into these
instruments for trading or speculative purposes.
In the nine-month period ended September 30, 2002 we terminated certain
foreign currency derivative contracts as described below. This will increase our
exposure to foreign exchange fluctuations in respect of the principal on bonds
no longer hedged. We have also increased our exposure to variable interest
rates, as we have not renewed some of the hedges that have expired in connection
with the Senior Secured Facility.
INTEREST RATE RISK
Our outstanding long-term bank debt is denominated in pounds sterling
and bears interest at variable rates. We seek to reduce our exposure to adverse
interest rate fluctuations on borrowings under current senior bank facilities
principally through interest rate swaps. Our interest rate swaps provide for
payments by us at a fixed rate of interest (ranging from 5.475% to 7.355%) and
the receipt of payments based on a variable rate of interest. The swaps have
maturities ranging from December 31, 2003 to March 31, 2005. The aggregate
amount outstanding under the senior bank facilities at September 30, 2002 was
(pound)1.70 billion (being (pound)2.0 billion of drawdowns less (pound)300
million cash balances) and the aggregate notional principal amount of the
hedging arrangements was (pound)900 million, leaving an unhedged amount of
(pound)800 million at September 30, 2002.
FOREIGN CURRENCY EXCHANGE RISK
We held derivative financial instruments solely to hedge specific risks
and did not hold such instruments for trading purposes. The derivatives were
held to hedge against the variability in cash flows arising from the effect of
fluctuations in the pound sterling/US dollar exchange rate on our future
interest payments and principal payments under our US dollar-denominated debt.
We used forward foreign currency contracts or cross currency swaps to fix the
pound sterling amount of future US dollar cash outflows for interest payments
and principal repayments up to their first call dates or other such dates where
we could have, at our option, redeemed the instruments before maturity.
Our results may be materially influenced by future exchange rate
movements now that we have largely discontinued the use of hedge accounting,
since such derivative financial instruments would be considered speculative for
accounting purposes and would be marked to their market value with changes being
included immediately in earnings, whereas the underlying liabilities would be
re-translated at the spot rate of exchange. Cancellation or redemption of the
derivative financial instruments has increased our exposure to foreign currency
exchange rate risk on our US dollar-denominated debt.
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In March 2002, we terminated certain US dollar/pound sterling exchange
rate hedging arrangements with a nominal amount of $950 million ((pound)655
million); termination of these arrangements netted (pound)74 million cash inflow
to us. A further (pound)30 millIOn cash inflow was realized by us in May 2002
through the termination of additional foreign exchange rate hedging arrangements
with a nominal amount of $367 million ((pound)253 million). On April 2, 2002
$560 million ((pound)390 million) of hedging arrangements matured and weRE
replaced with $350 million ((pound)246 million) of forward foreign exchange
contracts. In the three-month period ended September 30, 2002 we terminated
further hedging arrangements with a nominal value of $2.3 billion (approximately
(pound)1.5 billion). Contracts with a nominal value of $1 billion were settled
in cash resulting in an outflow of (pound)28 million. The remaining contracts
with a nominal value of $1.3 billion have yet to be settled for a total cost of
(pound)33 million of which (pound)19 million was due on October 1, 2002, but WE
deferred such payment and are considering the payment in the context of our
financial restructuring.
QUANTITATIVE DISCLOSURE OF MARKET RISK
The analysis below presents the sensitivity of the market value, or
fair value, of our financial instruments to selected changes in market rates and
prices. The changes chosen represent our view of changes that are reasonably
possible over a one-year period. The estimated fair value of the hedging
instruments identified below are based on quotations received from independent,
third-party financial institutions and represent the net amount receivable or
payable to terminate the position, taking into consideration market rates as of
the measuring date and counterparty credit risk. The estimated fair value of the
US dollar-denominated fixed-rate long-term debt is also based on market
quotations obtained from independent third-party financial institutions.
