SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26840
Telewest Communications plc
(Exact Name of Registrant as Specified in its Charter)
England and Wales N.A.
(State of other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Genesis Business Park
Albert Drive, Woking
Surrey, GU21 5RW
United Kingdom
Telephone number: 011 44 1483 750 900
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ].
At November 11, 1997, 927,567,600 ordinary shares of 10p each were outstanding.
PART 1 ----- FINANCIAL INFORMATION
ITEM 1 ----- FINANCIAL STATEMENTS
- -----------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
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,
1997 1997 1996 1997 1997 1996
---- ---- ---- ---- ---- ----
(note 1) (note 1)
REVENUE
Cable television $ 63746 (pound)39552 (pound)29261 $ 187597(pound)116397(pound) 86133
Telephony - residential 71996 44671 32853 197465 122520 90177
Telephony - business 19611 12168 8564 51686 32069 23796
Other ((pound)1,221 and(pound)1,201 in 1997
and 1996, from related parties ) 5952 3693 2445 16987 10540 6497
-------- -------- -------- -------- -------- --------
161305 100084 73123 453735 281526 206603
-------- -------- -------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Programming (including(pound)9,975 and(pound)3,059
in 1997 and 1996, respectively, to related parties) -36128 -22416 -16422 -111275 -69042 -47182
Telephony -16991 -10542 -11032 -61216 -37982 -36349
Selling, general, and administrative (including
(pound)847 and(pound)4,058
in 1997 and 1996, to related parties) -82680 -51300 -44178 -229349 -142303 -128687
Depreciation -81579 -50617 -29433 -204646 -126975 -84106
Amortization of goodwill -10642 -6603 -6570 -31920 -19805 -19584
-------- -------- -------- -------- -------- --------
-228020 -141478 -107635 -638406 -396107 -315908
-------- -------- -------- -------- -------- --------
OPERATING LOSS -66715 -41394 -34512 -184671 -114581 -109305
OTHER INCOME/(EXPENSE)
Interest income ((pound)2,409 and (pound)1,255
in 1997 and 1996, from related parties) 3433 2130 2918 10057 6240 14400
Interest expense -60403 -37478 -26035 -162318 -100712 -78307
Foreign exchange losses, net -13728 -8518 -7575 -52891 -32817 -55243
Share of net losses of affiliates -9024 -5599 -3958 -25661 -15922 -11449
Gain on disposal of assets 408 253 -18 1170 726 140
Minority interests in profits\(losses) of
consolidated subsidiaries, net -200 -124 -62 -538 -334 -116
-------- -------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES -146229 -90730 -69242 -414852 -257400 -239880
Income tax expense -81 -50 -61 -266 -165 -150
-------- -------- -------- -------- -------- --------
NET LOSS $ -146310(pound)-90780(pound)-69303 -415118(pound)-257565(pound)-240030
======== ======== ======== ======== ======== ========
LOSS PER ORDINARY SHARE (DOLLARS/POUNDS) (NOTE 7) $ (0.16)(pound)(0.10)(pound)(0.07) (0.45)(pound)(0.28)(pound)(0.26)
======== ======== ======== ======== ======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, September 30, December 31,
1997 1997 1996
---- ---- ----
(note 1)
ASSETS
Cash and cash equivalents $ 41401 (pound) 25688 (pound) 79116
Trade receivables (net of allowance for doubtful accounts of
(pound)5,706 and(pound)5,405) 59504 36920 29305
Other receivables 46654 28947 32394
Prepaid expenses 8210 5094 5168
Investments in affiliates, accounted for under the equity method, and
related receivables 100374 62278 71601
Other investments, at cost 41366 25666 23485
Property and equipment (less accumulated depreciation of(pound)434,710
and(pound)308,240) 2679435 1662490 1447194
Goodwill (less accumulated amortization of(pound)57,711 and(pound)37,907) 761520 472495 491290
Other assets (less accumulated amortization of(pound)8,369 and(pound)4,162) 102709 63727 62387
----------- ----------- ------------
TOTAL ASSETS $ 3841173 (pound)2,383,305 (pound)2,241,940
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 48098 (pound) 29843 (pound) 46855
Other liabilities 291469 180846 190200
Debt 2068785 1283604 879351
Capital lease obligations 120457 74739 54390
----------- ----------- ------------
TOTAL LIABILITIES 2528809 1569032 1170796
----------- ----------- ------------
Minority interests 1098 681 347
----------- ----------- ------------
SHAREHOLDERS' EQUITY
Convertible preference shares, 10 pence par value;
661,000,000 shares authorized, and
496,066,708 shares issued and outstanding 79952 49607 49607
Ordinary shares, 10 pence par value;
2,010,000,000 shares authorized, and
927,567,600 shares issued and outstanding 149496 92757 92757
Additional paid-in capital 2148214 1332887 1332887
Accumulated deficit -1063195 -659673 -402108
----------- ----------- ------------
1314467 815578 1073143
Ordinary shares held in trust for the Telewest Restricted Share Scheme -3201 -1986 -2346
----------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY 1311266 813592 1070797
----------- ----------- ------------
Commitments and contingencies (note 8)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3841173 (pound) 2383305 (pound) 2241940
=========== =========== ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
9 months 9 months 9 months
ended ended ended
Sept 30, Sept 30, Sept 30,
1997 1997 1996
---- ---- ----
(note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ -415118 (pound) -257565 (pound) -240030
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 204646 126975 84106
Amortization of goodwill 31920 19805 19584
