Exhibit 99.1
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Telewest Communications plc
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US GAAP Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations with respect to the three and
six-month periods ended June 30, 2002.
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Telewest Communications plc
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PART I: US GAAP FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Operations
-------------------------------------------------------------------------------------------------------------------
3 months 3 months 3 months 6 months 6 months 6 months
ended ended ended ended ended ended
June 30, June 30, June 30, June 30, June 30, June 30,
2002 2002 2001 2002 2002 2001
(in millions, except per share data)
(note 2) (note 2)
-------------------------------------------------------------------------------------------------------------------
Revenue
Cable television $ 134 (pound)88 (pound)80 $ 264 (pound)173(pound)158
Consumer telephony 191 125 121 383 251 241
Internet and other 27 18 9 51 34 16
------------------------------------------------------------------
Total Consumer Division 352 231 210 698 458 415
Business Services Division 117 77 74 218 143 136
------------------------------------------------------------------
Total Cable Division 469 308 284 916 601 551
Content Division 40 26 31 79 52 62
------------------------------------------------------------------
Total revenue 509 334 315 995 653 613
------------------------------------------------------------------
Operating costs and expenses
Consumer programming expenses (including(pound)8m
and (pound)5m in 2002 and 2001, respectively, to
related parties) 49 32 38 99 65 75
Business and consumer telephony expenses 88 58 60 172 113 121
Content expenses 23 15 19 47 31 38
Depreciation 196 129 115 375 246 230
------------------------------------------------------------------
Cost of sales 356 234 232 693 455 464
Selling, general, and administrative expenses 197 129 124 393 258 252
Amortization of goodwill - - 46 - - 91
------------------------------------------------------------------
553 363 402 1,086 713 807
------------------------------------------------------------------
------------------------------------------------------------------
Operating loss (44) (29) (87) (91) (60) (194)
------------------------------------------------------------------
Other income / (expense)
Interest income (including(pound)6m and(pound)5m in
2002 and 2001, respectively, from related
parties) 11 7 3 11 7 8
Interest expense (including amortization of
debt discount) (200) (131) (110) (384) (252) (221)
Foreign exchange gains/ (losses), net 96 63 12 128 84 (9)
Share of net (losses)/profits of affiliates (8) (5) (1) (2) (1) 5
Other, net 52 34 (5) 52 34 (6)
------------------------------------------------------------------
Loss before income taxes (93) (61) (188) (286) (188) (417)
Income tax benefit 3 2 3 6 4 5
------------------------------------------------------------------
Net loss before extraordinary item (90) (59) (185) (280) (184) (412)
Extraordinary loss on extinguishment of debt - - - - - (15)
------------------------------------------------------------------
Net loss for the period after extraordinary
item $ (90) (pound)(59) (pound)(185)$ (280) (pound)(184) (pound)(427)
======================================================================
Basic and diluted loss per ordinary share:
Before extraordinary loss $ (0.03)(pound)(0.02)(pound)(0.06)$(0.10)(pound)(0.06)(pound)(0.14)
After extraordinary loss $ (0.03)(pound)(0.02)(pound)(0.06)$(0.10)(pound)(0.06)(pound)(0.15)
Weighted average number of ordinary shares -
basic and diluted - (millions) 2,873 2,890 2,873 2,890
See accompanying notes to the unaudited condensed consolidated financial
statements.
1
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
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Unaudited Condensed Consolidated Balance Sheets
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June 30, June 30, Dec. 31,
2002 2002 2001
$m (pound)m (pound)m
(note 2) Audited
--------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents 520 341 14
Secured cash deposits restricted for more than one year 18 12 20
Trade receivables (net of allowance for doubtful accounts of(pound)16m in 2002 and 178 117 116
2001)
Other receivables 136 89 112
Prepaid expenses 76 50 33
------------------------------------
Total current assets 928 609 295
Investments in affiliates, accounted for under the equity method, and related
receivables 825 541 547
Property and equipment (less accumulated depreciation of(pound)2,118m in 2002 and
(pound)1,873m in 2001) 5,302 3,478 3,473
Goodwill (less accumulated amortization of(pound)382m in 2002 and 2001) 2,884 1,892 1,892
Inventory 116 76 67
Other assets (less accumulated amortization of(pound)56m in 2002 and(pound)47m
in 2001) 77 50 58
------------------------------------
Total assets 10,132 6,646 6,332
====================================
Liabilities and shareholders' equity
Accounts payable 226 148 109
Other liabilities 559 367 410
Deferred income 163 107 114
------------------------------------
Total current liabilities 948 622 633
Deferred tax 166 109 113
Debt 8,338 5,469 4,897
Capital lease obligations 343 225 238
------------------------------------
Total liabilities 9,795 6,425 5,881
------------------------------------
------------------------------------
Minority interests (2) (1) -
------------------------------------
Shareholders' equity
Ordinary shares, 10 xxxxx par value;
4,300 million authorized and 2,873 million shares issued and outstanding 438 287 287
Limited voting convertible ordinary shares, 10 xxxxx par value;
300 million shares authorized and 82 million shares issued
and outstanding 12 8 8
Additional paid-in capital 6,440 4,224 4,224
Accumulated deficit (6,537) (4,288) (4,104)
Accumulated other comprehensive income (14) (9) 37
------------------------------------
339 222 452
Ordinary shares held in trust for the Telewest Restricted Share
Scheme and the Telewest Long-Term Incentive Plan; (1 million shares in 2001) - - (1)
------------------------------------
Total shareholders' equity 339 222 451
------------------------------------
------------------------------------
Total liabilities and shareholders' equity 10,132 6,646 6,332
====================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Cash Flow
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6 months 6 months 6 months
ended ended ended
June 30, June 30, June 30,
2002 2002 2001
$m (pound)m (pound)m
(note 2)
--------------------------------------------------------------------------------------------------------------------
Net loss (280) (184) (427)
Adjustments to reconcile net loss to net cash (used in)/provided by operating
activities
Depreciation 375 246 230
Amortization of goodwill - - 91
Amortization of deferred financing costs and issue discount on Senior Discount 84 55 45
Debentures
Deferred tax credit (6) (4) (5)
Unrealized (gains)/losses on foreign currency translation (128) (84) 5
Accrued share-based compensation (credit)/cost (2) (1) 1
Extraordinary loss on extinguishment of debt - - 15
Share of net losses/(profits) of affiliates 2 1 (5)
Loss on disposal of other assets (net) - - 4
Changes in operating assets and liabilities :
Change in receivables (8) (5) (4)
Change in prepaid expenses 27 18 (13)
Change in other assets 11 7 (54)
Change in accounts payable (60) (39) 30
Change in other liabilities (35) (23) 17
---------------------------------
Net cash used in operating activities (20) (13) (70)
---------------------------------
Cash flows from investing activities
Cash paid for property and equipment (400) (263) (272)
Additional investments in and loans to affiliates - - (22)
Repayment of loans made to joint ventures 15 10 25
Disposal of subsidiaries 15 10 10
Cash disposed of with subsidiaries - - (2)
Disposal of affiliate 21 14 -
---------------------------------
Net cash used in investing activities (349) (229) (261)
---------------------------------
Cash flows from financing activities
Net repayment of borrowings under old credit facilities - - (136)
Net proceeds from borrowings under new facilities 732 480 410
Net proceeds from disposal of forward contracts 160 105 -
Proceeds from issue of Accreting Convertible Notes due 2003 - - 30
Proceeds from exercise of share options - - 5
Repayment of other borrowings (4) (3) -
Release of restricted deposit 12 8 -
Capital element of finance lease repayments (32) (21) (26)
---------------------------------
Net cash provided by financing activities 868 569 283
---------------------------------
Net increase/(decrease) in cash and cash equivalents 499 327 (48)
Cash and cash equivalents at beginning of period 21 14 60
---------------------------------
Cash and cash equivalents at the end of period 520 341 12
=================================
See accompanying notes to the unaudited condensed consolidated financial
statements
3
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
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Unaudited Condensed Consolidated Statement of Shareholders' Equity and
Comprehensive Income
--------------------------------------------------------------------------------------------------------------------
Ordinary Limited Shares Additional Other Accumulated Total
shares voting held paid-in comprehensive deficit
shares in trust capital income
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
(note 5)
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 287 8 (1) 4,224 37 (4,104) 451
-----------------------------------------------------------------------------
Net loss for the period - - - - - (184) (184)
Unrealized gain/(loss) on derivative
financial instruments:
De-designation of xxxxxx on debt
principal amounts - - - - (53) - (53)
Current period increases in fair
value - - - - 8 - 8
Amortization of cash flow xxxxxx - - - - (1) - (1)
-----------------------------------------------------------------------------
Total comprehensive income - - - - (46) (184) (230)
-----------------------------------------------------------------------------
Shares issued - - 1 - - - 1
-----------------------------------------------------------------------------
Balance at June 30, 2002 287 8 - 4,224 (9) (4,288) 222
=============================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
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Notes to the Unaudited Condensed Consolidated Financial Statements
1. Principal activities
The principal activities of Telewest Communications plc ("Telewest",
the "Company", "we", "our", and "us") are the provision of voice, video, data
and internet services across multiple platforms and the supply of content and
services to the United Kingdom ("UK") pay-television and on-line markets.
2. Basis of presentation
The unaudited, condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The preparation of
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 20-F for the year ended December
31, 2001 as filed with the Securities and Exchange Commission ("SEC") on July 1,
2002. In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited financial statements and contain
adjustments, all of which are of a normal recurring nature, to present fairly
its financial position as of June 30, 2002 and its results of operations and
cash flows for the three-month and six-month periods ended June 30, 2002 and
2001. Interim results are not necessarily indicative of results for the
financial year.
The economic environment and currency in which Telewest operates is the
UK, and hence its reporting currency is pounds sterling ((pound)). Certain
financial information as of and for the three-month and six-month periods ended
June 30, 2002 has been translated into US dollars ($), with such US dollar
amounts being unaudited and presented solely for the convenience of the reader,
at the rate of $1.5245 = (pound)1.00, the Noon Buying Rate of the Federal
Reserve Bank of New York on Friday, June 28, 2002, being the last business day
before June 30, 2002. The presentation of the US dollar amounts should not be
construed as a representation that the sterling amounts could be so converted
into US dollars at the rate indicated or at any other rate.
The unaudited, condensed consolidated financial statements include the
accounts of the Company and those of its majority-owned subsidiaries (the
"Group"). All significant inter-company accounts have been eliminated upon
consolidation.
These financial statements have been prepared on a going concern basis.
On the basis of cash flow information that they have prepared, the directors
consider that the Group will continue to operate within the Senior Secured
Facility currently agreed with its bankers and available for a period of at
least twelve months following the date of issue of these financial statements.
The Group's debt obligations begin to mature in late 2003 and as stated in our
letter to shareholders dated July 4, 2002 the directors are currently
considering their options to allow the Group to meet these obligations and
stabilize its medium to longer term financial position. In addition, over the
next twelve months, the margin of facilities over requirements is not large and
consistent delivery of budget is necessary to ensure continued compliance with
the terms of the covenants within the Senior Secured Facility. Inherently, there
can be no certainty in relation to any of these matters. These financial
statements do not include any adjustments that would result from this going
concern basis of preparation being inappropriate.
The Group regularly monitors its ongoing ability to draw down under the
facilities, which is dependent on satisfying financial covenants. As with most
growth businesses, further increases in business performance and profitability
are necessary to ensure continued compliance with the terms of the covenants.
