EXHIBIT 99.1
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
--------------------------------------------------------------------------------
US GAAP FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS WITH RESPECT TO THE THREE-MONTH
PERIOD ENDED MARCH 31, 2003.
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
--------------------------------------------------------------------------------
PART I: US GAAP FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2003 2002
(IN MILLIONS, EXCEPT PER SHARE DATA)
(note 2)
--------------------------------------------------------------------------------------------------------------------------
REVENUE
Cable television $ 125 (pound) 79 (pound)85
Consumer telephony 185 117 126
Internet and other 41 26 16
----------------------------------------
TOTAL CONSUMER DIVISION 351 222 227
Business Services Division 110 70 66
----------------------------------------
TOTAL CABLE DIVISION 461 292 293
Content Division 43 27 26
----------------------------------------
TOTAL REVENUE 504 319 319
----------------------------------------
OPERATING COSTS AND EXPENSES
Consumer programming expenses (including(pound)3m and(pound)4m in 2003
and 2002, respectively, to related parties) 50 32 33
Business and consumer telephony expenses 81 51 55
Content expenses 27 17 16
Depreciation 152 96 117
----------------------------------------
Cost of sales 310 196 221
Selling, general and administrative expenses
191 121 129
----------------------------------------
501 317 350
----------------------------------------
----------------------------------------
OPERATING PROFIT/(LOSS) 3 2 (31)
----------------------------------------
OTHER INCOME/(EXPENSE)
Interest income 9 6 -
Interest expense (including amortization of debt discount) (197) (125) (121)
Foreign exchange (losses)/gains, net (75) (48) 21
Share of net profits of affiliates 3 2 4
Other, net (2) (1) -
----------------------------------------
LOSS BEFORE INCOME TAXES (259) (164) (127)
Income tax benefit 2 1 2
----------------------------------------
NET LOSS FOR THE PERIOD (257) (163) (125)
========================================
Basic and diluted loss per ordinary share $(0.09) (pound)(0.06)(pound)(0.04)
Weighted average number of ordinary shares - basic and diluted - (millions) 2,874 2,874 2,873
See accompanying notes to the unaudited condensed consolidated financial
statements.
1
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------------------
MARCH 31, MARCH 31, DEC. 31,
2003 2003 2002
$M (POUND)M (POUND)M
(note 2) AUDITED
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 616 (pound) (pound)
390 390
Secured cash deposits restricted for more than one year 19 12 12
Trade receivables (net of allowance for doubtful accounts of
(pound)16m in 2003 and(pound)12m in 2002) 142 90 120
Other receivables 140 89 68
Prepaid expenses 71 45 27
----------------------------------------
Total current assets 988 626 617
Investments in affiliates, accounted for under the equity method,
and related receivables 586 371 376
Property and equipment (less accumulated depreciation of(pound)3,292m in 2003 and
(pound)3,196m in 2002) 4,052 2,566 2,598
Goodwill (less accumulated amortization of(pound)2,593m in 2003 and 2002) 706 447 447
Inventory 57 36 28
Other assets (less accumulated amortization of(pound)97m in 2003
and(pound)58m in 2002) 58 37 40
----------------------------------------
TOTAL ASSETS 6,447 4,083 4,106
========================================
LIABILITIES AND SHAREHOLDERS' FUNDS
Accounts payable 240 152 110
Other liabilities 897 568 520
Deferred income 181 115 111
Debt repayable within one year 7,398 4,685 3,652
----------------------------------------
Total current liabilities 8,716 5,520 4,393
Deferred tax 133 84 85
Debt 1,299 823 1,798
Capital lease obligations 302 191 204
----------------------------------------
TOTAL LIABILITIES 10,450 6,618 6,480
----------------------------------------
MINORITY INTERESTS (2) (1) (1)
SHAREHOLDERS' EQUITY
Ordinary shares, 10 xxxxx par value;
4,300 million shares authorized and 2,874 million shares issued and outstanding 453 287 287
Limited voting convertible ordinary shares, 10 xxxxx par value;
300 million shares authorized and 82 million shares issued and outstanding 13 8 8
Additional paid-in capital 6,668 4,223 4,223
Accumulated deficit (11,121) (7,043) (6,880)
Accumulated other comprehensive income (14) (9) (11)
----------------------------------------
TOTAL SHAREHOLDERS' DEFICIT (4,001) (2,534) (2,373)
----------------------------------------
----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 6,447 4,083 4,106
========================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
2
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
--------------------------------------------------------------------------------------------------------------------------------
3 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2003 2002
$M (POUND)M (POUND)M
(note 2)
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (257) (pound)(163) (pound)(125)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities
Depreciation 152 96 117
Amortization of deferred financing costs and issue discount on
Senior Discount Debentures 41 26 26
Deferred tax credit (2) (1) (2)
Unrealized losses/(gains) on foreign currency translation 75 48 (21)
Share of net losses of affiliates (3) (2) (4)
Loss on disposal of assets 2 1 -
Changes in operating assets and liabilities :
Change in receivables 14 9 (4)
Change in prepaid expenses (30) (19) (11)
Change in other assets (13) (8) (4)
Change in accounts payable 62 39 56
Change in other liabilities 76 48 (30)
-------------------------------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 117 74 (2)
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (106) (67) (110)
Additional investments in and loans to affiliates - - (1)
Repayment of loans made to joint ventures (net) 10 6 (4)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (96) (61) (115)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under existing credit facilities - - 130
Net proceeds from maturity of forward contracts - - 74
Repayment of other borrowings - - (1)
Capital element of finance lease repayments (21) (13) (9)
-------------------------------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (21) (13) 194
-------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 77
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 616 390 14
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 616 390 91
=====================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS OF SHAREHOLDERS' DEFICIT
AND COMPREHENSIVE LOSS
----------------------------------------------------------------------------------------------------------------------------
ORDINARY LIMITED ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING PAID-IN COMPREHENSIVE DEFICIT
SHARES CAPITAL LOSS
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
(note 6)
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 287 8 4,223 (11) (6,880) (2,373)
------------------------------------------------------------------------------
Net loss for the period - - - - (163) (163)
Current period increase in fair value of
Derivative instruments, (net) - - - 2 - 2
------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME/(LOSS) - - - 2 (163) (161)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 287 8 4,223 (9) (7,043) (2,534)
==============================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITIES
The principal activities of Telewest Communications plc and its
consolidated subsidiaries (`Telewest', the `Company, `we', `our', and `us') are
the provision of voice, video, data and internet services across multiple
platforms and the supply of content and services to the United Kingdom (`UK')
pay-television broadcasting market.
2. BASIS OF PRESENTATION
The unaudited, condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles in the United States of America (`US GAAP'). The preparation of
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 20-F for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission (`SEC')
on June 30, 2003. 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, 2003 and its results of
operations and cash flows for the three-month periods ended March 31, 2003 and
2002. Interim results are not necessarily indicative of results for the
financial year.
The economic environment in which Telewest operates is the UK, and
hence its reporting currency is sterling ((pound)). Certain financial
information as of and for the three-month period ended March 31, 2003 has been
translated into US dollars ($), with such US dollar amounts being unaudited and
presented solely for the convenience of the reader, at the rate of $1.5790 =
(pound)1.00, the Noon Buying Rate of the Federal Reserve Bank of New York on
Monday March 31, 2003. The presentation of the US dollar amounts should not be
construed as a representation that the sterling amounts could be so converted
into US dollars at the rate indicated or at any other rate.
The unaudited, condensed consolidated financial statements include the
accounts of the Company and those of its majority-owned subsidiaries (the
`Group'). All significant inter-company accounts have been eliminated upon
consolidation.
These financial statements have been prepared on a going concern basis
and do not include any adjustments that would arise as a result of the going
concern basis of preparation being inappropriate. As previously announced, the
Company is in discussions with its bondholders and other major stakeholders with
regard to a Financial Restructuring (see below) of its balance sheet as the
directors consider that the Company will not be able to meet all of its debts as
they fall due. However, the Board of Directors has confidence in the successful
conclusion of the Financial Restructuring (and any required amendments to the
Senior Secured Facility) and, together with and on the basis of cash flow
information that they have prepared, the directors consider the Group will
continue to operate as a going concern for a period of at least 12 months from
July 31, 2003, the date of issuance of our Interim Report for 2003. Any
restructuring will require the approval of our bankers and various stakeholders.
Inherently, there can be no certainty in relation to any of these matters.
3. FINANCIAL RESTRUCTURING
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the `Bondholder Committee'). That agreement
provided for the cancellation of all outstanding notes and debentures (the
`Notes') (approximately (pound)3.5 billion) and certain other unsecured foreign
exchange hedge contracts (the `Hedge Contracts') (approximately (pound)33
million) in exchange for new ordinary shares (the `New Shares') representing 97%
of our issued share capital immediately after the Financial Restructuring. Under
that agreement our current ordinary shareholders would have received the
remaining 3% of our issued ordinary share capital.
We also announced on September 30, 2002 that we were deferring payment of
interest under certain of our Notes and the amounts due as a result of the
settlement of the Hedge Contracts. Such non-payment continues and has resulted
in defaults under our Existing Facility and a number of other financing
arrangements. Based on one such default, in respect of non-payment of
approximately (pound)10.5 million to a Hedge Contract counter-party, that
5
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS
counter-party has filed a petition with a UK Court to wind us up. We intend to
deal with this claim as part of the overall restructuring of our unsecured debt
obligations and do not believe that the legal action will significantly delay or
impede the Financial Restructuring process. We expect to meet our obligations to
our suppliers and trade creditors and this legal action is expected to have no
impact on customer service.
On January 15, 2003, we announced that we had reached a non-binding
agreement with respect to the terms of amended and restated credit facilities
with both the steering committee of our Senior Lenders and the Bondholder
Committee. In addition, the terms of these facilities had received credit
committee approval, subject to documentation and certain other issues, from all
of our Senior Lenders, save for those banks which are also creditors by virtue
of the unsecured Hedge Contracts with which we will deal in the overall
Financial Restructuring. These amended facilities will replace the Existing
Facility and are, as noted above, conditional on various matters, including the
satisfactory finalization of arrangements for dealing with foreign exchange
creditors and the completion of our balance sheet restructuring. These amended
credit facilities will provide us with substantial liquidity, which is expected
to be sufficient to see us through to cash flow positive after completion of the
Financial Restructuring.
