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-MONTH
PERIOD ENDED MARCH 31, 2002.
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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
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2002 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)
(note 2)
REVENUE
Cable television $ 121 (pound) 85 (pound)78
Consumer telephony 179 126 120
Internet and other 23 16 7
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TOTAL CONSUMER DIVISION 323 227 205
Business Services Division 94 66 62
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TOTAL CABLE DIVISION 417 293 267
Content Division 37 26 31
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TOTAL REVENUE 454 319 298
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OPERATING COSTS AND EXPENSES
Consumer programming expenses (including(pound)4m and(pound)nil in 2002
and 2001, respectively, to related parties) 46 33 37
Business and consumer telephony expenses 78 55 61
Content expenses 23 16 19
Depreciation 167 117 115
------------------------------------
Cost of sales 314 221 232
Selling, general, and administrative expenses (including(pound)nil and
(pound)1m in 2002 and 2001, respectively, to related parties) 184 129 128
Amortization of goodwill - - 45
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498 350 405
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OPERATING LOSS (44) (31) (107)
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OTHER INCOME/(EXPENSE)
Interest income (including(pound)nil and(pound)3m in 2002 and 2001,
respectively, from related parties) - - 5
Interest expense (including amortization of debt discount) (173) (121) (111)
Foreign exchange gain/(loss), net 30 21 (21)
Share of net profits of affiliates 6 4 6
Other, net - - (1)
------------------------------------
LOSS BEFORE INCOME TAXES (181) (127) (229)
Income tax benefit 3 2 2
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NET LOSS BEFORE EXTRAORDINARY ITEM (178) (125) (227)
Extraordinary loss on extinguishment of debt - - (15)
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NET LOSS FOR THE PERIOD AFTER EXTRAORDINARY ITEM (178) (125) (242)
====================================
BASIC AND DILUTED LOSS PER ORDINARY SHARE:
Before extraordinary item $ (0.06)(pound)(0.04)(pound)(0.08)
After extraordinary item $ (0.06)(pound)(0.04)(pound)(0.08)
Weighted average number of ordinary shares - basic and diluted - (millions) 2,873 2,886
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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MARCH 31, MARCH 31, DEC. 31,
2002 2002 2001
$M (POUND)M (XXXXX)M
(note 2) AUDITED
ASSETS
Cash and cash equivalents $ 130 (pound) 91 (pound) 14
Secured cash deposits restricted for more than one year 28 20 20
Trade receivables (net of allowance for doubtful accounts of(pound)17m in 2002 and
(pound)16m in 2001) 182 128 116
Other receivables 145 102 112
Prepaid expenses 63 44 33
--------------------------------------
Total current assets 548 385 295
Investments in affiliates, accounted for under the equity method, and related receivables 788 553 547
Property and equipment (less accumulated depreciation of(pound)1,990m in 2002 and
(pound)1,873m in 2001) 4,965 3,486 3,473
Goodwill (less accumulated amortization of(pound)382m in 2002 and(pound)382m in 2001) 2,695 1,892 1,892
Inventory 102 72 67
Other assets (less accumulated amortization of(pound)51m in 2002 and(pound)47m in 2001) 77 54 58
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TOTAL ASSETS 9,175 6,442 6,332
======================================
LIABILITIES AND SHAREHOLDERS' FUNDS
Accounts payable 222 156 109
Other liabilities 526 369 410
Deferred income 161 113 114
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Total current liabilities 909 638 633
Deferred tax 158 111 113
Debt 7,377 5,180 4,897
Capital lease obligations 332 233 238
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TOTAL LIABILITIES 8,776 6,162 5,881
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SHAREHOLDERS' EQUITY
Ordinary shares, 10 xxxxx par value;
4,300 million shares authorized and 2,873 million shares issued and outstanding 409 287 287
Limited voting convertible ordinary shares, 10 xxxxx par value;
300 million shares authorized and 82 million shares issued and outstanding 11 8 8
Additional paid-in capital 6,016 4,224 4,224
Accumulated deficit (6,023) (4,229) (4,104)
Accumulated other comprehensive income (13) (9) 37
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400 281 452
Ordinary shares held in trust for the Telewest Restricted Share Scheme and the
Telewest Long-Term Incentive Plan (1) (1) (1)
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TOTAL SHAREHOLDERS' EQUITY 399 280 451
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 9,175 6,442 6,332
======================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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3 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2002 2001
$M (POUND)M (POUND)M
(note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (178)( pound)(125) (pound)(242)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities
Depreciation 167 117 115
Amortization of goodwill - - 45
Amortization of deferred financing costs and issue discount on Senior Discount Debentures 37 26 27
Deferred tax credit (3) (2) (2)
Unrealized (gain)/ loss on foreign currency translation (30) (21) 21
Non-cash accrued share-based compensation cost - - 1
Extraordinary loss on extinguishment of debt - - 15
Share of net losses of affiliates (6) (4) (6)
Changes in operating assets and liabilities :
Change in receivables (6) (4) 3
Change in prepaid expenses (15) (11) (22)
Change in other assets (6) (4) (44)
Change in accounts payable 80 56 27
Change in other liabilities (47) (33) 48
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NET CASH USED IN OPERATING ACTIVITIES (7) (5) (14)
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (157) (110) (121)
Additional investments in and loans to affiliates (1) (1) (5)
Repayment of loans made to joint ventures (net) (1) (1) 10
Proceeds from disposals of assets - - -
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NET CASH USED IN INVESTING ACTIVITIES (159) (112) (116)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments from borrowings under old credit facilities - - (133)
Proceeds from borrowings under new credit facilities 185 130 280
Net proceeds from maturity of forward contracts 105 74 -
Proceeds from exercise of share options - - 2
Proceeds from issue of Accreting Convertible Notes due 2003 - - 30
Repayment of other borrowings (1) (1) -
Issue costs of Notes and credit facility arrangement costs - - -
Capital element of finance lease repayments (13) (9) (10)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 276 194 169
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NET INCREASE IN CASH AND CASH EQUIVALENTS 110 77 39
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20 14 60
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CASH AND CASH EQUIVALENTS AT END OF PERIOD 130 91 99
=====================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
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ORDINARY LIMITED SHARES ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING HELD PAID-IN COMPREHENSIVE DEFICIT
SHARES IN TRUST CAPITAL INCOME
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
(note 5)
BALANCE AT DECEMBER 31, 2001 287 8 (1) 4,224 37 (4,104) 451
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Net loss for the period - - - - - (125) (125)
Current period decrease in fair value
of derivative instruments, (net) - - - - (46) - (46)
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TOTAL COMPREHENSIVE INCOME - - - - (46) (125) (171)
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Share-based compensation cost - - - - - - -
Shares issued under exercise of
share options - - - - - - -
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BALANCE AT MARCH 31, 2002 287 8 (1) 4,224 (9) (4,229) 280
==========================================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITIES
The principal activities of Telewest Communications plc ("Telewest",
the "Company", "we", "our", and "us") are the provision of voice, video, data
and internet services across multiple platforms and the supply of content and
services to the United Kingdom ("UK") pay-television and on-line markets.
2. BASIS OF PRESENTATION
The unaudited, condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The preparation of
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 20-F for the year ended
December 31, 2001 as filed with the Securities and Exchange Commission ("SEC")
on July 1, 2002. In the opinion of the Company's management, the accompanying
unaudited condensed consolidated financial statements have been prepared on a
basis substantially consistent with the audited financial statements and
contain adjustments, all of which are of a normal recurring nature to present
fairly its financial position as of March 31, 2002 and its results of
operations and cash flows for the three-month periods ended March 31, 2002 and
2001. Interim results are not necessarily indicative of results for the
financial year.
The economic environment and currency in which Telewest operates is the
UK, and hence its reporting currency is sterling ((pound)). Certain financial
information as of and for the three-month period ended March 31, 2002 has been
translated into US dollars ($), with such US dollar amounts being unaudited and
presented solely for the convenience of the reader, at the rate of $1.4242 =
(pound)1.00, the Noon Buying Rate of the Federal Reserve Bank of New York on
Thursday March 28, 2002, being the last business day before March 31, 2002. The
presentation of the US dollar amounts should not be construed as a
representation that the sterling amounts could be so converted into US dollars
at the rate indicated or at any other rate.
The unaudited, condensed consolidated financial statements include the
accounts of the Company and those of its majority-owned subsidiaries (the
"Group"). All significant inter-company accounts have been eliminated upon
consolidation.
The financial statements have been prepared on a going concern basis.
The directors consider that the current credit facilities of the Group which
were approved in March 2001, provide sufficient funding to finance its existing
business plans, satisfy working capital requirements and pay interest on
existing debt instruments for at least 12 months from the date of approval of
the audited consolidated financial statements for the year ended December 31,
2001 (February 28, 2002).
The Group regularly monitors its ongoing ability to draw down under the
facilities, which is dependent on satisfying financial covenants. As with most
growth businesses, further increases in business performance and profitability
are necessary to ensure continued compliance with the terms of the covenants.
However, as with any forecast information, the principal assumptions are clearly
subject to a high degree of risk, in particular the Group's ability to increase
revenues in accordance with its plans.
The Group's existing business plan and projections demonstrate that the
forecast growth in business performance will be sufficient to allow the Group to
continue to meet its current covenant obligations for a period of at least 12
months from the date of approval of those audited consolidated financial
statements.
The directors have considered all of these factors and they have a
reasonable expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. Therefore they have continued
to adopt the going concern basis in preparing the financial statements.