Amortization of deferred financing costs
and issue discount on senior discount
debentures 91685 56887 56388
Unrealized loss on foreign currency translation 52891 32817 55243
Share of losses of affiliates 25661 15922 11449
Gain on disposals of assets -1170 -726 -140
Minority interests in profits 538 334 116
Changes in operating assets and liabilities, net
of effect of acquisition
of subsidiaries:
Change in receivables -7809 -4845 -14975
Change in prepaid expenses 87 54 2920
Change in accounts payable -10515 -6524 -10783
Change in other liabilities 372 230 15112
---------- ---------- ---------
NET CASH USED IN OPERATING ACTIVITIES -26812 -16636 -21010
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment -529437 -328496 -303756
Cash paid for acquisition of subsidiaries 0 0 -14098
Additional investments in and loans to affiliates -14687 -9113 -1185
Additions to other investments 0 0 -5000
Proceeds from disposals of assets 3787 2350 899
---------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES -540337 -335259 -323140
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 487539 302500 0
Repayment of borrowings 0 0 -937
Cash paid for credit facility arrangement costs 0 0 -17993
Cash paid for debenture issue costs 0 0 -686
Capital element of finance lease repayments -6400 -3971 -1179
---------- ---------- ---------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 481139 298529 -20795
---------- ---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS -86010 -53366 -364945
Effect of exchange rate changes on cash and
cash equivalents -100 -62 288
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 127511 79116 464818
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41401 (pound) 25688 (pound) 100161
========== ========== =========
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE ADDITIONAL
PREFERENCE ORDINARY SHARES HELD PAID-IN ACCUMULATED
SHARES SHARES IN TRUST CAPITAL DEFICIT TOTAL
------ ------ -------- ------- ------- -----
BALANCE AT
DECEMBER 31, 1996 (pound) 49,607 (pound)92,757 (pound)-2346 (pound)1332887 (pound)(402,108)(POUND)1070797
Accrued employee compensation relating to
the Telewest Restricted Share Scheme 0 0 360 0 0 360
Net loss for the period to September 30, 1997 0 0 0 0 (257,565) (257,565)
-------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 (pound) 49607 (pound) 92757 (pound)-1986 (pound)1332887 (pound) -659673 (POUND)813592
=========================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
5
TELEWEST COMMUNICATIONS PLC
US GAAP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PREPARATION
The unaudited condensed consolidated financial statements of the
Company and its majority owned subsidiaries (and, where appropriate,
their predecessor companies, collectively, the "Telewest Group") have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations.
The economic environment in which the Company operates is the United
Kingdom ("UK") and hence its reporting currency is Pounds Sterling
("pound"). Merely for convenience, the financial statements contain
translations of certain Pounds Sterling amounts into US Dollars at
$1.6117 per (pound)1.00, the Noon Buying Rate of the Federal Reserve
Bank of New York on September 30, 1997. The presentation of the US
Dollar amounts should not be construed as a representation that the
Pounds Sterling amounts could be so converted into US Dollars at the
rate indicated or at any other rate.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements as of and for the
periods ended September 30, 1996 and 1997 are unaudited; however, in
the opinion of the management, such statements include all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the results of operations for the interim periods
presented. The results of operations for any interim period are not
necessarily indicative of the results of the full year. The unaudited
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 10-K for
the year ended December 31, 1996 filed with the Securities and Exchange
Commission (the "1996 Annual Report").
3. NEW ACCOUNTING STANDARDS APPLICABLE TO THE COMPANY
Earnings per Share and Capital Structure
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 will be effective for
interim and annual financial statements after December 15, 1997. The
Company believes that the adoption of SFAS No. 128 will not have a
material impact on the Company's reported earnings per share.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of
Information about Capital Structure" which is effective for financial
statements for periods ending after December 15, 1997. It contains no
changes in disclosure requirements for entities that were previously
subject to the requirements of APB Opinions No. 10 "Omnibus
Opinion-1566" and No. 15 "Earnings Per Share" and SFAS No. 47
"Disclosure of Long-Term Obligations." The Company is currently
reviewing the likely impact on the level of disclosure provided.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
6
TELEWEST COMMUNICATIONS PLC
US GAAP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income" which is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods
for comparative purposes is required. It requires that all items that
are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the statement of financial position. The Company is currently
reviewing the likely impact on the classification of items included in
the shareholders= funds.
