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 March 31, 1998
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
(Address of Principal Executive Offices)
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 May 15, 1998, 927,567,600 ordinary shares of 10p each were
outstanding.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1998 1998 1997
($) (POUND) (POUND)
TURNOVER
Cable television 74,068 44,180 38,101
Telephony - residential 81,203 48,436 39,674
Telephony - business 22,636 13,502 9,287
Other (including(pound)697 and(pound)377 in 1998 and 7,219 4,306 3,328
1997, respectively, from related parties)
------------------ ------------------ -----------------
185,126 110,424 90,390
------------------ ------------------ -----------------
OPERATING COSTS AND EXPENSES
Programming (including(pound)2,718 and(pound)3,248 in (42,343) (25,257) (23,198)
1998 and 1997, respectively, to related parties)
Telephony (23,808) (14,201) (14,379)
Selling, general, and administrative (75,790) (45,207) (45,529)
(including (pound)219 and(pound)341 in 1998 and 1997,
respectively, to related parties)
Depreciation (78,333) (46,724) (37,456)
Amortisation of goodwill (11,063) (6,599) (6,594)
------------------ ------------------ -----------------
(231,337) (137,988) (127,156)
------------------ ------------------ -----------------
------------------ ------------------ -----------------
OPERATING LOSS (46,211) (27,564) (36,766)
------------------ ------------------ -----------------
OTHER INCOME / (EXPENSE)
Interest income (including(pound)578 and(pound)415 in 1,888 1,126 2,362
1998 and 1997, respectively, from related
parties)
Interest expense (71,622) (42,721) (30,314)
Foreign exchange gains / (losses), net 11,115 6,630 (24,127)
Share of net losses of affiliates (11,239) (6,704) (4,978)
Gain on disposal of assets 857 511 121
Minority interest in profits of (44) (26) (117)
consolidated subsidiaries, net
------------------ ------------------ -----------------
LOSS BEFORE INCOME TAXES (115,256) (68,748) (93,819)
------------------ ------------------ -----------------
Income tax credit / (expense) 34 20 (64)
NET LOSS (115,222) (68,728) (93,883)
================== ================== =================
BASIC AND DILUTED LOSS PER ORDINARY SHARE (PENCE) (0.12) (0.07) (0.10)
See accompanying notes to the unaudited condensed consolidated financial
statements.
TELEWEST COMMUNICATIONS PLC
US GAAP
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, except share data)
- -------------------------------------------------------------------------------------------------------------------------
UNAUDITED UNAUDITED
MARCH 31, 1998 MARCH 31, 1998 DECEMBER 31, 1997
($) (pound) (pound)
ASSETS
Cash and cash equivalents 73,556 43,875 29,582
Trade receivables (net of allowance for
doubtful accounts of (pound)8,097 in 1998 and(pound)6,507 71,434 42,609 36,627
in 1997)
Other receivables 46,377 27,663 26,207
Prepaid expenses 17,013 10,148 7,625
Investments in affiliates , accounted for under
the equity method, and related receivables 87,726 52,327 59,707
Other investments, at cost 43,029 25,666 25,666
Property and equipment ( less accumulated
depreciation of(pound)528,846 in 1998 and(pound)481,451 in
1997) 2,858,277 1,704,907 1,705,520
Goodwill (less accumulated amortization
of (pound)70,895 in 1998 and (pound)64,301 in 1997) 770,035 459,311 465,905
Other assets ( less accumulated amortization of
(pound)12,054 in 1998 and(pound)10,140 in 1997) 81,827 48,808 56,513
=================== ================== ==================
TOTAL ASSETS 4,049,274 2,415,314 2,413,352
=================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 55,920 33,355 26,710
Other liabilities 313,322 186,891 198,664
Debt 2,428,947 1,448,820 1,373,054
Capital lease obligations 126,676 75,560 75,534
------------------- ------------------ ------------------
TOTAL LIABILITIES 2,924,865 1,744,626 1,673,962
------------------- ------------------ ------------------
MINORITY INTERESTS 1,117 666 640
------------------- ------------------ ------------------
SHAREHOLDERS' EQUITY
Convertible preference shares, 10 pence par value;
661,000,000 shares authorized, and 496,066,708 83,166 49,607 49,607
shares issued and outstanding
Ordinary shares, 10 pence par value;
2,010,000,000 shares authorized, and 927,567,600 155,507 92,757 92,757
shares issued and outstanding
Additional paid-in capital 2,234,585 1,332,887 1,332,887
Accumulated deficit (1,346,712) (803,288) (734,560)
------------------- ------------------ ------------------
1,126,546 671,963 740,691
Ordinary shares held in trust for the
Telewest Restricted Share Scheme (3,254) (1,941) (1,941)
------------------- ------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 1,123,292 670,022 738,750
------------------- ------------------ ------------------
=================== ================== ==================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,049,274 2,415,314 2,413,352
=================== ================== ==================
See accompanying notes to the unaudited condensed consolidated financial
statements.