On March 14, 2003, we notified the Senior Lenders that, as a result of
two non-recurring items, the VAT decision (see our 20-F, Item 5. Operating and
Financial Review and Prospects -- Operating Results -- Results of Operations
--Years ended December 31, 2001 and 2002 -- Revenue) and legal and professional
costs associated with the Financial Restructuring, and their impact on our net
operating cash flow, we would breach certain financial covenants under our bank
facility in respect of the quarter ended December 31, 2002. On May 16, 2003, we
further notified the Senior Lenders that we were in breach of the financial
covenants for the quarter ended March 31, 2003 due to continuing fees paid in
connection with the Financial Restructuring and the tightening of covenants.
On June 9, 2003, we announced that we had been notified by the
Bondholder Committee that, in order to obtain the support of certain of our
bondholders, the Bondholder Committee had requested certain changes to the
economic and other terms of the preliminary non-binding agreement relating to
our Financial Restructuring with the Bondholder Committee, as announced on
September 30, 2002,
On June 17, 2003, representatives of the Bondholder Committee provided
us with a new proposal for the terms of the Financial Restructuring.
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
We continue to engage in negotiations with our bondholders, Senior
Lenders and certain other major stakeholders and the directors believe that a
final agreement will be achieved in due course.
4. SEGMENTAL INFORMATION
The Company applies Statement of Financial Accounting Standard No. 131
(`SFAS 131'), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-making group is the board
of directors. The operating segments are managed separately because each
operating segment represents a strategic business unit that offers different
products and services in different markets. We operate in two main segments:
Cable and Content. The Cable segment of our business can be subdivided, for
revenue purposes only, between four product ranges: Cable Television, Consumer
Telephony, Internet and other, and Business Services. The Internet and other
unit comprises internet sales and, in 2002, sales of cable publications. The
Content segment provides entertainment content, interactive and transactional
services to the UK pay-television broadcasting market.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our financial
statements.
6
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents summarized financial information relating
to the reportable segments for the three-month periods ended March 31, 2003 and
2002, respectively:
UNAUDITED SEGMENTAL INFORMATION
7
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------------------------------
3 MONTHS ENDED 3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2003 MARCH 31, 2002
(note 2)
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------
CABLE
--------------------------------------------------------------------------------------------------------------------
Cable television $ 125 (pound) 79 (pound) 85
Consumer telephony 185 117 126
Internet and other 41 26 16
------------------------------------------------------------------
Total Consumer Division 351 222 227
Business Services Division 110 70 66
------------------------------------------------------------------
THIRD PARTY REVENUE 461 292 293
Operating costs and expenses (308) (195) (206)
Depreciation (147) (93) (115)
------------------------------------------------------------------
OPERATING PROFIT/(LOSS) 6 4 (28)
==================================================================
Share of net profits of affiliates - - -
Investment in affiliates 5 3 3
Additions to property & equipment 103 65 123
Goodwill 483 306 1,322
Total assets 5,479 3,470 5,191
--------------------------------------------------------------------------------------------------------------------
CONTENT
--------------------------------------------------------------------------------------------------------------------
Content Division 47 30 29
Inter-segmental * (4) (3) (3)
------------------------------------------------------------------
THIRD PARTY REVENUE 43 27 26
Operating costs and expenses (41) (26) (27)
Depreciation (5) (3) (2)
------------------------------------------------------------------
OPERATING LOSS (3) (2) (3)
==================================================================
Share of net profits of affiliates 3 2 4
Investments in affiliates 581 368 550
Additions to property & equipment - - 1
Goodwill 223 141 570
Total assets 968 613 1,251
--------------------------------------------------------------------------------------------------------------------
TOTAL
--------------------------------------------------------------------------------------------------------------------
Cable television 125 79 85
Consumer telephony 185 117 126
Internet and other 41 26 16
------------------------------------------------------------------
Total Consumer Division 351 222 227
Business Services Division 110 70 66
------------------------------------------------------------------
Total Cable Division 461 292 293
Content Division 47 30 29
Inter-segmental * (4) (3) (3)
------------------------------------------------------------------
TOTAL REVENUE 504 319 319
Operating costs and expenses (349) (221) (233)
Depreciation (152) (96) (117)
------------------------------------------------------------------
OPERATING PROFIT/( LOSS) 3 2 (31)
Other expense (262) (166) (96)
Income tax benefit 2 1 2
------------------------------------------------------------------
NET LOSS (257) (163) (125)
==================================================================
Share of net profits of affiliates 3 2 4
Investments in affiliates 586 371 553
Additions to property & equipment 103 65 124
Goodwill 706 447 1,892
Total assets 6,447 4,083 6,442
--------------------------------------------------------------------------------------------------------------------
* Inter-segmental revenues are revenues from sales in our Content Division
which are costs in our Cable Division and are eliminated on consolidation.
8
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS
5. SHARE-BASED COMPENSATION COST
As permitted under SFAS 123, Accounting for Stock-Based Compensation,
share-based compensation cost for employee share options is measured and
expensed over the period of the performance for such options under Accounting
for Stock Issued to Employees (`APB 25'), as the excess, if any, of the quoted
market price of a company's shares over the amount an employee must pay to
acquire the shares. During the three-month periods ended March 31, 2003 and 2002
the Company's share price continued to decrease, and no compensation charge
resulted during either period.
An amendment to SFAS 123, SFAS 148 Accounting for Stock Based
Compensation - Transition and Disclosure, was effective for the Group for the
year ended December 31, 2002. SFAS 148 permits two additional transition methods
for entities that adopt the fair value based method of accounting for
stock-based employee compensation. The Statement also requires new disclosures
about the ramp-up effect of stock-based employee compensation on reported
results and that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The Group has adopted the
disclosure provisions of the Statement in these financial statements. The Group
has not adopted the fair value based method of accounting for stock-based
employee compensation and still accounts for these in accordance with APB 25.
Following the adoption of SFAS 148 (and the non-adoption of the fair
value provisions), the Group is obliged to report the effect, on its net loss
and basic and diluted loss per share, of compensation costs for share option
grants and awards under the Group's various share option schemes as determined
based on their fair value at the date of grant, consistent with the method
prescribed by SFAS 123. During the three-month period ended March 31, 2003 no
options or awards were granted over any ordinary shares of the Company.
Compensation costs based on fair value at the date of grant for all options and
awards granted in previous periods were fully expensed by December 31, 2002,
accordingly there is no further charge or credit necessary and the net loss and
basic and diluted loss per share for the three-month period ended March 31, 2003
are not affected.
6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
At January 1, 2001 the Company adopted SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137 and 138.
SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires the recognition at fair value of
all derivative instruments as assets or liabilities in the Company's balance
sheet. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated a hedge and if so, the type
of hedge and its effectiveness as a hedge.
For derivatives, which are not designated as xxxxxx, changes in fair
value are recorded immediately in earnings.
For derivatives designated as cash flow xxxxxx, changes in fair value on
the effective portion of a hedge are recorded within Other Comprehensive Income
(`OCI') until the hedged transaction occurs and are then recorded within
earnings. Changes in the ineffective portion of a hedge are recorded immediately
in earnings. For derivatives designated as fair value xxxxxx, changes in fair
value are recorded immediately in earnings. We have not, however, had any fair
value xxxxxx since the adoption of SFAS 133.
We discontinue hedge accounting for derivative financial instruments
when it is determined that the derivative instrument is no longer effective in
offsetting changes in the cash flows of the hedged item; the derivative
instrument expires or is sold; the derivative instrument is no longer designated
as a hedging instrument, because it is unlikely that a forecasted transaction
will occur; a hedged firm commitment no longer meets the definition of a firm
commitment; or our management determines that designation of the derivative
instrument as a hedging instrument is no longer appropriate.
9
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS
The Company xxxxxx some of its interest rate risk on its Senior Secured
facility through the use of interest rate swaps. The Company also historically
hedged some of its foreign currency risk through the use of forward foreign
exchange contracts and foreign currency swaps. The Company, in response to
fluctuations in the sterling/ US dollar exchange rate, terminated its interest
rate hedging arrangements. The purpose of the derivative instruments is to
provide a measure of stability over the Company's exposure to movements in
interest rates and the sterling/ US dollar exchange rate. The majority of the
Company's derivative instruments are designated as cash flow xxxxxx.
7. RECENT DEVELOPMENTS
On June 9, 2003, we announced that we had been notified by the Bondholder
Committee that, in order to obtain the support of certain of our bondholders,
the Bondholder Committee had requested certain changes to the economic and other
terms of the preliminary non-binding agreement relating to our Financial
Restructuring with the Bondholder Committee, as announced on September 30, 2002,
On June 17, 2003, representatives of the Bondholder Committee provided us
with a new proposal for the terms of the Financial Restructuring.
On June 27, 2003 a High Court judgment was delivered against those mobile
telephone operators who had appealed decisions of Oftel and the Competition
Commission in the area of mobile call termination/interconnect rates. Following
this judgment and the initial mobile interconnect rate cuts of July 25, 2003, we
are considering retail price changes for calls from our network to mobiles with
the intent of passing the benefits to our customers whilst stimulating call
usage.
On July 8, 2003, we sold our Indirect Access (`XXX') telephony business
for approximately (pound)2 million. We acquired this business as part of our
acquisition of Eurobell PLC in November 2000. XXX revenues were (pound)9 million
in 2002 and (pound)4 million in the six-month period ended June 30, 2003. (XXX
customers have never been included in our reported customer numbers).
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
8. COMMITMENTS AND CONTINGENCIES
Other than as set forth below, neither Telewest nor any other member of
the Telewest Group is or has been engaged in any legal or arbitration
proceedings, nor are any such proceedings pending or threatened by or against
it, which may have, or have had during the 12 months preceding the date hereof,
a significant effect on the Telewest Group's financial position.
