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, 2003.
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TELEWEST COMMUNICATIONS PLC
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PART I: US GAAP FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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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,
2003 2003 2002 2003 2003 2002
(IN MILLIONS, EXCEPT PER SHARE DATA)
(note 2) (note 2)
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REVENUE
Cable television $ 131(pound) 79(pound) 88 $ 261(pound) 158(pound) 173
Consumer telephony 198 120 125 392 237 251
Internet and other 48 29 18 91 55 34
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TOTAL CONSUMER DIVISION 377 228 231 744 450 458
Business Services Division 114 69 77 230 139 143
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TOTAL CABLE DIVISION 491 297 308 974 589 601
Content Division 43 26 26 87 53 52
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TOTAL REVENUE 534 323 334 1,061 642 653
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OPERATING COSTS AND EXPENSES
Consumer programming expenses (including(pound)8m
in 2003 and 2002, respectively, to related parties) 49 30 32 102 62 65
Business and consumer telephony expenses 81 49 58 165 100 113
Content expenses 30 18 15 58 35 31
Depreciation 169 102 129 327 198 246
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Cost of sales 329 199 234 652 395 455
Selling, general, and administrative expenses 200 121 129 400 242 258
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529 320 363 1,052 637 713
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-
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OPERATING PROFIT/(LOSS) 5 3 (29) 9 5 (60)
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OTHER INCOME / (EXPENSE)
Interest income (including(pound)5m and(pound)6m in
2003 and 2002, respectively, from related parties) 10 6 7 20 12 7
Interest expense (including amortization of debt (197) (119) (131) (403) (244) (252)
discount)
Foreign exchange gains, net 193 117 63 114 69 84
Share of net (losses)/profits of affiliates - - (5) 3 2 (1)
Other, net - - 34 (2) (1) 34
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PROFIT/(LOSS) BEFORE INCOME TAXES 11 7 (61) (259) (157) (188)
Income tax benefit 2 1 2 3 2 4
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NET PROFIT/(LOSS) FOR THE PERIOD $ 13(pound) 8(pound) (59) $(256)(pound) (155)(pound) (184)
=============================================================================
BASIC AND DILUTED PROFIT/(LOSS) PER ORDINARY SHARE $ 0.00 0.00(pound)(0.02)(pound) $(0.09) (0.05)(pound)(0.06)pound
Weighted average number of ordinary shares - basic and
diluted - (millions) - 2,874 2,873 - 2,874 2,873
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,
2003 2003 2002
$M (POUND)M (POUND)M
(note 2) AUDITED
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ASSETS
Cash and cash equivalents 669 405 390
Secured cash deposits restricted for more than one year 20 12 12
Trade receivables (net of allowance for doubtful accounts of(pound)15m in
2003 and(pound)12m in 2002) 177 107 120
Other receivables 70 42 68
Prepaid expenses 67 41 27
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Total current assets 1,003 607 617
Investments in affiliates, accounted for under the equity method,
and related receivables 603 365 376
Property and equipment (less accumulated depreciation of(pound)
3,394m in 2003 and (pound)3,196m in 2002) 4,137 2,503 2,598
Goodwill (less accumulated amortization of(pound)2,593m in 2003 and 2002) 739 447 447
Inventory 65 39 28
Other assets (less accumulated amortization of(pound)63m in 2003
and(pound)58m in 2002) 56 34 40
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TOTAL ASSETS 6,603 3,995 4,106
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 208 126 110
Other liabilities 969 586 520
Deferred income 192 116 111
Debt repayable within one year 7,610 4,604 3,652
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Total current liabilities 8,979 5,432 4,393
Deferred tax 137 83 85
Debt 1,352 818 1,798
Capital lease obligations 307 186 204
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TOTAL LIABILITIES 10,775 6,519 6,480
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MINORITY INTERESTS (2) (1) (1)
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SHAREHOLDERS' EQUITY
Ordinary shares, 10 xxxxx par value;
4,300 million authorized and 2,874 million shares issued and outstanding 474 287 287
Limited voting convertible ordinary shares, 10 xxxxx par value;
300 million shares authorized and 82 million shares issued and 13 8 8
outstanding
Additional paid-in capital 6,980 4,223 4,223
Accumulated deficit (11,627) (7,035) (6,880)
Accumulated other comprehensive income (10) (6) (11)
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TOTAL SHAREHOLDERS' DEFICIT (4,170) (2,523) (2,373)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 6,603 3,995 4,106
===========================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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6 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
2003 2003 2002
$M (POUND)M (POUND)M
(note 2)
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CASH FLOWS FROM OPERATING AVTIVITIES
NET LOSS (256) (155) (184)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities
Depreciation 327 198 246
Amortization of deferred financing costs and issue discount on Senior Discount Debentures 91 55 55
Deferred tax credit (3) (2) (4)
Unrealized gains on foreign currency translation (114) (69) (84)
Accrued share-based compensation (credit)/cost - - (1)
Share of net (profits)/losses of affiliates (3) (2) 1
Loss on disposal of other assets (net) 2 1 -
Changes in operating assets and liabilities :
Change in receivables 53 32 (5)
Change in prepaid expenses (23) (14) 18
Change in other assets (20) (12) 7
Change in accounts payable 26 16 (39)
Change in other liabilities 145 88 (23)
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NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 225 136 (13)
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (182) (110) (263)
Repayment of loans made to joint ventures 20 12 10
Disposal of subsidiaries - - 10
Disposal of affiliate 10 6 14
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NET CASH USED IN INVESTING ACTIVITIES (152) (92) (229)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from borrowings under existing credit facilities - - 480
Net proceeds from disposal of forward contracts - - 105
Repayment of other borrowings - - (3)
Release of restricted deposit - - 8
Capital element of vendor finance and finance lease repayments (48) (29) (21)
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NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (48) (29) 569
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NET INCREASE IN CASH AND CASH EQUIVALENTS 25 15 327
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 644 390 14
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CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 669 405 341
====================================
See accompanying notes to the unaudited condensed consolidated financial
statements
3
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
COMPREHENSIVE LOSS
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ORDINARY LIMITED ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING PAID-IN COMPREHENSIVE DEFICIT
SHARES CAPITAL INCOME
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
(note 6)
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BALANCE AT DECEMBER 31, 2002 287 8 4,223 (11) (6,880) (2,373)
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Net loss for the period - - - - (155) (155)
Current period increases in fair value - - - 5 - 5
of derivative instruments
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TOTAL COMPREHENSIVE INCOME - - - 5 (155) (150)
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BALANCE AT JUNE 30, 2003 287 8 4,223 (6) (7,035) (2,523)
==============================================================================
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 and its
consolidated subsidiaries (`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 broadcasting market.
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, 2002 as filed with the Securities and Exchange Commission (`SEC')
on June 30, 2003 (the `20-F'). 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, 2003 and its
results of operations and cash flows for the three and six-month periods ended
June 30, 2003 and 2002. Interim results are not necessarily indicative of
results for the financial year.
The economic environment in which Telewest operates is the UK, and
hence its reporting currency is sterling ((pound)). Certain financial
information as of and for the three and six-month periods ended June 30, 2003
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 $1.6529 = (pound)1.00, the Noon Buying Rate of the Federal Reserve Bank of
New York on Monday June 30, 2003. The presentation of the US dollar amounts
should not be construed as a representation that the sterling amounts could be
so converted into US dollars at the rate indicated or at any other rate.
The unaudited, condensed consolidated financial statements include the
accounts of the Company and those of its majority-owned subsidiaries (the
`Group'). All significant inter-company accounts have been eliminated upon
consolidation.
These financial statements have been prepared on a going concern basis
and do not include any adjustments that would arise as a result of the going
concern basis of preparation being inappropriate. As previously announced, the
Company is in discussions with its bondholders and other major stakeholders with
regard to a Financial Restructuring (see below) of its balance sheet as the
directors consider that the Company will not be able to meet all of its debts as
they fall due. However, the Board of Directors has confidence in the successful
conclusion of the Financial Restructuring (and any required amendments to our
senior secured bank facility (the `Senior Secured Facility') and, together with
and on the basis of cash flow information that they have prepared, the directors
consider the Group will continue to operate as a going concern for a period of
at least 12 months from July 31, 2003, the date of issuance of our Interim
Report for 2003. Any restructuring will require the approval of our bankers and
various stakeholders. Inherently, there can be no certainty in relation to any
of these matters.
3. FINANCIAL RESTRUCTURING
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the `Bondholder Committee'). That agreement
provided for the cancellation of all outstanding notes and debentures (the
`Notes') (approximately (pound)3.5 billion) and certain other unsecured foreign
exchange hedge contracts (the `Hedge Contracts') (approximately (pound)33
million) in exchange for new ordinary shares (the `New Shares') representing 97%
of our issued share capital immediately after the Financial Restructuring. Under
that agreement our current ordinary shareholders would have received the
remaining 3% of our issued ordinary share capital.
5
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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
We also announced on September 30, 2002 that we were deferring payment of
interest under certain of our Notes and the amounts due as a result of the
settlement of the Hedge Contracts. Such non-payment continues and has resulted
in defaults under our Existing Facility and a number of other financing
arrangements. Based on one such default, in respect of non-payment of
approximately (pound)10.5 million to a Hedge Contract counter-party, that
counter-party has filed a petition with a UK Court to wind us up. We intend to
deal with this claim as part of the overall restructuring of our unsecured debt
obligations and do not believe that the legal action will significantly delay or
impede the Financial Restructuring process. We expect to meet our obligations to
our suppliers and trade creditors and this legal action is expected to have no
impact on customer service.
On January 15, 2003, we announced that we had reached a non-binding
agreement with respect to the terms of amended and restated credit facilities
with both the steering committee of our Senior Lenders and the Bondholder
Committee. In addition, the terms of these facilities had received credit
committee approval, subject to documentation and certain other issues, from all
of our senior lenders (the `Senior Lenders'), save for those banks which are
also creditors by virtue of the unsecured Hedge Contracts with which we will
deal in the overall Financial Restructuring. These amended facilities will
replace the Existing Facility and are, as noted above, conditional on various
matters, including the satisfactory finalization of arrangements for dealing
with foreign exchange creditors and the completion of our balance sheet
restructuring. These amended credit facilities will provide us with substantial
liquidity, which is expected to be sufficient to see us through to cash flow
positive after completion of the Financial Restructuring.
On March 14, 2003, we notified the Senior Lenders that, as a result of
two non-recurring items, the VAT decision (see the 20-F, Item 5. Operating and
Financial Review and Prospects -- Operating Results -- Results of Operations
--Years ended December 31, 2001 and 2002 -- Revenue) and legal and professional
costs associated with the Financial Restructuring, and their impact on our net
operating cash flow, we would breach certain financial covenants under our bank
facility in respect of the quarter ended December 31, 2002. On May 16, 2003 and
August 7, 2003, we further notified the Senior Lenders that we were in breach of
financial covenants for the three-month periods ended March 31, 2003 (two
covenants breached) and June 30, 2003 (one covenant breached) due to continuing
fees paid in connection with the Financial Restructuring and the tightening of
covenants.