TELEWEST COMMUNICATIONS PLC
US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED
MARCH 31, 1998 MARCH 31, 1998 MARCH 31, 1997
($) (pound) (pound)
CASH FLOWS BEFORE OPERATING ACTIVITIES
Net loss (115,222) (68,728) (93,883)
Adjustments to reconcile net loss to net cash
provided by / (used in ) operating activities :
Depreciation 78,333 46,724 37,456
Amortization of goodwill 11,055 6,594 6,594
Amortization of deferred financing costs and
issue discount on senior discount debentures 40,145 23,946 18,276
Unrealized (loss) / gain on foreign currency
translation (11,107) (6,625) 23,794
Share of net losses of affiliates 11,239 6,704 4,978
Gain on disposal of assets (857) (511) (121)
Minority interests in profits 44 26 117
Change in operating assets and liabilities :
Change in receivables (7,754) (4,625) (11,553)
Change in prepaid expenses (4,230) (2,523) 167
Change in accounts payable 9,710 5,792 (15,034)
Change in other liabilities (18,125) (10,811) 7,976
------------------ ------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES (6,769) (4,037) (21,233)
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (82,727) (49,345) (92,619)
Additional investments in and loans to
affiliates (3,692) (2,202) (8,505)
Proceeds from disposals of assets 5,346 3,188 999
------------------ ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (81,073) (48,359) (100,125)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for credit facility arrangement (9,891) (5,900) 0
costs
Proceeds from borrowings 125,737 75,000 150,000
Repayment of borrowings (18) (10) 0
Capital element of finance lease repayments (4,024) (2,401) (1,020)
------------------ ------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 111,804 66,689 148,980
------------------ ------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,962 14,293 27,622
Effect of exchange rate changes on cash and
cash equivalents - - 64
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
49,594 29,582 79,116
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
73,556 43,875 106,802
================== ================== ==================
See accompanying notes to the unaudited condensed consolidated financial
statements.
TELEWEST COMMUNICATIONS PLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The unaudited condensed consolidated financial statements of Telewest
Communications plc ("the Company") and its majority owned subsidiaries
(collectively, the "Telewest Group") have been prepared in accordance
with United States ("US") generally accepted accounting principles and
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 unaudited condensed
consolidated financial statements contain translations of certain
Pounds Sterling amounts into US Dollars at $1.6765 per (pound)1.00, the
Noon Buying Rate of the Federal Reserve Bank of New York on March 31,
1998. 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 March 31, 1997 and 1998 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, 1997 filed with the Securities and Exchange
Commission (the "1997 Annual Report").
3. NEW ACCOUNTING STANDARDS APPLICABLE TO THE COMPANY
EARNINGS PER SHARE
As noted in the 1997 Annual Report, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 128, AEarnings per
Share@, effective December 3, 1997. This Statement required that all
prior-period earnings per share calculations including interim
financial statements be restated to conform with the provisions of this
statement. Basic and diluted loss per ordinary share is based on the
weighted average number of ordinary shares outstanding of 927,567,600
for the three month periods ended March 31, 1998 and 1997.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 AReporting Comprehensive Income@ with
effect from January 1, 1998. Reclassification of financial statements
for earlier periods for comparative purposes is required. SFAS No. 130
establishes standards for the reporting and presentation of
comprehensive income in financial statements. Comprehensive income
encompasses all changes in shareholders' equity except those arising
from transactions with owners. There is no difference between
comprehensive loss and net loss for the three month periods ended March
31, 1998 and 1997.