However, as with any forecast information, the principal assumptions are clearly
subject to a high degree of risk, in particular the Group's ability to increase
revenues in accordance with its plans.
The Group faces the following significant risks and uncertainties:
o continued ability to raise finance to fund its operations;
o successful execution of its long-term business plan, which in turn will
affect the Group's ability to raise further finance under the Senior
Secured Facility (see below);
o the need to meet financial and other covenants relating to debt
instruments which have already been issued; and
5
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
o the downgrading of the Group's corporate credit ratings and the ratings of
its outstanding debt is likely to increase its cost of borrowing and may
mean that it will not be able to make future borrowings.
3. Segmental information
The Company applies Statement of Financial Accounting Standard No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-making group is the Board of
Directors. The operating segments are managed separately because each operating
segment represents a strategic business unit that offers different products and
services in different markets. We operate in two main segments: Cable and
Content. The Cable segment of our business can be subdivided, for revenue
purposes only, between four product ranges: Cable Television, Consumer
Telephony, Internet and other, and Business Services. The Internet and other
unit comprises internet sales and sales of cable publications. The Content
segment provides entertainment content, interactive and transactional services
to the UK pay-television and internet markets.
The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies in our
financial statements. The Company changed the structure of its segmental
analysis table with effect from September 30, 2001 and certain corresponding
information from the previous year has been restated to reflect the change in
structure.
The following table presents summarized financial information relating
to the reportable segments for the three and six-month periods ended June 30,
2002 and 2001, respectively:
Unaudited segmental information
--------------------------------------------------------------------------------------------------------------------
3 months 3 months 3 months 6 months 6 months 6 months
ended ended ended ended ended ended
June 30, June 30, June 30, June 30, June 30, June 30,
2002 2002 2001 2002 2002 2001
$m (pound)m (pound)m $m (pound)m (pound)m
(note 2) (note 2)
--------------------------------------------------------------------------------------------------------------------
CABLE
--------------------------------------------------------------------------------------------------------------------
Cable television 134 88 80 264 173 158
Consumer telephony 191 125 121 383 251 241
Internet and other 27 18 9 51 34 16
----------------------------------------------------------------------------
Total Consumer Division 352 231 210 698 458 415
Business Services Division 117 77 74 218 143 136
----------------------------------------------------------------------------
Third party revenue 469 308 284 916 601 551
Operating costs and expenses (317) (208) (210) (631) (414) (422)
Depreciation (193) (127) (113) (369) (242) (223)
Amortization of goodwill - - (21) - - (41)
----------------------------------------------------------------------------
Operating loss (41) (27) (60) (84) (55) (135)
============================================================================
Share of net (losses)/profits of
affiliates - - - - - -
Investment in affiliates 9 6 6 9 6 6
Additions to property and equipment 178 117 161 365 240 308
Goodwill 2,015 1,322 1,357 2,015 1,322 1,357
Total assets 8,121 5,327 5,081 8,121 5,327 5,081
--------------------------------------------------------------------------------------------------------------------
6
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
Unaudited segmental information (continued)
--------------------------------------------------------------------------------------------------------------------
3 months 3 months 3 months 6 months 6 months 6 months
ended ended ended ended ended ended
June 30, June 30, June 30, June 30, June 30, June 30,
2002 2002 2001 2002 2002 2001
$m (pound)m (pound)m $m (pound)m (pound)m
(note 2) (note 2)
--------------------------------------------------------------------------------------------------------------------
CONTENT
--------------------------------------------------------------------------------------------------------------------
Content Division 46 30 32 90 59 67
Inter-segmental * (6) (4) (1) (11) (7) (5)
----------------------------------------------------------------------------
Third party revenue 40 26 31 79 52 62
Operating costs and expenses (40) (26) (31) (80) (53) (64)
Depreciation (3) (2) (2) (6) (4) (7)
Amortization of goodwill - (25) - - (50)
----------------------------------------------------------------------------
Operating loss (3) (2) (27) (7) (5) (59)
============================================================================
Share of net (losses)/profits of affiliates (8) (5) (1) (2) (1) 5
Investment in affiliates 816 535 768 816 535 768
Additions to property and equipment - - 1 2 1 2
Goodwill 869 570 1,373 869 570 1,373
Total assets 2,011 1,319 2,282 2,011 1,319 2,282
--------------------------------------------------------------------------------------------------------------------
TOTAL
--------------------------------------------------------------------------------------------------------------------
Cable television 134 88 80 264 173 158
Consumer telephony 191 125 121 383 251 241
Internet and other 27 18 9 51 34 16
----------------------------------------------------------------------------
Total Consumer Division 352 231 210 698 458 415
Business Services Division 117 77 74 218 143 136
----------------------------------------------------------------------------
Total Cable Division 469 308 284 916 601 551
Content Division 46 30 32 90 59 67
Inter-segmental * (6) (4) (1) (11) (7) (5)
----------------------------------------------------------------------------
Total revenue 509 334 315 995 653 613
Operating costs and expenses (357) (234) (241) (711) (467) (486)
Depreciation (196) (129) (115) (375) (246) (230)
Amortization of goodwill - - (46) - - (91)
----------------------------------------------------------------------------
Operating loss (44) (29) (87) (91) (60) (194)
Other expense (49) (32) (101) (195) (128) (223)
Income tax benefit 3 2 3 6 4 5
----------------------------------------------------------------------------
Net loss (2001 before extraordinary loss) (90) (59) (185) (280) (184) (412)
============================================================================
Share of net (losses)/profits of affiliates (8) (5) (1) (2) (1) 5
Investments in affiliates 825 541 774 825 541 774
Additions to property and equipment 178 117 162 367 241 310
Goodwill 2,884 1,892 2,730 2,884 1,892 2,730
Total assets 10,132 6,646 7,363 10,132 6,646 7,363
--------------------------------------------------------------------------------------------------------------------
* Inter-segmental revenues are revenues from sales in our Content Division which
are costs in our Cable Division and are eliminated on consolidation.
4. Share-based compensation cost
Share-based compensation cost for employee share options is measured
over the period of the performance criteria for such options under "Accounting
for Stock Issued to Employees" ("APB 25") as the excess, if any, of the quoted
market price of a company's shares over the amount an employee must pay to
acquire the shares.
During the three-month and six-month periods ended June 30, 2002 the
Company's share price continued to decrease, resulting in a net compensation
credit of (pound)0.8 million being recorded in respect of employee share options
7
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
for both the three and six-month periods ended June 30, 2002 compared with a
credit of (pound)0.4 million for the three-month period ended June 30, 2001 and
a net compensation charge of (pound)1 million for the six-month period ended
June 30, 2001. Share-based compensation cost will continue to fluctuate
depending on the Company's share price movement.
5. Accounting for derivative instruments and hedging activities
At January 1, 2001 the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS 137 and 138.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition at fair value of
all derivative instruments as assets or liabilities in a company's balance
sheet. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated a hedge and if so, the type
of hedge and its effectiveness as a hedge.
For derivatives, which are not designated as xxxxxx, changes in fair
value are recorded immediately in earnings. For derivatives designated as cash
flow xxxxxx, changes in fair value on the effective portion of a hedge are
recorded within other comprehensive income ("OCI") until the hedged transaction
occurs and are then recorded within earnings. Changes in the ineffective portion
of a hedge are recorded immediately in earnings. For derivatives designated as
fair value xxxxxx, changes in fair value are recorded immediately in earnings.
We did not, however, have any fair value xxxxxx during the three-month and
six-month periods ended June 30, 2002.
We discontinue hedge accounting for derivative financial instruments
when it is determined that the derivative instrument is no longer effective in
offsetting changes in the cash flows of the hedged item; the derivative
instrument expires or is sold; the derivative instrument is no longer designated
as a hedging instrument, because it is no longer probable that a forecasted
transaction will occur; a hedged firm commitment no longer meets the definition
of a firm commitment; or our management determines that designation of the
derivative instrument as a hedging instrument is no longer appropriate. The
tests for determining the effectiveness of a cash flow hedge compare the amount
and timing of the underlying economic exposure with the cash flows of the
derivative instrument. We may continue to use derivative instruments to reduce
our exposure to interest and currency fluctuations but be unable to meet the
tests of effectiveness set out under SFAS 133.
In the three-month period ended March 31, 2002, we determined that it
was probable that forecasted future prepayments of principal against outstanding
US dollar-denominated debt would not occur. Accordingly, the cumulative
adjustment in OCI of (pound)53 million resulting from marking to market the
derivative instruments has been reclassified from OCI to foreign exchange gains
in the Statement of Operations. Subsequent adjustments of the carrying value of
these instruments to fair value are taken directly to the Statement of
Operations as incurred.
In the six-month period ended June 30, 2002, we had the ability to
terminate in-the-money derivative contracts that fluctuate in value. Such
derivative contracts hedged our exposure to fluctuations in the US dollar/pound
sterling exchange rates on our US dollar-denominated debt. In March 2002, we
terminated certain of these derivative contracts with a nominal value of $950
million ((pound)655 million), netting (pound)74 million to us, and in May 2002
we terminated further derivative contracts with a nominal value of $367 million
((pound)253 million) realizing an additional (pound)30 million. In July 2002, we
terminated further hedging arrangements with a nominal value of $1.3 billion
((pound)878 million) which will result in a total net cash outflow of (pound)43
million.
In addition, in June 2002, we reviewed the effectiveness as xxxxxx of
the derivative instruments hedging our exposure to fluctuations in interest
rates on our long-term bank debt. Our review concluded that continued
designation of these instruments as xxxxxx was no longer appropriate and hedge
accounting was discontinued with immediate effect. The cumulative balance in OCI
of (pound)23 million resulting from marking-to-market these instruments has been
deferred and will be reclassified to the Statement of Operations in the period
the forecasted transactions (i.e. interest payments) occur.
During the six-month period ended June 30, 2002, we recorded a net
(pound)46 million transfer from cumulative OCI to the Statement of Operations
arising from the termination of derivative contracts as ineffective xxxxxx, as
described above. In the six-month period ended June 30, 2001, we recorded a
(pound)67 million gain in fair value to cumulative OCI, consisting of a gain of
(pound)6 million to short-term derivative liabilities and a (pound)61 million
gain to long- term derivative assets.
The Company continues to hedge some of its interest rate risk and some
of its foreign currency risk on its Senior Secured Facility and US
dollar-denominated debt instruments through the use of interest rate swaps,
forward foreign exchange contracts and foreign currency swaps. The purpose of
the derivative instruments is to provide a measure of stability over the
8
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
Company's exposure to movements in interest rates and the US dollar/pound
sterling exchange rate.
6. Adoption of SFAS 142 "Goodwill and Other Intangible Assets"
In July 2001, the Financial Accounting Standards Board issued SFAS
142, "Goodwill and Other Intangible Assets" which requires that goodwill arising
from business combinations and intangible assets with indefinite lives are no
longer amortized but are subject to annual review for impairment (or more
frequently should indications of impairment arise). Goodwill associated with
equity method investments will also no longer be amortized upon adoption of SFAS
142, but will be subject to impairment testing as part of the investment to
which it relates in accordance with APB 18, "The Equity Method of Accounting for
Investments in Common Stock". Separable intangible assets that do not have
indefinite lives will continue to be amortized over their estimated useful lives
and will be subject to review for impairment in accordance with SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". For goodwill
and intangible assets acquired prior to July 1, 2001, the Group adopted SFAS 142
effective January 1, 2002. As of January 1, 2002 the Group had (pound)2,199
million of unamortized goodwill, (pound)1,892 million of which related to
business combinations and (pound)307 million of which related to equity method
investments. The adoption of SFAS 142 had no impact on the Company's financial
position or results of operations.
