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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-50886
TELEWEST GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3778247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 GREAT PORTLAND STREET, LONDON, W1W 5QA UNITED KINGDOM
(Address of principal executive offices)
(Zip Code)
+44 (20) 7299 5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the registrant's common stock as of
November 10, 2004 was 245,000,001.
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TELEWEST GLOBAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM - 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2004 for the
Reorganized Company and as of December 31, 2003 for the
Predecessor Company
Consolidated Statements of Operations for the three months ended
September 30, 2004 for the Reorganized Company and the three
months ended September 30, 2003 for the Predecessor Company
Consolidated Statements of Operations for the nine months ended
September 30, 2004 for the Reorganized Company and the six months
ended June 30, 2004, the nine months ended September 30, 2003,
and July 1, 2004 for the Predecessor Company
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 for the Reorganized Company and the six months
ended June 30, 2004, the nine months ended September 30, 2003,
and July 1, 2004 for the Predecessor Company
Notes to Consolidated Financial Statements
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM - 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM - 4 CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM - 1 LEGAL PROCEEDINGS
ITEM - 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM - 3 DEFAULTS UPON SENIOR SECURITIES
ITEM - 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM - 5 OTHER INFORMATION
ITEM - 6 EXHIBITS
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM - 1 FINANCIAL STATEMENTS
TELEWEST GLOBAL, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN (POUND)MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- ----------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------------- ----------------
ASSETS
Cash and cash equivalents 266 427
Restricted cash 33 13
Trade receivables 114 114
Other receivables 34 39
Prepaid expenses 28 16
-------------- ----------------
Total current assets 475 609
Investments accounted for under the equity method 305 362
Property and equipment 3,002 2,421
Intangible assets 323 -
Goodwill - 447
Reorganization value in excess of amounts allocable to
identifiable assets 425 -
Inventory 31 27
Other assets - 23
-------------- ----------------
TOTAL ASSETS 4,561 3,889
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Accounts payable 130 98
Other liabilities 444 809
Debt repayable within one year 1 5,287
Capital lease obligations repayable within one year 39 89
-------------- ----------------
Total current liabilities 614 6,283
Deferred taxes 105 108
Debt repayable after more than one year 1,846 6
Capital lease obligations repayable after more than one year 74 51
-------------- ----------------
TOTAL LIABILITIES 2,639 6,448
-------------- ----------------
-------------- ----------------
MINORITY INTEREST (1) (1)
-------------- ----------------
SHAREHOLDERS' EQUITY/ (DEFICIT)
Ordinary shares - 10 pence par value; authorized 4,300
million, issued 2,874 million (2003) - 287
Limited voting convertible ordinary shares - 10 pence par
value; authorized 300 million, issued 82 million (2003) - 8
Preferred stock - US$0.01 par value; authorized 5,000,000
shares, issued none (2004 and 2003) - -
Common stock - US$0.01 par value; authorized
1,000,000,000 shares, issued 245,000,001 (2004) and 1
(2003) 1 -
Additional paid-in capital 1,951 4,223
Accumulated deficit (29) (7,076)
-------------- ----------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) 1,923 (2,558)
-------------- ----------------
-------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) 4,561 3,889
============== ================
See accompanying notes to the consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN (POUND)MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2004 2003
------------- --------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(RESTATED)
(SEE NOTE 2)
------------- --------------
REVENUE
Consumer Sales Division 238 227
Business Sales Division 63 71
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Total Cable Segment 301 298
Content Segment 27 27
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Total revenue 328 325
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OPERATING COSTS AND EXPENSES
Cable segment expenses (72) (78)
Content segment expenses (17) (19)
Depreciation (103) (96)
Amortization (9) -
Selling, general and administrative expenses (117) (127)
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(318) (320)
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OPERATING INCOME 10 5
OTHER INCOME/(EXPENSE)
Interest income 6 5
Interest expense (including amortization of debt
discount) (49) (119)
Foreign exchange gains, net - 15
Share of net income of affiliates 4 2
Other, net - 1
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LOSS BEFORE INCOME TAXES (29) (91)
Income taxes - 2
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NET LOSS (29) (89)
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Basic and diluted loss per ordinary share of common stock (pound)(0.12)
Weighted average number of ordinary shares of common
stock - (millions) 245
See accompanying notes to the consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN (POUND)MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NINE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2004 2004 2003
-------------- ------------ --------------
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(RESTATED)
(SEE NOTE 2)
-------------- ------------ --------------
REVENUE
Consumer Sales Division 238 470 677
Business Sales Division 63 130 210
-------------- ------------ --------------
Total Cable Segment 301 600 887
Content Segment 27 54 80
-------------- ------------ --------------
Total revenue 328 654 967
-------------- ------------ --------------
OPERATING COSTS AND EXPENSES
Cable segment expenses (72) (153) (240)
Content segment expenses (17) (34) (54)
Depreciation (103) (184) (294)
Amortization (9) - -
Selling, general and administrative expenses (117) (244) (369)
-------------- ------------ --------------
(318) (615) (957)
-------------- ------------ --------------
OPERATING INCOME 10 39 10
OTHER INCOME/(EXPENSE)
Interest income 6 15 17
Interest expense (including amortization of
debt discount) (49) (230) (366)
Foreign exchange gains, net - 40 84
Share of net income of affiliates 4 8 4
Other, net - (1) -
-------------- ------------ --------------
LOSS BEFORE INCOME TAXES (29) (129) (251)
Income taxes - (1) 4
-------------- ------------ --------------
NET LOSS (29) (130) (247)
============== ============ ==============
Basic and diluted loss per ordinary share of
common stock (pound)(0.12)
Weighted average number of ordinary shares of
common stock - (millions) 245
JULY 1,
2004
------------
PREDECESSOR
COMPANY
------------
Fresh-start adoption - investments in affiliates (62)
Fresh-start adoption - property and equipment 711
Fresh-start adoption - intangible assets 332
Fresh-start adoption - goodwill (22)
Fresh-start adoption - inventory (4)
Fresh-start adoption - other assets (31)
Fresh-start adoption - current liabilities (15)
Fresh-start adoption - deferred taxes 5
------------
914
Gain on discharge of debt and associated interest 1,821
Gain on extinguishment of derivative contracts 6
Financial restructuring charges (26)
------------
Net income 2,715
============
See accompanying notes to the consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
NINE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JULY 1,
2004 2004 2003 2004
-------------- ------------ --------------- ------------
REORGANIZED PREDECESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
(RESTATED)
(SEE NOTE 2)
-------------- ------------ --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (29) (130) (247) -
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 103 184 294 -
Amortization 9 - - -
Amortization of deferred financing costs and
debt discount - 30 85 -
Deferred taxes charge/(credit) - 1 (4) -
Unrealized gains on foreign currency translation - (40) (84) -
Non-cash accrued stock-based compensation cost 3 - - -
Share of net income of affiliates (4) (8) (4) -
Amounts written off investments - 1 - -
Changes in operating assets and liabilities, net
of effect of acquisition of subsidiaries:
Change in receivables (7) 9 24 -
Change in prepaid expenses 5 (25) (5) -
Change in other assets (2) (3) (10) -
Change in accounts payable 10 27 3 -
Change in other liabilities (16) 124 144 -
-------------- ------------ --------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72 170 196 -
-------------- ------------ --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (50) (127) (173) -
Repayment/(payment) of loans made to affiliates,
net 6 (4) 16 -
Disposal of affiliate - 7 7 -
Proceeds from disposal of assets - - 1 -
Other investing activities - - (1) -
-------------- ------------ --------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (44) (124) (150) -
-------------- ------------ --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Release/(placement) of restricted cash 14 2 (1) (36)
Repayment of credit advance - - - (160)
Payment of bank facility amendment fee - - - (22)
Capital element of capital lease repayments (10) (23) (41) -
-------------- ------------ --------------- ------------
NET CASH PROVIDED BY/(USED IN) FINANCING
ACTIVITIES 4 (21) (42) (218)
-------------- ------------ --------------- ------------
Net increase/(decrease) in cash and cash
equivalents 32 25 4 (218)
Cash and cash equivalents at beginning of period - 427 390 452
Cash and cash equivalents transferred from
Predecessor Company to Reorganized Company 234 - - (234)
-------------- ------------ --------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 266 452 394 -
============== ============ =============== ============
Supplementary cash flow information:
Cash paid for interest, net (39) (61) (122) -
Cash received for income taxes - 2 - -
See accompanying notes to the consolidated financial statements
TELEWEST GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 2004
1 ORGANIZATION, HISTORY AND DESCRIPTION OF BUSINESS
Telewest Global, Inc. ("the Company" or "Reorganized Company") was
incorporated in the US State of Delaware on November 12, 2003, as a wholly
owned subsidiary of Telewest Communications plc. On November 26, 2003, the
Company acquired the entire issued share capital of Telewest UK Limited
("Telewest UK"), a subsidiary newly formed under the laws of England and
Wales.
On July 13, 2004, as part of the financial restructuring of Telewest
Communications plc and its subsidiaries (collectively the "Predecessor
Company"), the Company entered into a transfer agreement with the
Predecessor Company and Telewest UK to acquire substantially all the assets
of the Predecessor Company. The financial restructuring of the Predecessor
Company was declared effective on July 15, 2004 and the Company became the
ultimate holding company for the operating companies of the Predecessor
Company. See Note 4 - The Financial Restructuring for a further discussion
in respect of the completion of the financial restructuring.
The Company and its subsidiary did not carry on any business and incurred
only immaterial expenses prior to the completion of the Predecessor
Company's financial restructuring. For that reason the Company's
consolidated statements of operations for the nine months ended September
30, 2004 and the three months ended September 30, 2004 are in all material
respects identical.
The Company and its subsidiaries (together "the Group") provide cable
television, telephony and internet services to business and residential
customers in the United Kingdom ("UK"), and broadcast media activities. The
Group's Cable segment derives its cable television revenues from
installation fees, monthly basic and premium service fees and advertising
charges; its telephony revenues from connection charges, monthly line
rentals, call charges, special residential service charges and
interconnection fees payable by other operators; its internet revenues from
installation fees and monthly subscriptions to its internet service
provider.
The Group's Content segment is engaged in broadcast media activities, being
the supply of entertainment content, interactive and transactional services
to the UK pay-television broadcasting market.
2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America and the rules of the Securities and Exchange
Commission ("SEC"). In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three
months and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2004.
The consolidated balance sheet at December 31, 2003 has been derived from
the audited consolidated financial statements of the Predecessor Company.
The financial restructuring was completed on July 15, 2004, following the
acquisition of substantially all of the Predecessor Company's net assets on
July 14, 2004. The businesses acquired from the Predecessor Company operate
solely in the UK, and therefore, substantially all the Group's revenues and
expenses are derived from the UK. Consequently, the accompanying unaudited
consolidated financial statements have been prepared in pounds sterling,
the reporting currency of the Group for the period covered by this
Quarterly Report and for all subsequent filings.
RESTATEMENT BY PREDECESSOR COMPANY
Subsequent to the issue of the Predecessor Company's consolidated financial
statements for the year ended December 31, 2002, the Predecessor Group
determined the need to adjust the classification of debt previously
reflected as non-current in the consolidated balance sheet at December 31,
2002 and wrote off deferred issue costs as at that date relating to the
restated debt. Accordingly, the Predecessor Company's unaudited consolidated
financial statements for the three and nine months ended September 30, 2003
were also restated.
Previously reported interest expense for the three and nine months ended
September 30, 2003 included charges of (pound)2 million and (pound)7
million, respectively, in respect of amortization of deferred issue costs.
These charges were written back as all deferred issue costs on the restated
debt had been written off with effect from December 31, 2002. Additionally,
charges of (pound)6 million and (pound)14 million, respectively, were made
in the three and nine months ended September 30, 2003, for further interest
on bonds in default. Consequently, the net effect of these adjustments to
"Interest expense" for the three and nine months ended September 30, 2003
was an increase of (pound)4 million and (pound)7 million, respectively.
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RESTATEMENT IMPACT ON SEPTEMBER 30, 2003
3 MONTHS ENDED SEPT. 30, 2003 9 MONTHS ENDED SEPT. 30, 2003
------------------------------- ------------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
(POUND)M (POUND)M (POUND)M (POUND)M
--------------------------------------------------------------------------------------------------------------
Interest expense (including amortization of
debt discount) (115) (119) (359) (366)
Net loss (85) (89) (240) (247)
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3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies represent the accounting
policies of the Reorganized Company. For a more complete discussion of
historical changes to the accounting policies of the Predecessor Company,
refer to the financial statements included in the Predecessor Company's
Form 20-F filing for the year ended December 31, 2003.