TELEWEST COMMUNICATIONS PLC
US GAAP
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED 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 consolidated 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 March 31, 1998, the aggregate notional principal amount of the swaps
was (pound)500 million, and the total drawdown under the facility was
(pound)567.5 million.
5. DEPRECIATION
In 1997, the treatment of activation costs was reviewed. With effect
from January 1, 1997, activation labour was reclassified from 'Cable
and Ducting' to 'Electronics' to be consistent with the classification
of activation materials, with activation labour now depreciated over 8
years rather than 20 years. The effect of this revision was accounted
for in the second half of 1997, however, had the revision been
accounted for with effect from the beginning of the first quarter of
1997, depreciation expense for the three months ended March 31, 1997
would have increased by approximately (pound)2.6 million.
6. 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 financial position and its
operating results.
7. SUBSEQUENT EVENTS
Following the announcement of the proposed acquisition by NTL
Incorporated ("NTL") of Comcast UK Cable Partners Limited ("Comcast"),
the Company initiated the process governing the exercise of its
pre-emption rights in respect of Comcast's 27.45% interest in
Birmingham Cable. In addition, the Company intends to initiate the
process governing the exercise of its pre-emption rights in respect of
Comcast's 50% interest in Cable London if NTL's proposed acquisition of
Comcast is completed. In the event the Company decides to proceed with
the acquisition of Comcast's interest in Birmingham Cable and /or Cable
London, additional financing would be required. There can be no
assurance that such funding will be available on terms that are
satisfactory to the Company.
On April 15, 1998 it was announced that Telewest and General Cable had
agreed terms of a proposed merger to be achieved by way of a
recommended offer by Telewest for General Cable shares.
On April 24, 1998 SJ Davidson resigned as Chief Executive of the
Company.
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 consolidated financial statements in accordance with UK
GAAP. The UK GAAP consolidated 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 1997 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 BT and others as a
provider of telephony service; the ability of the Company to penetrate markets
and respond to changes or increases in competition (including the introduction
of digital services by BSkyB or other operators) and adverse changes in
government regulation; the ability of the Company to manage growth and
expansion; the ability of the Company to improve operating efficiencies
(including through cost reductions); 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 material adverse change in the Company's
anticipated revenues or expenses or to finance new initiatives; the extent
programming is available at reasonable costs; adverse changes in the price of
telephony interconnection; disruptions in supply of services and equipment; the
ability of the Company to exercise its pre-emption rights with respect to
Birmingham Cable and Cable London; and the performance of affiliated companies
(which are not controlled by the Company).
SUMMARY OF OPERATIONS (THREE MONTH PERIOD ENDED MARCH 31, 1997 AND 1998)
The Company's consolidated revenue increased by (pound)20.0 million or 22.2%
from (pound)90.4 million in the three month period ended March 31, 1997 to
(pound)110.4 million in the three month period ended March 31, 1998, primarily
due to the larger customer base created by the Company's continuing network
construction.
CABLE TELEVISION REVENUE
Cable television revenue increased by (pound)6.1 million or 16.0% from
(pound)38.1 million in the three months ended March 31, 1997 to (pound)44.2
million in the three months ended March 31, 1998. The increase was primarily
attributable to a 14.3% increase (from 533,648 to 609,866) in the average number
of customers in the three month period ended March 31, 1998, compared to the
corresponding period in 1997. The increase in the average number of customers
results primarily from an increase in the number of homes passed and marketed
from 2,439,377 at March 31, 1997 to 2,794,836 at March 31, 1998.
Penetration improved slightly from 22.0% at December 31, 1997 to 22.1% at March
31, 1998 compared to a slight decrease from 22.6% as at December 31, 1996 to
22.2% as at March 31, 1997. Churn increased from 34.3% in the three month period
ended March 31, 1997 to 37.2% in the three month period ended March 31, 1998 and
from 32.6% in the twelve-month period ended March 31, 1997 to 34.8% in the
twelve month period ended March 31, 1998. This increase in churn was due in part
to customer service related problems resulting from the Company's restructuring
and redundancy program and the cable television price increases implemented from
November 1,1997.
Average monthly revenue per cable television customer increased by 0.6% from
(pound)23.57 in the three month period ended March 31, 1997 to (pound)23.72 in
the three month period ended March 31, 1998 due to the expansion of pay per view
events, a decrease in promotional discounts offered by the Company and price
increases implemented from November 1, 1997.