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
The Group faces the following significant risks and uncertainties:
o continued ability to raise finance to fund its operations;
o successful execution of its long-term business plan, which in turn will
affect the Group's ability to raise further finance under the Senior
Secured Facility (see below);
o the need to meet financial and other covenants relating to debt
instruments which have already been issued; and
o the downgrading of the Group's corporate credit ratings and the ratings
of its outstanding debt is likely to increase its cost of borrowing and
may mean that it will not be able to make future borrowings.
3. SEGMENTAL INFORMATION
The Company applies Statement of Financial Accounting Standard No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-making group is the board of
directors. The operating segments are managed separately because each operating
segment represents a strategic business unit that offers different products and
services in different markets. We operate in two main segments: Cable and
Content. The Cable segment of our business can be subdivided, for revenue
purposes only, between four product ranges: Cable Television, Consumer
Telephony, Internet and Other, and Business Services. The Internet and Other
unit comprises internet sales and sales of cable publications. The Content
segment provides entertainment content, interactive and transactional services
to the UK pay-television and internet markets.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our financial
statements. The Company changed the structure of its segmental analysis table
with effect from September 30, 2001 and certain corresponding information from
the previous year has been restated to reflect the change in structure.
The following table presents summarized financial information relating
to the reportable segments for the three-month periods ended March 31, 2001 and
2000, respectively:
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
UNAUDITED SEGMENTAL INFORMATION
3 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2001
(note 2)
(IN MILLIONS)
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CABLE
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Cable television $ 121 (pound) 85 (pound) 78
Consumer telephony 179 126 120
Internet and other 23 16 7
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Total Consumer Division 323 227 205
Business Services Division 94 66 62
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THIRD PARTY REVENUE 417 293 267
Operating costs and expenses (293) (206) (212)
Depreciation (164) (115) (110)
Amortization of goodwill - - (20)
----------------------------------------------------------------------
OPERATING LOSS (40) (28) (75)
======================================================================
Share of net profits of affiliates - - -
Investment in affiliates 4 3 4
Additions to property & equipment 175 123 157
Goodwill 1,883 1,322 1,380
Total assets 7,393 5,191 5,143
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CONTENT
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Content Division 43 29 35
Inter-segmental * (6) (3) (4)
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THIRD PARTY REVENUE 37 26 31
Operating costs and expenses (38) (27) (33)
Depreciation (3) (2) (5)
Amortization of goodwill - - (25)
----------------------------------------------------------------------
OPERATING LOSS (4) (3) (32)
======================================================================
Share of net profits of affiliates 6 4 6
Investments in affiliates 784 550 777
Additions to property & equipment 1 1 1
Goodwill 812 570 1,384
Total assets 1,782 1,251 2,318
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TOTAL
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Cable television 121 85 78
Consumer telephony 179 126 120
Internet and other 23 16 7
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Total Consumer Division 323 227 205
Business Services Division 94 66 62
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Total Cable Division 417 293 267
Content Division 43 29 35
Inter-segmental * (6) (3) (4)
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TOTAL REVENUE 454 319 298
Operating costs and expenses (331) (233) (245)
Depreciation (167) (117) (115)
Amortization of goodwill - - (45)
----------------------------------------------------------------------
OPERATING LOSS (44) (31) (107)
Other expense (137) (96) (122)
Income tax benefit 3 2 2
----------------------------------------------------------------------
NET LOSS (2001 BEFORE EXTRAORDINARY LOSS) (178) (125) (227)
======================================================================
Share of net profits of affiliates 6 4 6
Investments in affiliates 788 553 781
Additions to property & equipment 176 124 158
Goodwill 2,695 1,892 2,764
Total assets 9,175 6,442 7,461
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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.
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
4. SHARE-BASED COMPENSATION COST
Share-based compensation cost for employee share options is measured,
over the period of the performance criteria for such options under "Accounting
for Stock Issued to Employees" ("APB 25"), as the excess, if any, of the quoted
market price of a company's shares over the amount an employee must pay to
acquire the shares.
During the three-month period ended March 31, 2002 the Company's share
price continued to decrease, resulting in a net compensation charge of
(pound)nil million being recorded in respect of employee share options as
compared with (pound)2 million for the three-month period ended March 31, 2001.
Share-based compensation cost will continue to fluctuate depending on the
Company's share price movement.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
At January 1, 2001 the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS 137 and 138.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition at fair value of
all derivative instruments as assets or liabilities in the Company's balance
sheet. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated a hedge and if so, the type
of hedge and its effectiveness as a hedge.
For derivatives, which are not designated as xxxxxx, changes in fair
value are recorded immediately in earnings.
For derivatives designated as cash flow xxxxxx, changes in fair value
on the effective portion of a hedge are recorded within other comprehensive
income ("OCI") until the hedged transaction occurs and are then recorded within
earnings. Changes in the ineffective portion of a hedge are recorded immediately
in earnings.
For derivatives designated as fair value xxxxxx, changes in fair value
are recorded immediately in earnings. We did not, however, have any fair value
xxxxxx during the three-month periods ended March 31, 2002 and 2001.
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.
In 2002, we had the ability to terminate in-the-money derivative
contracts that fluctuate in value. In March 2002, we terminated certain of these
derivative contracts netting (pound)74 million to us, and in May 2002 we
realized an additional (pound)30 million.
During the three-month period ended March 31, 2002, the Company
recorded a (pound)46 million decline in fair value to cumulative OCI, consisting
of a gain of (pound)4 million to short term derivative liabilities and a
(pound)50 million decline to long term derivative assets. In the three-month
period ended March 31, 2001, the Company recorded a (pound)31 million gain in
fair value to cumulative OCI, consisting of a decline of (pound)12 million to
short term derivative liabilities and a (pound)43 million gain to long term
derivative assets.
The Company xxxxxx some of its interest rate risk and some of its
foreign currency risk on its Senior Secured facility and US dollar-denominated
debt instruments through the use of interest rate swaps, forward foreign
exchange contracts and foreign currency swaps. The purpose of the derivative
instruments is to provide a measure of stability over the 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.
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
6. ADOPTION OF SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board issued SFAS 142,
"Goodwill and Other Intangible Assets" which requires that goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized upon adoption of SFAS 142, but will
be subject to impairment testing as part of the investment to which it relates
in accordance with APB 18, "The Equity Method of Accounting for Investments in
Common Stock". Separable intangible assets that do not have indefinite lives
will continue to be amortized over their estimated useful lives and will be
subject to review for impairment in accordance with SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". For goodwill and intangible assets
acquired prior to July 1, 2001, the Group adopted SFAS 142 effective January 1,
2002. As of January 1, 2002 the Group had (pound)2,199 million of unamortized
goodwill, (pound)1,892 million of which related to business combinations and
(pound)307 million of which related to equity method investments. The adoption
of SFAS 142 had no impact on the Company's financial position or results of
operations.
As required by SFAS 142, the standard has not been retroactively
applied to the results for the period prior to adoption. A reconciliation of net
loss for the three-month period ended March 31, 2002 and 2001, as if SFAS 142
had been adopted as of January 1, 2001, is presented below
3 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002 MARCH 31, 2001
(note 2)
(IN MILLIONS EXCEPT FOR SHARE DATA)
-------------------------------------------------------------------------------------------------------------------------
NET LOSS
-------------------------------------------------------------------------------------------------------------------------
Reported net loss $ (178) (pound) (125) (pound) (242)
Add back amortization of goodwill - - 45
------------------------------------------------------------------
Adjusted net loss (178) (125) (197)
==================================================================
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BASIC AND DILUTED NET LOSS PER SHARE
-------------------------------------------------------------------------------------------------------------------------
Reported net loss per share $ (0.06) (pound) (0.04) (pound) (0.08)
Add back amortization of goodwill - - 0.01
------------------------------------------------------------------
Adjusted net loss per share (0.06) (0.04) (0.07)
==================================================================
7. RECENT DEVELOPMENTS
On April 2, 2002, we agreed to dispose of our 37.95% interest in TV
Travel Group Limited ("TVT") to USA Networks Inc. as part of USA Network's
Inc.'s agreement to purchase TVT. This disposal was completed on May 2, 2002.
The consideration for our interest in TVT (comprised of ordinary shares,
preference shares and loan notes) was (pound)27.1 million after transaction
costs, all to be paid in cash.
On May 2, 2002, we announced that we were reducing our total staffing
levels from approximately 10,500 to approximately 9,000. This is part of a group
reorganization, which aims to streamline management and flatten reporting lines
and should allow us to focus on our core businesses. In addition, our Consumer
and Business Divisions, which are currently managed separately, will be merged
into a single operating division, which will be serviced by a newly created
Networks and Technology Division.
Also on May 2, 2002, we filed with the SEC our unaudited financial
statements for the first quarter of 2002. For the complete text of the financial
statements and related press release see the Form 6-K filed by us on May 2,
2002.
On May 14, 2002, Microsoft Corporation ("Microsoft") informed us that
it was withdrawing its three non-executive directors - Xxxxx Xxxxx, Xxxxxx Xxxxx
and Xxxxxx Xxxxxx - from our board of directors. Microsoft holds 23.6% of our
issued shares and has the right to nominate up to three representatives to the
board under corporate shareholder agreements with us. Microsoft said: "At
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
present we believe that we will be in a better position to manage our
relationship with, and investment in, Telewest without board representation.
Microsoft expects to continue to evaluate Telewest on an ongoing basis and, in
that regard, will continue to consider, among other things, purchasing or
selling Telewest securities or engaging in possible strategic transactions
involving Telewest. Microsoft has no current plan regarding any such
transactions, but reserves the right to change its plans at any time."