On June 9, 2003, we announced that we had been notified by the
Bondholder Committee that, in order to obtain the support of certain of our
bondholders, the Bondholder Committee had requested certain changes to the
economic and other terms of the preliminary non-binding agreement relating to
our Financial Restructuring with the Bondholder Committee, as announced on
September 30, 2002,
On June 17, 2003, representatives of the Bondholder Committee provided
us with a new proposal for the terms of the Financial Restructuring.
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
We continue to engage in negotiations with our bondholders, Senior
Lenders and certain other major stakeholders and the directors believe that a
final agreement will be achieved in due course.
4. 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
6
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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
Telephony, Internet and other, and Business Services. The Internet and other
unit comprises internet sales, and, in 2002, sales of cable publications. The
Content segment provides entertainment content, interactive and transactional
services to the UK pay-television broadcasting market.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our financial
statements.
7
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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
The following table presents summarized financial information relating to the
reportable segments for the three and six-month periods ended June 30, 2003 and
2002, respectively:
UNAUDITED SEGMENTAL INFORMATION
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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,
2003 2003 2002 2003 2003 2002
$M (POUND)M (POUND)M $M (POUND)M (POUND)M
(note 2) (note 2)
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CABLE
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Cable television $ 131(pound) 79 (pound) 88 $ 261(pound) 158(pound) 173
Consumer telephony 198 120 125 392 237 251
Internet and other 48 29 18 91 55 34
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Total Consumer Division 377 228 231 744 450 458
Business Services Division 114 69 77 230 139 143
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THIRD PARTY REVENUE 491 297 308 974 589 601
Operating costs and expenses (320) (194) (208) (646) (391) (414)
Depreciation (166) (100) (127) (319) (193) (242)
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OPERATING PROFIT/(LOSS) 5 3 (27) 9 5 (55)
======================================================================================
Share of net (losses)/profits of - - - - - -
affiliates
Investments in affiliates 5 3 6 5 3 6
Additions to property & equipment 64 39 117 170 103 240
Goodwill 506 306 1,322 506 306 1,322
Total assets 5,588 3,381 5,327 5,588 3,381 5,327
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CONTENT
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Content Division 46 28 30 95 58 59
Inter-segmental * (3) (2) (4) (8) (5) (7)
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THIRD PARTY REVENUE 43 26 26 87 53 52
Operating costs and expenses (40) (24) (26) (79) (48) (53)
Depreciation (3) (2) (2) (8) (5) (4)
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OPERATING LOSS - - (2) - - (5)
======================================================================================
Share of net (losses)/profits
of affiliates - - (5) 3 2 (1)
Investments in affiliates 598 362 535 598 362 535
Additions to property & equipment 2 1 - 2 1 1
Goodwill 233 141 570 233 141 570
Total assets 1,015 614 1,319 1,015 614 1,319
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TOTAL
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Cable television 131 79 88 261 158 173
Consumer telephony 198 120 125 392 237 251
Internet and other 48 29 18 91 55 34
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Total Consumer Division 377 228 231 744 450 458
Business Services Division 114 69 77 230 139 143
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Total Cable Division 491 297 308 974 589 601
Content Division 46 28 30 95 58 59
Inter-segmental * (3) (2) (4) (8) (5) (7)
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TOTAL REVENUE 534 323 334 1,061 642 653
Operating costs and expenses (360) (218) (234) (725) (439) (467)
Depreciation (169) (102) (129) (327) (198) (246)
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OPERATING PROFIT/( LOSS) 5 3 (29) 9 5 (60)
Other income/(expense) 6 4 (32) (268) (162) (128)
Income tax benefit 2 1 2 3 2 4
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NET PROFIT/(LOSS) 13 8 (59) (256) (155) (184)
======================================================================================
Share of net (losses)/profits of - - (5) 3 2 (1)
affiliates
Investments in affiliates 603 365 541 603 365 541
Additions to property & equipment 66 40 117 172 104 241
Goodwill 739 447 1,892 739 447 1,892
Total assets 6,603 3,995 6,646 6,603 3,995 6,646
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* Inter-segmental revenues are revenues from sales in our Content Division which
are costs in our Cable Division and are eliminated on consolidation.
8
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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
5. SHARE-BASED COMPENSATION COST
As permitted under SFAS 123, Accounting for Stock-Based Compensation,
share-based compensation cost for employee share options is measured and
expensed over the period of the performance for such options under Accounting
for Stock Issued to Employees (`APB 25'), as the excess, if any, of the quoted
market price of a company's shares over the amount an employee must pay to
acquire the shares. During the three and six-month periods ended June 30, 2003
and 2002 the Company's share price continued to decrease, and no compensation
charge resulted during the periods.
An amendment to SFAS 123, SFAS 148 Accounting for Stock Based
Compensation - Transition and Disclosure, was effective for the Group for the
year ended December 31, 2002. SFAS 148 permits two additional transition methods
for entities that adopt the fair value based method of accounting for
stock-based employee compensation. The Statement also requires new disclosures
about the ramp-up effect of stock-based employee compensation on reported
results and that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The Group has adopted the
disclosure provisions of the Statement in these financial statements. The Group
has not adopted the fair value based method of accounting for stock-based
employee compensation and still accounts for these in accordance with APB 25.
Following the adoption of SFAS 148 (and the non-adoption of the fair
value provisions), the Group is obliged to report the effect, on its net loss
and basic and diluted loss per share, of compensation costs for share option
grants and awards under the Group's various share option schemes as determined
based on their fair value at the date of grant, consistent with the method
prescribed by SFAS 123. During the three and six-month periods ended June 30,
2003 no options or awards were granted over any ordinary shares of the Company.
Compensation costs based on fair value at the date of grant for all options and
awards granted in previous periods were fully expensed by December 31, 2002,
accordingly there is no further charge or credit necessary and the net profit
and basic and diluted profit per share for the three-month period ended June 30,
2003 and the net loss and basic and diluted loss per share for the six-month
period ended June 30, 2003 are not affected.
6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
At January 1, 2001 the Company adopted SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137 and 138.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition at fair value of
all derivative instruments as assets or liabilities in the Company's balance
sheet. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated a hedge and if so, the type
of hedge and its effectiveness as a hedge.
For derivatives, which are not designated as 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 have not, however, had any fair
value xxxxxx since the adoption of SFAS 133.
We discontinue hedge accounting for derivative financial instruments
when it is determined that the derivative instrument is no longer effective in
offsetting changes in the cash flows of the hedged item; the derivative
instrument expires or is sold; the derivative instrument is no longer designated
as a hedging instrument, because it is unlikely that a forecasted transaction
will occur; a hedged firm commitment no longer meets the definition of a firm
commitment; or our management determines that designation of the derivative
instrument as a hedging instrument is no longer appropriate.
The Company xxxxxx some of its interest rate risk on its Senior Secured
Facility through the use of interest rate swaps. The Company also historically
hedged some of its foreign currency risk through the use of forward foreign
exchange contracts and foreign currency swaps. The Company, in response to
fluctuations in the sterling/ US dollar exchange rate, terminated its interest
rate hedging arrangements. The purpose of the derivative instruments is to
provide a measure of stability over the Company's exposure to movements in
interest rates and the sterling/ US dollar exchange rate. The majority of the
Company's derivative instruments are designated as cash flow xxxxxx.
9
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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
7. RECENT DEVELOPMENTS
On June 27, 2003 a High Court judgment was delivered against those mobile
telephone operators who had appealed decisions of the UK Office of
Telecommunications and the UK Competition Commission in the area of mobile call
termination/interconnect rates. Following this judgment and the initial mobile
interconnect rate cuts of July 25, 2003, we are considering retail price changes
for calls from our network to mobile telephones with the intent of passing the
benefits to our customers whilst stimulating call usage.
On July 8, 2003, we sold our Indirect Access (`XXX') telephony business
for approximately (pound)2 million. We acquired this business as part of our
acquisition of Eurobell PLC in November 2000. XXX revenues were (pound)9 million
in 2002 and (pound)4 million in the six-month period ended June 30, 2003. (XXX
customers have never been included in our reported customer numbers).
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
8. COMMITMENTS AND CONTINGENCIES
Other than as set forth below, neither Telewest nor any other member of
the Telewest Group is or has been engaged in any legal or arbitration
proceedings, nor are any such proceedings pending or threatened by or against
it, which may have, or have had during the 12 months preceding the date hereof,
a significant effect on the Telewest Group's financial position.
A dispute between Telewest Communications Group Limited, Telewest
Communications (Publications) Limited and the Commissioners of Customs and
Excise over the VAT status of Cable Guide and Zap magazines, was heard between
October 21 and October 25, 2002, in respect of which judgment was passed down on
January 21, 2003 which resulted in the provision of (pound)16 million against
revenue in our consolidated financial statements for the year ended December 31,
2002. The exceptional item arose in respect of VAT payable in the period from
January 2000 to July 2002. Our magazines ceased publication towards the end of
the year 2002. Therefore, the exceptional item represented the full extent of
our VAT liability in respect of our magazine operations. The VAT tribunal held
that our arrangements to protect the zero-rated VAT status of Cable Guide and
Zap magazines could, in principle, be effective in creating a separate supply by
Telewest Communications (Publications) Limited, which was not ancillary to the
supply of pay-television services. However, in practice, the steps taken by us
were insufficient to make the arrangements effective. We have appealed this
decision which is expected to be heard in the High Court in November 2003.
On October 29, 2002, following non-payment of our obligations under
certain foreign exchange contracts, Credit Agricole Indosuez presented a
winding-up petition against us (in respect of a debt of approximately (pound)10
million). On or about October 31, 2002 The Royal Bank of Scotland plc served a
notice in support of the petition. On June 5, 2003, The Xxxx Alternative Fund
LP, also served a notice in support of the winding-up petition. At the initial
hearing of the petition, it was adjourned until January 29, 2003. The winding-up
petition has since been further adjourned on several occasions and has not yet
been listed for hearing. As far as we are aware Credit Agricole Indosuez has not
taken any further steps to list it. We have obtained several orders under
Section 127 of the UK Insolvency Act 1986, to enable us to continue to make
certain payments without the risk of those payments subsequently being declared
void as a result of the granting of a winding-up order.
On April 24, 2003, process was filed in the Supreme Court of the State of
New York in relation to an action brought by Eximius Capital Funding, Ltd.
(`Eximius') against Telewest to recover the principal and interest and other
payments due in respect of certain of our Notes. We have been informed that X.X.