TELEPHONY REVENUE
Telephony revenue increased by (pound)12.9 million or 26.5% from (pound)49.0
million in the three month period ended March 31, 1997 to (pound)61.9 million in
the three month period ended March 31,1998.
Residential telephony revenue increased by (pound)8.8 million or 22.1% from
(pound)39.7 million in the three month period ended March 31, 1997 to
(pound)48.4 million in the three month period ended March 31,1998. Business
telephony revenue increased by (pound)4.2 million or 45.4% from (pound)9.3
million in the three months ended March 31, 1997 to (pound)13.5 million in the
three months ended March 31, 1998.
The increase in residential telephony revenue in the three month period ended
March 31, 1998 compared to the corresponding period ended March 31, 1997 was
primarily due to a 30.5% increase (from 651,035 to 849,271) in the average
number of residential lines, which was partially offset by a decrease in the
average monthly revenue per residential line of 6.0%, from (pound)20.31 in the
three month period ended March 31, 1997 to (pound)19.10 in the three month
period ended March 31, 1998. The increase in the average number of residential
lines results primarily from an increase in the number of homes passed and
marketed (from 2,377,511 at March 31, 1997 to 2,760,826 at March 31, 1998) 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 to reduce per minute call tariffs as
necessary to compete effectively and to seek to mitigate the revenue impact of
these reductions 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 29.7% at December 31, 1997 to
30.1% at March 31, 1998 and from 27.5% at December 31, 1996 to 28.2 % at March
31,1997. Churn increased from 19.8% in the three months ended March 31, 1997 to
21.7% in the three months ended March 31, 1998 and from 19.5% in the
twelve-month period ended March 31, 1997 to 20.5% in the twelve months ended
March 31, 1998.
The increase in business telephony revenue in the three month period ended March
31, 1998 compared to the corresponding period ended March 31, 1997 was
attributable to a 48.3% increase (from 70,871 to 105,125) in the average number
of business telephony lines. This increase was partially offset by a decrease in
the average monthly revenue per business line, which decreased by 2.0% from
(pound)43.68 in the three month period ended March 31, 1997 to (pound)42.81 in
the three month period ended March 31, 1998. The increase in the average number
of business telephony lines was attributable to a 20.4% increase in the number
of business premises passed and marketed (from 107,491 at March 31, 1997 to
129,375 at March 31, 1998) 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
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 29.4% from (pound)3.3 million in the three month
period ended March 31, 1997 to (pound)4.3 million in the three month period
ended March 31, 1998 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 8.5% from
(pound)127.2 million in the three month period ended March 31, 1997 to
(pound)138.0 million in the three month period ended March 31, 1998.
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 subscribers.
As a percentage of cable television revenues, programming costs decreased from
61% in the three month period ended March 31, 1997 to 57% in the three month
period ended March 31, 1998, resulting from the negotiation of more favourable
contract terms.
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 29% in the three month period
ended March 31, 1997 to 23% for the three month period ended March 31, 1998.
Interconnection charges in 1998 were reduced by the continuing reduction in
interconnection charges in the UK telephony market, a growing percentage of
interconnection charges handled within the Telewest network and by credits
relating to interconnection charges from earlier periods, which have been
recalculated based on the final agreed 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 50% in the
three month period ended March 31, 1997 to 41% for the corresponding period in
1998. The improvement is largely due to the rapid growth in revenues and
continued reduction in support costs per customer as the Company benefits from
the economies of scales resulting from its enlarged operations. Total labor and
overhead costs capitalized in the three month period ended March 31, 1998 were
(pound)15.3 million, compared to (pound)19.5 million for the corresponding
period in 1997. 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 from its fixed cost base are increasingly
exploited, and the full year benefits of a restructuring and redundancy program,
completed at the end of 1997, take effect.
Depreciation expense increased 24.7% from (pound)37.5 million in the three month
period ended March 31, 1997 to (pound)46.7 million in the three month period
ended March 31, 1998. With effect from January 1, 1997, activation labour was
reclassified from 'Cable and Ducting' to 'Electronics' to be consistent with the
classification of activation materials, with activation labour now depreciated
over 8 years rather than 20 years. Although the effect of this revision was
accounted for in the second half of 1997, had the revision been accounted for
with effect from the beginning of the first quarter of 1997, depreciation
expense for the three months ended March 31, 1997 would have increased by
approximately (pound)2.6 million.