Segment Information
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" which is effective for fiscal
years beginning after December 15, 1997. In the initial year of
application comparative information for earlier years is to be
restated. It requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and
measuring their performance. It also requires entity-wide disclosures
about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company is currently reviewing the likely impact on the
level of disclosure currently provided in its financial statements.
4. ACCOUNTING POLICIES - FINANCIAL INSTRUMENTS
The Company uses foreign currency option contracts which permit, but do
not require, the Company to exchange foreign currencies at a future
date with another party at a contracted exchange rate. The Company also
enters into combined foreign currency and interest rate swap contracts
("Foreign Currency Swaps"). Such contracts are used to hedge against
adverse changes in foreign currency exchange rates associated with
certain obligations denominated in foreign currency.
The foreign currency option and the Foreign Currency Swaps are recorded
on the balance sheet in "other assets" or "other liabilities" at their
fair value at the reporting period, with changes in their fair value
during the reporting period being reported as part of the foreign
exchange gain or loss in the statement of operations. Such gains and
losses are offset against foreign exchange gains and losses on the
obligations denominated in foreign currencies which have been hedged.
Interest rate swap agreements which are used to manage interest rate
risk on the Company's borrowings are accounted for using the accruals
method. Net income or expense resulting from the differential between
exchanging floating and fixed rate interest payments is recorded on an
accruals basis.
The Company (through a directly wholly owned subsidiary) entered into
certain delayed starting interest rate swap agreements in order to
manage interest rate risk on the Senior Secured Facility. The interest
rate swaps convert floating rate interest payable on drawdowns under
the facility to fixed interest rate payments in the range of 7.835% -
7.975%. The swap agreements, which commenced in early 1997, have a
five-year maturity and a notional principal amount which adjusts
upwards on a semi-annual basis to a maximum of (pound)750 million. As
at September 30, 1997, the aggregate notional principal amount of the
7
TELEWEST COMMUNICATIONS PLC
US GAAP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
swaps was (pound)350 million, and the total drawdown under the
facility was (pound)402.5 million.
5. DEPRECIATION
The Company regularly reviews the estimated useful lives of its
property and equipment. In 1996, the estimated useful lives of cable
and ducting and system electronics assets were reassessed and, with
effect from January 1, 1996, were changed from 25-30 years and 10 years
to 20 years and 8 years, respectively. The net book value of these
assets is being written-off over their revised estimated remaining
lives.
The impact of the change in estimated useful lives of these assets for
the year ended 31 December 1996 was to increase the depreciation charge
for the year from (pound)110,233,000 to (pound)129,716,000. A large
proportion of the increase in the depreciation charge was accounted for
in the fourth quarter 1996, however, had the change been accounted for
with effect from the beginning of the first quarter 1996, depreciation
expense for the nine month period ended September 30, 1996 would have
increased by (pound)6,900,000.
In 1997, the treatment of activation costs was reviewed. With effect
from 1 January 1997, activation labour was reclassified from 'Cable and
Ducting' to 'Electronics' to be consistent with the classification of
activation materials. The impact of this change for the nine months
ended 30 September, 1997, was an additional depreciation charge of
(pound)8,250,000, with activation labour now depreciated over 8 years
rather than 20 years.
6. CAPITALIZATION OF LABOR AND OVERHEADS
The Company regularly reviews the estimates used in calculating the
capitalizable labor and overhead costs which relate to the construction
of its cable network. In 1996, the Company revised these estimates and
the impact of this revision was to increase the capitalization of labor
and overhead costs during the year from (pound)38,812,000 to
(pound)54,019,000. The impact of the revision was accounted for
entirely in the fourth quarter of 1996, however, had the revision been
accounted for with effect from the beginning of the first quarter 1996,
selling, general, and administrative expenses for the nine month period
ended September 30, 1996 would have decreased by (pound)10,715,000.
7. LOSS PER ORDINARY SHARE
Loss per ordinary share is based on the weighted average number of
ordinary shares outstanding of 927,567,600 and 924,706,630 for the nine
month periods ended September 30, 1997 and 1996, respectively.
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 aggregate,
in a material adverse effect on its balance sheet position and its
results.