With the exception of adopting the provisions for accounting for stock
options in SFAS 123, Accounting for Stock-Based Compensation, the
accounting policies of the Group are the same as those of the Predecessor
Company as at December 31, 2003.
USE OF ESTIMATES
The Company uses estimates and assumptions in the preparation of its
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ from those estimates. Estimates are used when accounting for
revenues and related allowances, allowance for doubtful accounts, accrued
costs, depreciation and amortization of property, plant and equipment and
intangible assets, income taxes, contingent liabilities and fresh-start
accounting fair values. The Company evaluates and updates its assumptions
and estimates on an ongoing basis and from time to time employs outside
experts to assist in its evaluations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and those of its controlled subsidiaries. All significant inter-company
accounts and transactions have been eliminated upon consolidation.
The Predecessor Company has been consolidated in the financial statements
of the Group as at and for the three months ended September 30, 2004, as a
Variable Interest Entity (VIE), as defined by FASB Interpretation No.46(R)
(FIN46). The Predecessor Company is due to be placed into voluntary
liquidation and currently retains (pound)22 million of cash as at September
30, 2004, for settlement of financial restructuring claims and liquidation
expenses. The Company's obligation in respect of costs associated with
settling claims for financial restructuring and liquidation expenses is
unlimited, although the Company estimates that the (pound)22 million
available within the Predecessor Company to be sufficient to meet such
claims and expenses. Any cash remaining after settling claims is expected
to be transferred to the Group's subsidiary company Telewest UK upon the
Predecessor Company being liquidated. Given the nature of the cash held by
the VIE, the consolidated balance sheet discloses such cash as restricted
cash.
FRESH-START REPORTING
Although the Predecessor Company completed its financial restructuring on
July 15, 2004, the Company adopted fresh-start reporting effective July 1,
2004, for convenience. This resulted in a new reporting group for
accounting purposes (Reorganized Company). The consolidated balance sheet
as of September 30, 2004, gives effect to adjustments to the carrying value
of assets or amounts and classifications of liabilities that were necessary
when adopting fresh-start reporting under the provisions of Statement of
Position ("SOP") 90-7, Reporting by Entities in Reorganization under the
Bankruptcy Code (SOP 90-7).
IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
Statement of Financial Accounting Standard ("SFAS") No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, requires that long-lived
assets and certain identifiable intangibles, (intangible assets that do not
have indefinite lives), to be held and used by an entity, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Indications of
impairment are determined by reviewing undiscounted projected future cash
flows. If impairment is indicated, the amount of the impairment is the
amount by which the carrying value exceeds the fair value of the assets.
The Group reviews the carrying values of its investments in affiliates,
including any associated goodwill, to ensure that the carrying value of
such investments is stated at no more than their recoverable amounts. The
Group assesses the recoverability of its investments by determining whether
the carrying value of the investments can be recovered through projected
discounted future operating cash flows (excluding interest) of the
operations underlying the investments. The assessment of the recoverability
of the investments will be impacted if projected future operating cash
flows are not achieved. The amount of impairment, if any, is measured based
on the projected discounted future operating cash flows using a rate
commensurate with the risks associated with the assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill arising from business combinations, reorganization value in excess
of amounts allocable to identifiable assets and intangible assets with
indefinite lives are not amortized but are subject to annual review for
impairment (or more frequently should indications of impairment arise).
Goodwill associated with equity method investments is also not amortized
but is subject to impairment testing as part of the investment to which it
relates in accordance with Accounting Principles Board Opinion ("APB")
No.18, The Equity Method of Accounting for Investments in Common Stock.
Impairment of goodwill is determined using a two-step approach, initially
based on a comparison of the reporting unit's fair value to its carrying
value; if the fair value is lower, then the second step compares the
asset's fair value (implied fair value for goodwill and reorganization
value in excess of amounts allocable to identifiable assets) with its
carrying value to measure the amount of the impairment. The Company carries
out its annual impairment review during the fourth quarter consistent with
the annual budgetary timetable.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash.
DERIVATIVES AND HEDGING
All derivative instruments are recognized at their fair value as assets or
liabilities in the Reorganized Company's balance sheet in accordance with
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. 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 hedges, changes in fair value are recorded
immediately in earnings.
For derivatives designated as cash flow hedges, changes in fair value on
the effective portion of the hedging instrument 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 in earnings. For derivatives designated as fair value
hedges, changes in fair value are recorded in earnings. The Reorganized
Company has no designated cash flow hedges.
INVESTMENTS
Investments in partnerships, joint ventures and subsidiaries that are
voting interest entities in which the Group has significant influence,
generally when the Group's voting interest is 20% to 50%, are accounted for
using the equity method. Investments in which the Group does not have
significant influence are carried at cost and written down to the extent
that there has been an other-than-temporary diminution in value. The Group
accounts for certain investments in which the Group's ownership is greater
than 50% using the equity method. This method is used for such subsidiaries
where the minorities have substantive participating rights such as veto
over key operational and financial matters and equal representation on the
board of directors.
Investments in variable interest entities, those entities that either have
insufficient equity or whose equity lacks characteristics of a controlling
financial interest, are consolidated if the Group is the primary
beneficiary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at their fair value as of the date
fresh-start reporting was adopted under SOP 90-7. All subsequent
acquisitions are stated at cost. Depreciation is provided to write off the
cost, less estimated residual value, of property and equipment by equal
instalments over their estimated useful economic lives as follows:
Buildings 50 years Electronic equipment 5-8 years
Cable and ducting 20 years Other equipment 4-5 years
The Group accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems in accordance with SFAS 51,
Financial Reporting by Cable Television Companies. Initial subscriber
installation costs are capitalized and depreciated over the life of the
network.
DEFERRED FINANCING COSTS
Direct costs incurred in raising debt are deferred and recorded on the
consolidated balance sheet in other assets. The costs are amortized to the
consolidated statement of operations using the effective interest rate
method at a constant rate to the carrying value of the debt over the life
of the obligation.
MINORITY INTEREST
Recognition of the minority interest's share of losses of consolidated
subsidiaries is limited to the amount of such minority interest's allocable
portion of the equity of those consolidated subsidiaries.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of exchange
in effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
prevailing at the balance sheet date and the gains or losses on translation
are included in the consolidated statement of operations.
REVENUE RECOGNITION
Revenues recognized as network communication services are provided. Credit
risk is managed by disconnecting services to customers who are delinquent.
In accordance with SFAS 51 connection and activation fees relating to
services delivered over the cable network, which include cable television,
telephony and internet, are recognized in the period of connection to the
extent that such fees are less than direct selling costs. Excess connection
and activation fees over direct selling costs incurred are deferred and
amortized over the expected customer life.
Programming revenues are recognized in accordance with SOP 00-2, Accounting
by Producers or Distributors of Films. Revenue on transactional and
interactive sales is recognized as and when the services are delivered.
Advertising sales revenue is recognized at estimated realizable values when
the advertising is aired.
PENSION COSTS
The Group operates a defined contribution plan (the Telewest Communications
Pension Plan) and contributes to third-party plans on behalf of employees.
The Group has no obligation to fund any defined benefit plan.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered.
The Group recognizes deferred tax assets only where it is more likely than
not that the benefit will be realized through future taxable income.
Otherwise a valuation allowance is established to provide against deferred
tax assets.
SHARE-BASED COMPENSATION
The Group has chosen to account for share-based compensation in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, rather than the
intrinsic value method prescribed in APB 25, Accounting for Stock Issued to
Employees and related interpretations adopted by the Predecessor Company.
The Company operates several stock option plans, which contain graded
vesting arrangements, with vesting ranging from three to five year periods.
Compensation expense is measured at grant date based on the different
expected lives for the options that vest each year and is recognized using
the graded-vesting attribution method.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net loss available
to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. The period for the purposes of the
calculation of basic and diluted earnings per share, is the three months
ended September 30, 2004, being the period from inception of fresh-start
reporting. Diluted earnings per share is computed by adjusting the weighted
average number of ordinary shares outstanding during the year for all
dilutive potential ordinary shares outstanding during the year and
adjusting the net loss for any changes in income or loss that would result
from the conversion of such potential ordinary shares. There is no
difference in basic and diluted net loss per ordinary share, as potential
ordinary share equivalents for employee share options are not included in
the computation as their effect is antidilutive. A total of 8,944,534
common stock equivalents in respect of share options and restricted stock
were excluded from the diluted net loss per ordinary share calculation.
INVENTORIES
Inventories of equipment, held for use in the maintenance and expansion of
the Group's telecommunications systems, are stated at cost, including
appropriate overheads, less provision for deterioration and obsolescence.
Network capacity and ducting held for resale are stated at the lower of
cost or net realizable value.
NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP
There are various FASB Statements, FASB Staff Positions, EITF Issues and
AICPA Statement of Positions that have been recently issued, which have
various implementation requirements. The Reorganized Company has evaluated
each of these and does not expect a significant effect on its financial
statements from any of the new pronouncements.
4 THE FINANCIAL RESTRUCTURING
The Predecessor Company incurred substantial operating and net losses and
substantial borrowings prior to its financial restructuring, principally to
fund the capital costs of its network construction, operations and the
acquisition of UK cable assets. In the first half of 2002, a series of
circumstances, including the well-publicized downturn in the
telecommunications, media and technology sector, increasingly tight capital
markets, and the downgrading of the Predecessor Company's corporate credit
ratings, severely limited the Predecessor Company's access to financing and
consequently impaired its ability to service debt and refinance its
existing debt obligations.
In April 2002, the Predecessor Company began exploring a number of options
to address its funding requirements, and subsequently began discussions
with, among others, an ad hoc committee of its note holders, its senior
lenders and other creditors. After extensive negotiations with these
creditors, the terms, conditions and structure of a financial restructuring
were substantially agreed between these creditors and certain major
shareholders at the time.
The financial restructuring received the approval of the Predecessor
Company's creditors on June 1, 2004. Among other matters the financial
restructuring resulted in:
o the reorganization of the Predecessor Company's business under the
Company;
o the cancellation of all of the outstanding notes and debentures of the
Predecessor Company and Telewest Finance (Jersey) Limited ("Telewest
Jersey"), (its Jersey-based finance subsidiary company), in return for
the distribution of 98.5% of the Company's common stock, and the
distribution of the remaining 1.5% of the Company's common stock to
the Predecessor Company's shareholders, in accordance with English and
Jersey schemes of arrangement involving certain creditors of the
Predecessor Company and Telewest Jersey. This reduced the total
outstanding indebtedness of the business from approximately (pound)5.8
billion to approximately (pound)2.0 billion and significantly reduced
interest expense;
o the entry into an amended senior secured credit facility; and
o the cessation of dealings in the Predecessor Company's shares on the
London Stock Exchange and the Predecessor Company's American
Depository Receipts on the Nasdaq National Market.
On July 13, 2004, the Company, the Predecessor Company and Telewest UK
entered into a transfer agreement (the "Transfer Agreement"). The Transfer
Agreement provides for the transfer of substantially all of the assets of
the Predecessor Company (including the shares in Telewest Communications
Networks Limited ("TCN") and its other operating companies, but excluding
the shares in Telewest Jersey and one share of the Company's common stock)
to Telewest UK. The asset transfer contemplated by the Transfer Agreement
was completed on July 14, 2004.
On July 15, 2004, the Predecessor Company's financial restructuring became
effective. As a result, all outstanding notes and debentures of the
Predecessor Company and Telewest Jersey have been cancelled. A total of
241,325,000 shares, or 98.5%, of the Company's common stock was distributed
by an escrow agent to the holders of the Predecessor Company and Telewest
Jersey's notes and debentures and certain other scheme creditors. The
remaining 3,675,000 shares, or 1.5%, of the Company's common stock was
distributed to the Predecessor Company's existing shareholders. As part of
the financial restructuring, on July 15, 2004, the Company also
successfully completed the amendment of the senior secured credit facility
held by one of the operating subsidiaries of the Predecessor Company,
transferred to the Company on July 14, 2004.
As a condition to completing the amendment to the senior secured credit
facility, (pound)160 million outstanding on the prior senior secured credit
facility was repaid. The amended facility provides for fully committed
facilities of (pound)2,030 million.
Trading in the Company's common stock on the Nasdaq National Market
commenced on July 19, 2004 under the symbol "TLWT."
The Predecessor Company and Telewest Jersey are expected to be placed in
solvent liquidation by their respective shareholders as soon as
practicable.
5 FRESH-START REPORTING
As a result of the completion of the Predecessor Company's financial
restructuring on July 15, 2004, the Company adopted fresh-start accounting
in accordance with SOP 90-7, with effect from July 1, 2004.