A dispute between Telewest Communications Group Limited, Telewest
Communications (Publications) Limited and the Commissioners of Customs and
Excise over the VAT status of Cable Guide and Zap magazines, was heard between
October 21 and October 25, 2002, in respect of which judgment was passed down on
January 21, 2003 which resulted in the provision of (pound)16 million against
revenue in our consolidated financial statements for the year ended December 31,
2002. The exceptional item arose in respect of VAT payable in the period from
January 2000 to July 2002. Our magazines ceased publication towards the end of
the year 2002. Therefore, the exceptional item represented the full extent of
our VAT liability in respect of our magazine operations. The VAT tribunal held
that our arrangements to protect the zero-rated VAT status of Cable Guide and
Zap magazines could, in principle, be effective in creating a separate supply by
Telewest Communications (Publications) Limited, which was not ancillary to the
supply of pay-television services. However, in practice, the steps taken by us
were insufficient to make the arrangements effective. We have appealed this
decision which is expected to be heard in the High Court in November 2003.
On October 29, 2002, following non-payment of our obligations under
certain foreign exchange contracts, Credit Agricole Indosuez presented a
winding-up petition against us (in respect of a debt of approximately (pound)10
million). On or about October 31, 2002 The Royal Bank of Scotland plc served a
notice in support of the petition. On June 5, 2003, The Xxxx Alternative Fund
LP, also served a notice in support of the winding-up petition. At the initial
hearing of the petition, it was adjourned until January 29, 2003, when it was
adjourned further. The winding-up petition has not yet been listed for hearing,
and as far as we are aware Credit Agricole Indosuez has not taken any further
10
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTES TO THE UNAUDITED CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS
steps to list it. We have obtained several orders under Section 127 of the UK
Insolvency Act 1986, to enable us to continue to make certain payments without
the risk of those payments subsequently being declared void as a result of the
presentation of the winding-up petition.
On April 24, 2003, process was filed in the Supreme Court of the State of
New York in relation to an action brought by Eximius Capital Funding, Ltd.
(`Eximius') against Telewest to recover the principal and interest and other
payments due in respect of certain of our Notes. We have been informed that X.X.
Xxxx Asset Management Co., L.L.C. (`Xxxx') is an adviser to Xxxxxxx but that
Xxxxxxx is not a member of the same group of companies as Xxxx. Xxxxxxxx has
moved to dismiss Xxxxxxx' complaint principally on the grounds that, under the
terms of the indentures governing the Notes, Xxxxxxx has no standing to bring
the claims alleged in its complaint and has also failed to state legally
sufficient claims.
On May 12, 2003, process was filed in the Supreme Court of the State of
New York in relation to a further action brought by Xxxxxxx against, inter alia,
Telewest, Liberty Media Corporation, our Directors and certain of our former
Directors (collectively, the `Defendants') in respect of an alleged breach of
fiduciary duty and other alleged wrongful conduct by the Defendants in relation
to a potential restructuring of our balance sheet. On June 9, 2003, Xxxxxxx
moved to amend and supplement the complaint to add IDT Corporation and certain
alleged affiliates of IDT as defendants. The Defendants' time to answer, move or
otherwise respond to the action has not yet expired.
On or about June 12, 2003, the United States District Court for the
Southern District of New York agreed to allow Xxxx and certain other holders of
our Notes to amend a complaint originally filed against, inter alia, Liberty
Media Corporation relating to the tender offer by Liberty TWSTY Bonds, Inc. for
certain of our Notes. The amended complaint adds the Defendants as parties. The
amended action alleges violations of Rule 10b-5 under the Securities Exchange
Act of 1934 and common law fraud by, among others, Liberty Media Corporation and
the Defendants arising from certain statements in 2001 and early 2002. The
Defendants' time to answer, move or otherwise respond to the action has not yet
expired.
11
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
--------------------------------------------------------------------------------
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, 2002 and 2003
based upon financial information prepared in accordance with US GAAP.
References in this discussion to the `Group,' `we,' `us,' and `our,'
are to Telewest and its consolidated subsidiaries as at, or for, the specified
date or period.
CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since
December 31, 2002, as reported in our Form 20-F filed with the SEC on June 30,
2003.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2003
We operate in two main segments: Cable and Content. The Cable segment
of our business is subdivided, for revenue purposes only, into four units: Cable
Television, Consumer Telephony, Internet and other, and Business Services. The
Content segment provides entertainment, content, interactive and transactional
services to the UK pay-TV broadcasting market.
Our consolidated revenue remained flat at (pound)319 million for both
the three-month period ended March 31, 2002 and for the three-month period ended
March 31, 2003. Increases in our Business Services Division and Content Division
were offset by reduced revenues from our Consumer Division, where, despite a
62.5% increase in internet and other revenues, cable television and consumer
telephony revenues decreased by 7.1% mainly due to customer losses as we
continue to focus on more cash generative and profitable customers. We recorded
an operating profit of (pound)2 million for the three-month period ended March
31, 2003, compared with an operating loss of (pound)31 million for the
three-month period ended March 31, 2002.
CABLE SEGMENT
REVENUE
CONSUMER DIVISION
Consumer Division revenue represents a combination of cable
television (`CATV') revenue, consumer cable telephony revenue, and internet and
other income.
Our Consumer Division revenue decreased by (pound)5 million or 2.2%
from (pound)227 million for the three-month period ended March 31, 2002 to
(pound)222 million for the three-month period ended March 31, 2003. This
decrease was due to decreases of 7.1% in our combined CATV and consumer
telephony revenues partially offset by an increase of 62.5% in our internet and
other income. Consumer revenues were also impacted by the closure, towards the
end of 2002, of Cable Guide, our TV listings magazine which contributed (pound)2
million of revenues in the three-month period ended March 31, 2002.
Average monthly revenue per subscriber increased by (pound)0.35 or
0.8% from (pound)41.48 for the three-month period ended March 31, 2002 to
(pound)41.83 for the three-month period ended March 31, 2003. This increase is
attributable to an increase in dual or triple penetration (i.e. the proportion
of homes subscribing to at least two of our CATV, residential telephony and
broadband internet services), continued analogue to digital migration and
selected retail price increases in our CATV and residential telephony services
in April 2002 and March 2003, offset in part by a decrease in second line
penetration and lower call volumes in residential telephony. Dual or triple
penetration, which results from the continued market acceptance of combined
CATV, telephony and broadband internet packages, grew by 0.3 percentage points
to 70.2% at March 31, 2003 from 69.9% at March 31, 2002. This is primarily a
result of an increase in the number of subscribers to our broadband internet
services offset in part by increased product churn for CATV, telephony and
dial-up internet services, as described below. As at March 31, 2003, our `triple
play' customers totalled 206,950 and accounted for 11.9% of our total customer
base compared with 89,794 customers and 5.0% as at March 31, 2002.
12
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
Total customer homes connected decreased by 39,767 or 2.2% from
1,783,489 at March 31, 2002 to 1,743,722 at March 31, 2003 mainly as a result of
the continued effect of the selected price rises described below and the more
rigorous enforcement of our installation fee collection and disconnection
policies in line with our objective of focusing on more cash generative
customers, offset by new subscribers to our products, particularly our broadband
internet services. Accordingly, overall household penetration also decreased by
0.7 percentage points from 37.9% at March 31, 2002 to 37.2% at March 31, 2003.
The competitive nature of the markets in which the Consumer Division
operates will continue to restrict our ability to increase retail prices.
Nevertheless, following price rises by our competitors, we introduced selected
price rises across our CATV, telephony and dial-up internet product range in
April 2002 and March 2003. Customer growth was impacted by these price rises and
the tightening of our credit control policy as we focus on more cash generative
customers. We plan a return to customer growth in the second half of 2003 as we
reduce churn and continue to market and enhance our digital TV and `triple play'
products. We believe that our bundled offerings still remain competitive when
compared with those offered by other operators.
The focus on more cash generative customers has improved the profile
of our customer base as:
o `triple play' customers increased by 23,807 in the three-month period ended
March 31, 2003,
o `triple play' customers account for 11.9% of our customer base at March 31,
2003 compared to 5.0% at March 31, 2002,
o 23.8% of our telephony customer base now take our higher average monthly
revenue earning flat rate telephony products,
o 69.7% of our CATV customer base now take our higher average monthly revenue
earning digital TV, and
o household churn in the twelve-month period ended March 31, 2003 was 17.6%,
down from 18.2% in the twelve-month period ended December 31, 2002.
CATV REVENUE
CATV revenue decreased by (pound)6 million or 7.1% from (pound)85
million for the three-month period ended March 31, 2002 to (pound)79 million for
the three-month period ended March 31, 2003. The decrease was principally
attributable to our focus on cash generation and profitable customers rather
than pursuing overall subscriber growth, which resulted in increased churn and
an associated reduction in CATV subscribers, offset in part by higher average
monthly revenues per subscriber.
Our digital television services have now been rolled out in all
franchise areas, excluding our Eurobell South-East areas and our Cabletime
areas. As a result of this substantially completed roll-out, our CATV customers
continue to migrate from our analogue services to our digital services, where
they generate higher monthly revenues. As at March 31, 2003 we had an installed
base of 887,306 digital subscribers, an increase of 94,743 or 12.0% compared
with 792,563 as at March 31, 2002. At March 31, 2003, 69.7% and 30.3% of
customer homes connected subscribed to digital and analogue TV services,
respectively. This compares with 58.4% and 41.6%, respectively, at March 31,
2002. Notwithstanding the above, the migration of analogue customers to digital
has slowed during the twelve-month period ended March 31, 2003 compared with the
twelve-month period ended March 31, 2002; a trend that we expect to continue
during the rest of 2003. This results from our increased focus on cash and cost
control, including reduced marketing activity in respect of our digital CATV
services.