8
ITEM 2----MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The financial information contained in this Report on Form 10-Q is prepared in
accordance with US GAAP. In accordance with UK securities regulations, the
Company also prepares financial statements in accordance with UK GAAP. The UK
GAAP financial statements for the period covered by this Report are contained in
Exhibit 99 to this Report.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial review contained in
the 1996 Annual Report.
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: The discussion and analysis below includes certain forward looking
statements that involve risks and uncertainties that could lead to actual
results that are significantly different from those anticipated by the Company.
These risks and uncertainties relate to, among other things, the extent consumer
preference develops for cable television over other methods of providing in-home
entertainment and for the Company as a viable alternative to British
Telecommunications plc ("BT") and others as a provider of telephony service; the
ability of the Company to manage growth and expansion; the ability of the
Company to construct its network in a cost efficient and timely manner; the
ability of the Company to raise additional financing if there is a material
adverse change in the Company's anticipated revenues or expenses; the ability of
the Company to respond to changes or increases in competition (including the
introduction of digital services by competitors) and adverse changes in
government regulation; the extent programming is available at reasonable costs;
adverse changes in the pricing of telephony interconnection; disruptions in
supply of services and equipment; and the performance of Birmingham Cable
Corporation Limited, Cable London plc, and The Cable Corporation Limited
(together "the Affiliated Companies"), companies in which the Company has
substantial investments but which are not controlled by the Company.
SUMMARY OF OPERATIONS (THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996
AND 1997)
The Company's consolidated revenue increased by (pound)27.0 million or 37% from
(pound)73.1 million in the three month period ended September 30, 1996 to
(pound)100.1 million in the three month period ended September 30, 1997 and by
(pound)74.9 million or 36% from (pound)206.6 million in the nine month period
ended September 30, 1996 to (pound)281.5 million in the nine month period ended
September 30, 1997 primarily due to the larger customer base created by the
Company's continuing network construction.
CABLE TELEVISION REVENUE
Cable television revenue increased by (pound)10.3 million or 35% from
(pound)29.3 million in the three months ended September 30, 1996 to (pound)39.6
million in the three months ended September 30, 1997 and by (pound)30.3 million
or 35% from (pound)86.1 million in the nine months ended September 30, 1996 to
(pound)116.4 million in the nine months ended September 30, 1997. The increase
was primarily attributable to a 29% increase (from 440,681 to 569,662) and a 31%
increase (from 421,770 to 551,279) in the average number of customers in the
three and nine month periods ended September 30, 1997, respectively, compared to
the corresponding periods in 1996. The increase in the average number of
customers results primarily from an increase in the number of homes passed and
marketed from 2,164,276 at September 30, 1996 to 2,646,579 at September 30,
1997.
Penetration was flat at 22.0% from June 30, 1997 to September 30, 1997 compared
to a slight increase from 21.1% as at June 30, 1996 to 21.2% as at September 30,
1996. Penetration decreased from 22.6% as at December 31, 1996 to 22.0% as at
September 30, 1997 and from 21.9% as at December 31, 1995 to 21.2% as at
September 30 1996. Churn decreased from 35.6% in the three month period ended
9
September 30, 1996 to 34.0% in the three month period ended September 30, 1997
and from 36.2% in the twelve-month period ended September 30, 1996 to 32.1% in
the twelve month period ended September 30, 1997.
Prior to April 1, 1996, the Company had calculated churn by including in the
total of those customers who disconnect within the period, those who transfer
their cable television/residential telephony service from one premise to another
within an owned and operated company franchise. While this had no effect on the
calculation of penetration, which is based on period end figures, it has meant
that churn has been overstated. Like other companies within the UK cable
industry, and with effect from April 1, 1996, the Company has calculated churn
to exclude those customers who so transfer their service. For the purposes of
comparison, the churn rates above for the twelve month period ended September
30, 1996 have been restated to exclude transfers.
Average monthly revenue per cable television customer increased by 3.2% from
(pound)22.12 in the three month period ended September 30, 1996 to
(pound)22.83 in the three month period ended September 30, 1997 and by 2.2%
from (pound)22.69 in the nine month period ended September 30, 1996 to
(pound)23.18 in the nine month period ended September 30, 1997 primarily due to
a decrease in promotional discounts offered by the Company.
TELEPHONY REVENUE
Telephony revenue increased by (pound)15.4 million or 37% from (pound)41.4
million in the three month period ended September 30, 1996 to (pound)56.8
million in the three month period ended September 30, 1997 and by (pound)40.6
million or 36% from (pound)114.0 million in the nine month period ended
September 30, 1996 to (pound)154.6 million in the nine month period ended
September 30, 1997.