On June 14, 2002 we announced that we had agreed to dispose of our
75.6% interest in the ordinary share capital of The Way Ahead Group Limited
("Way Ahead") to Way Ahead Finance Limited, a wholly owned subsidiary of Xxxxx
Xxxx Group Holdings Limited, which trades as Really Useful Theatres. The
consideration due to us for our interest in Way Ahead will be (pound)10 million,
to be paid in cash. We intend to use the proceeds from the disposal for capital
expenditure in relation to our business.
On June 17, 2002 we announced the launch of our new 1,024kb (i.e. 1Mb)
blueyonder Broadband Internet service to all of our customers across the UK. The
launch follows an extensive trial with 1,500 customers. Our 1Mb service operates
at speeds faster than British Telecommunications ("BT"s) broadband service and
the services of ADSL providers using BT's network and is nearly 20 times faster
than traditional dial-up internet access. This service is available for
(pound)35.00 per month, when taken with other Telewest Broadband services, or
(pound)39.99 on its own. This is a (pound)10.00 premium on our standard (i.e.
512 kb) blueyonder Broadband access.
On June 12, 2002, Liberty Media Inc ("Liberty Media"), advised the
board that they would be making a tender offer for up to 20 per cent of our
outstanding non-convertible bonds. We issued a response to the tender offer on
June 24, 2002 indicating that we were unable to take a position with respect to
the tender offer because we were unable to determine whether the tender offer
was beneficial or detrimental to the holders of such notes and debentures. On
June 27, 2002, Liberty Media announced that during the first ten business days
of the offer it had received acceptances (subject to the offer otherwise going
unconditional) in respect of approximately 16 per cent of the bonds tendered
for. It also announced it had otherwise purchased approximately 5 per cent of
those bonds outside of the tender process. Prior to the tender offer, Xxxxxxx
had already purchased approximately 5 per cent of the bonds subject to the
tender. The tender offer is due to expire on July 11, 2002. In the tender offer
document sent to holders of the subject notes, Liberty Media stated that it was
doing so in order to "permit us as a creditor to participate in and influence
discussion and decisions regarding any future restructuring or recapitalization
of the Company".
The offer document went on to say: "If the offer is successful, Xxxxxxx
presently intends to propose to the Company's board of directors a restructuring
plan pursuant to which all or substantially all of the Company's publicly-traded
notes and debentures would be converted into equity of the Company. Xxxxxxx has
disclosed in general terms its intention to make such a proposal to the
Company's board of directors. However, as of the date of the offer, Liberty has
not determined any specific terms for a proposed restructuring". Liberty Media
also stated in its offer document that the "Company is not participating in and
has no responsibility for this offer".
We have also been approached by a committee representing a significant
proportion of our outstanding bonds (the "Bondholders' Committee"). The
Bondholders' Committee expressed the desire to work constructively with Xxxxxxxx
to explore the possibility of bondholders participating in some form of
reconstruction of the Company's balance sheet. We have not yet discussed any
specific proposals with the Bondholders' Committee or Liberty Media.
The directors have concluded that it is in the Company's best interests
to enter into discussions with Liberty Media and the Bondholders' Committee to
establish whether a proposal that would command the support of the directors is
capable of being agreed. The directors will continue to explore all available
options in order to arrive at a solution that is fair and equitable to all of
our stakeholders. These discussions will not begin until we have obtained the
necessary waivers and consents from our banks.
Further, on July 3, 2002 Microsoft notified Liberty Media that
Microsoft proposed to sell publicly all of the ordinary shares and all of the
limited voting shares it owned in Telewest. Under the terms of the Relationship
Agreement between Telewest, Liberty Media and Microsoft, the notification offers
Liberty Media the right to purchase those shares and Liberty Media have 30 days
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to purchase all, but not less than all, of those shares. If Liberty Media do not
exercise their right, Microsoft may sell publicly those shares for up to 90 days
following the expiration of the option period.
8. COMMITMENTS AND CONTINGENCIES
We are party to various legal proceedings in the ordinary course of
business which we do not believe will result, in the aggregate, in a material
adverse effect on our financial position or results of operations.
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PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Set forth below is a discussion of our financial condition and results
of operations for the three-month periods ended March 31, 2001 and 2002 based
upon financial information prepared in accordance with US GAAP.
References in this discussion to the "Group," "we," "us," and "our,"
are to Telewest and its consolidated subsidiaries as at, or for, the specified
date or period.
CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since
December 31, 2001, as reported in our Form 20-F filed with the SEC on July 1,
2002.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2002
REVENUE
We operate in two main segments: Cable and Content. The Cable segment
of our business is subdivided, for revenue purposes only, into four units: Cable
Television, Consumer Telephony, Internet and other, and Business Services
Division. The Content segment provides entertainment content, interactive and
transactional services to the UK pay-TV and internet markets.
Our consolidated revenue increased by (pound)21 million or 7.0% from
(pound)298 million in the three-month period ended March 31, 2001 to (pound)319
million in the three-month period ended March 31, 2002. This increase was
attributable to growth in our Consumer Division and Business Services Division
offset by a reduction in our Content Division, mainly due to the closure or sale
of non-core businesses.
RESIDENTIAL SERVICES REVENUE (CONSUMER DIVISION)
Residential services revenue represents a combination of cable
television ("CATV") revenue, consumer cable telephony revenue and internet and
other income.
Our Consumer Division revenue increased by (pound)22 million or 10.7%
from (pound)205 million for the three-month period ended March 31, 2001 to
(pound)227 million for the three-month period ended March 31, 2002. This
increase was attributable to an increase in customer homes connected and an
increase in average monthly revenue per household, which was achieved by
enhancement of our customer mix towards "triple play" subscribers, being those
subscribers to CATV, telephony and broadband internet.
Total customer homes connected increased by 69,415 or 4.0% from
1,714,074 at March 31, 2001 to 1,783,489 at March 31, 2002. The increase in
homes connected resulted particularly from the impact of our blueyonder
broadband high-speed internet product, the continuing success of our Active
Digital services and the launch of our Talk Unlimited telephony product in May
2001 together with lower churn rates experienced throughout the twelve months
ended March 31, 2002. Overall household penetration increased by 2.0 percentage
points from 35.9% at March 31, 2001 to 37.9% at March 31, 2002.
Average monthly revenue per subscriber increased by (pound)2.68 or 6.9%
from (pound)38.80 in the three-month period ended March 31, 2001 to
(pound)41.48, (see * below), for the three-month period ended March 31, 2002.
The increase in average monthly revenue per subscriber is attributable to an
increase in dual or triple penetration (i.e. the proportion of homes subscribing
to any two or all three of our CATV, residential telephony and high-speed
internet services), higher call volumes in residential telephony, higher
subscriber revenues generated by Active Digital versus analogue television
services and increases in our basic CATV price in July 2001. Dual or triple
penetration, which results from the continued market acceptance of combined
CATV, telephony and high-speed internet packages, grew by 3.7 percentage points
to 69.9% at March 31, 2002 from 66.2% at March 31, 2001.
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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 have introduced
selected price rises across our CATV, telephony and internet product range in
April 2002. For example, the "starter" digital TV pack, which includes a
telephone line, has risen by (pound)2.00 to (pound)11.49. Other digital basic TV
packages have risen by (pound)1.50 and the monthly price of our unmetered
dial-up internet service, SurfUnlimited, has risen by (pound)2.00 to
(pound)12.00. Our 512kb broadband internet service, blueyonder, remains at
(pound)25.00 per month. We believe that our bundled offerings still remain
competitive when compared with those offered by other operators.
CABLE TELEVISION REVENUE
Cable television revenue increased by (pound)7 million or 9.0% from
(pound)78 million for the three-month period ended March 31, 2001 to (pound)85
million for the three-month period ended March 31, 2002. The increase was
principally attributable to an increase in the number of CATV subscribers
connected, retail price increases introduced on July 1, 2001, and lower churn
rates experienced during the year ended March 31, 2002, offset in part by lower
subscriber revenues from our analogue services. As noted above, although the
competitive nature of the television market will continue to restrict our
ability to increase retail prices, certain increases have been introduced in
April 2002.
Total CATV subscribers connected increased by 69,696 or 5.4% from
1,288,504 at March 31, 2001 to 1,358,200 at March 31, 2002. The increase in
subscribers resulted from the continuing success of Active Digital and lower
churn rates experienced in the twelve-months ended March 31, 2002 compared to
2001.
As at March 31, 2002 we had an installed base of 792,563 digital
subscribers, an increase of 339,619 or 75.0% compared with 452,944 as at March
31, 2001. Active Digital, comprised of a wide array of TV and radio channels,
pay-per-view movies, interactive services and TV e-mail, has been rolled out in
all franchise areas, excluding the Eurobell areas and our Cabletime areas where
we currently offer only analogue services. It is expected that we will begin
rolling out Active Digital into our Eurobell areas in the third quarter of 2002.
At March 31, 2002, 41.6% of all customer homes connected for CATV
subscribed to our analogue CATV product and 58.4% subscribed to Active Digital.
This compares with 64.8% and 35.2%, respectively, at March 31, 2001. Excluding
the Eurobell areas, our Active Digital services are taken by 61.3% of our CATV
subscribers compared with 38.7% for analogue subscribers. At March 31, 2002
approximately 27% of our digital households had "set-up" our TV e-mail account,
and approximately 150,000 customers had purchased keyboards for use with our
interactive services.