Under SOP 90-7, the Company has established a new accounting basis. The
Company has allocated the reorganization value to the Predecessor Company's
existing assets in conformity with the procedures specified by SFAS 141
"Business Combinations" and recorded the Predecessor Company's existing
liabilities at their respective values. As a result of the application of
fresh-start accounting, the Company's balance sheet and results of
operations for the three months ended September 30, 2004 and for each
reporting period thereafter will not be comparable in many material
respects to the balance sheet and results of operations reflected in the
Predecessor Company's historical financial statements for periods prior to
July 1, 2004. In addition, the final results of operations of the
Predecessor Company include a gain on the extinguishment of the Predecessor
Company's outstanding notes and debentures. This may make it more difficult
to compare the Reorganized Company's performance with the historical
performance of the Predecessor Company.
The statements of operations and cash flows for periods prior to July 1,
2004, as presented reflect the operations of the Predecessor Company, which
include the adjustments from the application of fresh-start reporting. The
adoption of fresh-start reporting had a material effect on the consolidated
financial statements as of and for the three months ended September 30,
2004, and will have a material impact on the consolidated statements of
operations for periods subsequent to September 30, 2004. Fresh-start
reporting has resulted in an increase in depreciation and amortization
charges following revaluation of tangible and intangible assets to their
fair value. Revenues in the Business sales division of our Cable segment
have been reduced following the derecognition of deferred revenues for
which no future contractual performance obligations exist. Content segment
expenses and selling, general and administrative expenses have also been
impacted by fresh-start reporting as a result of revaluation of the
Company's programming inventory and property leases, respectively.
As of July 1, 2004, the tax bases of certain assets and liabilities remain
unresolved. Any future changes in these balances that existed as of the
fresh-start date will be adjusted through "reorganization value in excess
of amounts allocable to identifiable assets" in accordance with EITF 93-7,
Uncertainties Related to Income Taxes in a Purchase Business Combination.
Reorganization adjustments have been recorded in the consolidated balance
sheet of the Predecessor Company to reflect the discharge of debt and the
adoption of fresh-start reporting in accordance with SOP 90-7. The Company
engaged an independent financial advisor to assist in the determination of
the Company's reorganization value as defined in SOP 90-7. The Company
determined a reorganization value using various valuation methods
including: (i) publicly traded company analysis, (ii) discounted cash flow
analysis and (iii) precedent transactions analysis. These analyses are
necessarily based on a variety of estimates and assumptions which, though
considered reasonable by management, may not be realized and are inherently
subject to significant business, economic and competitive uncertainties and
contingencies. The equity value of (pound)1,949 million at July 1,2004
represents the enterprise value of (pound)3,914 million less (pound)1,965
million of post-reorganization debt (including capital leases of
approximately (pound)118 million).
The assumptions used in the calculations for the discounted cash flow
analysis regarding projected revenue, costs, and cash flows, for the period
2004-2014 were provided by the Company's management based on their best
estimate at the time the analysis was performed. These foregoing
projections are inherently subject to uncertainties and contingencies
beyond the control of the Company. Accordingly, there can be no assurance
that the projections reflected in the valuations will be realized, and
actual results could vary materially.
Fresh-start adjustments reflect the allocation of fair value to the
Reorganized Company's assets and the present value of liabilities to be
paid. The Company's property, plant and equipment were valued based on a
combination of the cost or market approach, depending on whether market
data was available. Also considered were technical, functional, and
economic obsolescence, including network utilization factors inherent in
the Reorganized Company's assets. Key assumptions used in the valuation to
determine the fair value of the Reorganized Company's long-lived assets
include (i) an income tax rate of 30%, (ii) a weighted average cost of
capital of 12% for the Cable operating segment based on a ratio of debt
40.6% to equity 59.4%, and a weighted average cost of capital of 22% for
the Content operating segment based on a ratio of debt 10.3% to equity
89.7%. Certain intangible assets were valued using a relief from royalty
methodology. These estimates of fair value have been reflected in the
Reorganized Company's consolidated balance sheet as of September 30, 2004.
Completion of the valuation process during the allocation period could
result in additional adjustments to the fair value of assets or present
value of estimated liabilities due to receipt of information, which the
Company is awaiting confirmation of in order to finalize its fair value
allocation. Potential allocation adjustments to the Company's assets and
liabilities include estimates used for the fair value of investments,
estimates made of remaining settlement costs in respect of fees and claims
associated with the financial restructuring of the Predecessor Company and
pre-acquisition contingencies.
In applying fresh-start reporting, the Company followed the following
principles:
o The reorganization value of the Reorganized Company was allocated
to its assets in conformity with the procedures specified by SFAS
No. 141, "Business Combinations". The reorganization value
exceeds the sum of the amounts assigned to assets and
liabilities. This excess is disclosed as Reorganization value in
excess of amounts allocable to identifiable assets on the
Reorganized Company's balance sheet with an indefinite life and
will be subject to annual impairment reviews in accordance with
SFAS 142, "Goodwill and Other Intangible Assets".
o Each liability existing as of the fresh-start reporting date,
other than deferred taxes, has been stated at the present value
of the amounts to be paid, determined at appropriate current
interest rates. Deferred revenue was adjusted to reflect the fair
value of future costs of contractual performance obligations plus
a normal profit margin, consistent with the consensus reached by
EITF 01-03, "Accounting in a Purchase Business Combination for
Deferred Revenue of an Acquiree".
o Deferred taxes were reported in conformity with applicable income
tax accounting standards, principally SFAS No. 109, "Accounting
for Income Taxes". Deferred tax assets and liabilities have been
recognized for differences between the assigned values and the
tax basis of the recognized assets and liabilities. In accordance
with management's judgment, a valuation allowance has been
established for those deferred tax assets that are not
recoverable through the reversal of existing taxable temporary
differences, consequently no deferred tax asset has been
recognized on the Company's balance sheet at July 1, 2004. As of
fresh-start date, the Company estimates that it has, subject to
Inland Revenue agreement, net operating losses of (pound)1,663
million and available capital allowances of (pound)5,166 million.
o Reversal of all items included in the Predecessor Company's
equity.
The following table identifies the adjustments recorded to the Predecessor
Company's June 30, 2004 consolidated balance sheet as a result of
implementing the Financial Restructuring and applying fresh-start reporting
(in (pound) millions):
PREDECESSOR FINANCIAL NOTE FRESH- NOTE REORGANIZED
COMPANY RESTRUCTURING START COMPANY
JUNE 30, ADJUSTMENTS ADJUSTMENTS JULY 1,
2004 2004
----------- ------------ ------ ----------- ------ -----------
ASSETS
Cash and cash equivalents 452 (182) 1 270
Restricted cash 11 11
Trade receivables 111 111
Other receivables 34 34
Prepaid expenses 41 (8) 2 33
----------- ------------ ----------- -----------
Total current assets 649 (190) 459
Investments accounted for
under the equity method 367 (62) 7 305
Property and equipment 2,342 711 8 3,053
Intangible assets - 332 9 332
Goodwill 447 (447) 10 -
Reorganization value in
excess of amounts
allocable to identifiable - 425 10 425
assets
Inventory 33 (4) 11 29
Other assets 19 12 3 (31) 12 -
----------- ------------ ----------- -----------
TOTAL ASSETS 3,857 (178) 924 4,603
----------- ------------ ----------- -----------
LIABILITIES AND
SHAREHOLDERS'
EQUITY/(DEFICIT)
Accounts payable 112 2 13 114
Other liabilities 917 (459) 4 13 13 471
Debt repayable within one year 5,283 (5,282) 5 1
Capital lease obligations
repayable within one year 76 (38) 6 38
----------- ------------ ----------- -----------
Total current liabilities 6,388 (5,779) 15 624
Deferred taxes 110 (5) 14 105
Debt repayable after more
than one year 6 1,840 5 1,846
Capital lease obligations
repayable after more than
one year 42 38 6 80
----------- ------------ ----------- -----------
TOTAL LIABILITIES 6,546 (3,901) 10 2,655
MINORITY INTEREST (1) (1)
SHAREHOLDERS'
(DEFICIT)/EQUITY (2,688) 3,723 15 914 15 1,949
----------- ------------ ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
(DEFICIT)/EQUITY 3,857 (178) 924 4,603
----------- ------------ ----------- -----------
NOTES:
1. To record the repayment of (pound)160 million of the Predecessor
Company senior secured credit facility and the payment of bank
facility fees for the amended senior secured credit facility.
2. To reclassify prepaid bank facility fees in respect of the amended
senior secured credit facility to other assets.
3. To record bank facility fees in respect of the amended senior secured
credit facility and the elimination of bank facility fees in respect
of the Predecessor Company senior secured credit facility.
4. To record financial restructuring charges incurred as a result of the
Predecessor Company restructuring and the extinguishment of derivative
contracts and unpaid interest of (pound)479 million in respect of
notes and debentures.
5. Extinguishment of (pound)3,282 million notes and debentures, repayment
of (pound)160 million of the Predecessor Company senior secured credit
facility and reclassification of the remaining (pound)1,840 million of
senior secured credit facility to debt repayable after more than one
year.
6. Reclassification of capital lease obligations, previously in default
as a result of the Predecessor Company's bonds and debentures being in
default and shown as repayable within one year to capital lease
obligations repayable after more than one year.
7. To record investments in affiliates at fair value.
8. To record property and equipment at fair value.
9. To record intangible assets including trade names, and customer
contracts and relationships at fair value.
10. To record the reorganization value in excess of amounts allocable to
identifiable assets.
11. To record programming inventory at fair value.
12. To record the fair value of other assets.
13. To record liabilities at the present value of amounts to be paid,
including pre-acquisition contingencies, unfavorable operating leases
and the elimination of deferred revenues for which no future
contractual obligation exists.
14. To record the tax effect of fresh-start accounting.
15. To record change in shareholders' equity resulting from the
cancellation of the Predecessor Company's equity, accumulated deficit
and other comprehensive loss and the change in equity resulting from
the adoption of fresh-start reporting.
6 PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
COST
Land and buildings 74 151
Cable and ducting 2,328 3,584
Electronic equipment 549 1,602
Other equipment 154 626
--------------- ---------------
3,105 5,963
Less: Accumulated depreciation (103) (3,542)
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 3,002 2,421
--------------- ---------------
7 INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
COST
Customer lists 298 -
Trade names 34 -
--------------- ---------------
332 -
Less: Accumulated amortization (9) -
--------------- ---------------
INTANGIBLE ASSETS, NET 323 -
--------------- ---------------
Trade names are deemed to have indefinite lives, and therefore, no
amortization is expensed. The carrying value of trade names is subject to
an annual impairment review or more frequently should events occur that
indicate that an impairment is likely. Customer lists are amortized over a
period of 8 years from fresh-start date, July 1, 2004.
8 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIED ASSETS
AND GOODWILL
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
Goodwill - 447
Reorganization value in excess of amounts allocable to
identifiable assets 425 -
--------------- ---------------
425 447
--------------- ---------------
9 DEBT
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
Accreting Notes 2003 - 294
Senior Convertible Notes 2005 - 280
Senior Debentures 2006 - 168
Senior Convertible Notes 2007 - 300
Senior Discount Debentures 2007 - 861
Senior Notes 2008 - 196
Senior Discount Notes 2009 - 316
Senior Discount Notes 2009 - 273
Senior Notes 2010 - 374
Senior Discount Notes 2010 - 224
Senior Secured Facility - 2,000
Other debt 1 1
--------------- ---------------
Debt repayable within one year 1 5,287
Amended Senior Secured Credit Facility 1,840 -
Other debt due after more than one year 6 6
--------------- ---------------
Total debt 1,847 5,293
--------------- ---------------
The Notes and Debentures were extinguished upon completion of the financial
restructuring of the Predecessor Company. For a further discussion of the
terms of the financial restructuring refer to note 4 - The Financial
Restructuring.
AMENDED SENIOR SECURED CREDIT FACILITY
On July 15, 2004, certain subsidiaries of the Company entered into a series
of agreements comprising an amendment to the senior secured credit facility
of the Predecessor Company. TCN is the primary borrower under the amended
senior secured credit facility. On July 15, 2004, committed facilities of
(pound)2.03 billion were obtained, of which (pound)1.84 billion were fully
drawn. The committed credit facilities are comprised of the following four
tranches:
o "Tranche A" term credit facilities in an aggregate principal amount of
(pound)1,695 million, maturing on December 31, 2005;
o "Tranche B" revolving credit facilities in an aggregate principal amount
of (pound)140 million, maturing on December 31, 2005;
o "Tranche C" overdraft facilities in an aggregate principal amount of
(pound)50 million, maturing on December 31, 2005; and
o "Tranche D" term credit facilities in an aggregate principal amount of
(pound)145 million, maturing on June 30, 2006.