As required by SFAS 142, the standard has not been retroactively
applied to the results for the period prior to adoption. A reconciliation of net
loss for the three and six-month periods ended June 30, 2002 and 2001, as if
SFAS 142 had been adopted as of January 1, 2001, is presented below:
--------------------------------------------------------------------------------------------------------------------------
3 months 3 months 3 months 6 months 6 months 6 months
ended ended ended ended ended ended
June 30, June 30, June 30, June 30, June 30, June 30,
2002 2002 2001 2002 2002 2001
(in millions except per share data)
(note 2) (note 2)
--------------------------------------------------------------------------------------------------------------------------
NET LOSS
--------------------------------------------------------------------------------------------------------------------------
Reported net loss (after extraordinary loss) $(90) (pound)(59)(pound)(185) $ (280) (pound)(184) (pound)(427)
Add back amortization of goodwill - - 46 - - 91
--------------------------------------------------------------------------
Adjusted net loss (after extraordinary loss) (90) (59) (139) (280) (184) (336)
==========================================================================
--------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE
--------------------------------------------------------------------------------------------------------------------------
Reported net loss per share (after
extraordinary loss) $(0.03)(pound)(0.02)(pound)(0.06)$ (0.10)(pound)(0.06)(pound)(0.15)
Add back amortization of goodwill - - 0.01 - - 0.03
--------------------------------------------------------------------------
Adjusted net loss per share (after
extraordinary loss) (0.03) (0.02) (0.05) (0.10) (0.06) (0.12)
==========================================================================
7. Recent developments
On July 17, 2002, Liberty Media Inc. ("Liberty Media") informed us that
it was withdrawing its three non-executive directors from our board of
directors. Liberty Media holds 25.2% of our issued share capital and has the
right to nominate up to three representatives to our board under corporate
shareholder arrangements with us. Liberty Media said: "We are taking this action
to eliminate any potential conflict of interest or appearance of a conflict in
any upcoming restructuring discussions. The management and the remaining
directors of Telewest continue to have our full support."
We have been approached by a committee representing a significant
proportion of our bonds (the "Bondholders' Committee"). The Bondholders'
Committee has expressed the desire to work constructively with us to explore the
possibility of bondholders participating in some form of reconstruction of the
Company's balance sheet. We have not yet discussed any specific proposals with
the Bondholders' Committee.
The directors have concluded that it is in the Company's best
interests to enter into discussions with the Bondholders' Committee and, if
approached, Liberty Media, to establish whether a proposal that would command
the support of the board is capable of being agreed. Our board will continue to
explore all available options in order to arrive at a solution that is fair and
equitable to all of our stakeholders. Detailed discussions will not begin until
we have obtained the necessary waivers and consents from our banks.
In view of the developments discussed above, a number of corporate
safeguards have been put in place to ensure that the directors are able to
operate impartially and in the best interests of the Company and all of its
9
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Telewest Communications plc
US GAAP Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
Notes to the Unaudited Condensed Consolidated Financial Statements (continued)
stakeholders. An executive management team has been instructed and authorised by
the board to conduct the detailed evaluation, development and negotiation of any
proposals for the reorganisation of the Company's balance sheet and all
alternatives thereto, (the executive management team will comprise the Group
Managing Director and Finance Director and the Group Strategy Director and
General Counsel, and the Company's Chairman will have a detailed day-to-day
involvement in the work of the management team who will report to the board on a
regular basis); and, as the directors are particularly conscious that any
reconstruction proposals might involve an actual or perceived conflict between
the interests of different stakeholders, for instance, shareholders,
bondholders, banks, trade creditors, management and employees, they have
established a committee to review any actual or perceived conflict and to make
appropriate recommendations to the full board, (on this committee are the
Company's Chairman and the three other independent non-executive members of the
board).
On July 31, 2002 we announced that Xxxx Xxxxxx, Chief Executive, would
be leaving the Company and had resigned as a director of the board. Xxxxxxx
Xxxxxxx, the Group Finance Director, became Managing Director with immediate
effect.
On August 5, 2002, Xxxxx'x Investors Service, Inc. ("Moody's") lowered
our senior implied rating one level to "Caa2" from "Caa1" and our senior
unsecured issuer rating one level to "Ca" from "Caa." In addition, Moody's
lowered our senior unsecured bond rating to "Ca" from "Caa3." Moody's outlook on
our credit remains negative. On August 6, 2002, Standard & Poor's Corporation
lowered our long-term corporate credit rating three levels to "CC."
On August 13, 2002, we announced that a circular had been sent to our
shareholders seeking their approval for the proposed disposal (the "Disposal")
of the Group's 16.9% shareholding in SMG plc ("SMG".) There will be an
extraordinary general meeting of the Company, to be held on September 4, 2002,
for shareholders to vote on this proposal.
In order to preserve our flexibility at a time of constrained capital
markets, in the next twelve months we may wish to effect the Disposal as part of
our efforts to address the Group's funding requirements and to make its
financial position more secure. The circular seeks shareholders' approval in
advance for the Disposal, and the actual sale of the shareholding will take
place if and when we consider it appropriate to make such Disposal. The
authority, if granted, would continue for a period of twelve months from the
date of approval, i.e. until September 4, 2003.
The value of our shareholding in SMG, based on the closing price of
SMG shares on August 12, 2002 of 98p per SMG share, was (pound)52.0 million. The
shareholding is used as security against a loan of (pound)28.3 million
((pound)33.3 million as of the date of our circular) made by The
Toronto-Dominion Bank to the Group.
8. Commitments and contingencies
The Company is party to various legal proceedings in the ordinary
course of business which it does not believe will result, in the aggregate, in a
material adverse effect on its financial position or results of operations.
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PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Set forth below is a discussion of our financial condition and results
of operations for the three-month and six-month periods ended June 30, 2001 and
2002 based upon financial information prepared in accordance with US GAAP.
References in this discussion to the "Group," "we," "us," and "our,"
are to Telewest and its consolidated subsidiaries as at, or for, the specified
date or period.
Critical Accounting Policies
There have been no changes to our critical accounting policies since
December 31, 2001, as reported in our Form 20-F filed with the SEC on July 1,
2002.
Results of Operations
Three and six-month periods ended June 30, 2001 and 2002
Revenue
We operate in two main segments: Cable and Content. The Cable segment
of our business is subdivided, for revenue purposes only, into four units: Cable
Television, Consumer Telephony, Internet and other, and Business Services
Division. The Content segment provides entertainment content, interactive and
transactional services to the UK pay-TV and internet markets.
Our consolidated revenue increased by (pound)19 million or 6.0% from
(pound)315 million in the three-month period ended June 30, 2001 to (pound)334
million in the three-month period ended June 30, 2002 and by (pound)40 million
or 6.5% from (pound)613 million in the six-month period ended June 30, 2001 to
(pound)653 million in the six-month period ended June 30, 2002. These increases
were attributable to growth in our Consumer Division and Business Services
Division offset by a reduction in our Content Division, mainly due to the
closure or sale of non-core businesses.
Residential Services Revenue (Consumer Division)
Residential services revenue represents a combination of cable
television ("CATV") revenue and consumer cable telephony revenue and internet
and other income.
Our Consumer Division revenue increased by (pound)21 million or 10.0%
from (pound)210 million for the three-month period ended June 30, 2001 to
(pound)231 million for the three-month period ended June 30, 2002 and by
(pound)43 million or 10.4% from (pound)415 million in the six-month period ended
June 30, 2001 to (pound)458 million in the six-month period ended June 30, 2002.
These increases were attributable to an increase in customer homes connected and
an increase in average monthly revenue per household, which was achieved by
enhancement of our customer mix towards "triple play", subscribers to CATV,
telephone and broadband internet, and selected price rises.
Total customer homes connected increased by 35,741 or 2.1% from
1,734,696 at June 30, 2001 to 1,770,437 at June 30, 2002. The increase in homes
connected resulted particularly from the impact of our blueyonder broadband
high-speed internet product, the continuing success of our Active Digital
services and the launch of our Talk Unlimited telephony product in May 2001
together with lower churn rates experienced throughout the twelve- month period
ended June 30, 2002 compared to the corresponding period in 2001. During the
three-month period ended June 30, 2002 net customer homes connected fell by
13,052 mainly as a result of the consumer price rises introduced in the period
and a less aggressive retention policy aimed at customers who wish to
disconnect. Despite the customer losses during the three-month period ended June
30, 2002, overall household penetration increased by 1.0 percentage point from
36.7% at June 30, 2001 to 37.7% at June 30, 2002.
Average monthly revenue per household increased by (pound)2.66 or 6.8%
from (pound)39.29 in the three-month period ended June 30, 2001 to (pound)41.95
for the three-month period ended June 30, 2002 and by (pound)2.65 or 6.8% from
(pound)39.07 in the six-month period ended June 30, 2001 to (pound)41.72 in the
six-month period ended June 30, 2002. The increase in average monthly revenue
per subscriber is attributable to an increase in dual or triple penetration
(i.e. the proportion of homes subscribing to any two or all three of our CATV,
residential telephony and high-speed internet services), higher call volumes in
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residential telephony, higher subscriber revenues generated by Active Digital
versus analogue television services and retail price increases in our basic CATV
price in July 2001 and April 2002. Dual or triple penetration, which results
from the continued market acceptance of combined CATV, telephony and high-speed
internet packages, grew by 3.0 percentage points to 69.9% at June 30, 2002 from
66.9% at June 30, 2001. As at June 30, 2002 "triple play" customers totalled
129,192 and accounted for 7.3% of our total customer base.
The competitive nature of the markets in which the Consumer Division
operates will continue to restrict our ability to increase retail prices.
Nevertheless, following price rises by our competitors, we introduced selected
price rises across our CATV, telephony and internet product range in April 2002.
For example, the "starter" digital TV pack, which includes a telephone line, has
risen by (pound)2.00 to (pound)11.49. Other digital basic TV packages have risen
by (pound)1.50 and the monthly price of our unmetered dial-up internet service,
SurfUnlimited, has risen by (pound)2.00 to (pound)12.00. Our broadband internet
service, blueyonder, remains at (pound)25.00 per month, if subscribed to in
addition to our Active Digital or residential telephony services. We believe
that our bundled offerings still remain competitive when compared with those
offered by other operators.
Cable Television Revenue
Cable television revenue increased by (pound)8 million or 10.0% from
(pound)80 million for the three-month period ended June 30, 2001 to (pound)88
million for the three-month period ended June 30, 2002 and by (pound)15 million
or 9.5% from (pound)158 million for the six-month period ended June 30, 2001 to
(pound)173 million for the six-month period ended June 30, 2002. The increases
were principally attributable to an increase in the number of CATV subscribers
connected, retail price increases introduced in July 2001 and April 2002, and
lower churn rates experienced during the twelve-month period ended June 30,
2002, offset in part by lower subscriber revenues from our analogue services. As
noted above, although the competitive nature of the television market will
continue to restrict our ability to increase retail prices, certain increases
were introduced in April 2002. Following the April 2002 price rises and changes
in our retention policy as discussed above, net CATV disconnections for the
three-month period ended June 30, 2002 were 25,117. CATV subscriber growth was
also impacted by a shift in targeted marketing towards broadband rather than
digital TV. Marketing of our TV services is expected to increase towards the end
of the third quarter as we are introducing our digital TV services to the former
Eurobell franchises in the South-West of the UK.