Average monthly revenue per CATV subscriber (combined digital and
analogue) increased by 3.6% from (pound)20.08 for the three-month period ended
March 31, 2001 to (pound)20.80 for the three-month period ended March 31, 2002,
primarily due to the increase in the number of our Active Digital subscribers
and price rises across our basic packages which were introduced from July 1,
2001 (our entry package, which includes digital TV, telephone line rental,
interactive services and TV e-mail, increased from (pound)9.00 to (pound)9.60
while other basic TV packages increased on average by (pound)2.00 each), offset
in part by an increased percentage of subscribers choosing lower-priced service
offerings. Average monthly revenue for digital CATV subscribers was (pound)22.91
for the three-month period ended March 31, 2002 compared with (pound)23.54 for
the three-month period ended March 31, 2001, which reflects the actively managed
change in the mix between premium and basic packages. For example, approximately
81% of our Active Digital subscribers at March 31, 2002 take "basic only"
packages compared to approximately 66% at March 31, 2001. Due to the higher cost
of the premium channels this increase in "basic only" packages results in higher
margins being achieved for our CATV products. Average monthly revenue for
digital CATV subscribers at (pound)22.91 for the three-month period ended March
31, 2002 compares with (pound)18.12 for analogue subscribers.
Product penetration increased by 1.9 percentage points from 27.0% at
March 31, 2001 to 28.9% at March 31, 2002 as a result of improved customer take
up of Active Digital packages and a reduction in churn throughout the year then
ended. Average CATV subscriber churn improved 4.6 percentage points from 23.7%
for the twelve-months ended March 31, 2001 to 19.1% for the twelve-months ended
March 31, 2002. We believe that this reduction in churn is principally
attributable to improved customer satisfaction with our products, services and
pricing, and improvements in our customer service.
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CONSUMER TELEPHONY REVENUE
Consumer telephony revenue increased by (pound)6 million or 5.0% from
(pound)120 million at March 31, 2001 to (pound)126 million at March 31, 2002.
The increase in consumer telephony revenue was primarily due to increases in the
number of residential telephony subscribers and lines, and increased average
monthly revenues, partially due to the success of our telephony product Talk
Unlimited, introduced in May 2001.
The number of residential subscribers increased by 79,178 or 5.1% from
1,556,337 at March 31, 2001 to 1,635,515 at March 31, 2002 and the number of
residential lines increased by 51,203 or 3.0% from 1,721,063 at March 31, 2001
to 1,772,266 at March 31, 2002. The increases in the number of residential
telephony subscribers and residential lines resulted from the impact of the
take-up of Talk Unlimited and a decrease in subscriber churn both leading to
higher product penetration.
Talk Unlimited, which was launched in May 2001, is the only 24-hour
flat-rate unmetered residential voice service available for local and national
calls in the UK and accounted for 252,501 subscribers or 15.4% of our total
telephony subscribers at March 31, 2002. This service is charged at a flat rate
of (pound)25.00 per month including digital television and is successful in
attracting new subscribers to our products.
Average subscriber churn improved by 3.2 percentage points from 19.4%
for the twelve-months ended March 31, 2001 to 16.2% for the twelve-months ended
March 31, 2002. This subscriber churn rate is the lowest rolling twelve-month
rate we have ever recorded for telephony churn. We believe this reduction in
churn is principally attributable to improved customer satisfaction with our
products, services and pricing, and improvements in our customer service.
Consumer telephony product penetration increased to 34.8% as at March
31, 2002 compared with 32.6% as at March 31, 2001. Second line penetration
decreased from 10.6% as at March 31, 2001 to 8.4% as at March 31, 2002, in part
due to price increases for second lines during the twelve-months ended March 31,
2002 and the migration of dial-up internet subscribers to our blueyonder
broadband internet service.
Average monthly revenue per line increased by (pound)0.69 or 3.1% from
(pound)22.54 for the three-month period ended March 31, 2001 to (pound)23.23,
(see * below), for the three-month period ended March 31, 2002. Similarly,
average monthly telephony revenue per subscriber increased by (pound)0.30 or
1.2% from (pound)24.97 for the three-month period ended March 31, 2001 to
(pound)25.27, (see * below), for the three-month period ended March 31, 2002.
Although average call volumes increased by approximately 11% year on year, our
average revenue per minute decreased by approximately 4% over the same period.
While we benefited from a new increased price structure known as "3-2-1-Free"
and a growing number of calls made to mobile operators, boosting telephony
revenue per minute, these factors were more than offset by the effects of price
competition on our telephony charges and a change in the mix of calls made by
our telephony subscribers, particularly the increases in the percentage of
calls, which has increased by approximately 34% year on year, made to Internet
Service Providers ("ISPs") at lower rates (or at no charge in the case of our
own blueyonder SurfUnlimited subscribers) and free cable-to-cable local calls.
(* In our first quarter's earnings release, filed on Form 6-K on May 2,
2002, we included in the calculations of three of the 2002 average monthly
revenue figures certain indirect access revenues, amounting to (pound)2.6
million, from Eurobell that had not been previously included in those
calculations. This represents revenues from BT's residential telephony customers
who have their calls routed through our Eurobell network. The effect of
including these revenues was that our average monthly revenue per residential
subscriber, average monthly revenue per residential telephony line and average
monthly revenue per residential telephony subscriber were increased in that
earnings release by (pound)0.49, (pound)0.49 and (pound)0.53, respectively. The
first quarter's average monthly revenue figures used in the above discussion
have been presented on a basis comparable with prior periods. This change in
calculation had no effect on reported revenues, subscriber numbers or any other
operating or financial statistics and indirect access revenues will not be
included in future calculations).
INTERNET AND OTHER REVENUE
Internet and other revenue, which arises wholly in our Consumer
Division, increased by (pound)9 million or 128.6% from (pound)7 million in the
three-month period ended March 31, 2001 to (pound)16 million in the three-month
period ended March 31, 2002. This increase is due primarily to an increase in
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internet income which increased by (pound)8 million to (pound)14 million in the
three-month period ended March 31, 2001 from (pound)6 million in the three-month
period ended March 31, 2000.
Dial-up internet subscribers to our blueyonder SurfUnlimited product,
the UK's first un-metered internet access service, together with our blueyonder
pay-as-you-go metered internet service increased by 54,876 or 20.3% from 270,231
at March 31, 2001 to 325,107 at March 31, 2002.
We began re-marketing our high-speed internet service for home personal
computers, "blueyonder broadband internet," on a national basis from the start
of 2001. The number of blueyonder broadband internet subscribers increased by
107,284 from 18,616 at March 31, 2001 to 125,900 at March 31, 2002. With the
exception of our Eurobell and Cabletime areas, we now have full coverage across
all of our regions.
We charge either (pound)33.00 per month for our 512kb blueyonder
broadband internet on a stand-alone basis or (pound)25.00 if it is purchased in
addition to our CATV and/or telephony services. As such, our blueyonder
broadband internet customers significantly contribute to the growth in our
average monthly revenue and 69.9% of our blueyonder broadband internet customers
also take both cable television and telephony services from us. These
"triple-play" customers have an average monthly revenue of approximately
(pound)68.00.
Other revenues are derived from the sales of cable publications and
contributed (pound)2 million of revenues in the three-month period ended March
31, 2001 compared with (pound)1 million in the three-month period ended March
31, 2000.
BUSINESS SERVICES REVENUE (BUSINESS DIVISION)
Business Services Division revenue increased by (pound)4 million or
6.5% from (pound)62 million for the three-month period ended March 31, 2001 to
(pound)66 million for the three-month period ended March 31 2002. This increase
is attributable to increases in sales of voice and data services primarily to
Small to Medium-Sized Enterprises ("SMEs") and increased revenues contributed by
our Carrier Services Unit, offset by a decrease in average monthly revenue per
line from our business customers. Excluding our Carrier Services Unit, revenues
increased by (pound)2 million or 3.8% from (pound)53 million for the three-month
period ended March 31, 2001 to (pound)55 million for the three-month period
ended March 31, 2002.
Our Carrier Services Unit, which provides our fiber optic National
Network to other carriers and operators, thereby exploiting our fixed network
investment by providing new revenues at higher margins, contributed (pound)11
million of revenue for the three-month period ended March 31, 2002 compared with
(pound)9 million for the three-month period ended March 31, 2001. Revenues from
this unit tend to be derived from a relatively small number of high value, short
and long-term contracts and can therefore fluctuate from period to period.
Average monthly revenue per line decreased by (pound)5.31 or 11.3% from
(pound)46.98 for the three-month period ended March 31, 2001 to (pound)41.67 for
the three-month period ended March 31, 2002 due to increased competition in the
marketplace.
The increase in the sale of voice and data services resulted primarily
from an increase in the number of business customers accounts using these
services and the number of lines used by those accounts. Business customer
accounts increased by 6,576 accounts or 9.8% from 67,042 at March 31, 2001 to
73,618 at March 31, 2002. Business telephony lines increased by 53,043 lines or
13.3% from 399,079 at March 31, 2001 to 452,122 at March 31, 2002.
During 2001, we launched our high-speed broadband internet service for
small businesses, blueyonder workwise, which reached 2,400 subscribers by March
31, 2002. In August 2001 we introduced the first hosted Microsoft Exchange
service by any network operator in Europe. This service is available through the
blueyonder workwise portal and had achieved approximately 4,100 sales by March
31, 2002.
CONTENT DIVISION REVENUE
Our Content Division's net revenue decreased by (pound)5 million or
16.1% from (pound)31 million for the three-month period ended March 31, 2001 to
(pound)26 million for the three-month period ended March 31, 2002. These
revenues are after eliminating inter-divisional trading between Flextech and
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Telewest of (pound)4 million in 2001 and (pound)3 million in 2002. Before
elimination of this inter-divisional trading, the Content Division's revenue
decreased by (pound)6 million or 17.1% from (pound)35 million for the
three-month period ended March 31, 2001 to (pound)29 million for the three-month
period ended March 31, 2002.