As noted above, we have shifted our focus from one of subscriber
acquisition to one which focuses on cash generative products, services and
customers. As part of this focus we have:
o discontinued active marketing of our Entry TV package to new
subscribers during the three-month period ended March 31, 2003;
o required new subscribers to TV as a stand-alone product to take our
top-tier basic package, Supreme;
o withdrawn the Essential Plus package for new subscribers to encourage
customers to take the full Supreme package; and
o during the three-month period ended March 31, 2003, put through a
significant price rise to some of our analogue customers.
13
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
Average monthly revenue from our digital CATV subscribers was
(pound)21.99 for the three-month period ended March 31, 2003 compared with
(pound)17.34 from our analogue subscribers for the same period. More of our
digital TV customers take higher priced services than our analogue TV customers.
In April 2002 and March 2003 we implemented selected CATV price
increases which had a positive impact on average monthly revenue per CATV
subscriber, but also resulted in a decline in total subscribers (as discussed
further below).
Total CATV subscribers connected decreased by 84,655 or 6.2% from
1,358,200 at March 31, 2002 to 1,273,545 at March 31, 2003 largely as a result
of higher churn rates experienced following the price increases described above.
During the three-month period ended March 31, 2003, we experienced a
fall in the amount of premium programming purchased by our subscribers. Our
`premium-to-basic' ratio (which measures units of premium programming as a
percentage of our basic TV subscriber base) fell from 73% at March 31, 2002 to
approximately 71% at March 31, 2003. Although this decrease in the purchase of
premium programming negatively impacts average monthly revenue per subscriber,
it also has the effect of decreasing the costs associated with our purchase of
that premium programming which therefore results in higher percentage margins
for our CATV products.
Average monthly revenue per CATV subscriber (combined digital and
analogue), decreased marginally by (pound)0.30 or 1.4% from (pound)20.80 for the
three-month period ended March 31, 2002 to (pound)20.50 for the three-month
period ended March 31, 2003 due to the decrease in the amount of premium
programming purchased by our subscribers offset by the migration of our
subscriber base from analogue to digital and selected price rises (each as
discussed above).
Average monthly revenue for digital CATV subscribers declined by
(pound)0.92 or 4.0% from (pound)22.91 for the three-month period ended March 31,
2002 to (pound)21.99 for the three-month period ended March 31, 2003. This
resulted principally from the change in the mix between premium and basic
packages described above. For example, approximately 75% of our digital TV
subscribers during the three-month period ended March 31, 2003 took `basic only'
packages compared to approximately 74% of subscribers during the three-month
period ended March 31, 2002, and the digital `premium-to-basic' ratio fell from
approximately 79% at March 31, 2002 to approximately 78% at March 31, 2003.
Product penetration decreased by 1.7 percentage points from 28.9% at
March 31, 2002 to 27.2% at March 31, 2003 principally as a result of the higher
average CATV subscriber churn which increased 2.7 percentage points from 19.1%
in the twelve-month period ended March 31, 2002 to 21.8% in the twelve-month
period ended March 31, 2003. This resulted principally from the selected price
increases described above.
CONSUMER TELEPHONY REVENUE
Consumer telephony revenue decreased by (pound)9 million or 7.1% from
(pound)126 million for the three-month period ended March 31, 2002 to (pound)117
million for the three-month period ended March 31, 2003. The decrease in
consumer telephony revenue was primarily due to reductions in telephone usage
(as reflected by a decrease in average monthly revenues per subscriber and the
total number of telephony subscribers) partially offset by increased revenues
from our Talk Unlimited customers.
Average monthly revenue per line decreased by (pound)0.74 or 3.2%
from (pound)23.23 for the three-month period ended March 31, 2002 to
(pound)22.49 for the three-month period ended March 31, 2003, and average
monthly revenue per subscriber decreased by (pound)1.39 or 5.5% from
(pound)25.27 for the three-month period ended March 31, 2002 to (pound)23.88 for
the three-month period ended March 31, 2003. The benefit of selected price
increases and the continued success of our un-metered telephony product, Talk
Unlimited, was more than offset by declining call volumes, principally as a
result of the substitution of mobile calls for fixed line calls, the continuing
migration of dial-up internet subscribers to broadband internet (which decreases
second line penetration) and the transfer of the dial-up minutes of a large
ISP's subscribers to a flat rate access regime provided by our Carrier Services
Unit.
14
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
Talk Unlimited is a 24-hour, 7 day-a-week fixed-fee residential
telephony package with unlimited local and national calls (excluding calls to
non-geographic, premium rate and mobile telephone numbers) in the UK and
accounted for 381,620 subscribers or 23.8% of our total telephony subscribers at
March 31, 2003 an increase of 129,119 from 252,501 subscribers at March 31,
2002. This service, charged at a flat rate of (pound)26.00 per month on a
stand-alone basis, or (pound)34.50 to (pound)41.50 per month including a digital
television package, is successful in attracting new customers to our services,
and generates higher average revenues per customer from existing subscribers who
migrate from our standard metered telephony services, 3-2-1. Talk Unlimited is
available in all of our franchise areas.
At the beginning of 2003, we expanded our flat rate telephony service
by launching Talk Evenings and Weekends, a telephony service offering unlimited
local and national evening and weekend calls to anywhere in the UK (including
line rental) and on March 1, 2003 we introduced Talk International, which offers
reduced rates to all international destinations, each for a flat monthly rate.
We are also improving the value for our telephony consumers by offering free
voicemail.
The number of residential telephony subscribers decreased by 33,909
or 2.1% from 1,635,515 at March 31, 2002 to 1,601,606 at March 31, 2003. The
number of residential lines decreased by 75,783 or 4.3% from 1,772,266 at March
31, 2002 to 1,696,483 at March 31, 2003. The decrease in the number of
residential telephony subscribers resulted principally from an increase in
customer churn following price rises in April 2002 offset in part by the impact
of the increased penetration of our Talk Unlimited product. The decrease in the
number of residential telephony lines resulted primarily from a decrease in
second lines during the year.
As a result of the selected price rises in April 2002 and March 2003,
the average residential telephony subscriber churn increased marginally by 0.7
percentage points from 16.2% for the twelve-month period ended March 31, 2002 to
16.9% for the twelve-month period ended March 31, 2003.
Residential telephony product penetration decreased marginally to
34.2% as at March 31, 2003 compared with 34.8% as at March 31, 2002. Second line
penetration decreased to 5.9% as at March 31, 2003 from 8.4% as at March 31,
2002, due to the price increases for second lines and the continued migration of
dial-up internet subscribers to our blueyonder broadband internet service during
the twelve-month period ended March 31, 2003.
INTERNET AND OTHER REVENUE
Internet and other revenue, which arises wholly in our Consumer
Division, increased by (pound)10 million or 62.5% from (pound)16 million in the
three-month period ended March 31, 2002 to (pound)26 million in the three-month
period ended March 31, 2003. The increase was due to an increase in internet
income by (pound)12 million or 85.7% to (pound)26 million in the three-month
period ended March 31, 2003 from (pound)14 million in the three-month period
ended March 31, 2002. This increase resulted from an increase in the number of
internet subscribers and the continued success of our broadband products.
At March 31, 2003 we had 571,476 broadband and dial-up internet
subscribers in total, compared with 451,007 as at March 31, 2002, an increase of
120,469 or 26.7%.
Total broadband internet subscribers increased by 173,321 or 137.7%
from 125,900 at March 31, 2002 to 299,221 at March 31, 2003. To supplement our
minimum standard 512Kb blueyonder broadband service (launched early in 2001), on
June 17, 2002, we announced the launch of our new 1Mb blueyonder broadband
service. At March 31, 2003 we had 29,878 subscribers to our 1Mb service.
Furthermore, on May 12, 2003, following a successful trial with 1,500 customers,
we launched a 2Mb blueyonder broadband residential internet service.
Our blueyonder broadband customers significantly contribute to the
growth in our average monthly revenue as 206,950 customers or approximately
69.2% are `triple-play' customers who also take both CATV and telephony services
from us and 93% take at least one other product. Broadband is also successful in
attracting new customers to Telewest, with approximately 39% of broadband
internet installations in the three-month period ended March 31, 2003 being
subscribers who are new to Telewest. Blueyonder broadband churn increased in the
twelve-month period ended March 31, 2003 from 7.8% to 12.8% as some of our
customers, who were initially attracted by promotions, discontinued their
service.
Average monthly revenue for blueyonder broadband decreased from
(pound)29.93 for the three-month period ended March 31, 2002 to (pound)22.50 for
the three-month period ended March 31, 2003 as installation fees in the
15
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
three-month period ended March 31, 2003 were discounted and as the portion of
average monthly revenue per subscriber attributable to installation fees gets
spread over a growing subscriber base.
Dial-up internet subscribers to our blueyonder SurfUnlimited product,
which introduces our subscribers to a reliable fixed-fee un-metered service,
together with our blueyonder pay-as-you-go metered internet service decreased by
52,852 or 16.3% from 325,107 at March 31, 2002 to 272,255 at March 31, 2003 as
subscribers continued to migrate to our blueyonder broadband service.
Approximately 19% of the broadband customers we added during the three-month
period ended March 31, 2003 were upgrades from SurfUnlimited. The price of our
metered blueyonder pay-as-you-go internet service was raised from 1.5p per
minute to 2p as we encourage these subscribers to upgrade to an un-metered
service.
Other revenues, derived from the sales of CATV publications,
decreased by (pound)2 million in the three-month period ended March 31, 2002 to
(pound)0 million at March 31, 2003 due to cessation of this sales activity in
November 2002.
BUSINESS SERVICES REVENUE
Business services revenue increased by (pound)4 million or 6.1% from
(pound)66 million for the three-month period ended March 31, 2002 to (pound)70
million for the three-month period ended March 31, 2003. This increase resulted
from increased revenues from voice and data services from both new and existing
customers.
The increase in revenues from voice and data services resulted
primarily from an increase in the number of lines used by our customer accounts.
Although business customer accounts decreased by 956 accounts or 1.3% from
73,618 at March 31, 2002 to 72,662 at March 31, 2003, business telephony lines
increased by 11,362 lines or 2.5% from 452,122 at March 31, 2002 to 463,484 at
March 31, 2003, giving an average of 6.4 business lines per customer account at
March 31, 2003 compared with an average of 6.1 business lines per customer
account at March 31, 2002.