Amortization expense remained stable at(pound)6.6 million in both the three
month periods to March 31, 1997 and March 31, 1998.
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)5.0 million and (pound)6.7 million for the three
month periods ended March 31, 1997 and 1998, respectively.
Financial expenses, net, consist primarily of interest expense of (pound)42.7
million for the three month period ended March 31, 1998, ((pound)30.3 million
for the three month period ended March 31,1997) and foreign exchange gain of
(pound)6.6 million for the three month period ended March 31, 1998, ((pound)24.1
million foreign exchange loss for the three month period ended March 31, 1997)
offset in part by interest income earned on short-term investments and loans to
affiliated companies of (pound)1.1 million for the three month period ended
March 31, 1998 ((pound)2.4 million for the three month period ended March 31,
1997). Interest expense increased by (pound)12.4 million in the three month
period ended March 31, 1998, 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 gains and losses arise principally from the
re-translation of the US Dollar denominated debentures to Pounds Sterling using
the March 31, 1998 exchange rate and marking the associated hedging instruments
to their market value at March 31, 1998. 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 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 the wholly owned telephony and television
franchises of the Company; to fund the payment of cash interest on the Senior
Debentures and Senior Discount Debentures; 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.
In connection with the restructuring of the Company's activities, including the
slow down of construction activity, the terms of the Senior Secured Facility
were amended in the first quarter of 1998. The amount of the Senior Secured
Facility has been reduced to (pound)1.0 billion and the Company entered into a
second secured facility (the "Second Secured Facility") of (pound)100 million
with certain of the banks that are party to the Senior Secured Facility. In
addition, certain changes were made to the financial covenants to accommodate
the Company's anticipated cashflows. The repayment dates for tranche A have been
accelerated by three months as described below.
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, reduced to
(pound)100 million by March 31, 1998, with full repayment by September 30, 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)1.0
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
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, and the failure to comply with such
covenants could result in all such amounts outstanding under the facility
becoming due and payable. At March 31, 1998 (pound)20 million was drawn down
under tranche A and (pound)547.5 million was drawn down under tranche B.
The Second Secured Facility is available from July 1, 1999 to June 30, 2001.
Advances under the Second Secured Facility may be drawn only if the Senior
Secured Facility has been drawn down to the fullest extent possible at the
relevant time. The Second Secured Facility is available on a revolving basis to
provide an aggregate amount under the Senior Secured Facility and the Second
Secured Facility equal to up to 6 times the trailing, rolling six month
annualized consolidated net operating cash flow through December 31, 1999,
gradually reducing thereafter throughout the period of the facility to 4.5 times
by January 1, 2001. On June 30, 2001, the amount outstanding under the Second
Secured Facility converts to a term loan amortizing over 5 years. Borrowings
under the Second Secured Facility bear interest at a rate equal to LIBOR plus a
margin that increases during the period of the facility from 3.5% per annum
through December 31, 1999, 4.5% per annum from December 31, 1999 through June
30, 2000 and to 5.5% per annum from June 30, 2000 to June 30, 2006. The
provisions as to prepayment, covenants and events of default in respect of the
Second Secured Facility are substantially similar to those for the Senior
Secured Facility.
The Company has 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 March 31, 1998, the aggregate
notional principal amount of the swaps was (pound)500 million.
On October 3, 1995, the Company raised (pound)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 direct wholly
owned subsidiary and to purchase the currency hedge arrangements described
below.
The Company's hedge instruments relating to the debentures 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, 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)4.0
million in the three month period ended March 31, 1998 compared with a net cash
outflow of (pound)21.2 million in the three month period ended March 31, 1997.
The Company incurred a net cash outflow from investing activities of
(pound)100.1 million and (pound)48.4 million in the three month periods ended
March 31, 1997 and 1998, respectively. The Company's principal investing
activities continue to be the construction of the network, although at a reduced
rate, and the provision of funding to the Affiliated Companies.
Cash provided by financing activities amounted to 149.0 million and (pound)66.7
million in the three month periods ended March 31, 1997 and 1998, respectively.
Cash provided by financing activities principally related to the drawdown of
(pound)150.0 million under the Senior Secured Facility in the three month period
ended March 31, 1997, and to the drawdown of (pound)75 million under the Senior
Secured Facility in the three month period ended March 31, 1998.