The three-month period ended March 31, 2001 included revenues from
HSNDI and Screenshop, which were either closed down or sold during 2001. It also
included a substantial Government grant payment in respect of the set-up of
Living Health, our broadband interactive TV health service and was the last
quarter before BSkyB's analogue switch-off, which has affected revenues from the
sale of spare analogue transponder capacity. The revenue from all these items
was (pound)6 million for the three-month period ended March 31, 2001 compared to
less than (pound)1 million for the three-month period ended March 31, 2002.
Our Content Division's subscription revenue increased marginally in the
three-month period ended March 31, 2002 over the corresponding period last year
and its share of the revenue of UKTV (our joint venture with BBC Worldwide)
increased by (pound)1 million or 6.3% from (pound)16 million for the three-month
period ended March 31, 2001 to (pound)17 million for the three-month period
ended March 31, 2002. These increases resulted primarily from an increase in the
number of homes which receive programming from our Content Division by 0.6
million or 6.0% from 10 million homes at March 31, 2001 to 10.6 million at March
31, 2002, offset in part by lower subscription rates from Sky Digital
subscribers.
Advertising revenue, within total Content Division's revenue and
including our share of UKTV's advertising revenue, increased by 0.6% during the
three-month period ended March 31, 2002 over the three-month period ended March
31, 2001. Our share of total United Kingdom TV advertising revenues increased
from 3.2% for the three-month period ended March 31, 2001 to 3.6% for the
three-month period ended March 31, 2002, an increase during a period which was
marked by an overall decline in UK television national advertising revenue of
10% compared to the previous year. Our share of basic pay-television viewing
fell from 23.5% in the three-month period ended March 31, 2001 to 20.0% in the
three-month period ended March 31, 2002 due primarily to increased competition
in the multi-channel market.
OPERATING COSTS AND EXPENSES
Our operating costs and expenses, before depreciation and amortization,
decreased by (pound)12 million or 4.9% from (pound)245 million in the
three-month period ended March 31, 2001 to (pound)233 million in the three-month
period ended March 31, 2002 due to reduced consumer programming expenses,
business and consumer telephony expenses, and content expenses partially offset
by a small increase in selling, general and administrative costs.
Consumer programming expenses decreased by (pound)4 million or 10.8%
from (pound)37 million for the three-month period ended March 31, 2001 to
(pound)33 million for the three-month period ended March 31, 2002, representing
14.2% of total operating costs before depreciation and amortization for the
three-month period ended March 31, 2002 compared with 15.1% for the three-month
period ended March 31, 2001. Decreased consumer programming expenses were
principally the result of lower programming costs resulting from an increase in
the number of our television subscribers choosing to subscribe to packages with
fewer or no premium channels, and favorable renegotiations with certain
programmers for content contracts, offset by increased costs of programming for
our digital packages, which have more channels than their analogue counterparts.
As a percentage of CATV revenues, programming expenses decreased from 47.4% for
the three-month period ended March 31, 2001 to 38.8% for the three-month period
ended March 31, 2002.
Business and consumer telephony expenses decreased by (pound)6 million
or 9.8% from (pound)61 million for the three-month period ended March 31, 2001
to (pound)55 million for the three-month period ended March 31, 2002,
representing 23.6% of total operating costs before depreciation and amortization
for the three-month period ended March 31, 2002 compared with 24.9% for the
three-month period ended March 31, 2001. These costs are principally payments to
third-party network providers for terminating calls that originate on our
networks (i.e. interconnection charges). As a percentage of consumer telephony
and Business Services Division's revenues, telephony expenses decreased from
33.5% for the three-month period ended March 31, 2001 to 28.6% for the
three-month period ended March 31, 2002. These decreases resulted principally
from increased telephony penetration and the resulting increase in volume of
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traffic terminating on our network and was in part offset by the increase in the
proportion of our total traffic terminating on mobile networks or third-party
ISPs where interconnection charges result in higher unit termination costs.
The Content Division's cost of sales decreased by (pound)3 million or
15.8% from (pound)19 million for the three-month period ended March 31, 2001 to
(pound)16 million for the three-month period ended March 31, 2002, representing
6.9% of total operating costs before depreciation and amortization for the
three-month period ended March 31, 2002 compared with 7.8% for the three-month
period ended March 31, 2001. The Content Division's cost of sales consists
principally of amortization costs of programming shown on its TV channels,
direct costs associated with its advertising revenues, and costs of products
sold through its web and transactional services.The Content Division's cost of
sales was 61.5% of the Content Division's revenues for the three-month period
ended March 31, 2002 compared with 61.3% for the three-month period ended March
31, 2001.
Selling, general and administrative expenses ("SG&A") which include,
among other items, salary and marketing costs, increased marginally by (pound)1
million or 0.8% from (pound)128 million in the three-month period ended March
31, 2001 to (pound)129 million in the three-month period ended March 31, 2002.
This increase primarily reflected the increase in employment costs due to an
increase in headcount between March 31, 2001 and 2002 and the increased expense
associated with the marketing of our broadband and digital products and was
partially offset by decreases in other overhead expenses as we achieve cost
efficiencies across the Group. SG&A increased as a percentage of total operating
costs before depreciation and amortization from 52.2% in the three-month period
ended March 31, 2001 to 55.4% in the three-month period ended March 31, 2002.
After capitalization to related property and equipment, staff costs increased to
(pound)67 million for the three-month period ended March 31, 2002 from (pound)63
million for the three-month period ended March 31, 2001, reflecting an increase
of some 200 employees on a base of approximately 10,300 as at March 31, 2001.
This increase in employees reflects the continuing focus on customer service and
staffing requirements to support high-speed internet and digital television
services offset in part by a reduction in the use of contractors for
installation.
Total labor and overhead costs capitalized in connection with new
subscriber installations and enhancement to our networks increased by (pound)2
million or 4.3% from (pound)47 million for the three-month period ended March
31, 2001 to (pound)49 million for the three-month period ended March 31, 2002.
The level of capitalized labor and overhead costs increased primarily as a
result of increases in installations of our Active Digital services in 2002 and
our growing subscriber base.
Depreciation expense increased by (pound)2 million or 1.7% from
(pound)115 million for the three-month period ended March 31, 2001 to (pound)117
million for the three-month period ended March 31, 2002. The increase is
primarily attributable to the increased capital expenditure associated with the
roll-out of Active Digital and high-speed internet products.
Under SFAS 142, effective from January 1, 2002, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized under SFAS 142 but will be subject
to impairment testing as part of the investment to which it relates in
accordance with APB 18. Accordingly, there was no charge for amorization of
goodwill in the three-month period ended March 31, 2002 compared to a charge of
(pound)45 million in the three-month period ended March 31, 2001. No impairment
resulted from the initial adoption of SFAS 142 on January 1, 2002.
OTHER INCOME/(EXPENSE)
Other expense, net of income, decreased by (pound)26 million or 21.3%
from (pound)122 million for the three-month period ended March 31, 2001 to
(pound)96 million for the three-month period ended March 31, 2002. This
consisted primarily of the movement of (pound)42 million from net foreign
exchange loss at March 31, 2001 to net foreign exchange gain at March 31, 2002,
offset by increased net interest expense of (pound)15 million over the
corresponding periods.
Interest expense increased by (pound)10 million or 9.0% from (pound)111
million for the three-month period ended March 31, 2001 to (pound)121 million
for the three-month period ended March 31, 2002, primarily as a result of the
additional interest expense incurred under our bank facilities with respect to
additional borrowing to fund the roll-out of digital television and high-speed
internet products and general working capital.
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In the three-month period ended March 31, 2002, foreign exchange gains,
net, of (pound)21 million compared with foreign exchange losses of (pound)21
million in the three-month period ended March 31, 2001. Under SFAS 133 these
gains and losses arose principally from re-translating those of our US
dollar-denominated Debentures and Notes which did not qualify for hedge
accounting and the marking of their associated derivative instruments to market
value.
Interest income was (pound)5 million in the three-month period ended
March 31, 2001 compared with (pound)nil in the three-month period ended March
31, 2002.
Our share of net profits of our affiliated companies, accounted for
under the equity method of accounting, was (pound)4 million for the three-month
period ended March 31, 2002 compared with (pound)6 million for the three-month
period ended March 31, 2001. Our principal affiliated companies include UK Gold
Holdings Limited, UK Channel Management Limited, SMG plc ("SMG"), TV Travel
Group Limited, (subsequently disposed of in April 2002) and Blueyonder Workwise
Limited.
Other losses, net, amounting to (pound)1 million in the three-month
period ended March 31, 2001, arose as a result of the disposal of certain
investments. There was nothing recorded as other losses in the three-month
period ended March 31, 2002.
Following the replacement of our old senior secured credit facility and
the Flextech facility during the three-month period ended March 31, 2001, we
recorded an extraordinary loss of (pound)15 million due to the write-off of the
bank facility fees which were being deferred and written-off over the life of
those facilities.
LIQUIDITY AND CAPITAL RESOURCES
We have a number of unused sources of liquidity. As of March 31, 2002,
these sources include the ability to access (pound)639 million committed but
undrawn amounts under the Senior Secured Facility. The Senior Secured Facility
also permits us to access up to (pound)105 million under the Institutional
Tranche and an additional (pound)223 million in vendor financing, but current
market conditions and the recent downgrading of our corporate credit ratings may
mean that we are not able to access these sources.
In 2002, we had the ability to terminate in-the-money derivative
contracts that fluctuate in value. In March 2002, we terminated certain of these
derivative contracts, netting (pound)74 million to us, and in May 2002, we
realized an additional (pound)30 million. This cash is currently held by us as a
further source of liquidity.