The hypothetical changes in fair value of hedging instruments are
estimated, based on the same methodology used by the third-party financial
institutions to calculate the fair value of the original instruments, keeping
all variables constant except that the relevant interest rate or exchange rate,
as the case may be, has been adjusted to reflect the hypothetical change. Fair
value estimates by their nature are subjective and involve uncertainties and
matters of significant judgment and therefore cannot be determined precisely.
Fair value of debt is the market value of bonds and bank debt, which can change
according to market conditions and company specific performance.
The amounts generated from the sensitivity analysis are forward-looking
estimates of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from those projected results
due to developments in the global financial markets which may cause fluctuations
in interest rates and exchange rates to affect fair values in a manner that
varies from the hypothetical amounts disclosed in the table below, which
therefore should not be considered a projection of likely future events and
losses. The sensitivity analysis is for information purposes only. In practice,
market rates rarely change in isolation.
INTEREST RATE RISK
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate one-percentage point (100 basis points) increase in
interest rates across all maturities:
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SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
CHANGE IN CHANGE IN
FAIR VALUE FAIR VALUE
(POUND)M (POUND)M (POUND)M (POUND)M
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Interest rate swaps................................................ (38) 13 (39) 19
Fixed rate debt.................................................... (909) (17) (2,143) (79)
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Based on our variable rate debt outstanding at
September 30, 2002 aftertaking into account our
derivative instruments, we estimate that a one-percentage
point change in interest rates would have an approximately
(pound)11 million impact on our annual net interest expense.
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FOREIGN CURRENCY EXCHANGE RATE RISK
The sensitivity analysis below presents the hypothetical
change in fair value based on an immediate 10% decrease in
the US dollar to pound sterling exchange rate.
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SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
---------- ----------
CHANGE IN CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
(POUND)M (POUND)M (POUND)M (POUND)M
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US dollar-denominated long-term debt................................ (502) (56) (1,528) (170)
Foreign currency swap............................................. No longer No longer 13 22
applicable applicable
Foreign exchange forward contracts................................ (33) No longer 100 244
applicable
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The hypothetical change in fair value for the US dollar-denominated
long-term debt is calculated by re-translating to pounds sterling the
dollar-denominated long-term debt at a rate 10% below the US dollar/pound
sterling exchange rate prevailing at the relevant period end.
The fair value of the foreign exchange forward contracts of (pound)33
million represents the settlement cost of the contrActs unwound but not yet
paid. This is a fixed cost and will not vary with movements in exchange rates.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS 143 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". SFAS 143, which is effective for fiscal years beginning
after June 15, 2002, requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, an entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Group is required to adopt this
standard from January 1, 2003. The Group has not yet determined the impact, if
any, the adoption of this standard will have on its financial position or
results of operations.
SFAS 145 RESCISSION OF FASB STATEMENTS 4, 44 AND 64, AMENDMENT OF FASB
13, AND TECHNICAL CORRECTIONS
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB 13, and Technical Corrections". SFAS 145
provides for the rescission of several previously issued accounting standards,
new accounting guidance for the accounting for certain lease modifications and
various technical corrections that are not substantive in nature to existing
pronouncements. SFAS 145 will be adopted beginning January 1, 2003, except for
the provisions relating to the amendment of SFAS 13, which will be adopted for
transactions occurring subsequent to May 15, 2002. Adoption of SFAS 145 will not
have a material impact on our consolidated financial statements.
SFAS 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 applies to
costs associated with an exit activity that do not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Group
has not yet determined the impact, if any, the adoption of this standard will
have on its financial position or results of operations.
SIGNIFICANT SHAREHOLDINGS
Historically our principal shareholders have been Liberty Media and
MediaOne Group Inc. ("MediaOne"). On July 7, 2000 MediaOne consummated an
agreement with certain subsidiaries of Microsoft Corporation ("Microsoft")
whereby Microsoft acquired the majority of MediaOne's interests in us. From May
3, 2001 and throughout the twelve-month period ended September 30, 2002 the
shareholdings of Liberty Media, Microsoft and MediaOne have been 25.2%, 23.6%
and 1.3%, respectively.