Average monthly revenue per business line increased from (pound)41.67
for the three-month period ended March 31, 2002 to (pound)41.81 for the
three-month period ended March 31, 2003, principally as a result of increased
demand for specialized voice and data services necessary to meet the
increasingly complex communications requirements of our business customers.
Our Carrier Services Unit, which provides our fiber optic National
Network to other carriers and operators (for example T-Mobile, a mobile
telephone company), contributed (pound)12 million of revenue for the three-month
period ended March 31, 2003 compared with (pound)11 million for the
corresponding period in 2002.
CONTENT SEGMENT
REVENUE
CONTENT DIVISION REVENUE
After the elimination of inter-divisional revenues of (pound)3
million for both the three-month periods ended March 31, 2002 and 2003, the net
revenue of Flextech, our Content Division, increased by (pound)1 million or 3.8%
from (pound)26 million for the three-month period ended March 31, 2002 to
(pound)27 million for the three-month period ended March 31, 2003. Before this
elimination of inter-divisional trading between Flextech and Telewest,
Flextech's revenue increased by (pound)1 million or 3.4% from (pound)29 million
for the three-month period ended March 31, 2002 to (pound)30 million for the
three-month period ended March 31, 2003. Flextech's increase in net revenue was
principally as a result of growth in advertising revenues offset by the disposal
of non-core businesses.
Our Content Division's subscription revenue, including the Content
Division's share of UKTV's (our joint venture with BBC Worldwide) subscription
revenue, decreased by (pound)1 million or 5.6% from (pound)18 million for the
three-month period ended March 31, 2002 to (pound)17 million for the three-month
period ended March 31, 2003, principally as a result of a decrease in its share
of the revenue of UKTV. This decrease in UKTV revenue resulted primarily from a
decrease in the number of homes receiving UKTV programming during 2002, largely
as the result of the closure of ITV Digital, offset by subscriber growth at
BSkyB. The number of homes receiving programming from our Content Division fell
to approximately 9.4 million during the course of 2002 from approximately 10.6
16
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
million at March 31, 2002 but has subsequently increased to approximately 9.9
million at March 31, 2003 as former ITV Digital subscribers have migrated to
platforms carrying Flextech programming.
Advertising revenue, including the Content Division's share of UKTV's
advertising revenue, increased by (pound)2 million or 16.1% from (pound)18
million for the three-month period ended March 31, 2002 to (pound)20 million for
the three-month period ended March 31, 2003. The Content Division's increased
advertising revenue resulted from the relative viewing strength of its channels,
despite increased competition in the multichannel market. The Content Division
grew its market share with a 4.0% share of the TV advertising market in the UK,
up from 3.6% for the three-month period ended March 31, 2002.
Our share of UKTV's revenue remained flat at (pound)17 million for
both the three-month periods ended March 31, 2002 and 2003.
CABLE AND CONTENT SEGMENTS
OPERATING COSTS AND EXPENSES
Our operating costs and expenses before depreciation decreased by
(pound)12 million or 5.2% from (pound)233 million for the three-month period
ended March 31, 2002 to (pound)221 million for the three-month period ended
March 31, 2003, due to reduced consumer programming expenses, business and
consumer telephony expenses, and selling, general and administrative expenses,
(`SG&A'), partially offset by increased cost of sales at our Content Division.
Consumer programming expenses decreased by (pound)1 million or 3.0%
from (pound)33 million for the three-month period ended March 31, 2002 to
(pound)32 million for the three-month period ended March 31, 2003 representing
14.5% of total operating costs before depreciation for the three-month period
ended March 31, 2003, compared with 14.2% for the three-month period ended March
31, 2002. Decreased consumer programming expenses were principally the result of
lower programming costs resulting from an increase in the number of our
television subscribers choosing to subscribe to packages with fewer or no
premium channels, and favorable renegotiations of content contracts with certain
programmers, offset by increased costs of programming for our digital packages,
which have more channels than their analogue counterparts.
Business and consumer telephony expenses decreased by (pound)4
million or 7.3% from (pound)55 million for the three-month period ended March
31, 2002 to (pound)51 million for the three-month period ended March 31, 2003,
representing 23.1% of total operating costs before depreciation for the
three-month period ended March 31, 2003, compared with 23.6% for the three-month
period ended March 31, 2002. This decrease resulted principally from improved
routing of telephony traffic and a reduction in termination rates for certain
calls.
The Content Division's cost of sales increased by (pound)1 million or
6.3% from (pound)16 million for the three-month period ended March 31, 2002 to
(pound)17 million for the three-month period ended March 31, 2003, representing
7.7% of total operating costs before depreciation for the three-month period
ended March 31, 2003 compared with 6.9% for the three-month period ended March
31, 2002. The Content Division's cost of sales consists principally of
amortization costs of programming shown on its TV channels and the costs of
advertising sales those channels receive. The Content Division's cost of sales
was 56.7% of the Content Division's revenues (including inter-divisional sales
to Telewest) for the three-month period ended March 31, 2003 compared with 55.2%
on the same basis for the three-month period ended March 31, 2002.
SG&A which includes, among other items, salary and marketing costs,
decreased by (pound)8 million or 6.2% from (pound)129 million for the
three-month period ended March 31, 2002 to (pound)121 million for the
three-month period ended March 31, 2003. The decrease in SG&A primarily reflects
the reductions in payroll costs from decreasing numbers of employees, lower
marketing and advertising costs and decreases in other overhead expenses, as we
continue to focus on cost control and achieve cost efficiencies across the
Group, offset by (pound)3 million of legal and professional costs relating to
our Financial Restructuring.
On May 2, 2002, we announced that we were reducing our staffing
levels by approximately 1,500 as part of a Group reorganization. This had been
substantially completed by the end of 2002 although a further 100 staff left in
the three-month period ended March 31, 2003 at a redundancy cost of (pound)3
million. Headcount now stands at approximately 9,100 compared to 10,650 a year
ago. SG&A decreased as a percentage of total operating costs, before
depreciation from 55.4% for the three-month period ended March 31, 2002 to 54.8%
for the three-month period ended March 31, 2003.
17
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
Depreciation expense decreased by (pound)21 million or 18.0% from
(pound)117 million for the three-month period ended March 31, 2002 to (pound)96
million for the three-month period ended March 31, 2003. This decrease is
primarily attributable to the decreasing level of capital expenditure over the
last 15 months and the charge for impairment of fixed assets (amounting to
(pound)841 million) which was recorded in the year ended December 31, 2002.
OTHER INCOME/(EXPENSE)
Other expense, net of other income, before taxation, totaled
(pound)166 million for the three-month period ended March 31, 2003 and (pound)96
million for the three-month period ended March 31, 2002, an increase of
(pound)70 million or 72.9%. This net increase resulted primarily from foreign
exchange losses of (pound)48 million incurred in the three-month period ended
March 31, 2003 compared with foreign exchange gains, net, of (pound)21 million
recorded in the three-month period ended March 31.
Interest income was (pound)6 million for the three-month period ended
March 31, 2003 compared with (pound)0 million for the three-month period ended
March 31, 2002. Interest income was generated from the higher cash balances held
by us during the three-month period ended March 31, 2003 as a result of drawing
down under our existing Senior Secured Facility (the `Existing Facility') in
advance of funding requirements.
Interest expense increased by (pound)4 million or 3.3% from
(pound)121 million for the three-month period ended March 31, 2002 to (pound)125
million for the three-month period ended March 31, 2003. This increase was
primarily as a result of the additional interest expense incurred under our bank
facilities with respect to additional borrowing to fund the continued roll-out
of digital television and broadband internet products and general working
capital and drawdowns under our Existing Facility in advance of funding
requirements.
In the three-month period ended March 31, 2002, the Group determined
that it was probable that forecasted future prepayments of principal against
outstanding US dollar-denominated debt would not occur. Accordingly, the
cumulative adjustment in Other Comprehensive Income (`OCI') of (pound)53 million
resulting from marking to market the derivative instruments was reclassified
from OCI to foreign exchange gains in the Statement of Operations. Subsequent
adjustments of the carrying value of these instruments to fair value are taken
directly to the Statement of Operations as incurred.
Foreign exchange gains, net, totaled (pound)21 million in the
three-month period ended March 31, 2002. These gains were primarily the result
of the release of (pound)53 million from OCI, as described above, together with
the result of the US dollar significantly weakening against the pound sterling
during that period. Following the termination of all of our derivative
arrangements (see `Liquidity and Capital Resources' below), we now have
increased our foreign exchange risk and our unhedged dollar-denominated
liabilities are translated at period-end exchange rates contributing to higher
foreign exchange gains or losses as the US dollar fluctuates against the pound
sterling. We will continue to monitor this risk until the Financial
Restructuring is complete, when it is anticipated that the US dollar-denominated
debt instruments will be swapped for equity and the foreign exchange risk is
minimised. In the three-month period ended March 31, 2003, we incurred foreign
exchange losses, net, totalling (pound)48 million as we re-translated our US
dollar-denominated debt at period-end exchange rates.
Our share of net profits of our affiliated companies was (pound)2
million for the three-month period ended March 31, 2003 compared with (pound)4
million for the three-month period ended March 31, 2002. Our principal
affiliated companies as at March 31, 2003 included UK Gold Holdings Limited, UK
Channel Management Limited and Front Row Television Limited.