Xxxx Asset Management Co., L.L.C. (`Xxxx') is an adviser to Xxxxxxx but that
Xxxxxxx is not a member of the same group of companies as Xxxx. Xxxxxxxx has
moved to dismiss Xxxxxxx' complaint principally on the grounds that, under the
terms of the indentures governing the Notes, Xxxxxxx has no standing to bring
the claims alleged in its complaint and has also failed to state legally
sufficient claims.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 12, 2003, process was filed in the Supreme Court of the State of
New York in relation to a further action brought by Xxxxxxx against, among
others, Telewest, Liberty Media Corporation, our Directors and certain of our
former Directors (collectively, the `Defendants') in respect of an alleged
breach of fiduciary duty and other alleged wrongful conduct by the Defendants in
relation to a potential restructuring of our balance sheet. On June 9, 2003,
Xxxxxxx moved to amend and supplement the complaint to add IDT Corporation and
certain alleged affiliates of IDT as defendants. The Defendants' time to answer,
move or otherwise respond to the action has not yet expired.
On or about June 12, 2003, the United States District Court for the
Southern District of New York agreed to allow Xxxx and certain other holders of
our Notes to amend a complaint originally filed against, among others, Liberty
Media Corporation relating to the tender offer by Liberty TWSTY Bonds, Inc. for
certain of our Notes. The amended complaint adds the Company, its Directors and
certain former Directors as parties. The amended action alleges violations of
Rule 10b-5 under the Securities Exchange Act of 1934 and common law fraud by,
among others, the Defendants arising from certain statements in 2001 and early
2002. The Defendants' time to answer, move or otherwise respond to the action
has not yet expired.
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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 and six-month periods ended June 30, 2002
and 2003 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, 2002, as reported in our Form 20-F filed with the SEC on June 30,
2003.
RESULTS OF OPERATIONS
THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2003
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. The
Content segment provides entertainment, content, interactive and transactional
services to the UK pay-TV broadcasting market.
Our consolidated revenue decreased by (pound)11 million or 3.3% from
(pound)334 million in the three-month period ended June 30, 2002 to (pound)323
million in the three-month period ended June 30, 2003 and also by (pound)11
million or 1.7% from (pound)653 million in the six-month period ended June 30,
2002 to (pound)642 million in the six-month period ended June 30, 2003.
Consolidated revenue in the three and six-month periods ended June 30, 2002, was
impacted by a one-time credit of (pound)8 million, (see Business Services
Revenue below). Excluding this one-time credit, our consolidated revenue would
have decreased by only (pound)3 million or 0.9% from (pound)326 million in the
three-month period ended June 30, 2002 to (pound)323 million in the three-month
period ended June 30, 2003 and also by (pound)3 million or 0.5% from (pound)645
million in the six-month period ended June 30, 2002 to (pound)642 million in the
six-month period ended June 30, 2003.
In our Consumer Division, despite a 61.1% increase in internet and
other revenues in the three-month period ended June 30, 2003 and a 61.8%
increase in the six-month period ended June 30, 2003, cable television and
consumer telephony revenues in aggregate decreased by 6.6% and 6.8% in the three
and six-month periods ended June 30, 2003, respectively, mainly due to customer
losses as we continue to focus on more cash generative and profitable customers.
Consumer Division revenues were also impacted by the closure of Cable Guide, our
TV listings magazine, in November 2002 which contributed (pound)1 million and
(pound)3 million, respectively, in the three and six-month periods ended June
30, 2002.
In our Business Division, revenues decreased by 10.4% in the
three-month period ended June 30, 2003 and 2.8% in the six-month period ended
June 30, 2003. Excluding the one-time credit to revenue in 2002, described
further below, our Business Division revenues would have remained flat in the
three-month periods ended June 30, 2002 and 2003 and increased by 3.0% in the
six-month period ended June 30, 2003. In our Content Division revenues remained
flat in the three-month periods ended June 30, 2002 and 2003 and increased by
(pound)1 million or 1.9% for the six-month period ended June 30, 2003 over the
same period in 2002.
Our operating costs and expenses also decreased in the three and
six-month periods ended June 30, 2003, by (pound)43 million or 11.8% in the
three-month period ended June 30, 2003 and by (pound)76 million or 10.7% in the
six-month period ended June 30, 2003. Accordingly, we recorded an operating
profit of (pound)3 million for the three-month period ended June 30, 2003,
compared with an operating loss of (pound)29 million for the three-month period
ended June 30, 2002 and an operating profit of (pound)5 million for the
six-month period ended June 30, 2003 compared with an operating loss of
(pound)60 million for the six-month period ended June 30, 2002.
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CABLE SEGMENT
CONSUMER DIVISION REVENUE
Consumer Division revenue represents a combination of cable
television (`CATV') revenue, consumer cable telephony revenue, and internet and
other income.
Our Consumer Division revenue decreased by (pound)3 million or 1.3%
from (pound)231 million for the three-month period ended June 30, 2002 to
(pound)228 million for the three-month period ended June 30, 2003 and by
(pound)8 million or 1.7% from (pound)458 million for the six-month period ended
June 30, 2002 to (pound)450 million for the six-month period ended June 30,
2003. These decreases were due to decreases of 6.6% in aggregate CATV and
consumer telephony revenues in the three-month period ended June 30, 2003 and
6.8% decrease in the six-month period ended June 30, 2003, partially offset by
an increase of 61.1% in our internet and other income in the three-month period
ended June 30, 2003 and a 61.8% increase in the six-month period ended June 30,
2003, in each case as compared to the comparable period in 2002. Consumer
revenues were also impacted by the closure, in November 2002, of Cable Guide,
our TV listings magazine which contributed (pound)1 million and (pound)3 million
of revenues in the three and six-month periods ended June 30, 2002,
respectively.
Average monthly revenue per subscriber increased by (pound)1.66 or
4.0% from (pound)41.95 for the three-month period ended June 30, 2002 to
(pound)43.61 for the three-month period ended June 30, 2003 and by (pound)1.00
or 2.4% from (pound)41.72 for the six-month period ended June 30, 2002 to
(pound)42.72 for the six-month period ended June 30, 2003. These increases are
attributable to selected retail price increases in our CATV and residential
telephony services in April 2002 and March 2003, increases in dual or triple
penetration (i.e. the proportion of homes subscribing to at least two of our
CATV, residential telephony and broadband internet services), and continued
analogue to digital TV migration, offset in part by a decrease in second line
penetration and lower call volumes per line in residential telephony. Dual or
triple penetration, which results from the continued market acceptance of
combined CATV, telephony and broadband internet packages, grew by 0.1 percentage
points to 71.0% at June 30, 2003 from 69.9% at June 30, 2002. This is primarily
a result of an increase in the number of subscribers to our broadband internet
services offset in part by increased product churn (particularly in the second
half of 2002) for CATV, telephony and dial-up internet services, as described
below. As at June 30, 2003, our `triple play' customers totalled 227,792 and
accounted for 13.2% of our total customer base compared with 129,192 customers
and 7.3% as at June 30, 2002.
Total customer homes connected decreased by 50,569 or 2.9% from
1,770,437 at June 30, 2002 to 1,719,868 at June 30, 2003 as a result of the
continued effect of the selected price rises described below (particularly in
analogue television) and by lower sales due to our tighter credit control
procedures, in line with our objective of focusing on more cash generative
customers, and also by the disconnection of approximately 7,000 `zero-paying'
analogue TV only customers following a database clean-up exercise, offset by new
subscribers to our products, particularly our broadband internet services.
Accordingly, overall household penetration also decreased by 1.0 percentage
point from 37.7% at June 30, 2002 to 36.7% at June 30, 2003.
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 dial-up internet product range in
April 2002 and March 2003. Customer growth was impacted by these price rises and
the tightening of our credit control policy as we focus on more cash generative
customers. We plan a return to customer growth in the second half of 2003 as we
reduce churn and continue to market and enhance our digital TV and `triple play'
products. We believe that our bundled offerings still remain competitive when
compared with those offered by other operators.
Our focus on more cash generative customers continues to improve the
profile of our customer base as:
o average revenue per subscriber increased to a record(pound)43.61 for the
three-month period ended June 30, 2003 and(pound)42.72 for the six-month
period ended June 30, 2003;
o `triple play' customers increased by 20,842 and 44,649 in the three and
six-month periods ended June 30, 2003, respectively;
o `triple play' customers account for 13.2% of our customer base at June 30,
2003 compared to 7.3% at June 30, 2002;
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o 25.0% of our telephony customer base now take our higher average monthly
revenue earning flat rate telephony products;
o 72.9% of our CATV customer base now take our higher average monthly revenue
earning digital TV; and
o household churn in the twelve-month period ended June 30, 2003 has fallen
to 16.1%, down from 18.2% in the twelve-month period ended December 31,
2002 and 17.6% in the twelve-month period ended March 31, 2003. (Churn has
also benefited from improved customer service processes, enabling more
efficient and responsive handling of customer calls.)
We plan a return to customer growth in the second half of 2003 as we
exploit the value of our bundled products through new product propositions and
increase spend on advertising and marketing promotions. Continued operational
improvement is expected to result in further sales efficiency, sustained churn
improvement and a return to profitable customer growth.
CATV REVENUE
CATV revenue decreased by (pound)9 million or 10.2% from (pound)88
million for the three-month period ended June 30, 2002 to (pound)79 million for
the three-month period ended June 30, 2003 and by (pound)15 million or 8.7% from
(pound)173 million for the six-month period ended June 30, 2002 to (pound)158
million for the six-month period ended June 30, 2003. The decreases were
attributable to a reduction in the number of subscribers as a result of focusing
on cash and on profitable customers as we move to acquiring profitable customers
rather than pursue overall subscriber growth, and a decline in average monthly
revenue per CATV subscriber.
Our digital television services have now been rolled out in all
franchise areas, excluding our Eurobell South-East areas and our Cabletime
areas. As a result of this substantially completed roll-out, our CATV customers
continue to migrate from our analogue services to our digital services, where
they generate higher monthly revenues. As at June 30, 2003 we had an installed
base of 911,191 digital subscribers, an increase of 92,411 or 11.3% compared
with 818,780 as at June 30, 2002. At June 30, 2003, 72.9% and 27.1% of customer
homes connected subscribed to digital and analogue TV services, respectively.
This compares with 61.4% and 38.6%, respectively, at June 30, 2002.
Notwithstanding the above, the migration of analogue customers to digital has
slowed during the twelve-month period ended June 30, 2003 compared with the
twelve-month period ended June 30, 2002; a trend that we expect to continue
during the rest of 2003. This resulted from our increased focus on cash and cost
control, including reduced marketing activity in respect of our digital CATV
services and a smaller base of analogue customers.