The Group also has a number of assets that could be sold, however, no
assurance can be given that buyers can be found for such assets, or, if found,
that the consideration offered for such assets would justify their sale.
Notwithstanding the sources of liquidity discussed above, the
downgrading of our corporate credit ratings and the ratings of our outstanding
debt is likely to increase our cost of borrowing and may mean that we are not
able to make future borrowings.
Since our initial public offering in 1994, we have financed the capital
costs of our network construction, our operations and our investments in General
Cable PLC ("General Cable"), Birmingham Cable Corporation Limited ("Birmingham
Cable"), Cable London PLC ("Cable London"), Flextech, Eurobell and in affiliated
companies, primarily from:
o the proceeds of the initial public offering of our ordinary shares
((pound)414 million, net of fees);
o the issuance in September 1998 of ordinary shares as partial funding
for the General Cable merger ((pound)241 million);
o the issuance in November 1999 of ordinary shares under a rights issue
to fund the Cable London acquisition ((pound)416 million);
o the issuance to Deutsche Telekom ("DT") in November 2000, January 2001
and May 2001, respectively, of an aggregate of(pound)254 million
Accreting Convertible Notes due 2003 as consideration for its 100%
interest in Eurobell;
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o the issuance in October 1995 of $300 million principal amount of Senior
Debentures due 2006 and $1,537 million principal amount at maturity of
Senior Discount Debentures due 2007;
o the issuance in November 1998 of $350 million principal amount of
Senior Notes due 2008;
o the issuance in February 1999 of(pound)300 million principal amount of
Senior Convertible Notes due 2007;
o the issuance in April 1999 of(pound)325 million principal amount at
maturity and $500 million principal amount at maturity of Senior
Discount Notes due 2009;
o the issuance in January 2000 of $450 million principal amount at
maturity of Senior Discount Notes due 2010 and(pound)180 million
principal amount and $350 million principal amount of Senior Notes due
2010;
o the issuance in July 2000 of $500 million Senior Convertible Notes due
2005;
o borrowings under the Senior Secured Facility and Institutional Tranche
(as described below), (an aggregate of (pound)1,490 million outstanding
at March 31, 2002);
o the raising of a net(pound)33 million loan, secured by a charge over
our shares in SMG; and
o cash from operations.
Where appropriate, we also use vendor financing. At March 31, 2002,
obligations under these vendor financing arrangements amounted to (pound)277
million, (pound)233 million in respect of finance leasing to fund the purchase
of certain equipment and (pound)44 million of finance provided by vendor
companies, respectively, compared with (pound)241 million and (pound)17 million,
respectively, at March 31, 2001.
We face the following significant risks and uncertainties:
o continued ability to raise finance to fund our operations;
o successful execution of our long-term business plan, which in turn will
affect our ability to raise further finance under the Senior Secured
Facility (see below);
o the need to meet financial and other covenants relating to debt
instruments; and
o the downgrading of our corporate credit ratings and the ratings of our
outstanding debt is likely to increase our cost of borrowing and may
mean that we are not able to make future borrowings.
For the three-month period ended March 31, 2002, we had a net cash
outflow from operating activities of (pound)5 million compared with (pound)14
million for the three-month period ended March 31, 2001.
We incurred a net cash outflow from investing activities of (pound)112
million for the three-month period ended March 31, 2002 compared with (pound)116
million for the three-month period ended March 31, 2001, a decrease of (pound)4
million or 3.4%. Capital expenditure accounted for (pound)111 million of the
total in 2002 compared with (pound)120 million in 2001. See "Capital
Expenditure" below.
Net cash provided by financing activities totalled (pound)194 million
for the three-month period ended March 31, 2002 compared with (pound)169 million
for the three-month period ended March 31, 2001. For the three-month period
ended March 31, 2002, net cash provided by financing activities consisted
primarily of (pound)130 million drawdowns from our Senior Secured Facility and
(pound)74 million realized on termination of certain US dollar/pound sterling
exchange rate hedging arrangements. Net cash provided by financing activities
for the three-month period ended March 31, 2001 included the repayment on March
16, 2001 of (pound)810 million and (pound)122 million under our old senior
secured credit facility and the Flextech facility, respectively, with a drawdown
from our new Senior Secured Facility. In connection with our acquisition of
Eurobell, on January 15, 2001, DT remitted a cash payment of (pound)30 million
to Eurobell and we issued an additional Accreting Convertible Note for the same
amount.
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We anticipate that our principal uses of cash in the future will be to
fund operating losses and capital expenditure, to make appropriate investments
and to service debt. Although we expect to continue to incur operating losses,
we anticipate that they will begin to reduce as we realize the expected benefits
of our roll-out of digital television and high-speed internet services which we
believe will increase product penetration, increase revenue per customer in our
residential, business and content markets, and achieve the cost-efficiencies of
delivering these services over our owned broadband network. We also expect to
have significant capital needs in the future. Nevertheless, with the majority of
our network construction complete and substantially all network upgrades
necessary for delivery of telephony and digital services complete, we anticipate
that our capital expenditure will be largely driven by connecting new
subscribers and the launch of new products, and consequently, will vary
depending upon the take-up of our services. In May 2002, we announced a plan to
reduce operating costs through such measures as divisional reorganization and
head count reductions and to reduce capital expenditures by delaying or
cancelling non-core projects such as video-on-demand.
We anticipate that our principal sources of funds in the future will be
cash flow from operating activities, proceeds from bank facilities, additional
vendor financing, if available, the strategic sale of assets and cash in hand.
Our future actual funding requirements could exceed currently anticipated
requirements. Differences may result from higher-than-anticipated costs or
capital expenditure and/or lower than anticipated revenues. Our actual costs,
capital expenditure and revenues will depend on many factors, including, inter
alia, consumer demand for voice, video, data and internet services, the impact
on our business of new and emerging technologies, the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment, the development of the interactive e-commerce market, consumer
acceptance of cable telephony as a viable alternative to British
Telecommunications plc's telephony services, and the continued downward pressure
on telephony margins.
In addition, we continuously review possibilities for accelerating our
delivery of bundled broadband services via a range of existing and new
distribution platforms and, as part of that strategy, we may acquire one or more
companies or their assets. Although the primary consideration for such
acquisitions may be our ordinary shares, we may also elect to fund such
acquisitions with the cash proceeds from indebtedness or cash flow from
operating activities. Any such acquisition could increase our funding
requirements.
As of March 31, 2002, we had cash balances of (pound)91 million
(excluding (pound)12 million that is restricted as to use to providing security
for leasing obligations and (pound)8 million that is on deposit guaranteeing a
temporary overdraft of an affiliated company). As of March 31, 2002 we had
(pound)639 million available to be drawn down under our Senior Secured Facility.
Following the Flextech merger in April 2000, we had two separate bank
facilities:
o we were party to a(pound)1.5 billion senior secured credit facility;
and
o Flextech and its subsidiaries were party to a(pound)200 million senior
secured credit facility.
On March 16, 2001, we entered into a new senior secured credit facility
(the "Senior Secured Facility") with a syndicate of banks (the "Senior Secured
Facility Banks") for (pound)2 billion. The terms of the loan agreement governing
the Senior Secured Facility also allowed us to raise a further (pound)250
million from institutional investors (the "Institutional Tranche") and raise a
further (pound)500 million of vendor financing. The first drawdown under this
new facility was used to repay our old senior secured credit facility and the
Flextech facility, noted above. On October 17, 2001, GE Capital Structured
Finance Group Limited, an affiliate of GE Capital, lent us (pound)125 million as
part of the additional (pound)250 million Institutional Tranche. Additionally,
on March 12, 2002, we announced that we had secured a further (pound)20 million
of institutional funding from Newcourt Capital (UK) Ltd., a subsidiary of CIT
Group Inc. As at March 31, 2002, (pound)277 million of vendor financing had been
incurred.
Borrowings under the Senior Secured Facility are secured on our assets,
including partnership interests and shares of subsidiaries, and bear interest at
between 0.5% and 2.25% above LIBOR (depending on the ratio of borrowings to
quarterly annualized consolidated net operating cash flow). Borrowings under the
Institutional Tranche bear interest at up to 4% above LIBOR. The terms of the
new facility restrict transfers or disposals of assets from certain subsidiary
companies. These restrictions relate to the type and value of the consideration
that can be accepted. Our ability to borrow under the Senior Secured Facility
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and the Institutional Tranche is subject to, among other things, our compliance
with the financial and other covenants set forth in the loan agreement governing
that facility and failure to comply with those covenants could result in all
amounts outstanding thereunder becoming immediately due and payable. We were in
compliance with these covenants as of March 31, 2002 and as of today and expect
to be in compliance for at least 12 months from the date of approval of our
audited consolidated financial statements for the year ended December 31, 2001
(February 28, 2002).
We regularly monitor our ongoing ability to draw down under the
facilities, which is dependent on satisfying the financial covenants. As with
most growth businesses, further increases in business performance and
profitability are necessary to ensure continued compliance with the terms of the
covenants. However, as with any forecast information, the principal assumptions
are clearly subject to a degree of risk, in particular, our ability to increase
revenues in accordance with our plans. If we were unable to remain compliant
with our covenants (or to meet our debt service obligations), we could attempt
to restructure or refinance some or all of our existing indebtedness or to seek
additional funding. We cannot assure you, however, that we would be able to do
so on satisfactory terms, if at all. The downgrading of our credit ratings in
March and April 2002 may mean that we are not able to make future borrowings. A
restructuring of our debt could take the form of a debt-for-equity swap, which
may result in severe dilution for existing shareholders at the time of the swap.