Other profits/losses, net, amounted to a net loss of (pound)1 million
for the three-month period ended March 31, 2003 compared with (pound)0 million
for the three-month period ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002 we announced that we had reached a non-binding
preliminary agreement relating to a restructuring of our balance sheet with an
ad hoc committee of our bondholders (the `Bondholder Committee'). That agreement
provided for the cancellation of all outstanding notes and debentures (the
`Notes') (approximately (pound)3.5 billion) and certain other unsecured foreign
exchange hedge contracts (the `Hedge Contracts') (approximately (pound)33
million) in exchange for new ordinary shares (the `New Shares') representing 97%
of our issued share capital immediately after the Financial Restructuring. Under
18
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
that agreement our current ordinary shareholders would have received the
remaining 3% of our issued ordinary share capital. On June 9, 2003, we announced
that we had been notified by the Bondholder Committee that, in order to obtain
the support of certain of the Company's bondholders, the Bondholder Committee
had requested certain changes to the economic and other terms of the preliminary
agreement relating to the Financial Restructuring. On July 28, 2003, we
announced that we expect the final terms of the Financial Restructuring to
provide that ordinary shareholders will receive 1.5% of the issued share capital
immediately following the restructuring. (For further disclosure relating to the
restructuring and continuing discussions, see `Financial Restructuring').
Notwithstanding the expected completion of the restructuring, over
the next twelve months, the margin of our available financing over requirements
is not large and consistent delivery of budget and the Group's long range plan
is necessary to ensure compliance with the terms of the financial covenants of
the Existing Facility relating to our financial and operational performance. We
anticipate that in order to obtain the required approval of our Senior Lenders
to any final restructuring agreement, we will be required to amend these
covenants and/or agree to additional covenants by entering into an amended and
restated Senior Secured Facility (the `Amended Facility'). We expect that any
amended or additional covenants will continue to require our consistent delivery
of budget and long range plan. Prior to reaching final agreement with the Senior
Lenders as to the Amended Facility, we will not be able to access further
funding from the Senior Lenders. We had (pound)390 million of available cash as
at March 31, 2003, but there are significant restrictions imposed by our Senior
Lenders on the use of a substantial portion of our cash balances.
Since our initial public offering in 1994, we have financed the
capital costs of our network construction, our operations and our investments in
General Cable PLC (`General Cable'), Birmingham Cable Corporation Limited
(`Birmingham Cable'), Cable London PLC (`Cable London'), Flextech, Eurobell and
in affiliated companies, primarily from:
o the proceeds of the initial public offering of our ordinary shares
((pound)414 million, net of fees);
o the issuance in September 1998 of ordinary shares as partial funding
for the General Cable merger ((pound)241 million);
o the issuance in November 1999 of ordinary shares under a rights issue
to fund the Cable London acquisition ((pound)416 million);
o the issuance to Deutsche Telekom (`DT') in November 2000, January 2001
and May 2001, respectively, of an aggregate of (pound)254 million
Accreting Convertible Notes due 2003 as consideration for its 100%
interest in Eurobell;
o the issuance in October 1995 of $300 million principal amount of
Senior Debentures due 2006 and $1,537 million principal amount at
maturity of Senior Discount Debentures due 2007;
o the issuance in November 1998 of $350 million principal amount of
Senior Notes due 2008;
o the issuance in February 1999 of(pound)300 million principal amount of
Senior Convertible Notes due 2007;
o the issuance in April 1999 of (pound)325 million principal amount at
maturity and $500 million principal amount at maturity of Senior
Discount Notes due 2009;
o the issuance in January 2000 of $450 million principal amount at
maturity of Senior Discount Notes due 2010 and(pound)180 million
principal amount and $350 million principal amount of Senior Notes due
2010;
o the issuance in July 2000 of $500 million Senior Convertible Notes due
2005;
o the sale during 2002 of our investments in subsidiary companies, The
Way Ahead Group and Maidstone Studios, and in affiliated companies TV
Travel Group and SMG, which realized (pound)14 million and (pound)59
million, respectively;
o the termination, in 2002, of foreign exchange derivative contracts
realizing(pound)76 million in aggregate;
19
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
o borrowings under the Existing Facility and Institutional Tranche (as
described below), (an aggregate of (pound)2,000 million outstanding at
March 31, 2003); and
o cash from operations.
Where appropriate, we have also used leasing and vendor financing. At
March 31, 2003, obligations under these financing arrangements amounted to
(pound)207 million in respect of finance leasing to fund the purchase of certain
equipment. Until we have reached final agreement with our bank lenders
concerning the Amended Facility and completed our restructuring, we will be
limited in our ability to incur further leasing and vendor financing.
We face the following significant risks and uncertainties relating to
liquidity and capital resources:
o the ability to successfully complete our balance sheet restructuring;
o successful execution of our long range business plan, which in turn
will affect our ability to raise further finance under the Existing or
Amended Facility, as applicable; and
o the ability to meet financial covenants necessary to secure further
finance under the Existing or Amended Facility, as applicable, or to
otherwise raise the finance necessary to fund our operations.
For the three-month period ended March 31, 2003, we had a net cash
inflow from operating activities of (pound)74 million compared with a net
outflow of (pound)2 million for the three-month period ended March 31, 2002,
principally due to our better operating results and management of working
capital together with the deferred payment of bond interest in advance of our
proposed Financial Restructuring.
We incurred a net cash outflow from investing activities of (pound)61
million for the three-month period ended March 31, 2003 compared with (pound)115
million for the three-month period ended March 31, 2002, a decrease of (pound)54
million or 47.0%. Capital expenditure accounted for (pound)67 million of the net
total in 2003 compared with (pound)110 million in 2002 (see `Property and
equipment' below) which was offset in part by the proceeds of repayments of
loans to affiliated companies.
Net cash used in financing activities totaled (pound)13 million for
the three-month period ended March 31, 2003, constituting solely the capital
element of finance lease payments, compared with net cash provided by financing
activities of (pound)194 million for the three-month period ended March 31,
2002. For the three-month period ended March 31, 2002, net cash provided by
financing activities consisted primarily of (pound)130 million in drawdowns from
our Existing Facility and (pound)74 million realized on termination of certain
US dollar/pound sterling exchange rate hedging arrangements.
We anticipate that our principal uses of cash in the future will be
to fund our operations (including operating losses), capital expenditure and to
service debt. Although we expect to continue to incur operating losses over the
short to medium term, we anticipate that they will reduce as we continue to
realize the benefits of our roll-out of digital television and broadband
internet services which we anticipate will continue to increase `triple play'
penetration, increase revenue per customer in our residential and business
markets, achieve the cost-efficiencies of delivering these services over our
owned broadband network and benefit from the significant headcount reduction in
2002. Notwithstanding that we expect our capital expenditure requirements to
continue to decrease in 2003, we also expect to continue to have significant
capital needs in the future. With the majority of our network construction
complete and substantially all network upgrades necessary for delivery of
telephony and digital services complete, we anticipate that our capital
expenditure will be largely driven by the costs associated with the connection
of new subscribers (which will vary depending upon the take-up of our services)
and of the replacement of network assets at the end of their useful lives.
We anticipate that our principal sources of funds in the future will
be proceeds from bank facilities, additional vendor financing, if available,
possible strategic sales of assets, cash in hand and cash flow from operating
activities. Our future actual funding requirements could exceed currently
anticipated requirements. Differences may result from higher-than-anticipated
costs or capital expenditure and/or lower than anticipated revenues. Our actual
costs, capital expenditure and revenues will depend on many factors, including,
inter alia, consumer demand for voice, video, data and internet services, the
impact on our business of new and emerging technologies, the extent to which
consumer preference develops for cable television over other methods of
providing in-home entertainment, the development of the interactive e-commerce
20
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
market, consumer acceptance of cable telephony as a viable alternative to BT's
telephony services, and the continued downward pressure on telephony margins.
As of March 31, 2003, we had cash balances of (pound)390 million
(excluding (pound)12 million that is restricted as to use to providing security
for leasing obligations). However, we are currently unable to access further
funding until such time as the Amended Facility is agreed with the Senior
Lenders and there are significant restrictions imposed by our Senior Lenders on
the use of a substantial portion of our cash balances. Our cash balances have
remained constant during the three-month period ended March 31, 2003 as a result
of net cash provided by operating facilities equalling net cash used in
investing and financing activities.
Following the Flextech merger in April 2000, we had two separate
facilities:
o we were a party to a(pound)1.5 billion senior secured facility; and
o Flextech and its subsidiaries were party to a(pound)200 million senior
secured credit facility
On March 16, 2001, we entered into the Existing Facility with a
syndicate of banks for (pound)2.25 billion. The terms of the loan agreement
governing the Existing Facility allowed us to raise (pound)250 million from
institutional investors (the `Institutional Tranche') and raise a further
(pound)500 million of leasing and vendor financing. The first drawdown under
this new facility was used to repay our old senior secured credit facility and
the Flextech facility, noted above. On October 17, 2001, GE Capital Structured
Finance Group Limited, an affiliate of GE Capital, lent us (pound)125 million as
part of the (pound)250 million Institutional Tranche. Additionally, on March 12,
2002, we announced that we had secured a further (pound)20 million of
institutional funding from Newcourt Capital (UK) Ltd., a subsidiary of CIT Group
Inc. As at March 31, 2003, (pound)207 million of leasing and (pound)0 of vendor
financing were outstanding.
As part of the negotiations with our Senior Lenders in respect of a
restructuring, on August 21, 2002, September 27, 2002, February 26, 2003 and May
29, 2003, the Company and its Senior Lenders amended certain provisions of the
Existing Facility restricting the level of our permitted borrowings,
investments, encumbrances and disposals. On January 15, 2003 we announced that
we had reached a non-binding agreement with respect to the terms of the Amended
Facility with both the steering committee of our Senior Lenders and the
Bondholder Committee. In addition, we announced that as at that date, the terms
of the Amended Facility had received credit committee approval, subject to
documentation and certain other issues, from all of our Senior Lenders, save for
those banks which are also creditors by virtue of the settlement of the Hedge
Contracts. The Amended Facility will replace our Existing Facility and is, as
noted above, conditional on various matters, including the satisfactory
finalization of arrangements for dealing with the Hedge Contracts and the
completion of our Financial Restructuring. The Amended Facility will provide us
with substantial liquidity which is expected to be sufficient to meet our
funding needs after completion of the Financial Restructuring.