Total CATV subscribers connected increased by 20,543 or 1.6% from
1,312,540 at June 30, 2001 to 1,333,083 at June 30, 2002. The increase in
subscribers resulted from the continuing success of Active Digital and lower
churn rates experienced in the twelve-month period ended June 30, 2002 compared
with the corresponding period in 2001.
As at June 30, 2002 we had an installed base of 818,780 digital
subscribers, an increase of 254,347 or 45.1% compared with 564,433 as at June
30, 2001. Active Digital, comprised of a wide array of TV and radio channels,
pay-per-view movies, interactive services and TV e-mail, has been rolled out in
all franchise areas, excluding the Eurobell areas and our Cabletime areas where
we currently offer only analogue services. As noted above, it is expected that
we will begin rolling out Active Digital into some of our Eurobell areas in the
third quarter of 2002.
At June 30, 2002, 61.4% of all customer homes connected for CATV
subscribed to Active Digital and 38.6% subscribed to our analogue TV product.
This compares with 43.0% and 57.0%, respectively, at June 30, 2001. Excluding
the Eurobell areas, our Active Digital services are taken by 64.6% of our CATV
subscribers compared with 35.4% for analogue subscribers.
Average monthly revenue per CATV subscriber (combined digital and
analogue), increased by (pound)1.11 or 5.5% from (pound)20.36 for the
three-month period ended June 30, 2001 to (pound)21.47 for the three-month
period ended June 30, 2002 and by (pound)0.92 or 4.5% from (pound)20.23 for the
six-month period ended June 30, 2001 to (pound)21.15 for the six-month period
ended June 30, 2002, primarily due to the increase in the number of our Active
Digital subscribers and price rises across our basic packages which were
introduced in July 2001 and April 2002, offset in part by an increased
percentage of subscribers choosing lower-priced service offerings. Average
monthly revenue for digital CATV subscribers was (pound)23.50 for the six-month
period ended June 31, 2002 compared with (pound)22.75 for the six-month period
ended June 30, 2001, which reflects the actively managed change in the mix
between premium and basic packages. For example, approximately 86% of our Active
Digital subscribers at June 30, 2002 were taking "basic only" packages compared
to approximately 70% at June 30, 2001. Due to the higher cost of the premium
channels this increase in "basic only" packages reflects in higher margins being
achieved for our CATV products. Average monthly revenue for digital CATV
subscribers at (pound)23.50 for the six-month period ended June 30, 2002
compared with (pound)18.91 for analogue CATV subscribers. From August 2002, the
monthly price of the digital starter pack is being increased from (pound)11.49
to (pound)15 for new acquisitions as we focus on improving the package mix of
our subscribers. There will be no price change for existing subscribers.
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Product penetration increased 0.7 percentage points from 27.7% at June
30, 2001 to 28.4% at June 30, 2002 as a result of improved customer take up of
Active Digital packages and a reduction in churn throughout the year then ended.
Average CATV subscriber churn improved 1.1 percentage points from 21.8% in the
twelve-month period ended June 30, 2001 to 20.7% in the twelve-month period
ended June 30, 2002. We believe that this reduction in churn is principally
attributable to overall improved customer satisfaction with our products,
services and pricing, and improvements in our customer service.
We launched our enhanced TV platform with "red button" functionality
during the three-month period ended June 30, 2002. The new functionality allows
our digital customers to interact with any eTV enabled programming. The service
has been well received by our subscribers with 50% of digital customers
accessing the World Cup service, 43% accessing the Wimbledon service and over
850,000 Big Brother votes being registered.
Consumer Telephony Revenue
Consumer telephony revenue increased by (pound)4 million or 3.3% from
(pound)121 million for the three-month period ended June 30, 2001 to (pound)125
million for the three-month period ended June 30, 2002 and by (pound)10 million
or 4.1% from (pound)241 million for the six-month period ended June 30, 2001 to
(pound)251 million for the six-month period ended June 30, 2002. The increase in
consumer telephony revenue was primarily due to increases in the number of
residential telephony customers and lines and selected price rises. We believe
that residential telephony usage was negatively affected by approximately
(pound)2.5, million in the week of the double Jubilee bank holiday in June,
which also coincided with some World Cup England games.
The number of residential telephony subscribers increased by 48,179 or
3.1% from 1,577,826 at June 30, 2001 to 1,626,005 at June 30, 2002, and the
number of residential lines increased by 7,236 or 0.4% from 1,738,589 at June
30, 2001 to 1,745,825 at June 30, 2002. The increases in the number of
residential telephony subscribers and residential lines resulted from the impact
of the take-up of Talk Unlimited and a decrease in subscriber churn, both
leading to higher product penetration, offset in part by a decrease in second
line penetration at June 30, 2002 compared with a year earlier.
Talk Unlimited, which was launched in May 2001, is the only 24-hour
flat-rate unmetered residential voice service available for local and national
calls in the UK and accounted for 300,325 subscribers or 18.5% of our total
telephony subscribers at June 30, 2002. This service, charged at a flat rate of
(pound)25.00 per month including digital television, is successful in attracting
new subscribers to our products and is available in all of our franchise areas.
Although residential subscribers decreased by 9,510 during the
three-month period ended June 30, 2002 following price rises in April 2002,
average subscriber churn improved by 1.4 percentage points from 18.2% for the
twelve-month period ended June 30, 2001 to 16.8% for the twelve-month period
ended June 30, 2002. We believe this reduction in churn is principally
attributed to overall improved customer satisfaction with our products, services
and pricing and improvements in our customer service.
Consumer telephony product penetration increased to 34.6% as at June
30, 2002 compared with 33.5% as at June 30, 2001. Second line penetration
decreased to 7.4% as at June 30, 2002 from 10.2% as at June 30, 2001, in part
due to the price increases for second lines during the year ended June 30, 2002
and the migration of dial-up internet subscribers to our blueyonder broadband
internet service.
Average monthly revenue per line increased by 1.3% from (pound)22.78
for the three-month period ended June 30, 2001 to (pound)23.08 for the
three-month period ended June 30, 2002 and increased by 2.3% from (pound)22.66
for the six-month period ended June 30, 2001 to (pound)23.17 for the six-month
period ended June 30, 2002. Although average call volumes increased by
approximately 7% year on year, our average revenue per minute only increased by
approximately 1% over the same period. While we benefited from our simplified
tariff known as "3-2-1-Free" and a growing number of calls made to mobile
operators, boosting telephony revenue per minute, these factors were offset by
the effects of price competition on our telephony charges and a change in the
mix of calls made by our telephony subscribers, particularly the approximately
24% increase in the percentage of calls made to Internet Service Providers
("ISPs") at lower rates (or at no charge, in the case of our own SurfUnlimited
subscribers) and free cable-to-cable local calls.
Internet and Other Revenue
Internet and other revenue, which arises wholly in our Consumer
Division, increased by (pound)9 million or 100% from (pound)9 million in the
three-month period ended June 30, 2001 to (pound)18 million in the three-month
period ended June 30, 2002 and by (pound)18 million or 112.5% from (pound)16
million in the six-month period ended June 30, 2001 to (pound)34 million in the
six-month period ended June 30, 2002. These increases are due primarily to an
increase in internet income, which increased by (pound)12 million to (pound)17
million in the three-month period ended June 30, 2002 from (pound)5 million in
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the three-month period ended June 30, 2001 and by (pound)20 million to (pound)31
million in the six-month period ended June 30, 2002 from (pound)11 million in
the six-month period ended June 30, 2001.
We began re-marketing our 512kb high-speed internet service for home
personal computers, "blueyonder broadband internet," on a national basis from
the start of 2001, and on June 17, 2002 we announced the launch of our new
1,024kb (i.e. 1Mb) blueyonder broadband internet service. The number of
blueyonder broadband internet subscribers increased by 146,252 from 31,142 at
June 30, 2001 to 177,394 (including 7,935 subscribers to our 1Mb service) at
June 30, 2002. With the exception of our Eurobell and Cabletime areas, we now
have full coverage across all of our regions. We currently expect to begin
rolling out blueyonder broadband internet to some of our Eurobell subscribers
during the three-month period ending September 30, 2002.
We charge (pound)35.00 per month for our 512kb and (pound)39.99 for our
1Mb blueyonder broadband internet services on a stand-alone basis or
(pound)25.00 and (pound)35.00, respectively, if purchased in addition to our
CATV and/or telephony services. As such, our blueyonder broadband internet
customers significantly contribute to the growth in our average monthly revenue
and 129,192 customers or 72.8% of our blueyonder broadband internet customers
also take both cable television and telephony services from us.
Dial-up internet subscribers to our blueyonder SurfUnlimited product, the
UK's first un-metered internet access service, together with our blueyonder
pay-as-you-go metered internet service increased by 38,911 or 14.6% from 267,297
at June 30, 2001 to 306,208 at June 30, 2002.
Other revenues are derived from the sales of cable publications and
contributed (pound)1 million of revenues in the three-month period ended June
30, 2002 compared with (pound)4 million in the three-month period ended June 30,
2001 and (pound)3 million in the six-month period ended June 30, 2002 compared
with (pound)5 million in the six-month period ended June 30, 2001.
Business Services Revenue (Business Division)
Business Services Division revenue increased by (pound)3 million or
4.0% from (pound)74 million for the three-month period ended June 30, 2001 to
(pound)77 million for the three-month period ended June 30, 2002 and by (pound)7
million or 5.1% from (pound)136 million for the six-month period ended June 30,
2001 to (pound)143 million for the six-month period ended June 30, 2002. These
increases resulted from the increased sales of voice and data services,
primarily to Small to Medium-sized Enterprises ("SMEs") and increased revenues
contributed by our Carrier Services Unit, offset in part by a decrease in
average monthly revenue per line from our business customers. Excluding our
Carrier Services Unit, revenues increased by (pound)1 million or 1.8% from
(pound)56 million for the three-month period ended June 30, 2001 to (pound)57
million for the three-month period ended June 30, 2002 and by (pound)6 million
or 5.6% from (pound)107 million for the six-month period ended June 30, 2001 to
(pound)113 million for the six-month period ended June 30, 2002.
The increase in the sale of voice and data services resulted primarily
from an increase in the number of business customers accounts using these
services and the number of lines used by those accounts. Business customer
accounts increased by 5,008 accounts or 7.2% from 69,282 at June 30, 2001 to
74,290 at June 30, 2002. Business telephony lines increased by 45,890 lines or
11.1% from 413,808 at June 30, 2001 to 459,698 at June 30, 2002.
The Business Division continues to benefit from growth in the provision
of data services across all market segments with the launch of IPVPN (Internet
Protocol Virtual Private Network) - a secure and scalable private network
solution that enables companies to send voice, video and data through one
single, efficient connection.
Our Carrier Services Unit, which provides our fiber optic National
Network to other carriers and operators, thereby exploiting our fixed network
investment by providing new revenues at higher margins, contributed (pound)20
million of revenue for the three-month period ended June 30, 2002 compared with
(pound)18 million for the corresponding period in 2001 and (pound)30 million for
the six-month period ended June 30, 2002 compared with (pound)29 million for the
corresponding period in 2001. Revenue in the six-month period ended June 30,
2002 benefited from the recognition of (pound)8 million from an Atlantic
Telecommunications contract, previously deferred and being recognised over 20
years. Atlantic Telecommunications was placed in administration and therefore
this contract was released from its terms, allowing us to credit the undeferred
revenue in the current period. Revenues from this unit tend to be derived from a
relatively small number of high value, short and long-term contracts and can
therefore fluctuate from period to period.