Residential telephony revenue increased by (pound)11.8 million or 36% from
(pound)32.9 million in the three month period ended September 30, 1996 to
(pound)44.7 million in the three month period ended September 30, 1997 and by
(pound)32.3 million or 36% from (pound)90.2 million in the nine months ended
September 30, 1996 to (pound)122.5 million in the nine months ended September
30, 1997. Business telephony revenue increased by (pound)3.6 million or 42%
from (pound)8.6 million in the three months ended September 30, 1996 to
(pound)12.2 million in the three months ended September 30, 1997 and by
(pound)8.3 million or 35% from (pound)23.8 million in the nine month period
ended September 30, 1996 to (pound)32.1 million in the nine month period ended
September 30, 1997.
The increase in residential telephony revenue in the three and nine month
periods ended September 30, 1997 compared to the corresponding periods ended
September 30, 1996 was primarily due to a 44% increase (from 529,571 to 760,211)
and a 45% increase (from 487,541 to 706,319), respectively, in the average
number of residential lines, which was partially offset by a decrease in the
average monthly revenue per residential line of 5.5%, from (pound)20.68 in the
three month period ended September 30, 1996 to (pound)19.54 in the three month
period ended September 30, 1997, and 6.3%, from (pound)20.55 in the nine month
period ended September 30, 1996 to (pound)19.26 in the nine month period ended
September 30, 1997. The increase in the average number of residential lines
results primarily from an increase in the number of homes passed and marketed
(from 2,060,910 at September 30, 1996 to 2,609,400 at September 30, 1997) and
from increased penetration. The decrease in the average monthly revenue per line
was mainly attributable to price reductions in per minute call charges in
response to price cutting by BT, the Company's main competitor in residential
telephony. The Company intends to continue reducing per minute call tariffs in
response to competitive pressures and expects the revenue impact of these
reductions to be mitigated through higher line rentals, increased call volumes,
and sales of value added services such as call waiting and voice messaging.
Residential telephony penetration increased from 28.9% at June 30, 1997 to 29.3%
10
at September 30, 1997 and increased from 26.4% at June 30, 1996 to 26.8% at
September 30, 1996. Penetration increased from 27.5% at December 31, 1996 to
29.3 % at September 30, 1997 and from 26.0% at December 31, 1995 to 26.8% at
September 30, 1996. Churn increased from 19.1% in the three months ended
September 30, 1996 to 20.6% in the three months ended September 30, 1997. Churn
decreased from 20.0% in the twelve-month period ended September 30, 1996 to
19.4% in the twelve months ended September 30, 1997.
As set out above in the discussion of cable television revenue, the Company has
modified its calculation of churn to exclude from such calculation those
customers who transfer their service within an owned and operated franchise. For
the purposes of comparison, the churn rates above for the twelve month period
ended September 30, 1996 have been restated to exclude transfers.
The increase in business telephony revenue in the three and nine month periods
ended September 30, 1997 compared to the corresponding periods ended September
30, 1996 was attributable to a 57% increase (from 55,684 to 87,625) and a 61%
increase (from 49,150 to 79,108) in the average number of business telephony
lines in the three and nine month periods, respectively, ended September 30,
1997. This increase was partially offset by a decrease in the average monthly
revenue per business line, which decreased by 9.3% from (pound)51.27 in the
three month period ended September 30, 1996 to (pound)46.52 in the three month
period ended September 30, 1997, and decreased by 15.8% from ,53.79 in the nine
month period ended September 30, 1996 to (pound)45.31 in the nine month period
ended September 30, 1997. The increase in the average number of business
telephony lines was attributable to a 21% increase in the number of business
premises passed and marketed (from 99,427 at September 30, 1996 to 119,950 at
September 30, 1997) and to an increased focus on marketing services to larger
businesses which generally purchase more lines. The decrease in the average
monthly revenue per line was mainly attributable to price reductions in both per
minute call charges and increased volume discounts, together with increased
sales of Centrex, a business telecommunications product which provides more
lines to customers but which has a lower average monthly revenue per line.
Other revenue increased by 51% from (pound)2.4 million in the three month
period ended September 30, 1996 to (pound)3.7 million in the three month period
ended September 30, 1997, and increased by 62% from (pound)6.5 million in the
nine month period ended September 30, 1996 to (pound)10.5 million in the nine
month period ended September 30, 1997 and is derived primarily from management
services provided to Affiliated Companies, internet sales, cable publications
and network management services provided to other operators, and advertising
sales.
OPERATING COSTS AND EXPENSES
The Company's consolidated operating costs and expenses (which include direct
costs of programming and interconnection; selling, general and administrative
expenses; depreciation expense and amortization expense) increased by 31% from
(pound)107.6 million in the three month period ended September 30, 1996 to
(pound)141.5 million in the three month period ended September 30, 1997, and
increased by 25% from (pound)315.9 million in the nine month period ended
September 30, 1996 to (pound)396.1 million in the nine month period ended
September 30, 1997.