Tranche D also contemplates the provision of additional uncommitted
facilities in an aggregate principal amount of (pound)125 million, of which
(pound)20 million will be freely available and (pound)105 million will only
be available to be drawn down by TCN with the prior written consent of the
lenders holding at least two-thirds in value of the total commitments.
Interest
Tranches A and B bear interest at a rate of: (a) LIBOR plus (b) the
mandatory cost (if applicable) (a rate set by a fixed formula based on
applicable English statutory banking regulations or their EU counterparts)
plus (c) the applicable margin as indicated below, and Tranche C bears
interest at the relevant overdraft lender's fluctuating base rate plus the
applicable margin, as follows:
TOTAL SENIOR DEBT TO CONSOLIDATED ANNUALIZED TCN GROUP
NET OPERATING CASH FLOW (AS DEFINED IN THE AMENDED APPLICABLE MARGIN
SENIOR SECURED CREDIT FACILITY)
TRANCHE A TRANCHE B TRANCHE C
------------ ------------- ------------
Greater than or equal to 5:1 4.00% 5.50% 4.00%
Less than 5:1 but greater than or equal to 4.5:1 3.50% 5.00% 3.50%
Less than 4.5:1 but greater than or equal to 4:1 3.00% 4.50% 3.00%
Less than 4:1 2.50% 4.00% 2.50%
The margin for the initial six months following the effective date of the
schemes is 3.00% for Tranches A and C and 4.50% for Tranche B. Thereafter,
the margin will be set for each interest period at the beginning of such
interest period by reference to the ratio of TCN's Total Senior Debt to
Consolidated Annualized TCN Group Net Operating Cash Flow in the most
recent quarterly management accounts delivered to the Senior Lenders. If
TCN has failed to deliver the relevant management accounts, the margin will
revert to the highest base in the grid.
Tranche D bears interest at a rate of: (a) LIBOR plus (b) the mandatory
cost (if applicable) plus (c) 5.00%.
If TCN fails to pay any sum on its due date with respect to the facilities,
the default interest rate will be 1% higher than the normal interest rate
for the relevant tranche.
As at September 30, 2004, the weighted average interest rate on the amended
senior secured credit facility was 7.92%, which included a margin of 3.00%
over LIBOR.
On November 2, 2004 the Company announced that it had executed a commitment
letter for new credit facilities. For a further discussion regarding this
announcement, see note 14 - Subsequent events.
10 COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
At September 30, 2004, the Group had cash restricted as to use of (pound)33
million (December 31, 2003: (pound)13 million), representing cash which
provides security for leasing obligations and cash held by the Predecessor
Company to settle restructuring and liquidation expenses.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Contractual obligations and other commercial commitments as at September
30, 2004 are summarized in the tables below.
--------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
--------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
TOTAL LESS THAN 1 1-3 YEARS 3-5 YEARS AFTER 5 YEARS
YEAR
(POUND) (POUND) (POUND) (POUND) (POUND)
MILLION MILLION MILLION MILLION MILLION
--------------------------------------------------------------
Debt 1,847 1 1,844 1 1
Capital lease obligations 113 39 63 11 -
Operating leases 131 13 25 20 73
Unconditional purchase obligations 34 34 - - -
Other long-term obligations - - - - -
--------------------------------------------------------------------------------------------------------
Total contractual obligations 2,125 87 1,932 32 74
--------------------------------------------------------------------------------------------------------
The following table includes information about other commercial commitments
as of September 30, 2004. Other commercial commitments are items that the
Group could be obligated to pay in the future. They are not required to be
included in the balance sheet.
--------------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
--------------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------------------------
TOTAL LESS THAN 1 1-3 YEARS 3-5 YEARS AFTER 5 YEARS
YEAR
(POUND) (POUND) (POUND) (POUND) (POUND)
MILLION MILLION MILLION MILLION MILLION
--------------------------------------------------------------------------------------------------------
Guarantees (1) 17 6 11 - -
--------------------------------------------------------------------------------------------------------
(1) Consists of performance guarantees of (pound)6 million due in less than
one year and lease guarantees of (pound)11 million due in one to three
years.
LEGAL MATTERS
The Group is a party to various legal proceedings in the ordinary course of
business, which it does not believe, will result, in aggregate, in a
material adverse effect on its financial condition or results of
operations.
11 SHAREHOLDERS' EQUITY
During the three months ended September 30, 2004, the Company issued
245,000,000 shares of common stock of US$0.01 each, in connection with the
financial restructuring of the Predecessor Company. The equity value of the
Company of (pound)1,949 million established additional paid-in capital of
(pound)1,948 million.
12 STOCK-BASED COMPENSATION
Under the fair value recognition provisions of SFAS 123, compensation
expense is measured at the grant date using the Black-Scholes model. Awards
with graded vesting are treated as separate awards and accordingly the fair
value is separately measured based on the different expected lives for the
options that vest each year. The cost is recognized using the
graded-vesting attribution method.
The Reorganized Company has recognized (pound)3 million of stock-based
compensation expense during the three months ended September 30, 2004, as a
result of awards granted over 8,944,534 shares of the Company's common
stock following completion of the Predecessor Company's financial
restructuring. The Black-Scholes model was used to determine the fair value
of shares awarded, details of the recognized fair value and related
assumptions for each plan type are disclosed below. The Group does not
expect to pay a dividend on its common stock at any time during the
expected life of any outstanding option and expects the performance
criteria within its option plans to be met.
If the Predecessor Company had applied the provisions of SFAS 123, the
Predecessor Company's net loss and loss per share would have been reported
as the pro forma amounts indicated below:
SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2003
------------ --------------- ----------------
PREDECESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(POUND) MILLION (POUND) MILLION (POUND) MILLION
------------ --------------- ----------------
Net loss as reported (130) (89) (247)
Less: pro forma employee compensation cost
related to stock options - - -
------------ --------------- ----------------
Pro forma net loss (130) (89) (247)
------------ --------------- ----------------
The following table summarizes the fair values of the options and
restricted stock outstanding at September 30, 2004:
Restricted
Stock Options Stock
------------- -- ------------- -- --------------- --------------
Exercise price (US$) 13.70(1) 13.70(2) 0.01(1)
Number of options/restricted
stock outstanding 7,571,055 113,155 939,778 320,546
Weighted average fair value
at grant date (US$) 4.19 3.39 13.74 13.73
Weighted average fair value
at grant date ((pound)) 2.24 1.87 7.33 7.33
Weighted average share price
at date of grant (US$) 13.75 11.72 13.75 -
Weighted average expected
life (years) 3.2 3.6 3.6 -
Weighted average expected
volatility (%) 38 41 41 -
Weighted average risk-free
rate (%) 3.0 3.1 3.1 -
Weighted average expected
dividend yield (%) 0.0 0.0 0.0 -
(1) Stock options with exercise price below market price on date of grant
(2) Stock options with exercise price above market price on date of grant
The fair value of options and restricted stock has been translated to
pounds sterling ((pound)) at the US$ to (pound) exchange rate prevailing on
the date of each grant.
13 SEGMENT INFORMATION
We operate in two segments: Cable and Content. Our chief operating
decision-maker receives performance and subscriber data for the Cable
segment, (including telephony, television and internet product lines),
however support, service and network costs are compiled only at the Cable
segment level. The Content segment supplies TV programming to the UK
pay-television broadcasting market and its operating results, which are
naturally separate from the Cable segment, are regularly reviewed by the
chief operating decision-maker. Revenues derived by the Content segment
from the Cable segment are eliminated on consolidation.
13 SEGMENT INFORMATION - CONTINUED
----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 2003
------------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
------------- ------------
CABLE SEGMENT
Consumer Sales Division revenue 238 227
Business Sales Division revenue 63 71
------------- ------------
THIRD PARTY REVENUE 301 298
Operating costs and expenses (before financial restructuring charges) (183) (191)
------------- ------------
ADJUSTED EBITDA including inter-segment costs 118 107
Inter-segment costs * 2 3
------------- ------------
ADJUSTED EBITDA 120 110
------------- ------------
CONTENT SEGMENT
Content Segment revenue 29 30
Operating costs and expenses (before financial restructuring charges) (25) (27)
------------- ------------
ADJUSTED EBITDA including inter-segment revenues 4 3
Inter-segment revenues * (2) (3)
------------- ------------
ADJUSTED EBITDA 2 -
------------- ------------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 120 110
Content Segment Adjusted EBITDA 2 -
------------- ------------
TOTAL ADJUSTED EBITDA 122 110
Financial restructuring charges - (9)
Depreciation (103) (96)
Amortization (9) -
------------- ------------
OPERATING INCOME 10 5
============= ============
* Inter-segment revenues are revenues of our Content Segment which are
costs in our Cable Segment and which are eliminated on consolidation.
13 SEGMENT INFORMATION - CONTINUED
----------------------------------------------------------------------------------------------------------
NINE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2004 2004 2003
-------------- -------------- -------------
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
(POUND) MILLION (POUND) MILLION (POUND) MILLION
-------------- -------------- -------------
CABLE SEGMENT
Consumer Sales Division revenue 238 470 677
Business Sales Division revenue 63 130 210
-------------- -------------- -------------
THIRD PARTY REVENUE 301 600 887
Operating costs and expenses (before financial
restructuring charges) (183) (369) (580)
-------------- -------------- -------------
ADJUSTED EBITDA including inter-segment costs 118 231 307
Inter-segment costs * 2 5 8
-------------- -------------- -------------
ADJUSTED EBITDA 120 236 315
-------------- -------------- -------------
CONTENT SEGMENT
Content Segment revenue 29 59 88
Operating costs and expenses (before financial
restructuring charges) (25) (46) (75)
-------------- -------------- -------------
ADJUSTED EBITDA including inter-segment revenues 4 13 13
Inter-segment revenues * (2) (5) (8)
-------------- -------------- -------------
ADJUSTED EBITDA 2 8 5
-------------- -------------- -------------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 120 236 315
Content Segment Adjusted EBITDA 2 8 5
-------------- -------------- -------------
TOTAL ADJUSTED EBITDA 122 244 320
Financial restructuring charges - (21) (16)
Depreciation (103) (184) (294)
Amortization (9) - -
-------------- -------------- -------------
OPERATING INCOME 10 39 10
============== ============== =============
* Inter-segment revenues are revenues of the Content Segment which are
costs in the Cable Segment and which are eliminated on consolidation.
14 SUBSEQUENT EVENTS
On November 2, 2004, our subsidiary TCN executed a commitment letter (the
"Commitment Letter") for new (pound)1.8 billion credit facilities (the
"Facilities"). Drawings under the Facilities together with cash on hand are
planned to be used to repay all outstanding borrowings under the Group's
existing (pound)2.03 billion amended senior secured credit facility. The
proposed Facilities consist of five tranches, one of which is a revolving
facility in the amount of (pound)100 million. It is not expected that an
immediate drawdown will occur under the revolving facility. TCN is the
primary borrower under the new facilities which will be guaranteed by
Telewest UK and several of TCN's subsidiaries (the "Guarantors") and
underwritten by Barclays Capital, BNP Paribas, Citigroup Global Markets
Limited, Credit Suisse First Boston, Deutsche Bank AG London and Royal Bank
of Scotland.
The commitment letter and the summary terms and conditions thereto (the
"Term Sheet") set out the terms and conditions on which the mandated lead
arrangers named therein will arrange and the underwriters named therein
will underwrite a bank financing (the "Financing") on behalf of TCN and its
direct and indirect subsidiaries and associated partnerships (together, the
"TCN Group"). The commitment of each of the mandated lead arrangers and
underwriters to arrange and underwrite, respectively, the facilities
contemplated by the Financing is subject to customary conditions, including
the negotiation of finance documentation on terms satisfactory to the
mandated lead arrangers and the underwriters and the execution and delivery
of the documentation by the parties thereto. In addition, any of the
mandated lead arrangers and the underwriters may terminate their respective
obligations under the commitment letter under certain circumstances,
including:
(a) on or after the close of business in London on January 31, 2005,
unless the first drawdown under the Facilities has occurred on or
before that date; and
(b) if a change occurs after the date hereof which has or is
reasonably likely to have, a material adverse effect on the
business, assets, operations or financial condition of the TCN
Group taken as a whole.
Certain changes to the Facilities and their terms may occur during the
syndication process.
All capitalized terms not defined have the meaning given to them in the
Commitment Letter and the Term Sheet.
The Facilities are expected to be comprised of the following five tranches:
(a) A 7-year amortizing term loan facility of a maximum amount of
(pound)700,000,000, available in Sterling in a single drawing,
amortizing semi-annually starting June 30, 2005 ("Tranche A");
(b) An 8-year repayment multi-currency term loan facility in a
maximum amount of (pound)425,000,000, available in Euro, U.S.