Until a final agreement is reached with our Senior Lenders, we
continue to operate under the Existing Facility, as amended on August 21, 2002
September 27, 2002, February 26, 2003 and May 29, 2003. Borrowings under the
Existing Facility are secured on our assets, including partnership interests and
shares of subsidiaries, and, except for the Institutional Tranche, bear interest
at between 0.5% and 2.25% above LIBOR (depending on the ratio of borrowings to
quarterly annualized consolidated net operating cash flow). Borrowings under the
Institutional Tranche bear interest at up to 4% above LIBOR. The terms of the
facility restrict transfers or disposals of assets from certain subsidiary
companies. These restrictions relate to the type and value of the consideration
that can be accepted. Currently our ability to borrow under the Existing
Facility is restricted by amendments agreed with our Senior Lenders on August 21
and September 27, 2002 referred to above. When a final agreement is reached with
our Senior Lenders, our ability to borrow under the Amended Facility will be
subject to, among other things, our compliance with the financial and other
covenants set forth in the loan agreement governing that facility and failure to
comply with those covenants could result in all amounts outstanding thereunder
becoming immediately due and payable. We anticipate that a final agreement with
our Senior Lenders will include amendments to existing covenants and/or the
addition of new covenants relating to our financial and operational performance.
As anticipated, the decision to defer payment of interest under
certain of our Notes and amounts due as a result of the settlement of the Hedge
Contracts has resulted in defaults under the Existing Facility. A default under
the Existing Facility generally allows a group of our Senior Lenders,
representing not less than two thirds in value of amounts borrowed under that
facility, to declare all amounts owed to be immediately payable and/or to
restrict our ability to access our otherwise available cash. Given progress
21
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
reached to date in respect of amending our Existing Facility as part of a
restructuring agreement, we do not expect our Senior Lenders to demand repayment
on account of any default under the Existing Facility, including a default that
arose as a result of a breach of certain financial covenants under the Existing
Facility (as discussed below). There can be no assurance, however, that our
Senior Lenders will not demand repayment of all amounts outstanding under the
Existing Facility based on a now existing or future default.
We regularly monitor our ongoing ability to draw down under our bank
facilities, which is dependent on satisfying the financial covenants contained
in the loan agreement governing those facilities (see below for a discussion of
our failure to meet two such covenants in the Existing Facility for each of the
three-month periods ended December 31, 2002 and March 31, 2003). We expect that
when agreed the Amended Facility will include covenants, compliance with which
will require us to improve business performance and profitability. Our new long
range business plan anticipates that we will be able to grow at a rate which
will allow us to meet these covenants. However, this long range plan includes
forecast information, the principal assumptions of which are clearly subject to
a degree of risk, in particular our ability to increase revenues in accordance
with our plans. If we were unable to remain compliant with our covenants (or to
meet our debt service obligations), we could attempt to further restructure or
refinance some or all of our existing indebtedness or to seek additional
funding. We cannot assure you, however, that we would be able to do so on
satisfactory terms, if at all.
On March 14, 2003, we notified our Senior Lenders that, as a result
of provisions made for the VAT judgment (see our Form 20-F filed June 30, 2003,
Item 5. Operating and Financial Review and Prospects--Operating Results--Results
of Operations--Years ended December 31, 2001 and 2002--Revenue) and fees
incurred in respect of the Financial Restructuring, and the resulting impact of
these provisions on our net operating cash flow, we were in breach of two
financial covenants under the Existing Facility in respect of the three-months
ended December 31, 2002. On May 16, 2003, we further notified the Senior Lenders
that we were in breach of financial covenants for the three-months ended March
31, 2003 due to continuing fees incurred in respect of the Financial
Restructuring and the tightening of covenants. The breach of these financial
covenants constituted a default under the Existing Facility. For the reasons
noted above, we do not expect our Senior Lenders to demand repayment of the
Existing Facility as a result of these defaults.
We believe we have adequate resources to continue in operational
existence for a period of at least 12 months from July 31, 2003, the date of
issuance of our Interim Report for 2003. This belief assumes the successful
conclusion of the Financial Restructuring (and any required amendments to the
Existing Facility).
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments as at March
31, 2003 are summarized in the table below.
------------------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
------------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
TOTAL LESS THAN 1 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- YEAR --------- --------- -------------
----
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
---------------------------------------------- --------------- ----------------- ---------------- ---------------- ----------------
Long-term debt................................ 5,508 4,685 8 - 815
Capital lease obligations..................... 191 76 69 31 15
Operating leases.............................. 155 15 28 24 88
Unconditional purchase obligations............ 876 876 - - -
Other long-term obligations................... - - - - -
---------------------------------------------- --------------- ----------------- ---------------- ---------------- ----------------
Total contractual obligations................. 6,730 5,652 105 55 918
============================================== =============== ================= ================ ================ ================
The following table includes information about our commercial
commitments as of March 31, 2003. Commercial commitments are items that we could
be obligated to pay in the future. They are not required to be included in the
balance sheet.
22
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
------------------------------------------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL AMOUNTS LESS THAN 1 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
COMMITTED YEAR --------- --------- -------------
--------- -----
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
-------------------------------------------- -------------------- --------------- ---------------- ---------------- ----------------
Guarantees................................. 20 8 - 12 -
============================================ ==================== =============== ================ ================ ================
We have no other contractual or commercial commitments.
PROPERTY AND EQUIPMENT
Additions to property and equipment in the three-month period ended
March 31, 2003 totaled (pound)65 million, a decrease of (pound)59 million or
47.6% from (pound)124 million for the three-month period ended March 31, 2002.
Our capital expenditure has primarily funded the construction of local
distribution networks and our National Network, capital costs of installing
customers, and enhancements to our network for new product offerings. The
additions in the three-month period ended March 31, 2003 were principally a
result of network upgrades and new subscriber installations in connection with
our roll-out of digital television and broadband internet services.
We have substantially completed all network upgrades necessary for
delivery of our digital television and broadband internet services.
Consequently, we anticipate that capital expenditures associated with our
services will be largely driven by the connection of new subscribers (which will
depend on the take-up of our services) and of the replacement of network assets
at the end of their useful lives. In 2003, management will continue to focus on
reducing capital expenditure.
Included in the table of contractual obligations shown above is a
total of (pound)13 million relating to capital expenditure authorized by us for
which no provision has been made in the consolidated financial statements. This
amount includes subscriber installations (e.g., set-top boxes) for customer
growth, network enhancements and computer projects necessary for the maintenance
of the infrastructure of our business. In addition, and also included in the
table, we have contracted to buy (pound)21 million of programming rights for
which the license period has not yet started. These commitments will be funded
when required from operating cash flow and available bank facilities. Both of
these amounts are shown as being payable in less than 1 year.
FINANCIAL RESTRUCTURING
On September 30, 2002 we announced that we had reached a
non-binding preliminary agreement relating to a restructuring of our balance
sheet with an ad hoc committee of our bondholders (the `Bondholder Committee').
That agreement provided for the cancellation of all outstanding notes and
debentures (the `Notes') (approximately (pound)3.5 billion) and certain other
unsecured foreign exchange hedge contracts (the `Hedge Contracts')
(approximately (pound)33 million) in exchange for new ordinary shares (the `New
Shares') representing 97% of our issued share capital immediately after the
Financial Restructuring. Under that agreement our current ordinary shareholders
would have received the remaining 3% of our issued ordinary share capital.
We also announced on September 30, 2002 that we were deferring
payment of interest under certain of our Notes and the amounts due as a result
of the settlement of the Hedge Contracts. Such non-payment continues and has
resulted in defaults under our Existing Facility and a number of other financing
arrangements. Based on one such default, in respect of non-payment of
approximately (pound)10.5 million to a Hedge Contract counter-party, that
counter-party has filed a petition with a UK Court to wind us up. We intend to
deal with this claim as part of the overall restructuring of our unsecured debt
obligations and do not believe that the legal action will significantly delay or
impede the Financial Restructuring process. We expect to meet our obligations to
our suppliers and trade creditors and this legal action is expected to have no
impact on customer service.
On January 15, 2003, we announced that we had reached a non-binding
agreement with respect to the terms of amended and restated credit facilities
with both the steering committee of our Senior Lenders and the Bondholder
Committee. In addition, the terms of these facilities had received credit
committee approval, subject to documentation and certain other issues, from all
of our Senior Lenders, save for those banks which are also creditors by virtue
of the unsecured Hedge Contracts with which we will deal in the overall
Financial Restructuring. These amended facilities will replace the Existing
Facility and are, as noted above, conditional on various matters, including the
satisfactory finalization of arrangements for dealing with foreign exchange
23
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
creditors and the completion of our balance sheet restructuring. These amended
credit facilities will provide us with substantial liquidity, which is expected
to be sufficient to see us through to cash flow positive after completion of the
Financial Restructuring.
On March 14, 2003, we notified the Senior Lenders that, as a result
of two non-recurring items, the VAT decision (see our 20-F, Item 5. Operating
and Financial Review and Prospects -- Operating Results -- Results of Operations
--Years ended December 31, 2001 and 2002 -- Revenue) and legal and professional
costs associated with the Financial Restructuring, and their impact on our net
operating cash flow, we would breach certain financial covenants under our bank
facility in respect of the quarter ended December 31, 2002. On May 16, 2003, we
further notified the Senior Lenders that we were in breach of the financial
covenants for the quarter ended March 31, 2003 due to continuing fees paid in
connection with the Financial Restructuring and the tightening of covenants.
On June 9, 2003, we announced that we had been notified by the
Bondholder Committee that, in order to obtain the support of certain of our
bondholders, the Bondholder Committee had requested certain changes to the
economic and other terms of the preliminary non-binding agreement relating to
our Financial Restructuring with the Bondholder Committee, as announced on
September 30, 2002,
On June 17, 2003, representatives of the Bondholder Committee provided
us with a new proposal for the terms of the Financial Restructuring.
On July 28, 2003, we announced that we expected the final terms of the
Financial Restructuring to provide that ordinary shareholders will receive 1.5%
of the issued share capital immediately following the Financial Restructuring.
We continue to engage in negotiations with our bondholders, Senior
Lenders and certain other major stakeholders and the directors believe that a
final agreement will be achieved in due course.