As noted above, we have shifted our focus from one of subscriber
acquisition to one which focuses on cash generative products, services and
customers. As part of this focus we have:
o discontinued active marketing of our Entry TV package to new subscribers
during the six-month period ended June 30, 2003;
o required new subscribers to TV as a stand-alone product to take our
top-tier basic package, Supreme;
o withdrawn the Essential Plus package for new subscribers to encourage
customers to take the full Supreme package; and
o during the six-month period ended June 30, 2003, put through price rises,
particularly in analogue television where we have moved customers from
non-standard packages to standard priced packages.
Average monthly revenues from our digital CATV subscribers were
(pound)22.35 and (pound)22.18 for the three and six-month periods ended June 30,
2003, respectively, compared with (pound)17.52 and (pound)17.42, respectively,
from our analogue TV subscribers for the same periods. A larger percentage of
our digital TV customers take higher priced services than our analogue TV
customers.
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In April 2002 and March 2003, we implemented selected CATV price
increases which had a positive impact on average monthly revenue per CATV
subscriber, but also resulted in a decline in total subscribers (as discussed
further below).
Total CATV subscribers connected decreased by 82,572 or 6.2% from
1,333,083 at June 30, 2002 to 1,250,511 at June 30, 2003 largely as a result of
higher churn rates experienced following the price increases described above,
and also by the disconnection of approximately 7,000 analogue TV only customers
following a database clean-up exercise. These customers had been receiving free
basic TV.
During the three-month period ended June 30, 2003, we continued to
experience a fall in the amount of premium programming purchased by our
subscribers. Our `premium-to-basic' ratio (which measures units of premium
programming as a percentage of our basic TV subscriber base) which has fallen
from approximately 69% at June 30, 2002 to approximately 68% at June 30, 2003.
Although this decrease in the purchase of premium programming negatively impacts
average monthly revenue per subscriber, it also has the effect of decreasing the
costs associated with our purchase of that premium programming which therefore
results in higher percentage margins for our CATV products.
Average monthly revenue per CATV subscriber (combined digital and
analogue), decreased by (pound)0.50 or 2.3% from (pound)21.47 for the
three-month period ended June 30, 2002 to (pound)20.97 for the three-month
period ended June 30, 2003 and by (pound)0.42 or 2.0% from (pound)21.15 for the
six-month period ended June 30, 2002 to (pound)20.73 for the six-month period
ended June 30, 2003, due to the decrease in the amount of premium programming
purchased by our subscribers offset by the migration of our subscriber base from
analogue to digital and selected price rises (each as discussed above).
Average monthly revenue for digital CATV subscribers declined by
(pound)1.63 or 6.8% from (pound)23.98 for the three-month period ended June 30,
2002 to (pound)22.35 for the three-month period ended June 30, 2003 and by
(pound)1.32 or 5.6% from (pound)23.50 for the six-month period ended June 30,
2002 to (pound)22.18 for the six-month period ended June 30, 2003. This resulted
principally from the change in the mix between premium and basic packages
described above. Approximately 77% of our digital TV subscribers during the
three-month period ended June 30, 2003 took `basic only' packages compared to
approximately 76% of subscribers during the three-month period ended June 30,
2002, and although the digital `premium-to-basic' ratio remained at
approximately 74% at both June 30, 2002 and June 30, 2003, it had previously
fallen from approximately 79% at March 31, 2002 to approximately 78% at March
31, 2003.
Product penetration decreased by 1.7 percentage points from 28.4% at
June 30, 2002 to 26.7% at June 30, 2003, principally as a result of higher
average CATV subscriber churn, particularly in the second half of 2002,
following the selected price increases described above. However, subscribers
churn slowed down in the six-month period ended June 30, 2003 and overall, churn
decreased marginally by 0.2 percentage points from 20.7% in the twelve-month
period ended June 30, 2002 to 20.5% in the twelve-month period ended June 30,
2003.
As stated above, we plan a return to subscriber growth in the second
half of 2003. We have continued to improve value for our subscribers by adding
new channels to all of our digital TV packages with six new basic channels added
in July 2003 in addition to ten basic channels and nine Sky multiplex movie
channels added in the six-month period ended June 30, 2003. We have also
launched a new digital TV package offering five of the best Asian TV channels
combined with our flat-rate international service, Talk International.
CONSUMER TELEPHONY REVENUE
Consumer telephony revenue decreased by (pound)5 million or 4.0% from (pound)125
million for the three-month period ended June 30, 2002 to (pound)120 million for
the three-month period ended June 30, 2003 and by (pound)14 million or 5.6% from
(pound)251 million for the six-month period ended June 30, 2002 to (pound)237
million for the six-month period ended June 30, 2003. The decrease in consumer
telephony revenue was primarily due to reductions in subscriber numbers and
telephony lines and lower average monthly revenue per line and subscriber.
Average monthly revenue per line increased by (pound)0.27 or 1.2% from
(pound)23.08 for the three-month period ended June 30, 2002 to (pound)23.35 for
the three-month period ended June 30, 2003, and average monthly revenue per
subscriber decreased by (pound)0.21 or 0.8% from (pound)24.89 for the
three-month period ended June 30, 2002 to (pound)24.68 for the three-month
period ended June 30, 2003. Average monthly revenue per line decreased by
(pound)0.25 or 1.1% from (pound)23.17 for the six-month period ended June 30,
2002 to (pound)22.92 for the six-month period ended June 30, 2003, and average
monthly revenue per subscriber decreased by (pound)0.81 or 3.2% from
(pound)25.09 for the six-month period ended June 30, 2002 to (pound)24.28 for
the six-month period ended June 30, 2003. The benefit of selected price
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increases, the continued success of our un-metered telephony product, Talk
Unlimited, and improved routing of telephony traffic, was more than offset by
declining call volumes principally as a result of the substitution of mobile
calls for fixed line calls, the continuing migration of dial-up internet
subscribers to broadband internet which decreases second line penetration and
the transfer of the dial-up minutes of a large ISP's subscribers to a flat rate
access regime provided by our Carrier Services unit.
Talk Unlimited is our 24-hour, 7 day-a-week fixed-fee residential
telephony package with unlimited local and national calls (excluding calls to
non-geographic, premium rate and mobile telephone numbers) in the UK. This
service, charged at a flat rate of (pound)26.00 per month on a stand-alone
basis, or (pound)34.50 to (pound)41.50 per month including a digital television
package, is successful in attracting new customers to our services, and
generates higher average revenues per customer from existing subscribers who
migrate from our standard metered telephony services, 3-2-1. Talk Unlimited is
available in all of our franchise areas. At the beginning of 2003, we expanded
our flat rate telephony service by launching Talk Evenings and Weekends, a
telephony service offering unlimited local and national evening and weekend
calls to anywhere in the UK (including line rental) and on March 1, 2003 as part
of Talk Unlimited we introduced Talk International, which offers reduced rates
to all international destinations, each for a flat monthly rate.
Talk Unlimited subscribers increased by 44,936 or 15.0% from 300,325
subscribers at June 30, 2002 to 345,261 subscribers at June 30, 2003, including
Talk International subscribers who accounted for 14,465 or 4.2% of Talk
Unlimited's subscribers at June 30, 2003. In addition, at June 30, 2003, Talk
Evenings and Weekends accounted for 52,224 subscribers. Total subscribers to our
`Talk' services therefore at June 30, 2003 amounted to 397,485 or 25.0% of our
total telephony subscribers at that date.
The number of residential telephony subscribers decreased by 37,647
or 2.3% from 1,626,005 at June 30, 2002 to 1,588,358 at June 30, 2003. The
number of residential lines decreased by 70,017 or 4.0% from 1,745,825 at June
30, 2002 to 1,675,808 at June 30, 2003. The decrease in the number of
residential telephony subscribers resulted principally as price rises in April
2002 and March 2003 affected the acquisition of new customers and because of
increased competitive pressure, offset in part by the impact of the increased
penetration of our Talk Unlimited products. The decrease in the number of
residential telephony lines resulted primarily from a decrease in second lines
during the year.
As a result of the price rises in April 2002 and March 2003, the
average residential telephony subscriber churn increased in the second half of
2002 from 16.8% at June 30, 2002 to 17.3% at December 31, 2002. However, churn
decreased by 1.1 percentage points from 16.8% to 15.7% for the twelve-month
period ended June 30, 2003.
Residential telephony product penetration decreased marginally to
33.9% as at June 30, 2003 compared with 34.6% as at June 30, 2002. Second line
penetration decreased to 5.5% as at June 30, 2003 from 7.4% as at June 30, 2002,
due to the price increases for second lines and the continued migration of
dial-up internet subscribers to our blueyonder broadband internet service during
the twelve-month period ended June 30, 2003.
INTERNET AND OTHER REVENUE
Internet and other revenue, which arises wholly in our Consumer
Division, increased by (pound)11 million or 61.1% from (pound)18 million in the
three-month period ended June 30, 2002 to (pound)29 million in the three-month
period ended June 30, 2003 and by (pound)21 million or 61.8% from (pound)34
million in the six-month period ended June 30, 2002 to (pound)55 million in the
six-month period ended June 30, 2003. The increase was due to an increase in
internet income by (pound)12 million or 70.6% to (pound)29 million in the
three-month period ended June 30, 2003 from (pound)17 million in the three-month
period ended June 30, 2002 and by (pound)24 million or 77.4% to (pound)55
million in the six-month period ended June 30, 2003 from (pound)31 million in
the six-month period ended June 30, 2002. These increases resulted from
increases in the number of internet subscribers and the continued success of our
broadband products.
At June 30, 2003 we had 587,700 broadband and dial-up internet
subscribers in total, compared with 483,602 as at June 30, 2002, an increase of
104,098 or 21.5%.
Total blueyonder broadband internet subscribers increased by 151,942
or 85.7% from 177,394 at June 30, 2002 to 329,336 at June 30, 2003. As well as
our minimum standard 512Kb blueyonder broadband service, on June 17, 2002 we
announced the launch of our 1Mb blueyonder broadband service and on May 12,
2003, following a successful trial with 1,500 customers, we launched a 2Mb
blueyonder broadband residential internet service. At June 30, 2003 we had
30,025 subscribers to our 1Mb service and 4,615 subscribers to our 2Mb service
or 9.1% and 1.4%, respectively, of our total blueyonder broadband subscribers.
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Our blueyonder broadband customers significantly contribute to the
growth in our average monthly revenue as 227,792 customers or approximately
69.2% are `triple-play' customers who also take both CATV and telephony services
from us and 93.3% take at least one other product. Broadband is also successful
in attracting new customers to Telewest, with approximately 42% and 40% of
broadband internet installations in the three and six-month periods ended June
30, 2003, respectively being subscribers who are new to Telewest. Blueyonder
broadband churn increased in the twelve-month period ended June 30, 2003 from
9.5% to 13.1% as some of our customers, who were initially attracted by
promotions, discontinued their service.