We believe we have adequate resources to continue in operational
existence for a period of at least 12 months from the date of approval of our
audited consolidated financial statements (February 28, 2002). As a result of
our debt obligations maturing beginning in late 2003 and uncertainty as to our
ability to satisfy those obligations, we are currently considering alternative
options to stabilize our medium and longer term liquidity position. We and our
auditors review from time to time our ability to meet our obligations going
forward and to continue in operational existence, and we will undertake such a
review in connection with the preparation of our interim financial statements
for the six months ending June 30, 2002. We cannot now determine what our
position will be with respect to future financial statements.
Although we believe that our current credit facilities are satisfactory
to meet our funding requirements going forward for at least 12 months from the
date of approval of our financial statements for the year ended December 31,
2001, (February 28, 2002) and that our actual net funding requirements and net
operating cash flows will not differ significantly from those currently
anticipated, we cannot assure you that this will be the case. Differences may
result from higher than anticipated costs and capital expenditure and/or lower
than anticipated revenues. To the extent that differences arise, such
differences could require us to request waivers from the Senior Secured Facility
Banks to prevent breaching certain covenants in the Senior Secured Facility
and/or to obtain additional financing and/or to amend or refinance our bank
facilities. Such waivers and/or new financing and/or amendments or refinancings
may not be available on acceptable terms, if at all. Our inability to obtain the
requisite waivers and/or to obtain additional financing and/or to amend or
refinance our bank facilities may result in a default under our Senior Secured
Facility and could result in a default under the indentures that govern our high
yield and convertible debt securities.
We may from time to time choose to repurchase our outstanding debt
securities for cash and/or in exchange for equity securities, in open market
purchases or privately negotiated transactions. Such repurchases or exchanges
will depend on, among other things, prevailing market conditions and our
liquidity requirements. The amounts of repurchased or exchanged debt securities
may be material.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments as of March 31,
2002 are summarized in the table below:
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PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
----------------------- ----- ---- --------- --------- -----
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Long-term debt.................................. 5,180 59 292 2,217 2,612
Capital lease obligations....................... 276 47 102 76 51
Operating leases................................ 33 3 9 6 15
Unconditional purchase obligations.............. 551 551 - - -
Other long-term obligations..................... 9 5 4 - -
------------------------------------------------ ------------- ----------------- ---------------- --------------- ---------------
Total contractual obligations................... 6,049 665 407 2,299 2,678
------------------------------------------------ ------------- ----------------- ---------------- --------------- ---------------
The following table includes information about our commercial
commitments as of March 31, 2002. Commercial commitments are items that we could
be obligated to pay in the future. They are not required to be included in the
balance sheet:
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL AMOUNTS LESS THAN AFTER 5
OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
---------------------------- --------- ------ --------- --------- -----
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Guarantees.................................. 27 12 4 - 12
-------------------------------------------- ----------------- ------------------ ---------------- ---------------- -------------
We have no other contractual or commercial commitments.
CAPITAL EXPENDITURE
Additions to property and equipment in the three-month period ended
March 31, 2002 totalled (pound)124 million, a decrease of (pound)33 million or
21.0% from (pound)157 million for the three-month period ended March 31, 2001.
Our capital expenditure has primarily funded the construction of local
distribution networks and our National Network, capital costs of installing
customers, and enhancing the network for new product offerings. The additions in
the three-month period ended March 31, 2002 were principally a result of network
upgrades and new subscriber installations in connection with our roll-out of
digital television and high-speed internet services. At March 31, 2002 our
broadband network, including Eurobell, was capable of providing 78% of the homes
in our franchises with both cable television and cable telephony services.
We have substantially completed all network upgrades necessary for
delivery of our digital television and high-speed internet services.
Consequently, we anticipate that capital expenditures associated with our
existing and currently planned services will be largely driven by connecting new
subscribers and the launch of new products, and will vary depending upon the
take-up of our services. Capital expenditure in the first quarter of 2002 at
(pound)124 million is in line with management guidance of (pound)500 million to
(pound)550 million for the the full year to December 31, 2002.
Included in the table of contractual obligations shown above is a total
of (pound)21 million relating to capital expenditure authorized by us for which
no provision has been made in the consolidated financial statements. This amount
includes subscriber installations (e.g., set-top boxes) for customer growth,
network enhancements and computer projects necessary for the maintenance of the
infrastructure of our business. In addition, and also included in the table, we
have contracted to buy (pound)8 million of programming rights for which the
license period has not yet started. These commitments will be funded when
required from operating cash flow and available bank facilities. Both of these
amounts are shown as being payable in less than 1 year.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The principal market risks to which we were exposed during the three-month
period ended March 31, 2002 (and which have not changed from previous periods)
were:
o interest rate changes on variable-rate, long-term bank debt;
and
o foreign exchange rate changes, generating translation and
transaction gains and losses on our US dollar-denominated debt
instruments.
From time to time we use derivative financial instruments solely to
reduce our exposure to these market risks and we do not enter into these
instruments for trading or speculative purposes.
In March and May 2002, we terminated certain foreign currency
derivative contracts as described below. This will increase our exposure to
foreign exchange fluctuations in respect of the principal on bonds no longer
hedged.
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 March 31, 2002 was
(pound)1.49 billion and the aggregate notional principal amount of the hedging
arrangements was (pound)850 million, leaving an unhedged amount of (pound)640
million at March, 31 2002.
FOREIGN CURRENCY EXCHANGE RISK
At March 31, 2002, certain of our fixed-rate debt instruments were
denominated in US dollars. We have entered into certain derivative instruments
to reduce our exposure to adverse changes in exchange rates. These derivative
instruments comprise foreign currency swaps and a series of foreign exchange
forward contracts. Our objective in using foreign currency derivative financial
instruments is to limit the impact of foreign exchange rate changes on our
interest and principal payments under our US dollar-denominated debt by choosing
hedging instruments to achieve our desired foreign exchange hedge at the lowest
cost available.
We hold derivative financial instruments solely to hedge specific risks
and do not hold such instruments for trading purposes. The derivatives are held
to hedge against the variability in cash flows arising from the effect of
fluctuations in the pound sterling/US dollar exchange rate on our future
interest payments and principal payments under our US dollar-denominated debt.
We typically use forward foreign currency contracts or cross currency swaps to
fix the pound sterling amount of future US dollar cash outflows for interest
payments and principal repayments up to their first call dates or other such
dates where we may, at our option, redeem the instruments before maturity.
We discontinue using hedge accounting for derivative financial
instruments when it is determined that:
o the derivative instrument is no longer effective in offsetting
changes in the cash flows of the hedged item;
o the derivative instrument expires or is sold;
o the derivative instrument is no longer designated as a hedging
instrument because it is unlikely that a forecasted
transaction will occur;
o a hedged firm commitment no longer meets the definition of a
firm commitment; or
o our management determines that designation of the derivative
instrument as a hedging instrument is no longer appropriate.
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Our results may be materially influenced by future exchange rate
movements should we discontinue 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. In addition, cancellation or
redemption of the derivative financial instruments would increase our exposure
to foreign currency exchange rate risk on our US dollar-denominated debt.
We had foreign currency swaps and forward contracts hedging our
principal and interest exposures totalling in aggregate (pound)2.0 billion at
March 31, 2002.
In March 2002, we terminated certain US dollar/pound sterling exchange
rate hedging arrangements with a notional amount of $950 million ((pound)655
million); termination of these arrangements netted (pound)74 million to us. A
further (pound)30 million was realized by us in May 2002 through the termination
of additional foreign exchange rate hedging arrangements with a notional amount
of $367 million ((pound)253 million). These cash proceeds are held as available
liquidity. On April 2, 2002 $560 million ((pound)390 million) of hedging
arrangements matured and was replaced with $350 million ((pound)246 million) of
forward foreign exchange contracts. Together these transactions have reduced our
foreign currency swaps and forward contracts hedging our principal and interest
exposures to an aggregate to date of approximately (pound)1.6 billion after
exchange rate differences, which represents approximately 50% of our US
dollar-denominated debt.
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 vary from the hypothetical amounts
disclosed in the table below, which therefore should not be considered a
projection of likely future events and losses. The sensitivity analysis is for
information purposes only. In practice, market rates rarely change in isolation.
INTEREST RATE RISK
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate one-percentage point (100 basis points) increase in
interest rates across all maturities:
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MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
---------- CHANGE IN ---------- CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
(POUND)M (POUND)M (POUND)M (POUND)M
Interest rate swaps................................................ (21.7) 15.0 (43.9) 19.1
Fixed rate debt.................................................... (1,880.2) (60.8) (3,220.8) (160.1)
Any movement in fair values of our interest rate swaps will not result
in any immediate change to our interest expense as these contracts are accounted
for as xxxxxx. Based on our variable rate debt outstanding at March 31, 2002
after taking into account our derivative instruments, we estimate that a
one-percentage point change in interest rates would not currently have a
material impact on our 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:
MAR 31, 2002 MAR 31, 2001
------------ ------------
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
---------- CHANGE IN ---------- CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
(POUND)M (POUND)M (POUND)M (POUND)M
US dollar-denominated long-term debt............................... (1,281.6) (142.4) (2,401.6) (266.8)
Foreign currency swap.............................................. 17.9 22.4 19.1 21.0
Foreign exchange forward contracts................................. 78.0 116.5 114.2 269.1
The hypothetical change in fair value for the US dollar-denominated
long-term debt is calculated by re-translating to pounds sterling the
dollar-denominated long-term debt at a rate 10% below the US dollar/pound
sterling exchange rate prevailing at the relevant period end.