Dollars and/or Sterling in a single drawing, payable in two equal
installments 7 1/2 and 8 years after the date that the Senior
Facilities are entered into (the "Closing Date") ("Tranche B");
(c) A 9-year repayment multi-currency term loan facility in a maximum
amount of (pound)325,000,000, available in Euro, U.S. Dollars
and/or Sterling in a single drawing, payable in two equal
installments 8 1/2 and 9 years after the Closing Date ("Tranche
C" and, together with Tranche A and Tranche B, the "Senior Term
Facilities");
(d) A 7-year revolving loan facility in a maximum amount of
(pound)100,000,000, available in Sterling (the "Revolving
Facility" and, together with the Senior Term Facilities, the
"Senior Facilities"); and
(e) A 9 1/2-year bullet repayment multi-currency second lien term
loan facility in a maximum amount of (pound)250,000,000,
available in Euro, U.S. Dollars and/or Sterling in a single
drawing, payable 9 1/2 years after the Closing Date (the "Second
Lien Facility" and, together with the Senior Facilities, the
Facilities).
Any prepayment of the Second Lien Facility within 12 months after the
Closing Date ("Non-Call Period") will be subject to payment of a make-whole
premium based on customary market standards. After the end of the Non-Call
Period, prepayment may be made in whole or in part, subject to a prepayment
premium equal to the following percentages of the principal amount of the
Second Lien Facility being prepaid: (i) 2.00% prior to the second
anniversary of the Closing Date, (ii) 1.00% after the second anniversary of
the Closing Date but prior to the third anniversary of the Closing Date,
and (iii) 0.00% thereafter.
Tranches A, B and C and the Revolving Facility will bear interest at a rate
of (a) EURIBOR (for any Euro-denominated advance) or LIBOR (for any advance
denominated in another currency) plus (b) the applicable cost of complying
with any reserve requirements plus an applicable margin. The applicable
margin for Tranche A and the Revolving Facility is 2.25%, for Tranche B
2.75% and for Tranche C 3.25%. The applicable interest rate for the Second
Lien Facility will be determined based on market conditions.
In addition the applicable margin for Tranche A and the Revolving Facility
is subject to a margin ratchet based upon the ratio of Consolidated Net
Borrowings to Consolidated Annualized TCN Group Net Operating Cash Flow
ranging between 1.50% and 2.25%. The applicable margin for the Tranche B
shall be subject to a margin ratchet such that, from and after the first
quarter date occurring at least 6 months after the closing date on which
the ratio of Consolidated Net Borrowings to Consolidated Annualized TCN
Group Net Operating Cash Flow (each of the above terms to be defined in the
Senior Facilities Agreement) is less than or equal to 3.0 to 1.0, the
Tranche B margin shall be reduced by 25 basis points.
The TCN Group will be subject to customary financial, affirmative and
negative covenants under the Facilities. The TCN Group is also subject to a
number of customary mandatory prepayment events.
The descriptions of the Commitment Letter and the Term Sheet set forth
above are qualified in their entirety by the complete text of those
documents. Closing of the Facilities is expected prior to January 31, 2005.
Definitive documentation for the Facilities (which is currently subject to
completion) will be filed subsequently to closing.
FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q constitute "forward-looking
statements" which we believe to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance,
including, but not limited to, strategic plans, potential growth (including
penetration of developed markets and opportunities in emerging markets),
product introductions and innovation, meeting customer expectations,
planned operational changes (including product improvements), expected
capital expenditures, future cash sources and requirements, liquidity,
customer service improvements, cost savings and other benefits of
acquisitions or joint ventures - potential and/or completed - that involve
known and unknown risks, uncertainties and other factors that may cause our
or our businesses' actual results, levels of activity, performance or
achievements to be materially different from those expressed or implied by
any forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "could,"
"would," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," or "continue," or the negative of those
terms or other comparable terminology.
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. These factors include those discussed
under the caption "Risk Factors" in the Registration Statement on Form S-1
(No. 333-115508) filed by Telewest Global, Inc. with, and declared
effective by, the United States Securities and Exchange Commission on July
16, 2004, although those risk factors may not be exhaustive. Other sections
of this Form 10-Q may describe additional factors that could adversely
impact our business and financial performance. We operate in a continually
changing business environment, and new risk factors may emerge from time to
time. Management cannot anticipate all of these new risk factors, nor can
they definitively assess the impact, if any, of new risk factors on us or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied
upon as a prediction of actual results.
Unless otherwise required by applicable securities laws, we assume no
obligation to publicly update or revise any of the forward-looking
statements after the date of this Form 10-Q to reflect actual results,
whether as a result of new information, future events or otherwise.
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Telewest Global, Inc. (the "Company") was incorporated in the US State of
Delaware. On November 26, 2003, the Company acquired the entire issued
share capital of Telewest UK Limited (Telewest UK), a newly formed
subsidiary under the laws of England and Wales.
On July 13, 2004, as part of the Predecessor Company's financial
restructuring, the Company entered into a transfer agreement with the
Predecessor Company and Telewest UK to acquire substantially all the assets
of the Predecessor Company. The financial restructuring of the Predecessor
Company was declared effective on July 15, 2004 and the Company became the
ultimate holding company for the operating companies of the Predecessor
Company. For a further discussion of financial restructuring see Note 4 to
the Company's Consolidated Financial Statements as disclosed in Item - 1
Financial Statements, of this quarterly report.
The presentation of the Company's financial results of operations for the
three months ended September 30, 2004 and all subsequent reporting periods
will differ from that of the Predecessor Company due to the financial
restructuring, and it may be difficult to compare the Company's future
performance to the historical performance of the Predecessor Company. In
particular, as result of the completion of the Predecessor Company's
financial restructuring:
o (pound)3,282 million of notes and debentures and (pound)479
million of unpaid accrued interest reflected on the Predecessor
Company's balance sheet, were extinguished. In addition, as part
of the financial restructuring, the senior secured credit
facility entered into by TCN, now a wholly owned subsidiary of
the Company was amended. As part of the amendment process,
(pound)160 million outstanding under the prior facility was
repaid. The final results of operations of the Predecessor
Company include a gain on the extinguishment of its outstanding
notes and debentures. The Company's future indebtedness and
related interest expense has been substantially reduced.
o The Company adopted fresh-start accounting with effect from July
1, 2004 in accordance with Statement of Position 90-7, "Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP
90-7"). Under SOP 90-7, the Company has established a new
accounting basis, and recorded its existing assets and
liabilities at their respective fair values. As a result of the
application of fresh-start accounting, the Company's balance
sheet and results of operations for the three months ended
September 30, 2004 and for each reporting period thereafter will
not be comparable in many material respects to the balance sheet
and results of operations reflected in the Predecessor Company's
historical financial statements for periods prior to July 1,
2004.
o The Company adopted pounds sterling as its reporting currency and
will, in contrast to the Predecessor Company, only present its
results in the future in accordance with US GAAP. See Note 2 to
the Company's Consolidated Financial Statements as disclosed in
Item - 1 Financial Statements, of this Quarterly Report.
The Reorganized Company has the same segments as the Predecessor Company.
The Company has adopted a new long-range plan for the restructured
business. The new plan builds on and strengthens the prior long-range plan
and includes an emphasis on product innovation, with the introduction of
video on demand (VOD) and a personal video recorder (PVR) in 2005.
In the following tables, for the convenience of the reader for comparison
purposes, the results and cash flows of the Reorganized Company for the
nine-month period ended September 30, 2004 have been combined with the
results and cash flows of the Predecessor Company for the six months ended
June 30, 2004, to give results and cash flows of the combined group
(Combined Companies) for the nine months ended September 30, 2004. The
Company and its subsidiary did not carry on any business and incurred only
immaterial expenses prior to the completion of the Predecessor Company's
financial restructuring. For that reason the Company's consolidated
statements of operations for the nine months ended September 30, 2004 and
the three months ended September 30, 2004 are in all material respects
identical. We believe this combined presentation is helpful for the
understanding of our performance and assessing our prospects for the
future, and that it provides useful supplemental information to the
investors. The presentation does not include any adjustments to give pro
forma effect to the financial restructuring as of an earlier date and is
not intended to be indicative of the results that would have been obtained
had the restructuring been completed at the beginning of the period. In
addition, it is not indicative of results to be expected in future periods.
COMBINED COMPANIES STATEMENTS OF OPERATIONS
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
9 MONTHS 6 MONTHS 9 MONTHS
ENDED ENDED ENDED
SEPT. 30, JUNE 30, SEPT. 30,
2004 2004 2004
-------------- -------------- -------------
REORGANIZED PREDECESSOR COMBINED
COMPANY COMPANY COMPANIES
--------------------------------------------------------------------------------------- -------------- -------------
REVENUE
Consumer Sales Division 238 470 708
Business Sales Division 63 130 193
--------------------------------------------------------------------------------------- -------------- -------------
TOTAL CABLE SEGMENT 301 600 901
Content Segment 27 54 81
--------------------------------------------------------------------------------------- -------------- -------------
TOTAL REVENUE 328 654 982
--------------------------------------------------------------------------------------- -------------- -------------
OPERATING COSTS AND EXPENSES
Cable segment expenses (72) (153) (225)
Content segment expenses (17) (34) (51)
Depreciation (103) (184) (287)
Amortization (9) - (9)
--------------------------------------------------------------------------------------- -------------- -------------
Cost of revenue (201) (371) (572)
SG&A (117) (244) (361)
--------------------------------------------------------------------------------------- -------------- -------------
(318) (615) (933)
--------------------------------------------------------------------------------------- -------------- -------------
OPERATING INCOME 10 39 49
OTHER INCOME/(EXPENSE)
Interest income 6 15 21
Interest expense (including amortization of debt discount) (49) (230) (279)
Foreign exchange gains, net - 40 40
Share of net income of affiliates 4 8 12
Other, net - (1) (1)
--------------------------------------------------------------------------------------- -------------- -------------
LOSS BEFORE INCOME TAXES (29) (129) (158)
Income taxes (charge) - (1) (1)
--------------------------------------------------------------------------------------- -------------- -------------
NET LOSS (29) (130) (159)
--------------------------------------------------------------------------------------- -------------- -------------
The Statement of Operations for the Combined Companies for the nine months
ended September 30, 2004 excludes the Predecessor Company's Statement of
Operations for July 1, 2004.
COMBINED COMPANIES STATEMENTS OF CASH FLOWS
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------
9 MONTHS 6 MONTHS 9 MONTHS
ENDED ENDED ENDED
SEPT. 30, JUNE 30, JULY 1, SEPT. 30,
2004 2004 2004 2004
-------------- --------------- ------------- --------------
REORGANIZED PREDECESSOR PREDECESSOR COMBINED
COMPANY COMPANY COMPANY COMPANIES
----------------------------------------------------------------------------- ----------------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (29) (130) - (159)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 103 184 - 287
Amortization 9 - - 9
Amortization of deferred financing costs and debt
discount - 30 - 30
Deferred taxes charge - 1 - 1
Unrealized gains on foreign currency translation - (40) - (40)
Non-cash accrued stock-based compensation cost 3 - - 3
Share of net income of affiliates (4) (8) - (12)
Amounts written off investments - 1 - 1
Changes in operating assets and liabilities, net of
effect of acquisition of subsidiaries:
Change in receivables (7) 9 - 2
Change in prepaid expenses 5 (25) - (20)
Change in other assets (2) (3) - (5)
Change in accounts payable 10 27 - 37
Change in other liabilities (16) 124 - 108
----------------------------------------------------------------------------- ----------------------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72 170 - 242
----------------------------------------------------------------------------- ----------------------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (50) (127) - (177)
Repayment/(payment) of loans made to affiliates, net 6 (4) - 2
Disposal of affiliate - 7 - 7
----------------------------------------------------------------------------- ----------------------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (44) (124) - (168)
----------------------------------------------------------------------------- ----------------------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Release/(placement) of restricted cash 14 2 (36) (20)
Capital element of capital lease repayments (10) (23) - (33)
Repayment of credit advance - - (160) (160)
Payment of bank facility amendment fee - - (22) (22)
----------------------------------------------------------------------------- ----------------------------- --------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 4 (21) (218) (235)
----------------------------------------------------------------------------- ----------------------------- --------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 32 25 (218) (161)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - 427 452 427
CASH AND CASH EQUIVALENTS TRANSFERRED FROM PREDECESSOR
COMPANY TO REORGANIZED COMPANY 234 - (234) -
----------------------------------------------------------------------------- ----------------------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 266 452 - 266
----------------------------------------------------------------------------- ----------------------------- --------------
Supplementary cash flow information:
Cash paid for interest, net (39) (61) - (100)
Cash received for income taxes - 2 - 2
COMBINED COMPANIES SEGMENT INFORMATION
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
9 MONTHS 6 MONTHS 9 MONTHS
ENDED ENDED ENDED
SEPT. 30, JUNE 30, SEPT. 30,
2004 2004 2004
-----------------------------------------
REORGANIZED PREDECESSOR COMBINED
COMPANY COMPANY COMPANIES
--------------------------------------------------------------------------------------------------------------------
CABLE SEGMENT
Consumer Sales Division revenue 238 470 708
Business Sales Division revenue 63 130 193
--------------------------------------------------------------------------------------------------------------------
THIRD PARTY REVENUE 301 600 901
Operating costs and expenses (before financial restructuring
charges) (183) (369) (552)
--------------------------------------------------------------------------------------------------------------------
ADJUSTED EBITDA including inter-segment costs 118 231 349
Inter-segment costs * 2 5 7
--------------------------------------------------------------------------------------------------------------------
ADJUSTED EBITDA 120 236 356
--------------------------------------------------------------------------------------------------------------------
CONTENT SEGMENT
Content Segment revenue 29 59 88
Operating costs and expenses (before financial restructuring
charges) (25) (46) (71)
--------------------------------------------------------------------------------------------------------------------
ADJUSTED EBITDA including inter-segment revenues 4 13 17
Inter-segment revenues* (2) (5) (7)
--------------------------------------------------------------------------------------------------------------------
ADJUSTED EBITDA 2 8 10
--------------------------------------------------------------------------------------------------------------------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 120 236 356
Content Segment Adjusted EBITDA 2 8 10
--------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTED EBITDA 122 244 366
Financial restructuring charges - (21) (21)
Depreciation (103) (184) (287)
Amortization (9) - (9)
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 10 39 49
--------------------------------------------------------------------------------------------------------------------
* Inter-segment revenues are revenues of the Content Segment which are
costs in the Cable Segment and which are eliminated on consolidation.