Average monthly revenue for blueyonder broadband decreased from
(pound)24.28 for the three-month period ended June 30, 2002 to (pound)22.95 for
the three-month period ended June 30, 2003 and from (pound)26.46 for the
six-month period ended June 30, 2002 to (pound)22.76 for the six-month period
ended June 30, 2003 as installation fees in the earlier months in the six-month
period ended June 30, 2003 were discounted and as the portion of average monthly
revenue per subscriber attributable to installation fees gets spread over a
growing subscriber base. Average monthly revenue for the three-month period
ended June 30, 2003 at (pound)22.95 compares with (pound)22.50 for the
three-month period ended March 31, 2003. This increase is due to the launch of
our higher prices 2Mb service in May 2003.
Dial-up internet subscribers to our blueyonder SurfUnlimited product,
which introduces our subscribers to a reliable fixed-fee un-metered service,
together with our blueyonder pay-as-you-go metered internet service decreased by
47,844 or 15.6% from 306,208 at June 30, 2002 to 258,364 at June 30, 2003 as
subscribers continued to migrate to our blueyonder broadband service.
Approximately 21% and 20% of the broadband customers we added during the three
and six-month periods ended June 30, 2003, respectively, were upgrades from
SurfUnlimited. The price of our metered blueyonder pay-as-you-go internet
service was raised from 1.5p per minute to 2p as we encourage these subscribers
to upgrade to an un-metered service.
Other revenues, derived from the sales of CATV publications,
decreased by (pound)1 million and (pound)3 million, respectively, in the three
and six-month periods ended June 30, 2002, respectively, to (pound)0 million at
June 30, 2003 due to cessation of this sales activity in November 2002.
BUSINESS SERVICES REVENUE
Business services revenue decreased by (pound)8 million or 10.4% from
(pound)77 million for the three-month period ended June 30, 2002 to (pound)69
million for the three-month period ended June 30, 2003 and by (pound)4 million
or 2.8% from (pound)143 million for the six-month period ended June 30, 2002 to
(pound)139 million for the six-month period ended June 30, 2003. Revenue in the
three and six-month periods ended June 30, 2002 benefited from a one-time
recognition of (pound)8 million in our Carrier Services unit (see below).
Excluding this one-time credit, business services revenue would have remained
flat at (pound)69 million in both the three-month periods ended June 30, 2002
and 2003, and would have increased by (pound)4 million or 3.0% from (pound)135
million in the six-month period ended June 30, 2002 to (pound)139 million in the
six-month period ended June 30, 2003. Excluding our Carrier Services unit
revenue, business services revenue remained flat at (pound)57 million for the
three-month periods ended June 30, 2002 and 2003 and increased by (pound)1
million or 0.9% from (pound)113 million for the six-month period ended June 30,
2002 to (pound)114 million for the six-month period ended June 30, 2003.
Although the number of business customer accounts decreased by 3,508
accounts or 4.7% from 74,290 at June 30, 2002 to 70,782 at June 30, 2003,
business telephony lines increased by 3,185 lines or 0.7% from 459,698 at June
30, 2002 to 462,883 at June 30, 2003, giving an average of 6.5 business lines
per customer account at June 30, 2003 compared with an average of 6.2 business
lines per customer account at June 30, 2002.
Average monthly revenue per line decreased from (pound)42.30 for the
three-month period ended June 30, 2002 to (pound)40.77 for the three-month
period ended June 30, 2003 and from (pound)41.99 for the six-month period ended
June 30, 2002 to (pound)40.89 for the six-month period ended June 30, 2003, due
primarily to increased business lines offset by increased price competition in
the market place.
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In May 2003, Telewest Business services received recognition of its
service expertise as it was named as one of six companies endorsed by the Office
of Government Commerce to provide broadband services to the public sector. The
Broadband Solutions Framework Agreement will enable public sector organizations
to buy broadband services more quickly and efficiently and provides an
opportunity for Telewest Business to increase its market share in providing
services to this important market.
Our Carrier Services unit, which provides our fiber optic National
Network to other carriers and operators (for example T-Mobile, a mobile
telephone company), contributed (pound)12 million of revenue for the three-month
period ended June 30, 2003 compared with (pound)20 million for the corresponding
period in 2002 and (pound)25 million of revenue for the six-month period ended
June 30, 2003 compared with (pound)30 million for the corresponding period in
2002. Revenue in the three and six-month periods ended June 30, 2002 benefited
from the recognition of (pound)8 million from an Atlantic Telecommunications
contract. (This one-time recognition arose when Atlantic Telecommunications was
placed in administration, the contract was released from its terms and we were
able to credit deferred revenue in the three and six-month periods ended June
30, 2002). Excluding this one-time credit, Carrier Services revenue would have
remained flat at (pound)12 million in both the three-month periods ended June
30, 2002 and 2003, and would have increased by (pound)3 million or 13.6% from
(pound)22 million in the six-month period ended June 30, 2002 to (pound)25
million in the six-month period ended June 30, 2003.
CONTENT SEGMENT
CONTENT DIVISION REVENUE
After the elimination of inter-divisional revenues of (pound)4
million for the three-month period ended June 30, 2002 and (pound)2 million for
the three-month period ended June 30, 2003, the net revenue of Flextech, our
Content Division, remained flat at (pound)26 million for both the three-month
periods ended June 30, 2002 and 2003. After the elimination of inter-divisional
revenues of (pound)7 million for the six-month period ended June 30, 2002 and
(pound)5 million for the six-month period ended June 30, 2003, the net revenue
of Flextech increased by (pound)1 million or 1.9% from (pound)52 million for the
six-month period ended June 30, 2002 to (pound)53 million for the six-month
period ended June 30, 2003. Flextech's increase in net revenue was principally
as a result of growth in advertising revenues offset by the disposal of non-core
businesses. Before the eliminations of inter-divisional trading between Flextech
and Telewest, Flextech's revenue decreased by (pound)2 million or 6.7% from
(pound)30 million for the three-month period ended June 30, 2002 to (pound)28
million for the three-month period ended June 30, 2003 and by (pound)1 million
or 1.7% from (pound)59 million for the six-month period ended June 30, 2002 to
(pound)58 million for the six-month period ended June 30, 2003. This decrease in
net revenue was principally as a result of the disposal of non-core businesses.
Our Content Division's subscription revenue including the Content
Division's share of UKTV's (our joint venture with BBC Worldwide) subscription
revenue increased by (pound)1 million or 6.3% from (pound)16 million for the
three-month period ended June 30, 2002 to (pound)17 million for the three-month
period ended June 30, 2003 and by (pound)1 million or 2.9% from (pound)34
million for the six-month period ended June 30, 2002 to (pound)35 million for
the six-month period ended June 30, 2003, principally as a result of an increase
in Flextech's net subscription revenues partially offset by a decrease in its
share of the revenue of UKTV. This decrease in UKTV revenue resulted primarily
from a decrease in the number of homes receiving UKTV programming during 2002,
largely as the result of the closure of ITV Digital, offset by subscriber growth
at BSkyB. The number of homes receiving programming from our Content Division
fell to approximately 9.4 million in June 2002 from approximately 10.6 million
at March 31, 2002 but has subsequently increased to approximately 10.0 million
at June 30, 2003 as former ITV Digital subscribers have migrated to platforms
carrying Flextech programming.
Advertising revenue, including the Content Division's share of UKTV's
advertising revenue, increased by (pound)2 million or 11.1% from (pound)18
million for the three-month period ended June 30, 2002 to (pound)20 million for
the three-month period ended June 30, 2003 and by (pound)5 million or 14.3% from
(pound)35 million for the six-month period ended June 30, 2002 to (pound)40
million for the six-month period ended June 30, 2003. The Content Division's
increased advertising revenue resulted from the relative viewing strength of its
channels, despite increased competition in the multichannel market. The Content
Division grew its market share with a 3.8% share of the TV advertising market in
the UK for the six-month period ended June 30, 2003, up from 3.4% for the
six-month period ended June 30, 2002.
Our share of UKTV's revenue increased by (pound)1 million in both the
three and six-month periods ended June 30, 2003, to (pound)17 million in the
three-month period ended June 30, 2003 and (pound)34 million in the six-month
period ended June 30, 2003.
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CABLE AND CONTENT SEGMENTS
OPERATING COSTS AND EXPENSES
Our operating costs and expenses before depreciation decreased by
(pound)16 million or 6.8% from (pound)234 million for the three-month period
ended June 30, 2002 to (pound)218 million for the three-month period ended June
30, 2003, and by (pound)28 million or 6.0% from (pound)467 million for the
six-month period ended June 30, 2002 to (pound)439 million for the six-month
period ended June 30, 2003, due to reduced consumer programming expenses,
business and consumer telephony expenses, and selling, general and
administrative expenses, (`SG&A'), partially offset by increased cost of sales
at our Content Division.
Consumer programming expenses decreased by (pound)2 million or 6.3%
from (pound)32 million for the three-month period ended June 30, 2002 to
(pound)30 million for the three-month period ended June 30, 2003 representing
13.8% of total operating costs before depreciation for the three-month period
ended June 30, 2003 compared with 13.7% for the three-month period ended June
30, 2002. Consumer programming expenses decreased by (pound)3 million or 4.6%
from (pound)65 million for the six-month period ended June 30, 2002 to (pound)62
million for the six-month period ended June 30, 2003 representing 14.1% of total
operating costs before depreciation for the six-month period ended June 30,
2003, compared with 13.9% for the six-month period ended June 30, 2002.
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 of content contracts with certain programmers,
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)9
million or 15.5% from (pound)58 million for the three-month period ended June
30, 2002 to (pound)49 million for the three-month period ended June 30, 2003,
representing 22.5% of total operating costs before depreciation for the
three-month period ended June 30, 2003, compared with 24.8% for the three-month
period ended June 30, 2002. Business and consumer telephony expenses decreased
by (pound)13 million or 11.5% from (pound)113 million for the six-month period
ended June 30, 2002 to (pound)100 million for the six-month period ended June
30, 2003, representing 22.8% of total operating costs before depreciation for
the six-month period ended June 30, 2003, compared with 24.2% for the six-month
period ended June 30, 2002. These decreases resulted principally from improved
routing of telephony traffic and a reduction in termination rates for certain
calls.