Movements in the fair values of the foreign currency swap and foreign
exchange forward contracts would result in a corresponding charge or credit to
our statement of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS 143 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". SFAS 143, which is effective for fiscal years beginning
after June 15, 2002, requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, an entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Group is required to adopt this
standard from January 1, 2003. The Group has not yet determined the impact, if
any, the adoption of this standard will have on its financial position or
results of operations.
SFAS 145 RESCISSION OF FASB STATEMENTS 4, 44 AND 64, AMENDMENT OF FASB
13, AND TECHNICAL CORRECTIONS
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB 13, and Technical Corrections". SFAS 145
provides for the rescission of several previously issued accounting standards,
new accounting guidance for the accounting for certain lease modifications and
various technical corrections that are not substantive in nature to existing
pronouncements. SFAS 145 will be adopted beginning January 1, 2003, except for
the provisions relating to the amrndment of SFAS 13, which will be adopted for
transactions occurring subsequent to May 15, 2002. Adoption of SFAS 145 will not
have a material impact on our consolidatred financial statements.
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SIGNIFICANT SHAREHOLDINGS
On June 15, 2000, AT&T Corporation ("AT&T") and MediaOne Group, Inc.
("MediaOne") announced that they had completed their merger, and MediaOne had
become a subsidiary of AT&T. AT&T had previously reported that it had agreed
with the European Commission that, as part of the European Union's approval of
the AT&T/MediaOne merger, MediaOne's interest in us would be sold. In addition,
MediaOne had entered into an agreement with certain subsidiaries of Microsoft
whereby those subsidiaries would purchase MediaOne's shareholding in us.
Following clearance by the European Commission for this agreement to proceed,
Microsoft subsidiaries acquired approximately 21.7 per cent of MediaOne's 22.98
per cent share-holding in us on July 7, 2000, bringing Microsoft's total holding
to approximately 23.6 per cent of our outstanding issued share capital.
On May 3, 2001 we were notified by Liberty Media of an increase in its
shareholding in us as a result of the purchase of a further 20 million of our
shares. When combined with the shareholdings of Microsoft and MediaOne, with
whom Liberty Media is presumed to be acting in concert for the purposes of the
City Code on Take-overs and Mergers, this takes the combined Liberty Media,
Microsoft and MediaOne concert party (the "Concert Party") shareholding back
over 50% of our total issued shares.
Prior to the Flextech merger, the Concert Party collectively owned over
50% of our total issued shares. Following the Concert Party's dilution to just
below 50% as a result of that merger, the Concert Party was permitted under the
City Code to purchase, prior to close of business on May 4, 2001, up to 1% of
our share capital without incurring any obligation to extend a full offer to all
shareholders. The recent acquisition of our shares by Liberty Media increases
the Concert Party's holding in us from 49.4% to 50.1% within the timeframe
permitted.
Prior to the increase in its shareholding, Liberty Media re-designated
20 million ordinary shares (equal to the number of additional ordinary shares
purchased) as limited voting shares. As a result, the Concert Party's overall
shareholding remains below 50% of the issued ordinary shares, above which level
a change of control for the purposes of our debt securities might otherwise have
resulted.
Following the re-designation and purchases, the shareholdings of
Liberty Media, Microsoft and MediaOne were and remain at 25.2%, 23.6% and 1.3%,
respectively.
On June 12, 2002, Liberty Media, advised the board that they would be
making a tender offer for up to 20 per cent of our outstanding non-convertible
bonds. We issued a response to the tender offer on June 24, 2002 indicating that
we were unable to take a position with respect to the tender offer because we
were unable to determine whether the tender offer was beneficial or detrimental
to the holders of such notes and debentures. On June 27, 2002, Liberty Media
announced that during the first ten business days of the offer it had received
acceptances (subject to the offer otherwise going unconditional) in respect of
approximately 16 per cent of the bonds tendered for. It also announced it had
otherwise purchased approximately 5 per cent of those bonds outside of the
tender process. Prior to the tender offer, Xxxxxxx had already purchased
approximately 5 per cent of the bonds subject to the tender. The tender offer is
due to expire on July 11, 2002. In the tender offer document sent to holders of
the subject notes, Liberty Media stated that it was doing so in order to "permit
us as a creditor to participate in and influence discussion and decisions
regarding any future restructuring or recapitalization of the Company".
The offer document went on to say: "If the offer is successful, Xxxxxxx
presently intends to propose to the Company's board of directors a restructuring
plan pursuant to which all or substantially all of the Company's publicly-traded
notes and debentures would be converted into equity of the Company. Xxxxxxx has
disclosed in general terms its intention to make such a proposal to the
Company's board of directors. However, as of the date of the offer, Liberty has
not determined any specific terms for a proposed restructuring". Liberty Media
also stated in its offer document that the "Company is not participating in and
has no responsibility for this offer".
We have also been approached by a committee representing a significant
proportion of our outstanding bonds (the "Bondholders' Committee"). The
Bondholders' Committee expressed the desire to work constructively with Xxxxxxxx
to explore the possibility of bondholders participating in some form of
reconstruction of the Company's balance sheet. We have not yet discussed any
specific proposals with the Bondholders' Committee or Liberty Media.
The directors have concluded that it is in the Company's best
interests to enter into discussions with Liberty Media and the Bondholders'
Committee to establish whether a proposal that would command the support of the
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US GAAP ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
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directors is capable of being agreed. The directors will continue to explore all
available options in order to arrive at a solution that is fair and equitable to
all of our stakeholders. These discussions will not begin until we have obtained
the necessary waivers and consents from our banks.
By virtue of its 25.2% equity holding Liberty Media is entitled to
appoint three representatives to our board of directors and has a number of
special rights pursuant to a shareholder-approved Relationship Agreement. In
view of the developments discussed above, a number of corporate safeguards have
been put in place to ensure that the directors are able to operate impartially
and in the best interests of the Company and all of its stakeholders. It has
been agreed that none of the Liberty Media-nominated directors will participate
in any board or board committee deliberations relating to any proposals for the
reorganisation of the Company's balance sheet; an executive management team has
been instructed and authorised by the board to conduct the detailed evaluation,
development and negotiation of any proposals for the reorganisation of the
Company's balance sheet and all alternatives thereto, (the executive management
team will comprise the Group Chief Executive, the Group Finance Director and the
Group Strategy Director and General Counsel, and the Company's Chairman will
have a detailed day-to-day involvement in the work of the management team who
will report to the board (excluding the Liberty Media-nominated directors) on a
regular basis); and, as the directors are particularly conscious that any
reconstruction proposals might involve an actual or perceived conflict between
the interests of different stakeholders, for instance, shareholders,
bondholders, banks, trade creditors, management and employees, they have
established a committee to review any actual or perceived conflict and to make
appropriate recommendations to the full board (excluding the Liberty
Media-nominated directors), (on this committee are the Company's Chairman and
the three other independent non-executive members of the board).
Further, on July 3, 2002 Microsoft notified Liberty Media that
Microsoft proposed to sell publicly all of the ordinary shares and all of the
limited voting shares it owned in Telewest. Under the terms of the Relationship
Agreement between Telewest, Liberty Media and Microsoft, the notification offers
Liberty Media the right to purchase those shares and Liberty Media have 30 days
to purchase all, but not less than all, of those shares. If Liberty Media do not
exercise their right, Microsoft may sell publicly those shares for up to 90 days
following the expiration of the option period.
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US GAAP ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
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* * * * *
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The discussion above includes certain statements that are, or may be
deemed to be, forward-looking statements within the meaning of the US securities
laws. These forward-looking statements, by their nature, involve risks and
uncertainties because they relate to events and depend on circumstances that may
or may not occur in the future.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed or
implied by those forward-looking statements, including, but not limited to: our
ability to raise additional financing, our ability to refinance our indebtedness
and our ability to continue to service our outstanding indebtedness; our ability
to access liquidity under our bank facility, which will require our compliance
with certain covenants that require continued growth in our business; the extent
to which consumer demand for voice, video, data and internet services increases;
the extent to which SMEs accept cable telephony services as an alternative to
those of competing service providers such as BT; the extent to which we are able
to adapt to, and compete with, new and emerging technologies including
Asynchronous Digital Subscriber Line technology; the extent to which consumer
preference develops for cable television over other methods of providing in-home
entertainment; the extent to which consumer preference develops for purchasing
goods and services on the internet and/or using interactive television over
other methods of purchasing such goods and services; the extent to which
consumers accept cable telephony as a viable alternative to telephony services
provided by BT; the extent to which we are successfully able to compete with
mobile network operators; the extent to which regulatory and competitive
pressures in the UK telephony market continue to reduce prices; our ability to
develop and introduce attractive interactive and high-speed data services in a
rapidly changing and highly competitive business environment; our ability to
penetrate markets and respond to changes or increases in competition; our
ability to compete with other ISPs; our ability to compete against digital
television service providers, including British Sky Broadcasting Group plc and
any successor to ITV Digital (formerly ONdigital, a joint venture between
Carlton Communications plc and Granada Group plc) by increasing our digital
services customer base, and the impact of our aggressive digital services
marketing campaign on our results of operations and liquidity; our ability to
have an impact on, or respond to, new or changed government regulation; our
ability to manage growth and expansion; our ability to improve operating
efficiencies, including through cost reductions; our ability to maintain and
upgrade our network in a cost-efficient and timely manner; adverse changes in
the price or availability of telephony interconnection or cable television
programming; disruptions in supply of programming, services and equipment; and
the extent to which consumer preference develops for, or shifts away from,
content developed and distributed by Flextech (our Content Division).
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