At March 31, 1998, the construction of the Company's broadband network had
passed approximately 75.4% of the homes in its owned and operated franchise
areas compared to 68% of homes in its owned and operated franchises at March 31,
1997. Total capital expenditure in the three month period ended March 31, 1998
was (pound)48.8 million, substantially lower than in the three month period
ended March 31, 1997((pound)111.5 million), due to the Company reducing 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 has
negotiated with the Director General appropriate modifications to its current
milestone obligations. Formal amendments to licences are expected by the end of
May 1998.
Cash and deposit balances at March 31, 1998 were (pound)43.9 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 and the Second Secured Facility. There can be no
assurance that the Company will not elect to use alternative funding sources or
that the Company's actual funding requirements will be in line with
expectations.
Following the announcement of the proposed acquisition by NTL Incorporated
("NTL") of Comcast UK Cable Partners Limited ("Comcast"), the Company initiated
the process governing the exercise of its pre-emption rights in respect of
Comcast's 27.45% interest in Birmingham Cable. In addition, the Company intends
to initiate the process governing the exercise of its pre-emption rights in
respect of Comcast's 50% interest in Cable London if NTL's proposed acquisition
of Comcast is completed. In the event the Company decides to proceed with the
acquisition of Comcast's interest in Birmingham Cable and /or Cable London,
additional financing would be required. There can be no assurance that such
funding will be available on terms that are satisfactory to the Company.
On April 15, 1998 it was announced that Telewest and General Cable had agreed
terms of a proposed merger to be achieved by way of a recommended offer by
Telewest for General Cable shares.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
10.59 ---- Loan Agreement, by and among Telewest Communications
Networks Limited, as borrower, The Bank of New York, CIBC Wood
Gundy plc, Chase Investment Bank Limited, NatWest Markets and
The Toronto-Dominion Bank, as arrangers, and CIBC Wood Gundy
plc, as agent and security trustee, dated as of May 22, 1996,
as amended pursuant to amendments dated as of May 31, 1996,
August 2, 1996, September 11, 1996 and March 27, 1998.
10.62 ---- Loan Agreement, by and among Telewest Communications
Networks Limited, as borrower, The Bank of New York, CIBC Wood
Gundy plc, Chase Manhattan plc, Greenwich NatWest and The
Toronto-Dominion Bank, as arrangers, and The Toronto-Dominion
Bank, as agent and security trustee, dated as of March 27,
1998.
10.63 ---- Letter, dated as of April 24, 1998, between Stephen Davidson
and Telewest CGL.
27 ---- Telewest Communications plc financial data schedule.
99 ---- Telewest Communications plc Press Release issued on May
7, 1998 with respect to results of operations for the three
month period ended March 31, 1998 (including unaudited
consolidated financial statements prepared in accordance with
UK GAAP).
b. Reports on Form 8-K
None
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: Group Finance Director
(duly authorized signatory
and principal financial officer)
May 15, 1998
EXHIBITS
EXHIBIT
10.59 ---- Loan Agreement, by and among Telewest Communications
Networks Limited, as borrower, The Bank of New York, CIBC Wood
Gundy plc, Chase Investment Bank Limited, NatWest Markets and
The Toronto-Dominion Bank, as arrangers, and CIBC Wood Gundy
plc, as agent and security trustee, dated as of May 22, 1996,
as amended pursuant to amendments dated as of May 31, 1996,
August 2, 1996, September 11, 1996 and March 27, 1998.
10.62 ---- Loan Agreement, by and among Telewest Communications
Networks Limited, as borrower, The Bank of New York, CIBC Wood
Gundy plc, Chase Manhattan plc, Greenwich NatWest and The
Toronto-Dominion Bank, as arrangers, and The Toronto-Dominion
Bank, as agent and security trustee, dated as of March 27,
1998.
10.63 ---- Letter, dated as of April 24, 1998, between Stephen Davidson
and Telewest CGL.
27 ---- Telewest Communications plc financial data schedule.
99 ---- Telewest Communications plc Press Release issued on May 7,
1998 with respect to results of operations for the three month
period ended March 31, 1998 (including unaudited consolidated
financial statements prepared in accordance with UK GAAP).