Programming fees are the largest component of the Company's operating costs in
providing cable television services. The Company obtains most of its programming
under contracts which provide for payments based upon the number of customers.
As a percentage of cable television revenues, programming costs increased from
56% in the three month period ended September 30, 1996 to 57% in the three month
period ended September 30, 1997 and increased from 55% in the nine month period
ended September 30, 1996, to 59% for the nine month period ended September 30,
1997, principally as a result of increases in programming costs for certain
11
channels and an increase in the number of channels included in the basic cable
television package, with no increase in the price charged to customers.
Interconnection charges are the largest component of the Company's telephony
operating costs in providing telephony services. As a percentage of telephony
revenue, telephony operating costs decreased from 27% and 32% in both the three
and nine month period ended September 30, 1996, respectively, to 19% and 25% for
the three and nine month periods ended September 30, 1997, respectively.
Interconnection charges in 1997 were reduced by the continuing reduction in
interconnection charges in the UK telephony market and by credits relating to
interconnection charges of earlier periods which have been calculated based on
the actual rates applicable for that period.
Selling, general and administrative expenses, which include, among other items,
salary and marketing costs, decreased as a percentage of revenue from 60% and
62% in both the three and nine month periods ended September 30, 1996 to 51% for
both the corresponding periods in 1997. The decrease is largely due to
reductions in support costs as the Company benefits from the economies of scale
resulting from its enlarged operations. The remainder of the decrease is the
result of revising, with effect from January 1, 1996, the estimates used in
calculating the proportion of labor and overhead costs which is capitalized as a
network asset. The impact of the revision was accounted for entirely in the
fourth quarter 1996, however, had the revision been accounted for with effect
from the beginning of the first quarter 1996, selling, general and
administrative expenses for the three and nine month periods ended September 30,
1996 would have been reduced by approximately (pound)3.7 million and
(pound)10.7 million, respectively. Total labor and overhead costs capitalized
in the three and nine month periods ended September 30, 1997 were (pound)22.5
million and (pound)62.8 million, respectively, compared to (pound)9.7 million
and (pound)28.3 million for the corresponding periods in 1996. The Company
expects that its selling, general and administrative expenses will continue to
decline as a percentage of revenue, as revenues increase and the efficiency
gains of its fixed cost base are increasingly exploited. In addition, the
Company is currently reducing its selling, general and administrative costs
through a planned restructuring program, reducing company and sub-contract
employees by up to 1,400 people. The Company expects that this redundancy
program will result in cash savings of approximately (pound)40 million for the
first full year following the implementation of such program. A charge of
(pound)2 million is included in the third quarter 1997. The final costs of the
redundancy program are expected to be reflected in the full year results.
Depreciation expense increased 72% from (pound)29.4 million in the three month
period ended September 30, 1996 to (pound)50.6 million in the three month
period ended September 30, 1997 and by 51% from (pound)84.1 million in the nine
month period ended September 30, 1996 to (pound)127 million in the nine month
period ended September 30, 1997. This increase was attributable to capital
expenditure associated with the Company's continuing construction activities
and, with effect from January 1, 1996, the revision of the estimated useful
lives of cable and ducting assets from 25 years to 20 years. The effect of this
revision on depreciation expense was accounted for entirely in the fourth
quarter 1996, however, had the revision been accounted for with effect from the
beginning of the first quarter 1996, depreciation expense for the three and nine
month periods ended September 30 1996 would have increased by approximately
(pound)2.5 million and (pound)6.9 million, respectively. In 1997, the
treatment of activation costs was reviewed. With effect from 1 January 1997,
activation labour was reclassified from 'Cable and Ducting' to 'Electronics' to
be consistent with the classification of activation materials. The impact of
this change for the nine months ended 30 September, 1997, was an additional
depreciation charge of (pound)8,250,000, with activation labour now depreciated
over 8 years rather than 20 years.
Amortization expense remained stable at (pound)6.6 million in both the three
month periods ended September 30, 1996 and 1997, respectively, and increased
slightly from (pound)19.6 million in the nine month period ended September 30,
1996 to (pound)19.8 million in the nine month period ended September 30, 1997.
12
OTHER INCOME/(EXPENSE)
The Company's share of the net losses of its Affiliated Companies accounted for
under the equity method, principally Birmingham Cable Corporation Limited and
Cable London plc, was (pound)4.0 million and (pound)5.6 million for the three
month periods ended September 30, 1996 and 1997, respectively, and (pound)11.4
million and (pound)15.9 million for the nine month periods ended September 30,
1996 and 1997, respectively.