The Segment Information for the Combined Companies for the nine months
ended September 30, 2004 excludes the Segment Information of the
Predecessor Company for July 1, 2004.
QUARTERLY OPERATING DATA - UNAUDITED
The following table sets out certain operating data for the three-month
periods shown. The information represents combined operating statistics for
all of our franchises.
---------------------------------------------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30,
2004 2004 2004 2003 2003
REORGANIZED PREDECESSOR COMPANY
COMPANY ---------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
CUSTOMER DATA
-------------
Homes passed and marketed (1) 4,686,799 4,682,777 4,678,182 4,674,764 4,679,688
Total customer relationships (2) 1,769,263 1,752,553 1,742,144 1,730,438 1,721,550
Customer penetration 37.7% 37.4% 37.2% 37.0% 36.8%
Customer additions 78,707 67,118 61,997 64,278 62,553
Customer disconnections (61,997) (56,709) (50,291) (55,390) (60,871)
Net customer additions 16,710 10,409 11,706 8,888 1,682
Revenue Generating Units ("RGUs") (3) 3,539,185 3,447,254 3,363,240 3,286,706 3,217,600
RGUs per customer 2.00 1.97 1.93 1.90 1.87
Net RGU additions 91,931 84,014 76,534 69,106 49,395
Average monthly revenue per customer (4) (pound)45.05 (pound)44.98 (pound)45.05 (pound)44.42 (pound)43.93
Average monthly churn (5) 1.2% 1.1% 1.0% 1.1% 1.2%
---------------------------------------------------------------------------------------------------------------------------------
BUNDLED CUSTOMERS
-----------------
Customers subscribing to two or more services 1,338,632 1,312,842 1,291,141 1,264,756 1,239,659
Customers subscribing to three services
("triple play") 431,290 381,859 329,955 291,512 256,391
Percentage of dual or triple-service
customers 75.7% 74.9% 74.1% 73.1% 72.0%
Percentage of triple-service customers 24.4% 21.8% 18.9% 16.8% 14.9%
---------------------------------------------------------------------------------------------------------------------------------
CABLE TELEVISION
----------------
Television ready homes passed and marketed 4,686,799 4,682,777 4,678,182 4,674,764 4,679,688
Total subscribers 1,297,304 1,288,272 1,285,797 1,272,064 1,258,549
Quarterly net additions 9,032 2,475 13,733 13,515 8,038
Television penetration 27.7% 27.5% 27.5% 27.2% 26.9%
Digital ready homes passed and marketed 4,405,162 4,401,860 4,386,050 4,306,251 4,292,032
Digital subscribers 1,078,623 1,052,855 1,029,759 987,873 945,595
Quarterly net digital additions 25,768 23,096 41,886 42,278 34,404
Penetration of digital subscribers to total
subscribers 83.1% 81.7% 80.1% 77.7% 75.1%
Average monthly churn 1.4% 1.3% 1.2% 1.3% 1.4%
Average monthly revenue per subscriber (4) (pound)20.72 (pound)20.53 (pound)21.18 (pound)21.16 (pound)20.93
---------------------------------------------------------------------------------------------------------------------------------
CONSUMER TELEPHONY
------------------
Telephony ready homes passed and marketed 4,682,002 4,677,861 4,674,932 4,670,494 4,678,970
3-2-1 telephony subscribers (metered) 1,082,125 1,105,056 1,130,171 1,144,474 1,164,549
Talk subscribers (unmetered) 552,534 516,313 481,976 455,559 427,092
Total subscribers 1,634,659 1,621,369 1,612,147 1,600,033 1,591,641
Quarterly net additions 13,290 9,222 12,114 8,392 3,283
Telephony penetration 34.9% 34.7% 34.5% 34.3% 34.0%
Average monthly churn 1.2% 1.1% 1.0% 1.1% 1.2%
Average monthly revenue per subscriber (4) (pound)23.53 (pound)23.70 (pound)24.20 (pound)24.13 (pound)24.53
---------------------------------------------------------------------------------------------------------------------------------
CONSUMER INTERNET
-----------------
Broadband ready homes passed and
marketed 4,405,162 4,401,860 4,386,050 4,306,251 4,292,032
Total metered dial-up internet
subscribers 39,196 47,884 50,953 49,368 52,353
Total unmetered dial-up internet
subscribers 127,745 151,457 177,250 184,009 190,571
Total broadband internet subscribers 607,222 537,613 465,296 414,609 367,410
Quarterly net broadband additions 69,609 72,317 50,687 47,199 38,074
Broadband internet penetration 13.8% 12.2% 10.6% 9.6% 8.6%
Average monthly churn 1.3% 1.2% 1.0% 1.1% 1.2%
Average monthly revenue per
broadband subscriber (4) (pound)22.27 (pound)23.04 (pound)22.57 (pound)22.97 (pound)22.52
---------------------------------------------------------------------------------------------------------------------------------
(1) The number of homes within our service area that can potentially be
served by our network with minimal connection costs.
(2) The number of customers who receive at least one level of service,
encompassing television, telephony and broadband services, without regard
to which service(s) customers purchase.
(3) Revenue Generating Units or RGUs represent the sum total of all primary
analog television, digital television, broadband and telephony subscribers.
Dial-up internet subscribers, second telephone lines and additional TV
outlets are not included although they are revenue generating for Telewest.
(4) Average monthly revenue per customer (often referred to as "ARPU" or
"Average Revenue per User") represents the Consumer sales division's US
GAAP total quarterly revenue of residential customers, including
installation revenues, divided by the average number of residential
customers in the quarter. The same methodology is used for television,
telephony and broadband ARPU.
(5) Average monthly churn represents the total number of customers who
disconnected during the quarter divided by the average number of customers
in the quarter, divided by three. Subscribers who move premises within
Telewest's addressable areas (known as Moves and Transfers) and retain
Telewest's services are excluded from this churn calculation.
RESULTS OF OPERATIONS
The following represents a discussion of the Results of Operations for the
three and nine months ended September 30, 2004, as compared to the three
and nine months ended September 30, 2003. The Results of Operations for the
three months ended September 30, 2004 represent those of the Reorganized
Company, the Results of Operations for the nine months ended September 30,
2004 represent those of the Combined Companies and the Results of
Operations for the three and nine months ended September 30, 2003 represent
those of the Predecessor Company.
We operate in two segments: Cable and Content. Our chief operating
decision-maker receives performance and subscriber data for the Cable
segment (including telephony, television and internet product lines),
however support, service and network costs are compiled only at the Cable
segment level. The Content segment supplies TV programming to the UK
pay-television broadcasting market and its operating results, which are
naturally separate from the Cable segment, are regularly reviewed by the
chief operating decision-maker. Revenues derived by the Content segment
from the Cable segment are eliminated on consolidation.
Our financial condition and results of operations for the three months and
nine months ended September 30, 2004 and 2003, in each case based upon
financial information prepared in accordance with US GAAP, are discussed
below.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Except where otherwise stated in this section, all comparisons compare the
Reorganized Company's three-month period ended September 30, 2004 to the
Predecessor Company's three-month period ended September 30, 2003.
Consolidated revenue increased by (pound)3 million or 0.9% from (pound)325
million for the three months ended September 30, 2003 to (pound)328 million
for the three months ended September 30, 2004. The increase was
attributable to a (pound)11 million or 4.8% increase in Consumer sales
division revenue, offset by a (pound)8 million or 11.3% decrease in
Business sales division revenue. Content segment revenue remained flat at
(pound)27 million in both periods.
CABLE SEGMENT
The Cable segment reported Adjusted EBITDA was (pound)120 million for the
three months ended September 30, 2004, as compared to (pound)110 million
for the three months ended September 30, 2003. The increase in Adjusted
EBITDA arose through increases in Consumer sales division revenue and a
decrease in operating costs and expenses, partially offset by a reduction
in Business sales division revenue.
CONSUMER SALES DIVISION
Consumer sales division revenue represents a combination of cable
television revenue, consumer cable telephony revenue, and internet income.
CONSUMER SALES DIVISION 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
--------------------------------------------------- --------------- -------------- -----------
Revenue (in millions)
Total Consumer Sales Division (pound) 238 (pound) 227 4.8%
============= =============
Homes passed and marketed (1) 4,686,799 4,679,688 0.2%
Total customer relationships (2) 1,769,263 1,721,550 2.8%
Customer penetration 37.7% 36.8% 2.4%
Revenue Generating Units ("RGUs") (3) 3,539,185 3,217,600 10.0%
Average monthly revenue per customer (4) (pound)45.05 (pound)43.93 2.5%
Average monthly churn (5) 1.2% 1.2% -
Customers subscribing to two or more services 1,338,632 1,239,659 8.0%
Dual or triple penetration 75.7% 72.0% 5.1%
Customers subscribing to three services ("triple
play") 431,290 256,391 68.2%
Triple-service penetration 24.4% 14.9% 63.8%
Notes:
(1) The number of homes within our service areas that can potentially be
served by our network with minimal connection costs.
(2) The number of customers who receive at least one level of service,
encompassing television, telephony and broadband services, without regard
to which service(s) customers purchase.
(3) Revenue Generating Units or RGUs represent the sum total of all primary
analog television, digital television, broadband and telephony subscribers.
Dial-up internet subscribers, second telephone lines and additional TV
outlets are not included although they are revenue generating for Telewest.
(4) Average monthly revenue per customer (often referred to as "ARPU" or
"Average Revenue per User") represents the Consumer sales division's US
GAAP total quarterly revenue of residential customers, including
installation revenues, divided by the average number of residential
customers in the quarter. The same methodology is used for television,
telephony and broadband ARPU.
(5) Average monthly churn represents the total number of customers who
disconnected during the quarter divided by the average number of customers
in the quarter, divided by three. Subscribers who move premises within
Telewest's addressable areas (known as Moves and Transfers) and retain
Telewest's services are excluded from this churn calculation.
Overall Consumer sales division revenues increased by (pound)11 million or
4.8% from (pound)227 million for the three months ended September 30, 2003
to (pound)238 million for the three months ended September 30, 2004.
Substantially all of the increase resulted from growth in internet revenue,
coupled with a small increase in cable television revenue, and partially
offset by a decrease in residential telephony revenue.
Cable television revenue increased for the three months ended September 30,
2004, compared to the three months ended September 30, 2003, primarily due
to an increase in customers over the year, a price rise of (pound)1 on our
mid-tier pack from July 1, 2004 and selected price rises on our premium
channels. With effect from November 1, 2004, we increased the price of our
digital Starter pack by (pound)1 to (pound)4.50 per month.