On May 14, 2002, Microsoft informed us that it was withdrawing its
three non-executive directors from our board of directors. Microsoft holds 23.6%
of our issued shares and has the right to nominate up to three representatives
to the board under corporate shareholder agreements with us. At that time,
Microsoft said: "At present we believe that we will be in a better position to
manage our relationship with, and investment in, Telewest without board
representation. Microsoft expects to continue to evaluate Telewest on an ongoing
basis and, in that regard, will continue to consider, among other things,
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US GAPP ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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purchasing or selling Telewest securities or engaging in possible strategic
transactions involving Telewest. Microsoft has no current plan regarding any
such transactions, but reserves the right to change its plans at any time."
On June 28, 2002, Microsoft filed a notice that it had delivered to
Liberty Media. That notice expressed Microsoft's intention to sell publicly its
interest in us and, in accordance with the terms of shareholder agreements noted
above, offered Liberty Media the right to purchase that interest. Neither
Liberty Media nor Microsoft has commented publicly on any discussions relating
to Microsoft's interest in us since that filing.
On June 12, 2002, Liberty Media announced a tender offer for certain of
our publicly traded bonds. At that time, Liberty Media announced that upon
completion of the tender it intended to "propose to the Company's board of
directors a restructuring plan pursuant to which all or substantially all of the
Company's publicly-traded notes and debentures would be converted into equity of
the Company". On July 17, 2002, Liberty Media citing "the continuing decline in
the US and UK securities markets and the significant fall in the trading price
of Liberty Media's common stock since the commencement of the Offer", terminated
the tender offer. We do not know whether Liberty Media still intends to approach
us concerning a restructuring plan.
On July 17, 2002, Liberty Media informed us that it was withdrawing its
three non-executive directors from our board of directors. Liberty Media holds
25.2% of our issued share capital and has the right to nominate up to three
representatives to our board under corporate shareholder arrangements with us.
Liberty Media said: "We are taking this action to eliminate any potential
conflict of interest or appearance of a conflict in any upcoming restructuring
discussions. The management and the remaining directors of Telewest continue to
have our full support".
RECENT DEVELOPMENTS
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring with the Bondholder Committee.
The agreement provides for the cancellation of all of the Notes and certain
unsecured foreign exchange hedge contracts in exchange for new ordinary shares
representing 97%of the issued share capital of the Company immediately after the
restructuring. Existing shareholders will retain a 3% interest in the Company
post-restructuring.
Discussions with our senior lenders are continuing and we are close to
reaching an agreement with a steering committee of senior lenders and the
Bondholder Committee with respect to amended and restated bank facilities (the
"Facilities"). The agreement includes total committed amount of the Facilities;
maturity; margins; and financial covenants. It is expected that the Facilities
will provide the Company with liquidity which the Company believes will be
sufficient to meet its funding needs going forward. The provision of the
Facilities is conditional on various matters including the completion of the
restructuring on terms satisfactory to the Company's senior lenders.
Negotiations are continuing with other major stakeholders with a view
to them agreeing to vote in favour of the restructuring and the Company expects
to be able to make a further announcement on the progress of these negotiations
by the end of November.