The Content Division's cost of sales increased by (pound)3 million or
20.0% from (pound)15 million for the three-month period ended June 30, 2002 to
(pound)18 million for the three-month period ended June 30, 2003, representing
8.3% of total operating costs before depreciation for the three-month period
ended June 30, 2003 compared with 6.4% for the three-month period ended June 30,
2002. The Content Division's cost of sales increased by (pound)4 million or
12.9% from (pound)31 million for the six-month period ended June 30, 2002 to
(pound)35 million for the six-month period ended June 30, 2003, representing
8.0% of total operating costs before depreciation for the six-month period ended
June 30, 2003 compared with 6.6% for the six-month period ended June 30, 2002.
The Content Division's cost of sales consists principally of amortization costs
of programming shown on its TV channels and the costs of advertising sales those
channels receive. The Content Division's cost of sales was 64.3% of the Content
Division's revenues (including inter-divisional sales to Telewest) for the
three-month period ended June 30, 2003 compared with 50.0% on the same basis for
the three-month period ended June 30, 2002 and 60.3% for the six-month period
ended June 30, 2003 compared with 52.5% on the same basis for the six-month
period ended June 30,2002. The increase in the Content Division's cost of sales
is primarily attributable to additional investment in programming in the
six-month period ended June 30, 2003.
SG&A which includes, among other items, salary and marketing costs,
decreased by (pound)8 million or 6.2% from (pound)129 million for the
three-month period ended June 30, 2002 to (pound)121 million for the three-month
period ended June 30, 2003 and by (pound)16 million or 6.2% from (pound)258
million for the six-month period ended June 30, 2002 to (pound)242 million for
the six-month period ended June 30, 2003. The decrease in SG&A primarily
reflects the reductions in payroll costs from decreasing numbers of employees,
lower marketing and advertising costs and decreases in other overhead expenses,
as we continue to focus on cost control and achieve cost efficiencies across the
Group, offset by (pound)7 million of legal and professional costs relating to
our Financial Restructuring incurred during the six-month period ended June 30,
2003.
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On May 2, 2002, we announced that we were reducing our staffing
levels by approximately 1,500 as part of a Group reorganization. This had been
substantially completed by the end of 2002 although a further 300 staff left in
the six-month period ended June 30, 2003 and headcount now stands at
approximately 8,900 compared to 10,200 a year ago. SG&A increased as a
percentage of total operating costs, before depreciation from 55.1% for the
three-month period ended June 30, 2002 to 55.5% for the three-month period ended
June 30, 2003 and decreased from 55.2% for the six-month period ended June 30,
2002 to 55.1% for the six-month period ended June 30, 2003. Also, as part of our
focus on cost control, we are in the process of rationalizing our property
portfolio and reducing the number of occupied properties from some 230 to 190.
As part of this rationalization, we recently moved out of our original head
office building in Woking.
Depreciation expense decreased by (pound)27 million or 20.9% from
(pound)129 million for the three-month period ended June 30, 2002 to (pound)102
million for the three-month period ended June 30, 2003 and by (pound)48 million
or 19.5% from (pound)246 million for the six-month period ended June 30, 2002 to
(pound)198 million for the six-month period ended June 30, 2003. This decrease
is primarily attributable to the decreasing level of capital expenditure over
the last 18 months and the charge for impairment of fixed assets (amounting to
(pound)841 million) which was recorded in the year ended December 31, 2002.
OTHER INCOME/(EXPENSE)
Other income, net of other expense, before taxation, totaled (pound)4
million for the three-month period ended June 30, 2003 compared with other
expense, net of other income of (pound)32 million for the three-month period
ended June 30, 2002, an increase in net income of (pound)36 million or 112.5%.
This net increase in income resulted primarily from increased foreign exchange
gains and decreased interest expense due to the weakening of the US dollar
against the pound sterling on re-translating our US dollar-denominated debt and
interest in the three-month period ended June 30, 2003, partially offset by
decreased gains on disposals of investments. Other expense, net of other income,
before taxation, totaled (pound)162 million for the six-month period ended June
30, 2003 and (pound)128 million for the six-month period ended June 30, 2002, an
increase of (pound)34 million or 26.6%. This net increase in expense resulted
primarily from decreased foreign exchange gains incurred in the six-month period
ended June 30, 2003, and decreased gains on disposals of investments.
Interest income was (pound)6 million for the three-month period ended
June 30, 2003 and (pound)12 million for the six-month period ended June 30, 2003
compared with (pound)7 million for both the three and six-month periods ended
June 30, 2002. Interest income was generated from the higher cash balances held
by us during the three and six-month periods ended June 30, 2003 as a result of
drawing down under our existing Senior Secured Facility (the `Existing
Facility') in advance of funding requirements.
Interest expense decreased by (pound)12 million or 9.2% from
(pound)131 million for the three-month period ended June 30, 2002 to (pound)119
million for the three-month period ended June 30, 2003 and by (pound)8 million
or 3.2% from (pound)252 million for the six-month period ended June 30, 2002 to
(pound)244 million for the six-month period ended June 30, 2003. These decreases
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 broadband internet products and general
working capital offset by decreased expense on re-translating our
dollar-denominated interest at the period end exchange rate.
In the three-month period ended March 31, 2002, the Group 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 Other Comprehensive Income (`OCI') of (pound)53 million
resulting from marking to market the derivative instruments was 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.
Foreign exchange gains, net, totaled (pound)117 million in the
three-month period ended June 30, 2003 compared with (pound)63 million in the
three-month period ended June 30, 2002, and (pound)69 million in the six-month
period ended June 30, 2003 compared with (pound)84 million in the six-month
period ended June 30, 2002. These gains were primarily the result of the US
dollar significantly weakening against the pound sterling during the respective
periods, and in the six-month period ended June 30, 2002, the result of the
release of (pound)53 million from OCI, as described above. Following the
termination of all of our derivative arrangements (see `Liquidity and Capital
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Resources' below), we now have increased our foreign exchange risk and our
unhedged dollar-denominated liabilities are translated at period-end exchange
rates contributing to higher foreign exchange gains or losses as the US dollar
fluctuates against the pound sterling. We will continue to monitor this risk
until the Financial Restructuring is complete, when it is anticipated that the
US dollar-denominated debt instruments will be swapped for equity and the
foreign exchange risk is minimised.
Our share of net profits of affiliated companies was (pound)0 million
for the three-month period ended June 30, 2003 compared with losses of (pound)5
million for the three-month period ended June 30, 2002 and net profits of
(pound)2 million for the six-month period ended June 30, 2003 compared with
losses of (pound)1 million for the six-month period ended June 30, 2002. Our
principal affiliated companies as at June 30, 2003 included UK Gold Holdings
Limited, UK Channel Management Limited and Front Row Television Limited.
Other profits/losses, net, amounted to (pound)0 million for the
three-month period ended June 30, 2003 and a net loss of (pound)1 million for
the six-month period ended June 30, 2003 compared with net profits of (pound)34
million for both the three and six-month periods ended June 30, 2002. The net
profits in 2002 arose primarily as a result of gains arising on the disposal of
our investments in our subsidiaries The Way Ahead Group Limited and Maidstone
Studios and in affiliated companies, TV Travel Group Limited and SMG plc.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the `Bondholder Committee'). That agreement
provided for the cancellation of all outstanding notes and debentures (the
`Notes') (approximately (pound)3.5 billion) and certain other unsecured foreign
exchange hedge contracts (the `Hedge Contracts') (approximately (pound)33
million) in exchange for new ordinary shares (the `New Shares') representing 97%
of our issued share capital immediately after the Financial Restructuring. Under
that agreement our current ordinary shareholders would have received the
remaining 3% of our issued ordinary share capital. On June 9, 2003, we announced
that we had been notified by the Bondholder Committee that, in order to obtain
the support of certain of the Company's bondholders, the Bondholder Committee
had requested certain changes to the economic and other terms of the preliminary
agreement relating to the Financial Restructuring. On July 28, 2003, we
announced that we expect the final terms of the Financial Restructuring to
provide that ordinary shareholders will receive 1.5% of the issued share capital
immediately following the restructuring. (For further disclosure relating to the
restructuring and continuing discussions, see `Financial Restructuring').
Notwithstanding the expected completion of the restructuring, over
the next twelve months, the margin of our available financing over requirements
is not large and consistent delivery of budget and the Group's long range plan
is necessary to ensure compliance with the terms of the financial covenants of
the Existing Facility relating to our financial and operational performance. We
anticipate that in order to obtain the required approval of our Senior Lenders
to any final restructuring agreement, we will be required to amend these
covenants and/or agree to additional covenants by entering into an amended and
restated Senior Secured Facility (the `Amended Facility'). We expect that any
amended or additional covenants will continue to require our consistent delivery
of budget and long range plan. Prior to reaching final agreement with the Senior
Lenders as to the Amended Facility, we will not be able to access further
funding from the Senior Lenders. We had (pound)405 million of available cash as
at June 30, 2003, but there are significant restrictions imposed by our Senior
Lenders on the use of a substantial portion of our cash balances.
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);
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o the issuance to Deutsche Telekom (`DT') in November 2000, January 2001
and May 2001, respectively, of an aggregate of (pound)254 million
Accreting Convertible Notes due 2003 as consideration for its 100%
interest in Eurobell;
o the issuance in October 1995 of $300 million principal amount of
Senior Debentures due 2006 and $1,537 million principal amount at
maturity of Senior Discount Debentures due 2007;
o the issuance in November 1998 of $350 million principal amount of
Senior Notes due 2008;
o the issuance in February 1999 of(pound)300 million principal amount of
Senior Convertible Notes due 2007;
o the issuance in April 1999 of (pound)325 million principal amount at
maturity and $500 million principal amount at maturity of Senior
Discount Notes due 2009;
o the issuance in January 2000 of $450 million principal amount at
maturity of Senior Discount Notes due 2010 and(pound)180 million
principal amount and $350 million principal amount of Senior Notes due
2010;
o the issuance in July 2000 of $500 million Senior Convertible Notes due
2005;
o the sale during 2002 of our investments in subsidiary companies, The
Way Ahead Group and Maidstone Studios, which realized (pound)14
million in aggregate, and in affiliated companies TV Travel Group and
SMG, which realized (pound)59 million in aggregate;
o the termination in 2002 of foreign exchange derivative contracts
realizing(pound)76 million in aggregate;
o borrowings under the Existing Facility and Institutional Tranche (as
described below), (an aggregate of (pound)2,000 million outstanding at
June 30, 2003); and
o cash from operations.
Where appropriate, we have also used leasing and vendor financing. At
June 30, 2003, obligations under these financing arrangements amounted to
(pound)186 million in respect of finance leasing to fund the purchase of certain
equipment. Until we have reached final agreement with our bank lenders
concerning the Amended Facility and completed our restructuring, we will be
limited in our ability to incur further leasing and vendor financing.
We face the following significant risks and uncertainties relating to
liquidity and capital resources:
o the ability to successfully complete our balance sheet restructuring;
o successful execution of our long range business plan, which in turn
will affect our ability to raise further finance under the Existing or
Amended Facility, as applicable; and
o the ability to meet financial covenants necessary to secure further
finance under the Existing or Amended Facility, as applicable, or to
otherwise raise the finance necessary to fund our operations.