Average monthly revenue per line decreased by (pound)1.95 or 4.4% from
(pound)44.25 for the three-month period ended June 30, 2001 to (pound)42.30 for
the three-month period ended June 30, 2002 and by (pound)3.73 or 8.2% from
(pound)45.72 for the six-month period ended June 30, 2001 to (pound)41.99 for
the six-month period ended June 30, 2002, due to increased competition in the
marketplace.
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During 2001, we launched our high-speed broadband internet service for
small businesses, blueyonder workwise, which reached nearly 3,000 subscribers by
June 30, 2002. In August 2001, we introduced the first hosted Microsoft Exchange
service by any network operator in Europe. This service is available through the
blueyonder workwise portal and had achieved approximately 4,600 sales by June
30, 2002.
Content Division Revenue
Our Content Division's net revenue decreased by (pound)5 million or 16.1%
from (pound)31 million for the three-month period ended June 30, 2001 to
(pound)26 million for the three-month period ended June 30, 2002 and by
(pound)10 million or 16.1% from (pound)62 million for the six-month period ended
June 30, 2001 to (pound)52 million for the six-month period ended June 30, 2002.
These revenues are after eliminating inter-divisional trading between Flextech
and Telewest of (pound)1 million and (pound)5 million for the three and
six-month periods ended June 30, 2001, respectively, and (pound)4 million and
(pound)7 million for the three and six-month periods ended June 30, 2002,
respectively. Before elimination of this inter-divisional trading, the Content
Division's revenue decreased by (pound)2 million or 6.3% from (pound)32 million
for the three-month period ended June 30, 2001 to (pound)30 million for the
three-month period ended June 30, 2002 and by (pound)8 million or 11.9% from
(pound)67 million for the six-month period ended June 30, 2001 to (pound)59
million for the six-month period ended June 30, 2002.
The six-month period ended June 30, 2001 included revenues from HSNDI and
Screenshop, which were either closed down or sold during 2001. The period also
included a substantial Government grant payment in respect of the set-up of
Living Health, our broadband interactive TV health service and was the last
period before BSkyB's analogue switch-off, which has affected revenues from the
sale of spare analogue transponder capacity. The revenue from all these items
was (pound)12 million for the six-month period ended June 30, 2001 compared to
(pound)1 million for the six-month period ended June 30, 2002.
Our Content Division's subscription revenue increased marginally for the
three-month period ended June 30, 2002 over the corresponding period last year
and increased by (pound)1 million for the six-month period ended June 30, 2002
compared with the six-month period ended June 30, 2001. Our share of the revenue
of UKTV (our joint venture with BBC Worldwide) increased marginally to (pound)16
million for the three-month period ended June 30, 2002 and by (pound)1 million
or 3.1% from (pound)32 million for the six-month period ended June 30 2001 to
(pound)33 million for the six-month period ended June 30, 2002. These increases
resulted primarily from an increase in the number of homes which were receiving
programming from our Content Division until the closure of ITV Digital on April
30, 2002 (see below), offset in part by lower subscription rates from Sky
Digital subscribers. As at June 30, 2002, due to the closure of ITV Digital, the
number of homes receiving programming from our Content Division had fallen to
9.5 million from 10.2 million at June 30, 2001.
The closure of ITV Digital (formerly ONdigital, a joint venture between
Carlton Communications plc and Granada Group plc) on April 30, 2002 has
negatively affected the revenues of UKTV. The effect of the closure on the
Content Division's share of revenue is approximately (pound)1.5 million per
quarter. As a result of the closure of ITV Digital, UKTV has announced that one
of its channels, Play UK, is to close at the end of the year. None of the
Content Division's wholly owned channels were carried on the ITV Digital
platform.
Advertising revenue, within total Content Division revenue and including
our share of UKTV's advertising revenue, increased by 7.9% during the
three-month period ended June 30, 2002 over the three-month period ended June
30, 2001 and by 4.2% during the six-month period ended June 30, 2002 over the
six-month period ended June 30, 2001. Our share of total United Kingdom
television national advertising revenues increased from 3.2% for the six-month
period ended June 30, 2001 to 3.4% for the six-month period ended June 30, 2002,
an increase during a period which was marked by an overall decline in UK
television national advertising revenue of 3% compared to the previous year. Our
share of basic pay-television viewing fell from 22.1% in the six-month period
ended June 30, 2001 to 20.7% in the six-month period ended June 30, 2002 due
primarily to increased competition in the multi-channel market.
Operating Costs and Expenses
Our operating costs and expenses before depreciation and amortization
decreased by (pound)7 million or 2.9% from (pound)241 million in the three-month
period ended June 30, 2001 to (pound)234 million in the three-month period ended
June 30, 2002 and by (pound)19 million or 3.9% from (pound)486 million in the
six-month period ended June 30, 2001 to (pound)467 million in the six-month
period ended June 30, 2002, due to reduced consumer programming expenses,
business and consumer telephony expenses, and content expenses partially offset
by a small increase in selling, general and administrative costs.
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Consumer programming expenses decreased by (pound)6 million or 15.8%
from (pound)38 million for the three-month period ended June 30, 2001 to
(pound)32 million for the three-month period ended June 30, 2002 representing
13.7% of total operating costs before depreciation and amortization for the
three-month period ended June 30, 2002, compared with 15.8% for the three-month
period ended June 30, 2001. Consumer programming expenses decreased by (pound)10
million or 2.1% from (pound)75 million for the six-month period ended June 30,
2001 to (pound)65 million for the six-month period ended June 30, 2002
representing 13.9% of total operating costs before depreciation and amortization
for the six-month period ended June 30, 2002, compared with 15.4% for the
six-month period ended June 30, 2001. Decreased consumer programming expenses
were principally the result of lower programming costs resulting from an
increase in the number of our television subscribers choosing to subscribe to
packages with fewer or no premium channels, and favorable renegotiations with
certain programmers for content contracts, offset by increased costs of
programming for our digital packages, which have more channels than their
analogue counterparts.
Business and consumer telephony expenses decreased by (pound)2 million
or 3.3% from (pound)60 million for the three-month period ended June 30, 2001 to
(pound)58 million for the three-month period ended June 30, 2002, representing
24.8% of total operating costs before depreciation and amortization for the
three-month period ended June 30, 2002, compared with 25.0% for the three-month
period ended June 30, 2001. Business and consumer telephony expenses decreased
by (pound)8 million or 6.6% from (pound)121 million for the six-month period
ended June 30, 2001 to (pound)113 million for the six-month period ended June
30, 2002, representing 24.2% of total operating costs before depreciation and
amortization for the six-month period ended June 30, 2002, compared with 24.9%
for the six-month period ended June 30, 2001. These decreases resulted
principally from increased telephony penetration and the resulting increase in
volume of traffic terminating on our network and was in part offset by the
higher proportion of our total traffic terminating on mobile networks or
third-party ISPs where interconnection charges result in higher unit termination
costs.
The Content Division's cost of sales decreased by (pound)4 million or
21.1% from (pound)19 million for the three-month period ended June 30, 2001 to
(pound)15 million for the three-month period ended June 30, 2002, representing
6.4% of total operating costs before depreciation and amortization for the
three-month period ended June 30, 2002 compared with 7.9% for the three-month
period ended June 30, 2001. The Content Division's cost of sales decreased by
(pound)7 million or 18.4% from (pound)38 million for the six-month period ended
June 30, 2001 to (pound)31 million for the six-month period ended June 30, 2002,
representing 6.6% of total operating costs before depreciation and amortization
for the six-month period ended June 30, 2002 compared with 7.8% for the
six-month period ended June 30, 2001. The Content Division's cost of sales
consists principally of amortization costs of programming shown on its TV
channels, direct costs associated with its advertising revenues, and costs of
products sold through its web and transactional services. The Content Division's
cost of sales was 57.7% of the Content Division's revenues for the three-month
period ended June 30, 2002 compared with 61.3% for the three-month period ended
June 30, 2001 and 59.6% of the Content Division's revenues for the six-month
period ended June 30, 2002 compared with 61.3% for the six-month period ended
June 30, 2001.
Depreciation expense increased by (pound)14 million or 12.2% from
(pound)115 million for the three-month period ended June 30, 2001 to (pound)129
million for the three-month period ended June 30, 2002 and by (pound)16 million
or 7.0% from (pound)230 million for the six-month period ended June 30, 2001 to
(pound)246 million for the six-month period ended June 30, 2002. These increases
are primarily attributable to the increased capital expenditure associated with
the roll-out of our Active Digital and high-speed internet products and write
off of certain cancelled capital projects.
Selling, general and administrative expenses ("SG&A") which include,
among other items, salary and marketing costs, increased by (pound)5 million or
4.0% from (pound)124 million for the three-month period ended June 30, 2001 to
(pound)129 million for the three-month period ended June 30, 2002 and by
(pound)6 million or 2.4% from (pound)252 million in the six-month period ended
June 30, 2001 to (pound)258 million in the six-month period ended June 30, 2002.
On May 2, 2002, we announced that we were reducing our total staffing levels
from approximately 10,500 to approximately 9,000. This is part of a group
re-organization, which aims amongst other things to streamline management and
flatten reporting lines. The increases in SG&A primarily reflected the net
increase in employment costs due to redundancy charges following our
announcement on May 2, 2002 offset by reductions in payroll costs from
decreasing numbers of employees, and increased expense associated with the
marketing of our broadband and digital products and was partially offset by
decreases in other overhead expenses as we continue to achieve cost efficiencies
across the Group. Redundancy costs incurred during the three-month period ended
June 30, 2002 were approximately (pound)7 million and we anticipate that there
will be further costs of a similar or greater magnitude in the third quarter of
2002 as we complete the redundancy consultation period. SG&A increased as a
percentage of total operating costs, before depreciation and amortization from
51.4% for the three-month period ended June 30, 2001 to 55.1% for the
three-month period ended June 30, 2002 and from 51.9% for the six-month period
ended June 30, 2001 to 55.2% for the six-month period ended June 30, 2002. After
capitalization to related property and equipment, staff costs increased to
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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(pound)68 million for the three-month period ended June 30, 2002 from (pound)63
million for the three-month period ended June 30, 2001 and to (pound)135 million
for the six-month period ended June 30, 2002 from (pound)126 million for the
six-month period ended June 30, 2001, reflecting the redundancy costs offset by
decreased ongoing payroll costs as we reduced headcount by some 800 employees
from a base of approximately 11,000 as at June 30, 2001.
Total labor and overhead costs capitalized in connection with new
subscriber installations and enhancements to our networks remained constant at
(pound)50 million for the three-month periods ended June 30, 2001 and June 30,
2002 and increased marginally by (pound)1 million from (pound)97 million for the
six-month period ended June 30, 2001 to (pound)98 million for the six-month
period ended June 30, 2002.
Under SFAS 142, effective from January 1, 2002, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized under SFAS 142 but will be subject
to impairment testing as part of the investment to which it relates in
accordance with APB 18. Accordingly, there was no charge for amortization of
goodwill in the three and six-month periods ended June 30, 2002 compared to
charges of (pound)46 million and (pound)91 million for the three and six-month
periods ended June 30, 2001, respectively. No impairment resulted from the
initial adoption of SFAS 142 on January 1, 2002.
Other Income/(Expense)
Other expense, net of income, decreased by (pound)69 million or 68.3% from
(pound)101 million for the three-month period ended June 30, 2001 to (pound)32
million for the three-month period ended June 30, 2002 and by (pound)95 million
or 42.6% from (pound)223 million for the six-month period ended June 30, 2001 to
(pound)128 million for the six-month period ended June 30, 2002. This consisted
primarily of increased net foreign exchange gains and gains on disposals of
investments in affiliates offset by increased net interest expense.