Financial expenses, net, consist primarily of interest expense of (pound)37.5
million and (pound)100.7 million for the three and nine month periods ended
September 30, 1997, respectively, ((pound)26.0 million and (pound)78.3 million
for the corresponding periods in 1996) and foreign exchange losses of (pound)8.5
million and (pound)32.8 million for the three and nine month periods ended
September 30, 1997, respectively ((pound)7.6 million and (pound)55.2 million for
the corresponding periods in 1996) offset in part by interest income earned on
short-term investments and loans to Affiliated Companies of (pound)2.1 million
and (pound)6.2 million for the three and nine month periods ended September 30,
1997 ((pound)2.9 million and (pound)14.4 million for the corresponding periods
in 1996). Interest expense increased by (pound)11.5 million and (pound)22.4
million in the three and nine month periods ended September 30, 1997,
respectively, primarily as a result of the interest expense on higher
outstanding borrowings relating to the Senior Secured Facility (as defined
below) entered into in May 1996 and higher accrued interest expense on the
Senior Discount Debentures (as defined below) issued by the Company in October
1995. The foreign exchange losses arise principally from the re-translation of
the US Dollar denominated debentures to Pounds Sterling using the September 30,
1997 exchange rate and marking the associated hedging instruments to their
market value at September 30, 1997. It is the Company's policy to hedge
non-Sterling denominated borrowings to reduce or eliminate exchange rate
exposure.
LIQUIDITY AND CAPITAL RESOURCES
On May 22, 1996, the Company (through a directly wholly owned subsidiary)
entered into a (pound)1.2 billion senior secured credit facility with a
syndicate of banks (the "Senior Secured Facility"). The Senior Secured Facility
is being used to finance the capital expenditure, working capital requirements
and other permitted related activities for the construction and operation of
directly or indirectly wholly owned telephony and television franchises of the
Company; to fund the payment of cash interest on the Senior Debentures and
Senior Discount Debentures (as defined below); to fund the repayment of existing
secured borrowings of the Company in respect of the London South and South West
Regional Franchise Areas; to fund loans to or investments in Affiliated
Companies; to fund the acquisition, and subsequent construction, of local
delivery operators/franchises; and to refinance advances and the payment of
interest, fees and expenses in respect of the Senior Secured Facility.
The Senior Secured Facility is divided into two tranches, the first, Tranche A,
is available on a revolving basis for up to (pound)300 million, reducing to
(pound)100 million by June 30, 1998, with full repayment by December 31, 1998.
The second tranche, Tranche B, is available on a revolving basis concurrently
with Tranche A for an amount up to 6.5 times the trailing, rolling six month
annualized consolidated net operating cash flow, gradually reducing throughout
the period of the facility to 4 times by January 1, 2000. Thereafter, the amount
outstanding under the facility converts to a term loan amortizing over 5 years.
The aggregate drawing at any time under both tranches cannot exceed (pound)1.2
billion. Borrowings under the Senior Secured Facility are secured by assets
including the partnership interests and shares of subsidiaries of the Company
and bear interest at 2.25% above LIBOR for Tranche A and between 0.5% and 1.875%
above LIBOR (depending on the ratio of borrowings to the trailing, rolling six
month annualized consolidated net operating cash flow) for Tranche B. The
13
Company's ability to borrow under the Senior Secured Facility is subject to,
among other things, its compliance with the financial and other covenants and
borrowing conditions contained therein. The failure to comply with such
covenants could result, in extremis, in all such amounts outstanding under the
facility becoming due and payable. As at September 30, 1997, the Company has
drawn down (pound)145 million and (pound)257.5 million under Tranche A and
Tranche B, respectively.
The Company (through a directly wholly owned subsidiary) entered into certain
delayed starting interest rate swap agreements in order to manage interest rate
risk on the Senior Secured Facility. The interest rate swaps convert floating
rate interest payable on drawdowns under the facility to fixed interest rate
payments in the range of 7.835% - 7.975%. The swap agreements, which commenced
in early 1997, have a five-year maturity and a notional principal amount which
adjusts upwards on a semi-annual basis to a maximum of (pound)750 million. As
at September 30, 1997, the aggregate notional principal amount of the swaps was
(pound)350 million.
On October 3, 1995, the Company raised ,734 million through the issue of $300
million principal amount of 9 5/8% Senior Debentures due 2006 (the "Senior
Debentures") and $1,536 million principal amount at maturity of 11% Senior
Discount Debentures due 2007 (the "Senior Discount Debentures"). Interest on the
Senior Debentures is payable semi-annually and commenced on April 1, 1996.