For the six-month period ended June 30, 2003, we had a net cash
inflow from operating activities of (pound)136 million compared with a net
outflow of (pound)13 million for the six-month period ended June 30, 2002,
principally due to our better operating results and management of working
capital together with the deferred payment of bond interest in advance of our
proposed Financial Restructuring.
We incurred a net cash outflow from investing activities of (pound)92
million for the six-month period ended June 30, 2003 compared with (pound)229
million for the six-month period ended June 30, 2002, a decrease of (pound)137
million or 59.8%. Capital expenditure accounted for (pound)110 million of the
net total in 2003 compared with (pound)263 million in 2002 (see `Property and
equipment' below) which was offset by the proceeds of repayments of loans to
affiliated companies and disposal of an affiliated company.
Net cash used in financing activities totaled (pound)29 million for
the six-month period ended June 30, 2003, consisting solely of the capital
element of vendor finance and finance lease repayments, compared with net cash
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provided by financing activities of (pound)569 million for the six-month period
ended June 30, 2002. 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 Existing Facility and (pound)105 million realized on
termination of certain US dollar/pound sterling exchange rate hedging
arrangements.
We anticipate that our principal uses of cash in the future will be
to fund our operations (including operating losses), capital expenditure and to
service debt. Although we expect to continue to incur operating losses over the
short to medium term, we anticipate that they will reduce as we continue to
realize the benefits of our roll-out of digital television and broadband
internet services which we anticipate will continue to increase `triple play'
penetration, increase revenue per customer in our residential and business
markets, achieve the cost-efficiencies of delivering these services over our
owned broadband network and benefit from the significant headcount reduction
during 2002. Notwithstanding that we expect our capital expenditure requirements
to continue to decrease in 2003 over 2002, we expect to continue to have
significant capital needs in the future. With the majority of our network
construction complete and substantially all network upgrades necessary for
delivery of telephony and digital services complete, we anticipate that our
capital expenditure will be largely driven by the costs associated with the
connection of new subscribers (which will vary depending upon the take-up of our
services) and of the replacement of network assets at the end of their useful
lives.
We anticipate that our principal sources of funds in the future will
be proceeds from bank facilities, additional vendor financing, if available,
possible strategic sale of assets, cash in hand and cash flow from operating
activities. Our future actual funding requirements could exceed currently
anticipated requirements. Differences may result from higher-than-anticipated
costs or capital expenditure and/or lower than anticipated revenues. Our actual
costs, capital expenditure and revenues will depend on many factors, including,
inter alia, consumer demand for voice, video, data and internet services, the
impact on our business of new and emerging technologies, the extent to which
consumer preference develops for cable television over other methods of
providing in-home entertainment, the development of the interactive e-commerce
market, consumer acceptance of cable telephony as a viable alternative to BT's
telephony services, and the continued downward pressure on telephony margins.
As of June 30, 2003, we had cash balances of (pound)405 million
(excluding (pound)12 million that is restricted as to use to providing security
for leasing obligations). However, we are currently unable to access further
funding until such time as the Amended Facility is agreed with the Senior
Lenders and there are significant restrictions imposed by our Senior Lenders on
the use of a substantial portion of our cash balances. Our cash balances have
increased by (pound)15 million during the six-month period ended June 30, 2003
as a result of net cash provided by operating activities, significantly reduced
expenditure on property and equipment and the non-payment of bond interest in
advance of our proposed Financial Restructuring.
Following the Flextech merger in April 2000, we had two separate
facilities:
o we were a party to a(pound)1.5 billion senior secured 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 the Existing Facility with a
syndicate of banks for (pound)2.25 billion. The terms of the loan agreement
governing the Existing Facility allowed us to raise (pound)250 million from
institutional investors (the `Institutional Tranche') and raise a further
(pound)500 million of leasing and vendor financing. The first drawdown under
this new facility was used to repay our old senior secured credit facility and
the Flextech facility, noted above. On October 17, 2001, GE Capital Structured
Finance Group Limited, an affiliate of GE Capital, lent us (pound)125 million as
part of the (pound)250 million Institutional Tranche. Additionally, on March 12,
2002, we announced that we had secured a further (pound)20 million of
institutional funding from Newcourt Capital (UK) Ltd., a subsidiary of CIT Group
Inc. As at June 30, 2003, (pound)186 million of leasing and (pound)0 million of
vendor financing had been incurred.
As part of the negotiations with our Senior Lenders in respect of a
restructuring, on August 21, 2002, September 27, 2002, February 26, 2003 and May
29, 2003, the Company and its Senior Lenders amended certain provisions of the
Existing Facility restricting the level of our permitted borrowings,
investments, encumbrances and disposals. On January 15, 2003 we announced that
we had reached a non-binding agreement with respect to the terms of the Amended
Facility with both the steering committee of our Senior Lenders and the
Bondholder Committee. In addition, we announced that as at that date, the terms
of the Amended Facility had received credit committee approval, subject to
documentation and certain other issues, from all of our Senior Lenders, save for
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those banks which are also creditors by virtue of the settlement of the Hedge
Contracts. The Amended Facility will replace our Existing Facility and is, as
noted above, conditional on various matters, including the satisfactory
finalization of arrangements for dealing with the Hedge Contracts and the
completion of our Financial Restructuring. The Amended Facility will provide us
with substantial liquidity which is expected to be sufficient to meet our
funding needs after completion of the Financial Restructuring.
Until a final agreement is reached with our Senior Lenders, we
continue to operate under the Existing Facility, as amended on August 21, 2002,
September 27, 2002, February 26, 2003 and May 29, 2003. Borrowings under the
Existing Facility are secured on our assets, including partnership interests and
shares of subsidiaries, and, except for the Institutional Tranche, bear interest
at between 0.5% and 2.25% above LIBOR (depending on the ratio of borrowings to
quarterly annualized consolidated net operating cash flow). Borrowings under the
Institutional Tranche bear interest at up to 4% above LIBOR. The terms of the
facility restrict transfers or disposals of assets from certain subsidiary
companies. These restrictions relate to the type and value of the consideration
that can be accepted. Currently our ability to borrow under the Existing
Facility is restricted by amendments agreed with our Senior Lenders on August 21
and September 27, 2002 referred to above. When a final agreement is reached with
our Senior Lenders, our ability to borrow under the Amended Facility will be
subject to, among other things, our compliance with the financial and other
covenants set forth in the loan agreement governing that facility and failure to
comply with those covenants could result in all amounts outstanding thereunder
becoming immediately due and payable. We anticipate that a final agreement with
our Senior Lenders will include amendments to existing covenants and/or the
addition of new covenants relating to our financial and operational performance.
As anticipated, the decision to defer payment of interest under
certain of our Notes and amounts due as a result of the settlement of the Hedge
Contracts has resulted in defaults under the Existing Facility. A default under
the Existing Facility generally allows a group of our Senior Lenders,
representing not less than two thirds in value of amounts borrowed under that
facility, to declare all amounts owed to be immediately payable and/or to
restrict our ability to access our otherwise available cash. Given progress
reached to date in respect of amending our Existing Facility as part of a
restructuring agreement, we do not expect our Senior Lenders to demand repayment
on account of any default under the Existing Facility, including a default that
arose as a result of a breach of certain financial covenants under the Existing
Facility (as discussed below). There can be no assurance, however, that our
Senior Lenders will not demand repayment of all amounts outstanding under the
Existing Facility based on a now existing or future default.
We regularly monitor our ongoing ability to draw down under our bank
facilities, which is dependent on satisfying the financial covenants contained
in the loan agreement governing those facilities (see below for a discussion of
our failure to meet two such covenants in the Existing Facility for each of the
three-month periods ended December 31, 2002 and March 31, 2003). We expect that
when agreed the Amended Facility will include covenants, compliance with which
will require us to improve business performance and profitability. Our new long
range business plan anticipates that we will be able to grow at a rate which
will allow us to meet these covenants. However, this long range plan includes
forecast information, the principal assumptions of which are clearly subject to
a degree of risk, in particular our ability to increase revenues in accordance
with our plans. If we were unable to remain compliant with our covenants (or to
meet our debt service obligations), we could attempt to further restructure or
refinance some or all of our existing indebtedness or to seek additional
funding. We cannot assure you, however, that we would be able to do so on
satisfactory terms, if at all.
On March 14, 2003, we notified our Senior Lenders that, as a result
of provisions made for the VAT judgment (see our Form 20-F filed June 30, 2003,
Item 5. Operating and Financial Review and Prospects--Operating Results--Results
of Operations--Years ended December 31, 2001 and 2002--Revenue) and fees
incurred in respect of the Financial Restructuring, and the resulting impact of
these provisions on our net operating cash flow, we were in breach of two
financial covenants under the Existing Facility in respect of the three-months
ended December 31, 2002. On May 16, 2003 and August 7, 2003, we further notified
the Senior Lenders that we were in breach of financial covenants for the
three-month periods ended March 31, 2003 (two covenants breached) and June 30,
2003 (one covenant breached) due to continuing fees incurred in respect of the
Financial Restructuring and the tightening of covenants. The breach of these
financial covenants constituted a default under the Existing Facility. For the
reasons noted above, we do not expect our Senior Lenders to demand repayment of
the Existing Facility as a result of these defaults.
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We believe we have adequate resources to continue in operational
existence for a period of at least 12 months from July 31, 2003, the date of
issuance of our Interim Report for 2003. This belief assumes the successful
conclusion of the Financial Restructuring (and any required amendments to the
Existing Facility).
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments as at June 30,
2003 are summarized in the table below.
--------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
--------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- ------ --------- --------- -------------
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
------------------------------------------- ------------------ ------------------ ------------- ----------------- -----------------
Long-term debt............................. 5,422 4,604 3 3 812
Capital lease obligations.................. 186 102 53 29 2
Operating leases........................... 152 15 27 24 86
Unconditional purchase obligations......... 757 757 - - -
Other long-term obligations................ - - - - -
------------------------------------------- ------------------ ------------------ ------------- ----------------- -----------------
Total contractual obligations.............. 6,517 5,478 83 56 900
=========================================== ================== ================== ============= ================= =================
The following table includes information about our commercial
commitments as of June 30, 2003. 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 YEARS
COMMITTED YEAR --------- --------- -------------
------------ -----------
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
----------------------------------- ---------------------- ----------------- ---------------- ---------------- ----------------
Guarantees......................... 18 6 - 12 -
=================================== ====================== ================= ================ ================= ================
We have no other contractual or commercial commitments.