Interest expense increased by (pound)21 million or 19.1% from (pound)110
million for the three-month period ended June 30, 2001 to (pound)131 million for
the three-month period ended June 30, 2002 and by (pound)31 million or 14.0%
from (pound)221 million for the six-month period ended June 30, 2001 to
(pound)252 million for the six-month period ended June 30, 2002. These increases
were primarily as a result of the additional interest expense incurred under our
bank facilities with respect to additional borrowing to fund the continued
roll-out of digital television and high-speed internet products and general
working capital together and increased interest expense on our
dollar-denominated debt due to the weakening of the US dollar against the pound
sterling.
Foreign exchange gains, net, increased by (pound)51 million from
(pound)12 million in the three-month period ended June 30, 2001 to (pound)63
million in the three-month period ended June 30, 2002 and by (pound)93 million
from a loss of (pound)9 million in the six-month period ended June 30, 2001 to a
gain of (pound)84 million in the six-month period ended June 30, 2002. These
gains were primarily the result of the release of (pound)53 million from OCI, as
descibed in note 5 above "Accounting for derivative instruments and hedging
activities", together with the result of the US dollar significantly weakening
against the pound sterling during the three and six-month periods ended June 30
2002. In previous periods our dollar-denominated debt was substantially hedged.
Following the termination of certain of these derivative arrangements (see
"Liquidity and Capital Resources" below), we now have a higher proportion of
unhedged dollar-denominated liabilities that have been translated at period-end
exchange rates contributing to higher foreign exchange gains as the US dollar
has weakened against pound sterling.
Interest income was (pound)7 million for the three-month period ended
June 30, 2002 compared with (pound)3 for the three-month period ended June 30,
2001 and (pound)7 million for the six-month period ended June 30, 2002 compared
with (pound)8 million for the six-month period ended June 30, 2001. Interest
income was generated from the higher cash balances held by us during the three
and six-month periods ended June 30, 2002 as a result of unwinding certain
foreign exchange contracts.
Our share of net losses or profits of our affiliated companies, accounted
for under the equity method of accounting, was a (pound)5 million loss for the
three-month period ended June 30, 2002 and a (pound)1 million loss for the
six-month period ended June 30, 2002 compared with a (pound)1 million loss for
the the three-month period ended June 30, 2001 and a (pound)5 million gain for
the six-month period ended June 30, 2001. Our principal affiliated companies
include UK Gold Holdings Limited, UK Channel Management Limited, SMG, and
Blueyonder Workwise Limited.
Other profits, net, amounting to (pound)34 million in both the three and
six-month periods ended June 30, 2002, arose primarily as a result of the gain
of (pound)33 million on the disposal of certain investments, namely, our
subsidiary The Way Ahead Group Limited and an affiliated company, TV Travel
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US GAAP Analysis of Financial Conditions and Results
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Group Limited, and compared with losses of (pound)5 million and (pound)6 million
in the three and six-month periods ended June 30, 2001, respectively.
Following the replacement of our old senior secured credit facility and
the Flextech facility during the three-month period ended March 31, 2001, we
recorded an extraordinary loss of (pound)15 million in the six-month period
ended June 30, 2001 due to the write-off of the bank facility fees which were
being deferred and amortized over the life of those facilities.
Liquidity and Capital Resources
The Group's debt obligations begin to mature in late 2003 and as stated
in our letter to shareholders dated July 4, 2002 the directors are currently
considering their options to allow the Group to meet these obligations and
stabilize its medium to longer term financial position. In addition, over the
next twelve months, the margin of facilities over requirements is not large and
consistent delivery of budget is necessary to ensure continued compliance with
the terms of the covenants within the Senior Secured Facility.
We have a number of unused sources of liquidity. As of June 30, 2002,
these sources include the ability to access (pound)305 million committed but
undrawn amounts under the Senior Secured Facility. The Senior Secured Facility
also permits us to access up to (pound)105 million under the Institutional
Tranche and an additional (pound)254 million in vendor financing, but current
market conditions and the recent downgradings of our corporate credit ratings
may mean that we are not able to access these sources.
In 2002, we had the ability to terminate in-the-money derivative
contracts that fluctuate in value. In March 2002, we terminated certain of these
derivative contracts, netting (pound)74 million to us, and in May 2002, we
realized an additional (pound)30 million. In addition, in July 2002, we
terminated further hedging arrangements that resulted in a cash outflow of
(pound)31 million. The net cash resulting from these transactions is currently
held by us as a further source of liquidity. In addition, as part of the July
2002 terminations, a cash outflow of (pound)12 million will be incurred in
October 2002.
The Group also has a number of assets that could be sold, however, no
assurance can be given that buyers can be found for such assets, or, if found,
that the consideration offered for such assets would justify their sale.
Notwithstanding the sources of liquidity discussed above, the downgrading
of our corporate credit ratings and the ratings of our outstanding debt is
likely to increase our cost of borrowing and may mean that we are not able to
make future borrowings.
Since our initial public offering in 1994, we have financed the capital
costs of our network construction, our operations and our investments in General
Cable PLC ("General Cable"), Birmingham Cable Corporation Limited ("Birmingham
Cable"), Cable London PLC ("Cable London"), Flextech, Eurobell and in affiliated
companies, primarily from:
o the proceeds of the initial public offering of our ordinary shares
((pound)414 million, net of fees);
o the issuance in September 1998 of ordinary shares as partial funding
for the General Cable merger ((pound)241 million);
o the issuance in November 1999 of ordinary shares under a rights issue
to fund the Cable London acquisition ((pound)416 million);
o the issuance to Deutsche Telekom ("DT") in November 2000, January 2001
and May 2001, respectively, of an aggregate of (pound)254 million
Accreting Convertible Notes due 2003 as consideration for its 100%
interest in Eurobell;
o the issuance in October 1995 of $300 million principal amount of Senior
Debentures due 2006 and $1,537 million principal amount at maturity of
Senior Discount Debentures due 2007;
o the issuance in November 1998 of $350 million principal amount of
Senior Notes due 2008;
o the issuance in February 1999 of(pound)300 million principal amount of
Senior Convertible Notes due 2007;
o the issuance in April 1999 of (pound)325 million principal amount at
maturity and $500 million principal amount at maturity of Senior
Discount Notes due 2009;
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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o the issuance in January 2000 of $450 million principal amount at
maturity of Senior Discount Notes due 2010 and (pound)180 million
principal amount and $350 million principal amount of Senior Notes due
2010;
o the issuance in July 2000 of $500 million Senior Convertible Notes due
2005;
o borrowings under the Senior Secured Facility and Institutional Tranche
(as described below), (an aggregate of (pound)1,840 million outstanding
at June 30, 2002);
o the raising of a net(pound)33 million loan, secured by a charge over
our shares in SMG; and
o cash from operations.
Where appropriate, we also use vendor financing. At June 30, 2002,
obligations under these vendor financing arrangements amounted to (pound)246
million, (pound)225 million in respect of finance leasing to fund the purchase
of certain equipment and (pound)21 million of finance provided by vendor
companies, respectively, compared with (pound)241 million and (pound)13 million,
respectively, at June 30, 2001.
We face the following significant risks and uncertainties:
o continued ability to raise finance to fund our operations;
o successful execution of our long-term business plan, which in turn will
affect our ability to raise further finance under the Senior Secured
Facility (see below);
o the need to meet financial and other covenants relating to debt
instruments; and
o the downgrading of our corporate credit ratings and the ratings of our
outstanding debt is likely to increase our cost of borrowing and may
mean that we are not able to make future borrowings.
For the six-month period ended June 30, 2002, we had a net cash outflow
from operating activities of (pound)13 million compared with (pound)70 million
for the six-month period ended June 30, 2001.
We incurred a net cash outflow from investing activities of (pound)229
million for the six-month period ended June 30, 2002 compared with (pound)261
million for the six-month period ended June 30, 2001, a decrease of (pound)32
million or 12.3%. Capital expenditure accounted for (pound)263 million of the
total in 2002 compared with (pound)272 million in 2001. See "Capital
Expenditure" below.
Net cash provided by financing activities totalled (pound)569 million
for the six-month period ended June 30, 2002 compared with (pound)283 million
for the six-month period ended June 30, 2001. For the six-month period ended
June 30, 2002, net cash provided by financing activities consisted primarily of
(pound)480 million in drawdowns from our Senior Secured Facility and (pound)105
million realized on termination of certain US dollar/pound sterling exchange
rate hedging arrangements. Net cash provided by financing activities for the
six-month period ended June 30, 2001 included the repayment on March 16, 2001 of
(pound)810 million and (pound)122 million under our old senior secured credit
facility and the Flextech facility, respectively, with a drawdown from our new
Senior Secured Facility.
We anticipate that our principal uses of cash in the future will be to
fund operating losses and capital expenditure, to make appropriate investments
and to service debt. Although we expect to continue to incur operating losses,
we anticipate that they will begin to reduce as we realize the expected benefits
of our roll-out of digital television and high-speed internet services which we
believe will increase product penetration, increase revenue per customer in our
residential, business and content markets, and achieve the cost-efficiencies of
delivering these services over our owned broadband network. We also expect to
have significant capital needs in the future. Nevertheless, with the majority of
our network construction complete and substantially all network upgrades
necessary for delivery of telephony and digital services complete, we anticipate
that our capital expenditure will be largely driven by connecting new
subscribers and the launch of new products, and consequently, will vary
depending upon the take-up of our services. In May 2002, we announced a plan to
reduce operating costs through such measures as divisional reorganization and
head count reductions and to reduce capital expenditures by delaying or
cancelling non-core projects such as video-on-demand. This plan is ongoing.
We anticipate that our principal sources of funds in the future will be
proceeds from bank facilities, additional vendor financing, if available, the
strategic sale of assets, cash in hand and cash flow from operating activities.
Our future actual funding requirements could exceed currently anticipated
requirements. Differences may result from higher-than-anticipated costs or
capital expenditure and/or lower than anticipated revenues. Our actual costs,
capital expenditure and revenues will depend on many factors, including, inter
alia, consumer demand for voice, video, data and internet services, the impact
on our business of new and emerging technologies, the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment, the development of the interactive e-commerce market, consumer
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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acceptance of cable telephony as a viable alternative to British
Telecommunications plc's ("BT") telephony services, and the continued downward
pressure on telephony margins.
As of June 30, 2002, we had cash balances of (pound)341 million
(excluding (pound)12 million that is restricted as to use to providing security
for leasing obligations) and (pound)305 million available to be drawn down under
our Senior Secured Facility. Our cash balances have increased by (pound)327
million during the six-month period ended June 30, 2002 mainly as a result of
drawdowns from our senior bank facility (see below), (pound)31 million of cash
realized on the termination of certain foreign exchange contracts and (pound)29
million received in respect of the disposal of our shareholdings in TV Travel
Group Limited and The Way Ahead Group Limited.
Following the Flextech merger in April 2000, we had two separate bank
facilities:
o we were party to a(pound)1.5 billion senior secured credit facility;
and
o Flextech and its subsidiaries were party to a (pound)200 million senior
secured credit facility.