We also announced on September 30, 2002 that we were deferring payment
of interest under certain of our Notes and the settlement of certain foreign
exchange hedge contracts. In view of the continuing progress in the
restructuring process, on October 31, 2002 the Company announced that it had
determined to continue to defer the payment of interest under certain of its
Notes (including a payment that was due on November 1, 2002) and the settlement
of foreign exchange hedge contracts. Failure to pay interest on these Notes
beyond a 30-day grace period, gives the holders of 25% of each series of
affected Notes the right to demand repayment of the principal amount of, and
accrued interest on, those Notes. As anticipated, in addition to creating a
default under the affected bonds, the decision to defer such payments has
resulted in defaults under the Group's bank facilities and a number of other
financing arrangements. Such defaults will result in the re-classification of
debts in default to amounts payable within one year. Based on one such default,
a creditor has filed a petition for the winding up of the Company as a result of
non-payment of amounts due ((pound)10.5 million). The Company intends to deal
with this claim as part of the overall restructuring of its unsecured deBt
obligations and does not believe that the legal action will delay or
significantly impede the restructuring process. The Company expects to continue
to meet its obligations to its suppliers and trade creditors and that this legal
action will have no impact on customer service.
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US GAPP ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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On July 31, 2002 we announced that Adam Singer, Chief Executive would
be leaving the Company and had resigned as a director of the Board. Charles
Burdick, the Group Finance Director, became Managing Director with immediate
effect. In addition, on August 23, 2002 we announced that Mark Luiz had been
appointed to the role of Group Finance Director.
On September 30, 2002, the ratio of the Company's ordinary shares to
American Depositary Shares quoted on the NASDAQ National Market was changed from
10-to-1 to 200-to-1 ordinary shares per American Depositary Share.
On September 4, 2002 we received approval from our shareholders to sell
our 16.9% interest in SMG. On October 29, 2002 we repaid the outstanding balance
of approximately (pound)26 million on the loan secured by a charge over our
shares in SMG. On NovembeR 6, 2002, we sold our holding in SMG and realized
approximately (pound)20 million in proceeds net of expenses and the loan
repayment.
* * * * *
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The discussion above includes certain statements that are, or may be
deemed to be, forward-looking statements within the meaning of the US securities
laws. These forward-looking statements, by their nature, involve risks and
uncertainties because they relate to events and depend on circumstances that may
or may not occur in the future.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed or
implied by those forward-looking statements, including, but not limited to: our
ability to access liquidity under our bank facility, which will require our
compliance with certain covenants that require continued growth in our business;
our ability to raise additional financing, our ability to refinance our
indebtedness and our ability to continue to service our outstanding
indebtedness; our ability to reach final agreement with our senior lenders on
the terms of the Amended Facility; our ability to successfully conclude a
restructuring of our balance sheet; the extent to which consumer demand for
voice, video, data and internet services increases; the extent to which we are
able to compete with other providers of broadbandinternet services, including
BT; the extent to which SMEs accept cable telephony services as an alternative
to those of competing service providers such as BT; the extent to which we are
able to adapt to, and compete with, new and emerging technologies including
Asynchronous Digital Subscriber Line technology; the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment; the extent to which consumer preference develops for purchasing
goods and services on the internet and/or using interactive television over
other methods of purchasing such goods and services; the extent to which
consumers accept cable telephony as a viable alternative to telephony services
provided by BT; the extent to which we are successfully able to compete with
mobile network operators; the extent to which regulatory and competitive
pressures in the UK telephony market continue to reduce prices; our ability to
develop and introduce attractive interactive and high-speed data services in a
rapidly changing and highly competitive business environment; our ability to
penetrate markets and respond to changes or increases in competition; our
ability to compete with other ISPs; our ability to compete against digital
television service providers, including British Sky Broadcasting Group plc, by
increasing our digital services customer base, and the impact of our aggressive
digital services marketing campaign on our results of operations and liquidity;
our ability to have an impact on, or respond to, new or changed government
regulation; our ability to manage growth and expansion; our ability to improve
operating efficiencies, including through cost reductions; our ability to
maintain and upgrade our network in a cost-efficient and timely manner; adverse
changes in the price or availability of telephony interconnection or cable
television programming; disruptions in supply of programming, services and
equipment; and the extent to which consumer preference develops for, or shifts
away from, content developed and distributed by Flextech (our Content Division).
27