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, 2003 were:
o interest rate changes on variable-rate, long-term bank debt; and
o foreign exchange rate changes, generating translation and transaction
gains and losses on our US dollar-denominated debt instruments.
From time to time we may use derivative financial instruments solely
to reduce our exposure to these market risks and we do not enter into these
instruments for trading or speculative purposes.
Notwithstanding that we intend to cancel all of our outstanding bonds
upon completion of the Financial Restructuring, until and unless that
restructuring occurs, we will be exposed to foreign exchange fluctuations in
respect of the principal and interest on bonds no longer hedged. We have also
increased our exposure to variable interest rates, as we have not renewed a
significant number of the xxxxxx that have expired in connection with the
Existing Facility.
INTEREST RATE RISK
Our outstanding long-term bank debt is denominated in pounds sterling
and bears interest at variable rates. We seek to reduce our exposure to adverse
interest rate fluctuations on borrowings under current senior bank facilities
principally through interest rate swaps. Our interest rate swaps provide for
payments by us at a fixed rate of interest (ranging from 5.475% to 7.355%) and
the receipt of payments based on a variable rate of interest. The swaps have
maturities ranging from December 31, 2003 to March 31, 2005. The aggregate
amount outstanding under the senior bank facilities at March 31, 2003 was
(pound)1.6 billion (being approximately (pound)2.0 billion of drawdowns less
approximately (pound)400 million cash balances) and the aggregate notional
principal amount of the hedging arrangements was (pound)900 million, leaving an
unhedged amount of (pound)1.1 billion at March 31, 2003.
24
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE RISK
We hold derivative financial instruments solely to hedge specific
risks and did not hold such instruments for trading purposes. The derivatives
are held to hedge against the variability in cash flows arising from the effect
of fluctuations in the pound sterling/US dollar exchange rate on our future
interest payments and principal payments under our US dollar-denominated debt.
We use forward foreign currency contracts or cross currency swaps to fix the
pound sterling amount of future US dollar cash outflows for interest payments
and principal repayments up to their first call dates or other such dates where
we could, at our option, redeem the instruments before maturity.
Our results may be materially influenced by future exchange rate
movements now that we have largely discontinued the use of hedge accounting,
since such derivative financial instruments would be considered speculative for
accounting purposes and would be marked to their market value with changes being
included immediately in earnings, whereas the underlying liabilities would be
re-translated at the spot rate of exchange. Cancellation or redemption of the
derivative financial instruments has increased our exposure to foreign currency
exchange rate risk on our US dollar-denominated debt.
In the three-month period ended September 30, 2002, we terminated all
of our then remaining hedging arrangements with a nominal value of $2.3 billion
(approximately (pound)1.5 billion). Contracts with a nominal value of $1 billion
were settled in cash resulting in an outflow of (pound)28 million. The remaining
contracts have a nominal value of $1.3 billion and have yet to be settled for a
total cost of (pound)33 million of which (pound)19 million was due on October 1,
2002. Our Board of Directors has decided to defer such payment and is
considering the payment in the context of our Financial Restructuring.
QUANTITATIVE DISCLOSURE OF MARKET RISK
The analysis below presents the sensitivity of the market value, or
fair value, of our financial instruments to selected changes in market rates and
prices. The changes chosen represent our view of changes that are reasonably
possible over a one-year period. The estimated fair value of the hedging
instruments identified below are based on quotations received from independent,
third-party financial institutions and represent the net amount receivable or
payable to terminate the position, taking into consideration market rates as of
the measuring date and counterparty credit risk. The estimated fair value of the
US dollar-denominated fixed-rate long-term debt is also based on market
quotations obtained from independent third-party financial institutions.
The hypothetical changes in fair value of hedging instruments are
estimated, based on the same methodology used by the third-party financial
institutions to calculate the fair value of the original instruments, keeping
all variables constant except that the relevant interest rate or exchange rate,
as the case may be, has been adjusted to reflect the hypothetical change. Fair
value estimates by their nature are subjective and involve uncertainties and
matters of significant judgment and therefore cannot be determined precisely.
Fair value of debt is the market value of bonds and bank debt, which can change
according to market conditions and company specific performance.
The amounts generated from the sensitivity analysis are
forward-looking estimates of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ materially from those
projected results due to developments in the global financial markets which may
cause fluctuations in interest rates and exchange rates to affect fair values in
a manner that varies from the hypothetical amounts disclosed in the table below,
which therefore should not be considered a projection of likely future events
and losses. The sensitivity analysis is for information purposes only. In
practice, market rates rarely change in isolation.
INTEREST RATE RISK
The sensitivity analysis below presents the hypothetical change in
fair value based on an immediate one-percentage point (100 basis points)
increase in interest rates across all maturities:
------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
---------- CHANGE IN ---------- CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
(POUND)M (POUND)M (POUND)M (POUND)M
------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps............................................ (34) 9 (22) 15
Fixed rate debt................................................ (712) (16) (1,880) (61)
------------------------------------------------------------------------------------------------------------------------------
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 have an approximately
(pound)11 million impact on our annual net interest expense.
25
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
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.
------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
------------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE HYPOTHETICAL FAIR VALUE HYPOTHETICAL
CHANGE IN CHANGE IN
FAIR VALUE FAIR VALUE
----------- ----------
(POUND)M (POUND)M (POUND)M (POUND)M
------------------------------------------------------------------------------------------------------------------------------------
US dollar-denominated long-term debt.............................. (514) (57) (1,282) (142)
Foreign currency swap.............................................. No longer No longer 18 22
applicable applicable
Foreign exchange forward contracts................................ (33) No longer 78 117
applicable
------------------------------------------------------------------------------------------------------------------------------------
The hypothetical change in fair value for the US dollar-denominated
long-term debt is calculated by re-translating to pounds sterling the
dollar-denominated long-term debt at a rate 10% below the US dollar/pound
sterling exchange rate prevailing at the relevant period end.
The fair value of the foreign exchange forward contracts of (pound)33
million represents the settlement cost of the contracts unwound but not yet
paid. This is a fixed cost and will not vary with movements in exchange rates.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS 149 AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, to address (1)
decisions reached by the Derivatives Implementation Group, (2) developments in
other Board projects that address financial instruments, and (3) implementation
issues related to the definition of a derivative.
SFAS 149 has multiple effective date provisions depending on the
nature of the amendment to SFAS 133, and we are currently considering its
potential effect on our financial statements.
SFAS 150 ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. For unmodified financial instruments existing at
May 31, 2003, SFAS 150 is effective at the beginning of the first interim period
beginning after June 15, 2003. We do not expect the new standard to have a
significant effect on our financial statements.
26
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
SIGNIFICANT SHAREHOLDINGS
Historically our principal shareholders have been Liberty Media and
MediaOne Group Inc. (`MediaOne'). On July 7, 2000 MediaOne consummated an
agreement with certain subsidiaries of Microsoft Corporation (`Microsoft')
whereby Microsoft acquired the majority of MediaOne's interests in us. In
September 2002, MediaOne disposed of its entire shareholding. From May 3, 2001
through March 31, 2003 the shareholdings of Liberty Media and Microsoft were
approximately 25.2% and 23.6%, respectively. In May 2003, Microsoft sold its
entire holding to a subsidiary of IDT Corporation, resulting in IDT Corporation
beneficially owning approximately 23.6% of our shares. Microsoft's right to
appoint members to our board of directors was not transferable and terminated as
a result of Microsoft's sale.
27
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
* * * * *
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The discussion above includes certain statements that are, or may
be deemed to be, forward-looking statements within the meaning of the US
securities laws. These forward-looking statements relate to, among other things,
our anticipated cost savings, revenue growth, operating efficiencies, future
liquidity, introduction of services and our plans and objectives. By their
nature, forward-looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that may or may not occur in the
future.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed or
implied by those forward-looking statements, including, but not limited to:
o our ability to reach final agreement with our Senior Lenders on the
terms of the Amended Facility (as described under Liquidity and
Capital Resources above);
o our ability to successfully conclude the Financial Restructuring (as
described above) of our balance sheet;
o the extent to which consumer demand for voice, video, data and
internet services increases;
o the extent to which we are able to compete with other providers of
broadband internet services, including British Telecommunications plc
(`BT');
o the extent to which Small-to-Medium-sized Enterprises (`SMEs') accept
cable telephony services as an alternative to those of competing
service providers such as BT;
o the extent to which we are able to adapt to, and compete with, new and
emerging technologies including Asynchronous Digital Subscriber Line
technology (`ADSL') and 3rd generation mobile telephony technology;
o the extent to which consumer preference develops for cable television
over other methods of providing in-home entertainment;
o the extent to which consumer preference develops for purchasing goods
and services on the internet and/or using interactive television over
other methods of purchasing such goods and services;
o the extent to which consumers accept cable telephony as a viable
alternative to telephony services provided by BT;
o the extent to which we are successfully able to compete with mobile
network operators;
o the extent to which regulatory and competitive pressures in the UK
telephony market continue to reduce prices;
o our ability to develop and introduce attractive interactive and high
speed data services in a rapidly changing and highly competitive
business environment;
o our ability to penetrate markets and respond to changes or increases
in competition;
o our ability to compete with other internet service providers (`ISPs');
o our ability to compete against digital television service providers,
including British Sky Broadcasting Group plc (`BSkyB') and Freeview,
by increasing our digital services customer base, and the impact of
our aggressive digital services marketing campaign on our results of
operations and liquidity;
o our ability to have an impact on, or respond to, new or changed
government regulation;
28
--------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS PLC
US GAAP ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
o our ability to manage growth and expansion;
o our ability to improve operating efficiencies, including through cost
reductions;
o our ability to maintain and upgrade our network in a cost-efficient
and timely manner without losing key personnel to the detriment of
operational performance;
o adverse changes in the price or availability of telephony
interconnection or cable television programming;
o disruptions in supply of programming, services and equipment; and
o the extent to which consumer preference develops for, or shifts away
from, content developed and distributed by Flextech (our Content
Division).
29