On March 16, 2001, we entered into a new senior secured credit facility
(the "Senior Secured Facility") with a syndicate of banks (the "Senior Secured
Facility Banks") for (pound)2 billion. The terms of the loan agreement governing
the Senior Secured Facility also allowed us to raise a further (pound)250
million from institutional investors, (the "Institutional Tranche") and raise a
further (pound)500 million of vendor financing. The first drawdown under this
new facility was used to repay our old senior secured credit facility and the
Flextech facility, noted above. On October 17, 2001, GE Capital Structured
Finance Group Limited, an affiliate of GE Capital, lent us (pound)125 million as
part of the additional (pound)250 million Institutional Tranche. Additionally,
on March 12, 2002, we announced that we had secured a further (pound)20 million
of institutional funding from Newcourt Capital (UK) Ltd., a subsidiary of CIT
Group Inc. As at June 30, 2002, (pound)246 million of vendor financing had been
incurred.
Borrowings under the Senior Secured Facility are secured on our assets,
including partnership interests and shares of subsidiaries, and bear interest at
between 0.5% and 2.25% above LIBOR (depending on the ratio of borrowings to
quarterly annualized consolidated net operating cash flow). Borrowings under the
Institutional Tranche bear interest at up to 4% above LIBOR. The terms of the
new facility restrict transfers or disposals of assets from certain subsidiary
companies. These restrictions relate to the type and value of the consideration
that can be accepted. Our ability to borrow under the Senior Secured Facility
and the Institutional Tranche is subject to, among other things, our compliance
with the financial and other covenants set forth in the loan agreement governing
that facility and failure to comply with those covenants could result in all
amounts outstanding thereunder becoming immediately due and payable. We were in
compliance with these covenants as of June 30, 2002 and as of today and expect
to be in compliance for at least 12 months from the date of issue of these
financial statements.
We regularly monitor our ongoing ability to draw down under the
facilities, which is dependent on satisfying the financial covenants contained
in our debt agreements. As with most growth businesses, further increases in
business performance and profitability are necessary to ensure continued
compliance with the terms of the covenants. However, as with any forecast
information, the principal assumptions are clearly subject to a degree of risk,
in particular, our ability to increase revenues in accordance with our plans. If
we were unable to remain compliant with our covenants (or to meet our debt
service obligations), we could attempt to restructure or refinance some or all
of our existing indebtedness or to seek additional funding. We cannot assure
you, however, that we would be able to do so on satisfactory terms, if at all.
The downgrading of our credit ratings in March, April and August 2002 may mean
that we are not able to make future borrowings. A restructuring of our debt
could take the form of a debt-for-equity swap, which may result in severe
dilution for existing shareholders at the time of the swap.
We believe we have adequate resources to continue in operational
existence for a period of at least 12 months from the date of issue of these
financial statements. As a result of our debt obligations maturing beginning in
late 2003 and uncertainty as to our ability to satisfy those obligations, we are
currently considering alternative options to stabilize our medium and longer
term liquidity position.
We may from time to time choose to repurchase our outstanding debt
securities for cash and/or in exchange for equity securities, in open market
purchases or privately negotiated transactions. Such repurchases or exchanges
will depend on, among other things, prevailing market conditions and our
liquidity requirements. The amounts of repurchased or exchanged debt securities
may be material.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments as of June 30,
2002 are summarized in the table below.
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US GAAP Analysis of Financial Conditions and Results
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------------------------------------------------------------------------------------------------------------------
Contractual Obligations
------------------------------------------------------------------------------------------------------------------
Payments Due by Period
----------------------
Total Less than 1 1-3 years 4-5 years After 5
----- --------- ---------
year years
---- -----
(pound)m (pound)m (pound)m (pound)m (pound)m
--------------------------------------------- ----------- -------------- ------------- ------------- -------------
Long-term debt............................... 5,468 55 321 2,485 2,607
Capital lease obligations.................... 269 87 91 61 30
Operating leases............................. 153 13 24 21 95
Unconditional purchase obligations........... 531 531 - - -
Other long-term obligations.................. 9 9 - - -
--------------------------------------------- ----------- -------------- ------------- ------------- -------------
Total contractual obligations................ 6,430 695 436 2,567 2,732
============================================= =========== ============== ============= ============= =============
The following table includes information about our commercial commitments
as of June 30, 2002. Commercial commitments are items that we could be obligated
to pay in the future. They are not required to be included in the balance sheet.
------------------------------------------ -----------------------------------------------------------------------
Other Commercial Commitments
------------------------------------------ -----------------------------------------------------------------------
Amount of Commitment Expiration Per Period
------------------------------------------
Total Amounts Less than 1 1-3 years 4-5 years After 5
--------- ---------
Committed year years
--------- ---- -----
(pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------- --------------- --------------- ------------- -------------- -----------
Guarantees............................... 17 5 - - 12
========================================= =============== =============== ============= ============== ===========
We have no other contractual or commercial commitments.
Capital Expenditure
Additions to property and equipment in the six-month period ended June
30, 2002 totalled (pound)241 million, a decrease of (pound)78 million or 24.5%
from (pound)319 million for the six-month period ended June 30, 2001. Our
capital expenditure has primarily funded the construction of local distribution
networks and our National Network, capital costs of installing customers, and
enhancements to our network for new product offerings. The additions in the
six-month period ended June 30, 2002 were principally a result of network
upgrades and new subscriber installations in connection with our roll-out of
digital television and high-speed internet services. At June 30, 2002 our
broadband network was capable of providing 77.6% of the homes in our franchises
with both cable television and cable telephony services.
We have substantially completed all network upgrades necessary for
delivery of our digital television and high-speed internet services.
Consequently, we anticipate that capital expenditures associated with our
existing and currently planned services will be largely driven by connecting new
subscribers and the launch of new products, and will vary depending upon the
take-up of our services. Capital expenditure in the six-month period ended June
30, 2002 at (pound)241 million is in line with management's stated aim of
reducing capital expenditure to below (pound)500 million for the the full year
to December 31, 2002.
Included in the table of contractual obligations shown above is a total
of (pound)6 million relating to capital expenditure authorized by us for which
no provision has been made in the consolidated financial statements. This amount
includes subscriber installations (e.g., set-top boxes) for customer growth,
network enhancements and computer projects necessary for the maintenance of the
infrastructure of our business. In addition, and also included in the table, we
have contracted to buy (pound)12 million of programming rights for which the
license period has not yet started. These commitments will be funded when
required from operating cash flow and available bank facilities. Both of these
amounts are shown as being payable in less than 1 year.
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US GAAP Analysis of Financial Conditions and Results
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Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The principal market risks to which we were exposed during the
six-month period ended June 30, 2002 (and which have not changed from previous
periods) were:
o interest rate changes on variable-rate, long-term bank debt; and
o foreign exchange rate changes, generating translation and transaction
gains and losses on our US dollar-denominated debt instruments.
From time to time we use derivative financial instruments solely to
reduce our exposure to these market risks and we do not enter into these
instruments for trading or speculative purposes.
In March, May and July 2002, we terminated certain foreign currency
derivative contracts as described below. This will increase our exposure to
foreign exchange fluctuations in respect of the principal on bonds no longer
hedged. We have also increased our exposure to variable interest rates, as we
have not renewed some of the xxxxxx that have expired in connection with the
Senior Secured Facility.
Interest Rate Risk
Our outstanding long-term bank debt is denominated in pounds sterling
and bears interest at variable rates. We seek to reduce our exposure to adverse
interest rate fluctuations on borrowings under current senior bank facilities
principally through interest rate swaps. Our interest rate swaps provide for
payments by us at a fixed rate of interest (ranging from 5.475% to 7.355%) and
the receipt of payments based on a variable rate of interest. The swaps have
maturities ranging from December 31, 2003 to March 31, 2005. The aggregate
amount outstanding under the senior bank facilities at June 30, 2002 was
(pound)1.65 billion (being (pound)1.84 billion of drawdowns less (pound)195
million cash balances) and the aggregate notional principal amount of the
hedging arrangements was (pound)850 million, leaving an unhedged amount of
(pound)795 million at June 30, 2002.
Foreign Currency Exchange Risk
At June 30, 2002, certain of our fixed-rate debt instruments were
denominated in US dollars. We have entered into certain derivative instruments
to reduce our exposure to adverse changes in exchange rates. These derivative
instruments comprise foreign currency swaps and a series of foreign exchange
forward contracts. Our objective in using foreign currency derivative financial
instruments is to limit the impact of foreign exchange rate changes on our
interest and principal payments under our US dollar-denominated debt by choosing
hedging instruments to achieve our desired foreign exchange hedge at the lowest
cost available.
We hold derivative financial instruments solely to hedge specific risks
and do not hold such instruments for trading purposes. The derivatives are held
to hedge against the variability in cash flows arising from the effect of
fluctuations in the pound sterling/US dollar exchange rate on our future
interest payments and principal payments under our US dollar-denominated debt.
We typically use forward foreign currency contracts or cross currency swaps to
fix the pound sterling amount of future US dollar cash outflows for interest
payments and principal repayments up to their first call dates or other such
dates where we may, at our option, redeem the instruments before maturity.
We discontinue using hedge accounting for derivative financial
instruments when it is determined that:
o the derivative instrument is no longer effective in offsetting changes
in the cash flows of the hedged item;
o the derivative instrument expires or is sold;
o the derivative instrument is no longer designated as a hedging
instrument because it is no longer probable that the forecasted
transaction will occur;
o a hedged firm commitment no longer meets the definition of a firm
commitment; or
o our management determines that designation of the derivative instrument
as a hedging instrument is no longer appropriate.
Our results may be materially influenced by future exchange rate
movements now that we have largely discontinued the use of hedge accounting,
since such derivative financial instruments would be considered speculative for
accounting purposes and would be marked to their market value with changes being
included immediately in earnings, whereas the underlying liabilities would be
re-translated at the spot rate of exchange. Cancellation or redemption of the
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US GAAP Analysis of Financial Conditions and Results
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derivative financial instruments has increased our exposure to foreign currency
exchange rate risk on our US dollar-denominated debt.
We had foreign currency swaps and forward contracts hedging our
principal and interest exposures totalling in aggregate (pound)1.5 billion at
June 30, 2002 and which has reduced to (pound)1.0 billion to date.
In March 2002, we terminated certain US dollar/pound sterling exchange
rate hedging arrangements with a nominal amount of $950 million ((pound)655
million); termination of these arrangements netted (pound)74 million to us. A
further (pound)30 million was realized by us in May 2002 through the termination
of additional foreign exchange rate hedging arrangements with a nominal amount
of $367 million ((pound)253 million). These cash proceeds are held as available
liquidity. On April 2, 2002 $560 million ((pound)390 million) of hedging
arrangements matured and were replaced with $350 million ((pound)246 million) of
forward foreign exchange contracts. In July 2002 we terminated further hedging
arrangements with a nominal value of $1.3 billion ((pound)878 million) which
will result in a total cash outflow of (pound)43 million. Together these
transactions have reduced our foreign currency swaps and forward contracts
hedging our principal and interest exposures to an aggregate to date of
approximately (pound)1.0 billion after exchange rate differences.
Quantitative Disclosure of Market Risk
The analysis below presents the sensitivity of the market value, or
fair value, of our financial instruments to selected changes in market rates and
prices. The changes chosen represent our view of changes that are reasonably
possible over a one-year period. The estimated fair value of the hedging
instruments identified below are based on quotations received from independent,
third-party financial institutions and represent the net amount receivable or
payable to terminate the position, taking into consideration market rates as of
the measuring date and counterparty credit risk. The estimated fair value of the
US dollar-denominated fixed-rate long-term debt is also based on market
quotations obtained from independent third-party financial institutions.