Consumer telephony decreased for the three months ended September 30, 2004
compared to the three months ended September 30, 2003, primarily due to
continued decline in usage (particularly as customers switch to mobile
handset use), price reductions on July 1, 2004 for certain unmetered
products and the continuing decline in second line penetration (driven by
the continuing migration from dial-up to broadband internet). These
reductions were partially offset by an increase in customers over the year.
Internet revenue increased for the three months ended September 30, 2004
compared to the three months ended September 30, 2003 primarily due to an
increase in customers over the year.
Overall, the Consumer sales division's average monthly revenue per customer
increased (pound)1.12 or 2.5% from (pound)43.93 for the three months ended
September 30, 2003 to (pound)45.05 for the three months ended September 30,
2004. The increase in average monthly revenue per customer was attributable
to increasing broadband internet and "triple play" penetration. Dual or
triple penetration grew from 72.0% at September 30, 2003 to 75.7% at
September 30, 2004. The increase in dual or triple penetration was
primarily a result of the growth of our broadband internet services,
subscribers to which generally also subscribe to one or more of our cable
television or residential telephony products. As at September 30, 2004,
approximately 93.9% of our blueyonder broadband subscribers took at least
one of our cable television or residential telephony products, up from
93.6% at September 30, 2003 and 71.0% took all three services at September
30, 2004 up from 69.8% at September 30, 2003.
During the three-month period ended September 30, 2004, total residential
subscribers increased by 16,710 or approximately 1.0% as customer growth
continued for the fifth consecutive quarter following losses in residential
subscribers in the first half of 2003. This increase was achieved due to
new product propositions, such as our 256Kb broadband service, promotional
campaigns, such as our "3 for (pound)30" offer and offering discounts on
premium channels for customers bundling TV with a flat rate telephone
package.
This increase is also reflected in the growth of RGUs which grew by 91,931
in the three months ended September 30, 2004 compared to 49,395 in the
corresponding period in 2003.
Average monthly subscriber churn remained flat at 1.2% for the three months
ended September 30, 2003 and September 30, 2004. However, subscriber growth
was partially offset by increased churn in the three months ended September
30, 2004 of 1.2% over 1.1% for the three months ended June 30 2004 and 1.0%
for the three months ended March 31, 2004. These quarterly increases were
primarily due to seasonal uplift in house move activity coupled with
increased non-pay churn as a result of higher acquisition activity over
recent quarters.
We anticipate that further growth in internet revenue should lead to
overall revenue growth for the Consumer sales division for the remainder of
2004. However, this is contingent upon, among other things, continued
growth in consumer demand for internet broadband services generally, and
our service offerings in particular, as well as our ability to manage
broadband internet customer churn.
CABLE TELEVISION 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
--------------------------------------------------- --------------- --------------- -----------
Cable television subscribers - digital 1,078,623 945,595 14.1%
Cable television subscribers - analog 218,681 312,954 (30.1%)
--------------- ---------------
Total cable television subscribers 1,297,304 1,258,549 3.1%
=============== ===============
Television ready homes passed and marketed 4,686,799 4,679,688 0.2%
Digital ready homes passed and marketed 4,405,162 4,292,032 2.6%
Percentage of digital subscribers to total
subscribers 83.1% 75.1% 10.7%
Television penetration 27.7% 26.9% 3.0%
Average monthly revenue per CATV subscriber (pound)20.72 (pound)20.93 (1.0%)
Average monthly churn 1.4% 1.4% -
Total cable television customers connected increased by 3.1% from 1,258,549
at September 30, 2003 to 1,297,304 at September 30, 2004 largely as a
result of a return to growth in the number of subscribers. We added 9,032
cable television subscribers in the three-month period ended September 30,
2004 compared with 8,038 during the three-month period ended September 30,
2003. Television penetration increased by 3.0% to 27.7% at September 30,
2004 from 26.9% at September 30, 2003. The reason for this increase is
primarily new products, such as "Free TV" and "3 for (pound)30" and
offering discounts on premium channels for customers bundling TV with a
flat rate telephone package, together with the effect of new channels added
to our Starter and Essential packages in July 2004.
Our digital television services have been rolled out in all franchise
areas, except for certain of the areas covered by Eurobell South-East and
Cabletime, where we currently offer only our analog service. We are in the
course of upgrading parts of these areas and now deliver digital services
to approximately 94% of our network. As a result of this substantially
completed roll-out, our cable television customers continue to migrate from
our analog services to our digital services, where in aggregate, they
generate higher monthly revenues. The migration of analog customers to
digital slowed during the three months ended September 30, 2004 compared to
the three months ended September 30, 2003, a trend that we expect to
continue during the remaining quarter of 2004.
Average monthly revenue per CATV subscriber decreased by (pound)0.21 or
1.0% from (pound)20.93 for the three months ended September 30, 2003 to
(pound)20.72 for the three months ended September 30, 2004, primarily due
to falling additional outlet penetration in digital and analog services.
Average monthly churn remained flat at 1.4% for the three months ended
September 30, 2003 and September 30, 2004. However, CATV subscriber growth
was partially offset by increased churn in the three months ended September
30, 2004 of 1.4% over 1.3% for the three months ended June 30 2004 and 1.2%
for the three months ended March 31, 2004. These quarterly increases were
primarily due to seasonal uplift in house move activity coupled with
increased non-pay churn as a result of higher acquisition activity over
recent quarters.
We continue to improve the range of content included in our digital
television packs. The entry level starter pack was expanded in the
three-month period ended September 30, 2004 to incorporate the five most
popular digital television channels and the mid-tier Essential pack now
includes the top fifteen. Alongside these changes, we increased the price
of our Essential pack by (pound)1 per month with effect from July 1, 2004.
We expect to begin rolling out Video On Demand (VOD) in the first half of
2005 and Personal Video Recorder (PVR) services in the second half of 2005.
CONSUMER TELEPHONY 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------- --------------- --------------- ---------
3-2-1 subscribers 1,082,125 1,164,549 (7.1%)
Total Talk subscribers 552,534 427,092 29.4%
--------------- ---------------
Total residential telephony subscribers 1,634,659 1,591,641 2.7%
=============== ===============
Telephony ready homes passed and marketed 4,682,002 4,678,970 0.1%
Telephony penetration 34.9% 34.0% 2.6%
Average monthly revenue per subscriber (pound)23.53 (pound)24.53 (4.1%)
Average monthly churn 1.2% 1.2% -
Total consumer telephony subscribers increased by 2.7% from 1,591,641 at
September 30, 2003 to 1,634,659 at September 30, 2004. Additions in the
three months ended September 30, 2004 were 13,290 compared to 3,283 in the
three months ended September 30, 2003, following five previous quarters of
net losses. These increases resulted principally from an increase in the
number of subscribers to our "Talk" products partly offset by a decrease in
the number of subscribers to our 3-2-1 product.
Talk Unlimited is our 24-hour, 7 day-a-week fixed-fee residential telephony
package with unlimited local and national calls (excluding calls to
non-geographic, premium rate and mobile telephone numbers) in the UK. This
service is successful in attracting new customers to our services, and
generates higher average revenue 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.
In the first six months 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) at a flat monthly rate. We also launched
Talk International, which offers reduced rates to all international
destinations, to our Talk Unlimited and Talk Evenings and Weekends
subscribers at a fixed monthly rate.
We have recently introduced a further "Talk" package, Talk Mobile, which
gives customers significant discounts on calls to mobile telephones for a
fee of (pound)1.50 per month on top of the usual line rental.
Telephony penetration increased 2.6% to 34.9% at September 30, 2004 from
34.0% at September 30, 2003, principally as a result of new product
propositions and promotional campaigns.
Average monthly revenue per telephony subscriber decreased by (pound)1.00
or 4.1% from (pound)24.53 for the three months ended September 30, 2003 to
(pound)23.53 for the three months ended September 30, 2004, primarily due
to declining usage revenue as a result of mobile substitution and
reductions in second line penetration as customers migrate from dial-up to
broadband internet.
Year on year, average monthly telephony subscriber churn remained flat at
1.2% for the three months ended September 30, 2003 and September 30, 2004.
However, subscriber growth was partially offset by increased churn in the
three months ended September 30, 2004 of 1.2% over 1.1% for the three
months ended June 30 2004 and 1.0% for the three months ended March 31,
2004. These quarterly increases were primarily due to seasonal uplift in
house move activity coupled with increased non-pay churn as a result of
higher acquisition activity over recent quarters.
CONSUMER INTERNET 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------- --------------- --------------- -----------
INTERNET SUBSCRIBERS
Blueyonder broadband 607,222 367,410 65.3%
Blueyonder SurfUnlimited 127,745 190,571 (33.0%)
Blueyonder pay-as-you-go 39,196 52,353 (25.1%)
--------------- ---------------
Total internet subscribers 774,163 610,334 26.8%
=============== ===============
BLUEYONDER BROADBAND
Broadband ready homes passed and marketed 4,405,162 4,292,032 2.6%
Broadband internet penetration 13.8% 8.6% 60.5%
Average monthly revenue per broadband subscriber (pound)22.27 (pound)22.52 (1.1%)
Average monthly churn 1.3% 1.2% 8.3%
Total blueyonder broadband internet subscribers increased by 65.3% from
367,410 at September 30, 2003, to 607,222 at September 30, 2004. Additions
in the three months ended September 30, 2004 were 69,609 compared to 38,074
in the three months ended September 30, 2003. Blueyonder broadband
subscriber numbers continued to increase as a result of new customer
additions, the migration of subscribers from our blueyonder pay-as-you-go
and blueyonder SurfUnlimited dial-up internet services, and the successful
launch of our lower tier 256Kb service in March 2004. (We had offered the
256Kb service to our existing subscribers since December 2003).
Broadband internet penetration increased 60.5% to 13.8% at September 30,
2004 from 8.6% at September 30, 2003, principally as a result of the launch
of our 256Kb product (being 5 times faster than our dial-up product) and
promotional bundles of our broadband internet products, with some 42% of
new installations in the three months ended September 30, 2004 being new
customers to the Company.
Blueyonder broadband internet customers have significantly contributed to
the growth in our average monthly revenue. As at September 30, 2004,
431,290 broadband internet customers, or approximately 24.4% of our total
customers, were "triple play" customers who also take both cable television
and residential telephony services from us (compared with 256,391 and 14.9%
at September 30, 2003), and 32.2% of our total customers took broadband
internet and at least one of these two other services. Blueyonder broadband
is also successful in attracting new customers to the Company, with
approximately 42.0% of broadband installations in the three months ended
September 30, 2004, being subscribers who were not existing customers.
Average monthly revenue per broadband subscriber decreased by (pound)0.25
or 1.1% from (pound)22.52 for the three months ended September 30, 2003 to
(pound)22.27 for the three months ended September 30, 2004 primarily due to
the introduction of the lower tier 256Kb product.
Blueyonder broadband internet average monthly churn increased to 1.3% for
the three-month period ended September 30, 2004 compared to 1.2% for the
corresponding period in 2003, 1.2% for the three-month period ended June
30, 2004 and 1.0% for the three-month period ended March 31, 2004 primarily
as a result of seasonal uplift in house move activity, increased non-pay
churn as a result of higher acquisition activity over recent quarters and
increased competition.
In May 2004, we increased by approximately 50% the connection speeds of our
top three broadband tiers at no additional cost to our customers. The
standard blueyonder broadband service increased in speed from 512Kb to
750Kb. The 1Mb and 2Mb services increased to speeds of 1.5Mb and 3Mb,
respectively.
Dial-up internet subscribers to our blueyonder SurfUnlimited product, which
introduces our subscribers to a reliable fixed-fee unmetered service,
together with our blueyonder pay-as-you-go metered internet service
decreased by approximately 76,000 or 31.3% from approximately 243,000 at
September 30, 2003 to approximately 167,000 at September 30, 2004, as
subscribers continued to migrate to our blueyonder broadband internet
services.
We believe we are the broadband internet market leader in our addressable
areas (those areas of the country where consumers are able to receive our
broadband internet services) with around 71% market share. We have achieved
strong multi-service penetration amongst our broadband customers, with
71.0% subscribing to the full "triple play" and 94% to at least one other
product as of September 30, 2004.
BUSINESS SALES DIVISION
Business sales division revenue is derived from the delivery of business
communications solutions through a combination of voice, data and managed
solutions services.
BUSINESS SALES DIVISION 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
----------------------------------------------- ---------------- --------------- -----------
Revenue (in millions)
Business services (pound) 54 (pound) 59 (8.5%)
Carrier services 9 12 (25.0%)
---------------- ---------------
Total Business Sales Division (pound) 63 (pound) 71 (11.3%)
================ ===============
Business sales division revenue decreased by (pound)8 million or 11.3% from
(pound)71 million for the three months ended September 30, 2003 to
(pound)63 million for the three months ended September 30, 2004. The
decline in revenues included (pound)1 million arising as a result of the
derecognition of deferred revenues under fresh-start reporting for which no
future contractual performance obligations exist.