PROPERTY AND EQUIPMENT
Additions to property and equipment in the six-month period ended
June 30, 2003 totaled (pound)104 million, a decrease of (pound)137 million or
56.8% from (pound)241 million for the six-month period ended June 30, 2002. This
decrease is due to reduced network spend and lower levels of customer
acquisition. 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, 2003 were principally a
result of network upgrades and new subscriber installations in connection with
our roll-out of digital television and broadband internet services.
We have substantially completed all network upgrades necessary for
delivery of our digital television and broadband internet services.
Consequently, we anticipate that capital expenditures associated with our
services will be largely driven by the connection of new subscribers (which will
depend on the take-up of our services) and of he replacement of network assets
at the end of their useful lives. In the second half of 2003, management will
continue to focus on reducing capital expenditure, however, additions to
property and equipment in the second half are expected to be higher than the
first six months as we plan to return to customer growth, upgrade our IP
capacity and enhance our IT infrastructure.
Included in the table of contractual obligations shown above is a
total of (pound)13 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
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table, we have contracted to buy (pound)32 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.
FINANCIAL RESTRUCTURING
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the `Bondholder Committee'). That agreement
provided for the cancellation of all outstanding notes and debentures (the
`Notes') (approximately (pound)3.5 billion) and certain other unsecured foreign
exchange hedge contracts (the `Hedge Contracts') (approximately (pound)33
million) in exchange for new ordinary shares (the `New Shares') representing 97%
of our issued share capital immediately after the Financial Restructuring. Under
that agreement our current ordinary shareholders would have received the
remaining 3% of our issued ordinary share capital.
We also announced on September 30, 2002 that we were deferring payment of
interest under certain of our Notes and the amounts due as a result of the
settlement of the Hedge Contracts. Such non-payment continues and has resulted
in defaults under our Existing Facility and a number of other financing
arrangements. Based on one such default, in respect of non-payment of
approximately (pound)10.5 million to a Hedge Contract counter-party, that
counter-party has filed a petition with a UK Court to wind us up. We intend to
deal with this claim as part of the overall restructuring of our unsecured debt
obligations and do not believe that the legal action will significantly delay or
impede the Financial Restructuring process. We expect to meet our obligations to
our suppliers and trade creditors and this legal action is expected to have no
impact on customer service.
On January 15, 2003, we announced that we had reached a non-binding
agreement with respect to the terms of amended and restated credit facilities
with both the steering committee of the Senior Lenders and the Bondholder
Committee. In addition, the terms of these facilities had received credit
committee approval, subject to documentation and certain other issues, from all
of our Senior Lenders, save for those banks which are also creditors by virtue
of the unsecured Hedge Contracts with which we will deal in the overall
Financial Restructuring. These amended facilities will replace the Existing
Facility and are, as noted above, conditional on various matters, including the
satisfactory finalization of arrangements for dealing with foreign exchange
creditors and the completion of our balance sheet restructuring. These amended
credit facilities will provide us with substantial liquidity, which is expected
to be sufficient to see us through to cash flow positive after completion of the
Financial Restructuring.
On March 14, 2003, we notified the Senior Lenders that, as a result of
two non-recurring items, the VAT decision (see the 20-F, Item 5. Operating and
Financial Review and Prospects -- Operating Results -- Results of Operations
--Years ended December 31, 2001 and 2002 -- Revenue) and legal and professional
costs associated with the Financial Restructuring, and their impact on our net
operating cash flow, we would breach certain financial covenants under our bank
facility in respect of the quarter ended December 31, 2002. On May 16, 2003 and
August 7, 2003, we further notified the Senior Lenders that we were in breach of
the financial covenants for the three-month periods ended March 31, 2003 (two
covenants breached) and June 30, 2003 (one covenant breached) due to continuing
fees paid in connection with the Financial Restructuring and the tightening of
covenants.
On June 9, 2003, we announced that we had been notified by the Bondholder
Committee that, in order to obtain the support of certain of our bondholders,
the Bondholder Committee had requested certain changes to the economic and other
terms of the preliminary non-binding agreement relating to our Financial
Restructuring with the Bondholder Committee, as announced on September 30, 2002,
On June 17, 2003, representatives of the Bondholder Committee provided
us with a new proposal for the terms of the Financial Restructuring.
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
We continue to engage in negotiations with our bondholders, Senior
Lenders and certain other major stakeholders and the directors believe that a
final agreement will be achieved in due course.
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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, 2003 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 may 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.
Notwithstanding that we intend to cancel all of our outstanding bonds
upon completion of the Financial Restructuring, until and unless that
restructuring occurs, we will be exposed to foreign exchange fluctuations in
respect of the principal and interest on bonds no longer hedged. We have also
increased our exposure to variable interest rates, as we have not renewed a
significant number of the xxxxxx that have expired in connection with the
Existing 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, 2003 was
(pound)1.6 billion (being approximately (pound)2.0 billion of drawdowns less
approximately (pound)400 million cash balances) and the aggregate notional
principal amount of the hedging arrangements was (pound)900 million, leaving an
unhedged amount of (pound)1.1 billion at June 30, 2003.
FOREIGN CURRENCY EXCHANGE RISK
We hold derivative financial instruments solely to hedge specific
risks and did 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 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 could, at our option, redeem the instruments before maturity.
Our results may be materially influenced by future exchange rate
movements now that we have largely discontinued the use of hedge accounting,
since such derivative financial instruments would be considered speculative for
accounting purposes and would be marked to their market value with changes being
included immediately in earnings, whereas the underlying liabilities would be
re-translated at the spot rate of exchange. Cancellation or redemption of the
derivative financial instruments has increased our exposure to foreign currency
exchange rate risk on our US dollar-denominated debt.
In the three-month period ended September 30, 2002, we terminated all
of our then remaining hedging arrangements with a nominal value of $2.3 billion
(approximately (pound)1.5 billion). Contracts with a nominal value of $1 billion
were settled in cash resulting in an outflow of (pound)28 million. The remaining
contracts have a nominal value of $1.3 billion and have yet to be settled for a
total cost of (pound)33 million of which (pound)19 million was due on October 1,
2002 but our Board of Directors decided to defer such payment and is considering
the payment in the context of our Financial Restructuring.
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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, 2003 JUNE 30, 2002
------------- -------------
---------------------------------------------------------------------------------------------------------------------------------
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................................................ (29) 6 (23) 14
Fixed rate debt.................................................... (1,258) (38) (1,676) (54)
---------------------------------------------------------------------------------------------------------------------------------
Based on our variable rate debt outstanding at June 30, 2003 after
taking into account our derivative instruments, we estimate that a
one-percentage point change in interest rates would have an approximately
(pound)11 million impact on our annual net interest expense.
FOREIGN CURRENCY EXCHANGE RATE RISK
The sensitivity analysis below presents the hypothetical change in
fair value based on an immediate 10% decrease in the US dollar to pound sterling
exchange rate.
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------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
------------------------------------------------------------------------------------------------------------------------------------
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............................. (896) (100) (1,121) (125)
Foreign currency swap............................................ No longer No longer 1 22
applicable applicable
Foreign exchange forward contracts............................... (33) No longer (49) 119
applicable
------------------------------------------------------------------------------------------------------------------------------------
The hypothetical change in fair value for the US dollar-denominated
long-term debt is calculated by re-translating to pounds sterling the
dollar-denominated long-term debt at a rate 10% below the US dollar/pound
sterling exchange rate prevailing at the relevant period end.
The fair value of the foreign exchange forward contracts of (pound)33
million represents the settlement cost of the contracts unwound but not yet
paid. This is a fixed cost and will not vary with movements in exchange rates.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS 149 AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, to address (1)
decisions reached by the Derivatives Implementation Group, (2) developments in
other Board projects that address financial instruments, and (3) implementation
issues related to the definition of a derivative.
SFAS 149 has multiple effective date provisions depending on the
nature of the amendment to SFAS 133, and we are currently considering its
potential effect on our financial statements.
SFAS 150 ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. For unmodified financial instruments existing at
May 31, 2003, SFAS 150 is effective at the beginning of the first interim period
beginning after June 15, 2003. We do not expect the new standard to have a
significant effect on our financial statements.
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. In
September 2002, MediaOne disposed of its entire shareholding. From May 3, 2001
through May 28, 2003 the shareholdings of Liberty Media and Microsoft have been
approximately 25.2% and 23.6%, respectively. On May 28, 2003, we were informed
that Microsoft had sold its entire holding to a subsidiary of IDT Corporation,
resulting in IDT Corporation beneficially owning approximately 23.6% of our
shares. Microsoft's right to appoint members to our board of directors was not
transferable and terminated as a result of Microsoft's sale.
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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 relate to, among other things,
our anticipated cost savings, revenue growth, operating efficiencies, future
liquidity, introduction of services and our plans and objectives. By their
nature, forward-looking statements 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:
o our ability to reach final agreement with our Senior Lenders on the
terms of the Amended Facility (as described under Liquidity and
Capital Resources above);
o our ability to successfully conclude the Financial Restructuring (as
described above) of our balance sheet;
o the extent to which consumer demand for voice, video, data and
internet services increases;
o the extent to which we are able to compete with other providers of
broadband internet services, including British Telecommunications plc
(`BT');
o the extent to which Small-to-Medium-sized Enterprises (`SMEs') accept
cable telephony services as an alternative to those of competing
service providers such as BT;
o the extent to which we are able to adapt to, and compete with, new and
emerging technologies including Asynchronous Digital Subscriber Line
technology (`ADSL') and 3rd generation mobile telephony technology;
o the extent to which consumer preference develops for cable television
over other methods of providing in-home entertainment;
o 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;
o the extent to which consumers accept cable telephony as a viable
alternative to telephony services provided by BT;
o the extent to which we are successfully able to compete with mobile
network operators;
o the extent to which regulatory and competitive pressures in the UK
telephony market continue to reduce prices;
o our ability to develop and introduce attractive interactive and high
speed data services in a rapidly changing and highly competitive
business environment;
o our ability to penetrate markets and respond to changes or increases
in competition;
o our ability to compete with other internet service providers (`ISPs');
o our ability to compete against digital television service providers,
including British Sky Broadcasting Group plc (`BSkyB') and Freeview,
by increasing our digital services customer base, and the impact of
our aggressive digital services marketing campaign on our results of
operations and liquidity;
o our ability to have an impact on, or respond to, new or changed
government regulation;
o our ability to manage growth and expansion;
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o our ability to improve operating efficiencies, including through cost
reductions;
o our ability to maintain and upgrade our network in a cost-efficient
and timely manner without losing key personnel to the detriment of
operational performance;
o adverse changes in the price or availability of telephony
interconnection or cable television programming;
o disruptions in supply of programming, services and equipment; and
o the extent to which consumer preference develops for, or shifts away
from, content developed and distributed by Flextech (our Content
Division).
31