The hypothetical changes in fair value of hedging instruments are
estimated, based on the same methodology used by the third-party financial
institutions to calculate the fair value of the original instruments, keeping
all variables constant except that the relevant interest rate or exchange rate,
as the case may be, has been adjusted to reflect the hypothetical change. Fair
value estimates by their nature are subjective and involve uncertainties and
matters of significant judgment and therefore cannot be determined precisely.
Fair value of debt is the market value of bonds and bank debt, which can change
according to market conditions and company specific performance.
The amounts generated from the sensitivity analysis are forward-looking
estimates of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from those projected results
due to developments in the global financial markets which may cause fluctuations
in interest rates and exchange rates to affect fair values in a manner that
varies from the hypothetical amounts disclosed in the table below, which
therefore should not be considered a projection of likely future events and
losses. The sensitivity analysis is for information purposes only. In practice,
market rates rarely change in isolation.
Interest Rate Risk
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate one-percentage point (100 basis points) increase in
interest rates across all maturities:
--------------------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Fair value Hypothetical Fair value Hypothetical
---------- ----------
Change in Change in
Fair value Fair value
---------- ----------
(pound)m (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------
Interest rate swaps....................................... (23) 14 (21) 11
Fixed rate debt........................................... (1,676) (54) (2,873) (140)
--------------------------------------------------------------------------------------------------------------------
Based on our variable rate debt outstanding at June 30, 2002 after
taking into account our derivative instruments, we estimate that a
one-percentage point change in interest rates would have an approximately
(pound)10 million impact on our annual net interest expense.
Foreign Currency Exchange Rate Risk
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate 10% decrease in the US dollar to pound sterling
exchange rate.
23
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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--------------------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Fair value Hypothetical Fair value Hypothetical
---------- ----------
Change in Change in
Fair value Fair value
----------- ----------
(pound)m (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------
US dollar-denominated long-term debt...................... (1,121) (125) (2,109) (234)
Foreign currency swap..................................... 1 22 23 22
Foreign exchange forward contracts........................ (49) 119 180 296
--------------------------------------------------------------------------------------------------------------------
The hypothetical change in fair value for the US dollar-denominated
long-term debt is calculated by re-translating to pounds sterling the
dollar-denominated long-term debt at a rate 10% below the US dollar/pound
sterling exchange rate prevailing at the relevant period end.
Movements in the fair values of the foreign currency swap and foreign
exchange forward contracts would result in a corresponding charge or credit to
our statement of operations.
Recently Issued Accounting Standards Not Yet Adopted
SFAS 143 Accounting for Asset Retirement Obligations
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". SFAS 143, which is effective for fiscal years beginning
after June 15, 2002, requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, an entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Group is required to adopt this
standard from January 1, 2003. The Group has not yet determined the impact, if
any, the adoption of this standard will have on its financial position or
results of operations.
SFAS 145 Rescission of FASB Statements 4, 44 and 64, Amendment of FASB
13, and Technical Corrections
In April 2002, the FASB issued SFAS 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections". SFAS
145 provides for the rescission of several previously issued accounting
standards, new accounting guidance for the accounting for certain lease
modifications and various technical corrections that are not substantive in
nature to existing pronouncements. SFAS 145 will be adopted beginning January 1,
2003, except for the provisions relating to the amendment of SFAS 13, which will
be adopted for transactions occurring subsequent to May 15, 2002. Adoption of
SFAS 145 will not have a material impact on our consolidated financial
statements.
SFAS 146 Accounting for Costs Associated with Exit or Disposal
Activities
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 applies to
costs associated with an exit activity that do not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Group
has not yet determined the impact, if any, the adoption of this standard will
have on its financial position or results of operations.
Significant Shareholdings
Historically our principal shareholders have been Liberty Media and
MediaOne Group Inc. ("MediaOne"). On July 7, 2000 MediaOne consummated an
agreement with certain subsidiaries of Microsoft Corporation ("Microsoft")
whereby Microsoft acquired the majority of MediaOne's interests in us. From May
3, 2001 and throughout the twelve-month period ended June 30, 2002 the
shareholdings of Liberty Media, Microsoft and MediaOne have been 25.2%, 23.6%
and 1.3%, respectively.
24
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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On May 14, 2002, Microsoft informed us that it was withdrawing its
three non-executive directors from our board of directors. Microsoft holds 23.6%
of our issued shares and has the right to nominate up to three representatives
to the board under corporate shareholder agreements with us. At that time,
Microsoft said: "At present we believe that we will be in a better position to
manage our relationship with, and investment in, Telewest without board
representation. Microsoft expects to continue to evaluate Telewest on an ongoing
basis and, in that regard, will continue to consider, among other things,
purchasing or selling Telewest securities or engaging in possible strategic
transactions involving Telewest. Microsoft has no current plan regarding any
such transactions, but reserves the right to change its plans at any time."
On June 28, 2002, Microsoft notified Liberty Media that Microsoft
intended to sell publicly its interest in us and, in accordance with the terms
of shareholder agreements noted above, offered Liberty Media the right to
purchase that interest within 30 days. If Liberty Media do not exercise their
right, Microsoft may sell publicly those shares for up to 90 days following the
expiration of the option period. We are not aware of the status of the
discussions between these two shareholders, if any, as to Microsoft's interest.
On June 12, 2002, Liberty Media announced a tender offer for certain
of our publicly traded bonds. At that time, Liberty Media announced that upon
completion of the tender it intended to "propose to the Company's board of
directors a restructuring plan pursuant to which all or substantially all of the
Company's publicly-traded notes and debentures would be converted into equity of
the Company". On July 17, 2002, Liberty Media citing "the continuing decline in
the US and UK securities markets and the significant fall in the trading price
of Liberty Media's common stock since the commencement of the Offer", terminated
the tender offer. We do not know whether Liberty Media still intends to approach
us concerning a restructuring plan.
Also on July 17, 2002, Liberty Media informed us that it was
withdrawing its three non-executive directors from our board of directors.
Liberty Media holds 25.2% of our issued share capital and has the right to
nominate up to three representatives to our board under corporate shareholder
arrangements with us. Liberty Media said: "We are taking this action to
eliminate any potential conflict of interest or appearance of a conflict in any
upcoming restructuring discussions. The management and the remaining directors
of Telewest continue to have our full support".
Recent Developments
We have been approached by a committee representing a significant proportion of
our bonds (the "Bondholders' Committee"). The Bondholders' Committee has
expressed the desire to work constructively with us to explore the possibility
of bondholders participating in some form of reconstruction of the Company's
balance sheet. We have not yet discussed any specific proposals with the
Bondholders' Committee.
The directors have concluded that it is in the Company's best
interests to enter into discussions with the Bondholders' Committee and, if
approached, Liberty Media, to establish whether a proposal that would command
the support of the board is capable of being agreed. Our board will continue to
explore all available options in order to arrive at a solution that is fair and
equitable to all of our stakeholders. Detailed discussions will not begin until
we have obtained the necessary waivers and consents from our banks.
In view of the developments discussed above, a number of corporate
safeguards have been put in place to ensure that the directors are able to
operate impartially and in the best interests of the Company and all of its
stakeholders. An executive management team has been instructed and authorised by
the board to conduct the detailed evaluation, development and negotiation of any
proposals for the reorganisation of the Company's balance sheet and all
alternatives thereto, (the executive management team will comprise the Group
Managing Director and Finance Director and the Group Strategy Director and
General Counsel, and the Company's Chairman will have a detailed day-to-day
involvement in the work of the management team who will report to the board on a
regular basis); and, as the directors are particularly conscious that any
reconstruction proposals might involve an actual or perceived conflict between
the interests of different stakeholders, for instance, shareholders,
bondholders, banks, trade creditors, management and employees, they have
established a committee to review any actual or perceived conflict and to make
appropriate recommendations to the full board, (on this committee are the
Company's Chairman and the three other independent non-executive members of the
board).
On July 31, 2002 we announced that Xxxx Xxxxxx, Chief Executive, would
be leaving the Company and had resigned as a director of the board. Xxxxxxx
Xxxxxxx, the Group Finance Director, became Managing Director with immediate
effect.
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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On August 5, 2002, Xxxxx'x Investors Service, Inc. ("Moody's") lowered
our senior implied rating one level to "Caa2" from "Caa1" and our senior
unsecured issuer rating one level to "Ca" from "Caa." In addition, Moody's
lowered our senior unsecured bond rating to "Ca" from "Caa3." Xxxxx'x outlook on
our credit remains negative. On August 6, 2002, Standard & Poor's Corporation
lowered our long-term corporate credit rating three levels to "CC."
On August 13, 2002, we announced that a circular had been sent to our
shareholders seeking their approval for the proposed disposal (the "Disposal")
of the Group's 16.9% shareholding in SMG plc ("SMG".) There will be an
extraordinary general meeting of the Company, to be held on September 4, 2002,
for shareholders to vote on this proposal.
In order to preserve our flexibility at a time of constrained capital
markets, in the next twelve months we may wish to effect the Disposal as part of
our efforts to address the Group's funding requirements and to make its
financial position more secure. The circular seeks shareholders' approval in
advance for the Disposal, and the actual sale of the shareholding will take
place if and when we consider it appropriate to make such Disposal. The
authority, if granted, would continue for a period of twelve months from the
date of approval, i.e. until September 4, 2003.
The value of our shareholding in SMG, based on the closing price of
SMG shares on August 12, 2002 of 98p per SMG share, was (pound)52.0 million. The
shareholding is used as security against a loan of (pound)28.3 million
((pound)33.3 million as of the date of our circular) made by The
Toronto-Dominion Bank to the Group.
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Telewest Communications plc
US GAAP Analysis of Financial Conditions and Results
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* * * * * *
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The discussion above includes certain statements that are, or may be
deemed to be, forward-looking statements within the meaning of the US securities
laws. These forward-looking statements, by their nature, involve risks and
uncertainties because they relate to events and depend on circumstances that may
or may not occur in the future.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed or
implied by those forward-looking statements, including, but not limited to: our
ability to raise additional financing, our ability to refinance our indebtedness
and our ability to continue to service our outstanding indebtedness; our ability
to access liquidity under our bank facility, which will require our compliance
with certain covenants that require continued growth in our business; the extent
to which consumer demand for voice, video, data and internet services increases;
the extent to which SMEs accept cable telephony services as an alternative to
those of competing service providers such as BT; the extent to which we are able
to adapt to, and compete with, new and emerging technologies including
Asynchronous Digital Subscriber Line technology; the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment; the extent to which consumer preference develops for purchasing
goods and services on the internet and/or using interactive television over
other methods of purchasing such goods and services; the extent to which
consumers accept cable telephony as a viable alternative to telephony services
provided by BT; the extent to which we are successfully able to compete with
mobile network operators; the extent to which regulatory and competitive
pressures in the UK telephony market continue to reduce prices; our ability to
develop and introduce attractive interactive and high-speed data services in a
rapidly changing and highly competitive business environment; our ability to
penetrate markets and respond to changes or increases in competition; our
ability to compete with other ISPs; our ability to compete against digital
television service providers, including British Sky Broadcasting Group plc and
any successor to ITV Digital by increasing our digital services customer base,
and the impact of our aggressive digital services marketing campaign on our
results of operations and liquidity; our ability to have an impact on, or
respond to, new or changed government regulation; our ability to manage growth
and expansion; our ability to improve operating efficiencies, including through
cost reductions; our ability to maintain and upgrade our network in a
cost-efficient and timely manner; adverse changes in the price or availability
of telephony interconnection or cable television programming; disruptions in
supply of programming, services and equipment; and the extent to which consumer
preference develops for, or shifts away from, content developed and distributed
by Flextech (our Content Division).
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