Interest on the Senior Discount Debentures will be payable semi-annually
commencing on April 1, 2001. The proceeds of the issue were used by the Company
to fund general working capital, capital expenditures, additional investments in
Affiliated Companies, to repay a credit facility entered into by a directly
wholly owned subsidiary and to purchase the currency hedge arrangements
described below.
The Company's principal hedge instruments are a combined foreign currency and
interest rate swap ("Foreign Currency Swap") and a foreign currency option. The
Foreign Currency Swap fully hedges against adverse exchange rate fluctuations on
the principal amount of the Senior Debentures and the associated interest
payments. The foreign currency option provides protection against exchange rate
fluctuations on the Senior Discount Debentures below a rate of $1.452:(pound)1,
and allows the Company to benefit from positive exchange rate movements. Both
hedging instruments provide protection up to October 1, 2000, the early
redemption date of the Senior Debentures and the Senior Discount Debentures.
The Company's results may be materially influenced by future exchange rate
movements, particularly in the US GAAP financial statements, due to the
requirement that the hedge instruments are marked to their market value at the
end of the financial period and the US Dollar denominated debentures are
re-translated to Pounds Sterling using the period end exchange rate.
The Company incurred a net cash outflow from operating activities of
(pound)16.6 million in the nine month period ended September 30, 1997 compared
with a net cash outflow of (pound)21.0 million in the nine month period ended
September 30, 1996.
The Company incurred a net cash outflow from investing activities of
(pound)323.1 million and (pound)335.3 million in the nine month periods ended
September 30 1996 and 1997, respectively. The Company's principal investing
activities continue to be the construction of the network and the provision of
funding to the Affiliated Companies, and in the nine month period ended
September 30, 1996, the acquisition of a franchise covering the Worcester area
from Bell Cablemedia for (pound)9.8 million.
Cash (used in)/provided by financing activities amounted to ((pound)20.8)
million and (pound)298.5 million in the nine month period ended September 30,
1996 and 1997, respectively. Cash (used in)/provided by financing activities
principally related to loan arrangement and agency fees of (pound)18.0 million
relating to the (pound)1.2 billion Senior Secured Facility which were paid in
the nine month period ended September 30, 1996, and to the drawdown of
(pound)302.5 million under the Senior Secured Facility in the nine month period
ended September 30, 1997.
14
At September 30, 1997, the construction of the Company's broadband network had
passed approximately 72.5% of the homes in its owned and operated franchise
areas compared to 61% of homes in its owned and operated franchises at September
30, 1996. Total capital expenditure in the nine month period ended September 30,
1997 was (pound)340.7 million compared with (pound)361.3 million in the nine
month period ended September 30, 1996. The Company has started to implement a
reduction in the pace of its network construction and its expenditure on certain
discretionary capital projects.
The Company is obligated under the terms of its telecommunications licences to
construct its network to pass a specified number of premises by prescribed
dates. If such milestones are not met, the Company may be subject to enforcement
action from regulatory authorities which, if not complied with, could result in
revocation of the Company's telecommunications licences. As a consequence of its
intention to reduce the pace of its network construction, the Company currently
is negotiating with the Director General for appropriate modifications to its
current milestone obligations, although there can be no assurance that any such
modifications will be granted.
Cash and deposit balances at September 30, 1997 were (pound)25.7 million.
The Company currently expects that the anticipated funding requirements (after
taking into account current cash and deposit balances and anticipated revenues)
required to substantially complete the construction of the owned and operated
network, to fund the Company's operations, to upgrade older portions of the
network, and to pay interest on the Company's debt will be provided by the
Senior Secured Facility. There can be no assurance that the Company will not
elect to use alternative funding sources or that the Company's current
anticipated funding requirements will be in line with expectations.
ITEM 3--- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
PART II ---- OTHER INFORMATION
ITEM 1 ---- LEGAL PROCEEDINGS.
None
ITEM 2 ---- CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3 ---- DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 ---- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5 ---- OTHER INFORMATION.
None
ITEM 6 ---- EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 ---- Telewest Communications plc financial data schedule
99 ---- Telewest Communications plc Press Release issued on
October 30, 1997 with respect to results of operations for the
nine month period ended September 30, 1997 (including
unaudited consolidated financial statements prepared in
accordance with UK GAAP).
b. Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEWEST COMMUNICATIONS PLC
By: /S/ CHARLES J BURDICK
---------------------------------
Name: Charles J Burdick
Title: Chief Financial Officer
(duly authorized signatory
and principal financial officer)
November 11, 1997
17
EXHIBITS
EXHIBIT
27 --- Telewest Communications plc Financial Data Schedule
99 --- Telewest Communications plc Press Release issued on October
30, 1997 with respect to results of operations for the nine
month period ended September 30, 1997 (including unaudited
consolidated financial statements prepared in accordance
with UK GAAP)
18