Business services revenue (which comprises voice, data and travel revenues)
decreased by (pound)5 million or 8.5% from (pound)59 million for the three
months ended September 30, 2003 to (pound)54 million for the three months
ended September 30, 2004. The decrease primarily resulted from a 12% fall
in voice revenue, (driven particularly by a fall in minutes of use) and a
44% fall in legacy travel sector revenue, partially offset by a 7% increase
in data products revenue.
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)9 million of revenue for the three months
ended September 30, 2004 compared with (pound)12 million for the
corresponding period in 2003. Revenues from the carrier services unit tend
to be derived from a relatively small number of high value, short and
long-term contracts and can therefore fluctuate significantly from period
to period. Over recent periods our carrier services unit has been
negatively impacted by a general weakness in the market in which we
operate, a trend which we expect will continue.
As the market for business services, and in particular business voice
services, remains intensely competitive, we believe that the most
significant opportunities to expand Business sales division revenues will
be further penetration of data services to our existing customer base and
expansion of our presence in the public sector market. The success of those
efforts will be primarily contingent upon our ability to offer reliable,
competitively priced services to business and public sector users.
We have reorganized the Business sales division to provide a differentiated
service to customers, based more closely on the services and products they
have or may require in the future, with separate service models for
standard and complex customer segments. These changes have resulted in cost
savings and have impacted revenue growth in 2004. However, we believe these
changes will lay the foundation for profitable future growth.
As part of our strategy of introducing new voice products to defend
declining telephony usage, we successfully launched our new SRS (Special
Rate Services) Advanced Solutions product during the third quarter. We had
previously launched Carrier Pre-Select and Wholesale Line Rental services
during the second quarter and we have now secured a number of contracts for
these services.
CONTENT SEGMENT
The Content segment reported Adjusted EBITDA was (pound)2 million for the
three months ended September 30, 2004, as compared to (pound)0 million for
the three months ended September 30, 2003. The increase in Adjusted EBITDA
arose through decreases in operating costs and expenses, partially offset
by a reduction in total segment revenues.
CONTENT SEGMENT REVENUE
Content segment revenue is derived principally from advertising and
subscription revenue from the provision of content to the UK multi-channel
pay-television broadcasting market through our content subsidiary Flextech.
CONTENT SEGMENT 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------- ---------------- --------------- -----------
Revenue (in millions)
Subscription revenue (pound) 10 (pound) 10 -
Advertising revenue 14 12 16.7%
Other revenue 3 5 (40.0%)
---------------- ---------------
Net revenue (1) (pound) 27 (pound) 27 -
================ ===============
Number of paying homes receiving Telewest
programming - (millions) 9.4 9.0 4.4%
Share of the net income of UKTV (millions) (pound) 3 (pound) 3 -
UK television advertising market share (2) 4.6% 4.0% 15.0%
Notes
(1) Net revenue consists of total revenue (subscription revenue,
advertising revenue, management fees, transactional and interactive revenue
and other revenue) less inter-segment revenues of (pound)2 million for the
three months ended September 30, 2004 and (pound)3 million for the three
months ended September 30, 2003.
(2) Including 100% of the market share of UKTV.
After the elimination of inter-segment revenues of (pound)3 million for the
three months ended September 30, 2003 and (pound)2 million for the three
months ended September 30, 2004, the net revenue of the Content segment
remained flat period-on-period. Subscription revenues remained flat in both
periods and an increase in advertising revenues was offset by the loss of
other revenue resulting from the disposal of non-core businesses.
Before the elimination of inter-segment trading between Flextech and the
rest of our business, the Content segment's overall revenue decreased by
(pound)1 million or 3.3% from (pound)30 million for the three months ended
September 30, 2003 to (pound)29 million for the three months ended
September 30, 2004.
After the elimination of inter-segment revenues, subscription revenue
increased marginally. We believe subscriber growth is likely to continue.
The Content segment's increased advertising revenue resulted from the
relative viewing strength of its channels, despite increased competition in
the multi-channel market. The UK advertising market is showing signs of
growth after a period of contraction, and we believe that this will drive
continued growth in advertising revenues, to be supplemented by growth in
subscription revenues as pay-television penetration rates improve.
The decrease in other revenue reflects primarily a reduction in rights
revenue and a reduction in the number of our transponders from two to one,
and the resulting loss of sublease revenue.
Our Content segment's share of the net income of UKTV, its joint ventures
with BBC Worldwide, is included in share of net income of affiliates.
COMBINED CABLE AND CONTENT SEGMENTS
OPERATING COSTS AND EXPENSES
OPERATING COSTS AND EXPENSES (IN MILLIONS) 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------- ---------------- --------------- -----------
Cable segment expenses (pound) 72 (pound) 78 (7.7%)
Content segment expenses 17 19 (10.5%)
Depreciation 103 96 7.3%
Amortization 9 - -
---------------- ---------------
Cost of revenue 201 193 4.1%
SG&A (excluding financial restructuring charges) 117 118 (0.8%)
Financial restructuring charges - 9 -
---------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES (pound) 318 (pound) 320 (0.6%)
================ ===============
Our total operating costs and expenses decreased due to decreased Cable
segment expenses, Content segment expenses, SG&A and financial
restructuring charges, partially offset by increased depreciation and
amortization charges.
In total, the Cable segment's expenses decreased by 7.7% for the three
months ended September 30, 2004, compared with the corresponding period in
2003 and consist of cable programming expenses for our consumer cable
television services and cable telephony expenses for our consumer and
business telephony products.
Cable programming expenses decreased principally as the result of 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.
A decrease in cable telephony expenses resulted principally from lower
interconnect charges, particularly as a result of the regulatory
environment pressures on pricing, (primarily mobile calls) and a continued
decline in call usage.
The Content segment's expenses consist principally of amortization costs of
programming shown on its television channels and the costs of advertising
sales those channels receive. The Content segment's expenses were 58.6% of
the Content segment's revenues (including inter-segment sales to Telewest)
for the three months ended September 30, 2004 compared with 63.3% on the
same basis for the three months ended September 30, 2003. The decrease in
the Content segment's cost of revenue is due to improved efficiency
surrounding programming.
The increase in depreciation expense was primarily attributable to the
recognition of increased values of property and equipment following the
adoption of fresh-start accounting with effect from July 1, 2004, offset by
the decreasing levels of capital expenditure.
Amortization expense was (pound)9 million for the three months ended
September 30, 2004 compared to zero in the three months ended September 30,
2003 and was attributable to the recognition of new intangible assets
following the adoption of fresh-start accounting with effect from July 1,
2004. Under fresh-start accounting, we have valued and begun the
amortization of our customer lists for the first time.
The decrease in SG&A, which includes, among other items, salary and
marketing costs, primarily reflects reductions in payroll costs from
decreasing numbers of employees, and net decreases in other overhead
expenses, as the Group continues to focus on cost control and achieve cost
efficiencies.
Stock-based compensation expense ("SBCE") of (pound)3 million was incurred
in the third quarter of 2004 and is included in SG&A. SBCE arises as a
result of options and restricted stock issued by the Reorganized Company
upon completion of the financial restructuring of the Predecessor Company.
SBCE is accounted for in accordance with SFAS 123, Accounting for
Stock-Based Compensation. This is a non-cash item and no such expense was
incurred in the third quarter of 2003.
We expect levels of capital expenditure to increase slightly in the
remainder of 2004 and in 2005, thereby increasing the levels of
depreciation. The decline in operating costs and expenses for the three
months ended September 30, 2004 reflects costs savings achieved through
headcount reductions, rationalization of the property portfolio and other
measures. We anticipate continued cost reductions, although at a declining
rate as costs are reduced and efficiencies achieved.
Other Income/(Expense)
OTHER INCOME/EXPENSE (IN MILLIONS) 3 MONTHS ENDED 3 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
-------------------------------------------------- ---------------- ---------------- -----------
Interest income (pound) 6 (pound) 5 20.0%
Interest expense (including amortisation of debt
discount) (49) (119) (58.8%)
Foreign exchange gains, net - 15 -
Share of net income of affiliates 4 2 100.0%
Other, net - 1
---------------- ----------------
TOTAL OTHER INCOME/(EXPENSE), NET (pound) (39) (pound) (96) (59.4%)
================ ================
The net decrease in other expense resulted principally from decreases in
interest expense and foreign exchange gains on US dollar-denominated debt
following the cancellation of Telewest Communications' indebtedness to Note
and Debenture holders in its financial restructuring in July 2004.
We receive interest income principally from our cash resources and from our
loan to UKTV, our principal affiliate. During the three months ended
September 30, 2004, we recognized (pound)3 million of interest income from
UKTV, compared to (pound)2 million for the three months ended September 30,
2003.
Share of net income of affiliates increased primarily due to an increase in
the net share of income of UKTV in the three months ended September 30,
2004. Our principal affiliated companies for the purpose of our share of
net income of affiliated companies as at September 30, 2004 included the
companies that comprise UKTV and Front Row Television Limited.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Except where otherwise stated in this section, all comparisons compare the
Reorganized Company's nine-month period ended September 30, 2004 plus the
Predecessor Company's six-month period ended June 30, 2004, (Combined
Companies) to the Predecessor Company's nine-month period ended September
30, 2003.
Consolidated revenue increased by (pound)15 million or 1.6% from (pound)967
million for the nine months ended September 30, 2003 to (pound)982 million
for the nine months ended September 30, 2004. The increase was attributable
to a (pound)31 million or 4.6% increase in Consumer sales division revenue,
and a (pound)1 million or 1.3% increase in Content segment revenue, offset
by a (pound)17 million or 8.1% decrease in Business sales division revenue.
CABLE SEGMENT
The Cable segment reported Adjusted EBITDA was (pound)356 million for nine
months ended September 30, 2004, as compared to (pound)315 million for the
nine months ended September 30, 2003. The increase in Adjusted EBITDA arose
through increases in Consumer sales division revenue and a decrease in
operating costs and expenses, partially offset by a reduction in Business
sales division revenue.
CONSUMER SALES DIVISION
Consumer sales division revenue represents a combination of cable
television revenue, consumer cable telephony revenue, and internet income.
CONSUMER SALES DIVISION 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
-------------------------------------------------- ---------------- ---------------- -----------
Revenue (in millions)
Total Consumer Sales Division (pound) 708 (pound) 677 4.6%
=============== ===============
Average monthly revenue per customer (pound)45.03 (pound)43.10 4.5%
Overall Consumer sales division revenues increased by (pound)31 million or
4.6% from (pound)677 million for the nine months ended September 30, 2003
to (pound)708 million for the nine months ended September 30, 2004.
Substantially all of the increase resulted from growth in internet
revenues, together with a small increase in cable television revenues,
partially offset by a decrease in residential telephony revenues.
Cable television revenue increased for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003 primarily due to
increased customers year-on- year and a price rise on our mid-tier package
effective July 1, 2004 and selected price rises on our premium channels.
Consumer telephony revenue decreased for the nine months ended September
30, 2004 compared to the nine months ended September 30, 2003 primarily due
to declining usage revenue, as discussed above, price reductions for our
Talk products and continued decline in second line penetration, driven by
continuing migration from dial-up to broadband internet.
Internet revenue increased for the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003 primarily due to the
launch of our 256Kb product and promotional bundles increasing the
awareness of our products.
Overall the Consumer sales division's average monthly revenue per customer
increased (pound)1.93 or 4.5% from (pound)43.10 for the nine months ended
September 30, 2003 to (pound)45.03 for the nine months ended September 30,
2004. The increase in average monthly revenue per customer was attributable
to increasing broadband internet and dual and triple play penetration. Dual
or triple penetration grew from 72.0% at September 30, 2003 to 75.7% at
September 30, 2004. The increase in dual or triple penetration was
primarily a result of the growth of our broadband internet services,
subscribers to which generally also subscribe to one or more of our cable
television or residential telephony products.
During the nine-month period ended September 30, 2004, total residential
subscribers increased by 38,825 compared to net losses of 37,075
subscribers during the nine months ended September 30, 2003, as customer
growth continued following losses in residential subscribers in the first
six months of 2003. This increase was achieved due to new product
propositions and promotional campaigns, as discussed above. This increase
is also reflected in the growth of RGUs which grew by 252,479 in the nine
months ended September 30, 2004 compared to 47,246 in the corresponding
period in 2003.
CABLE TELEVISION 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
--------------------------------------------------- ---------------- ---------------- ----------
Cable television net additions/(disconnections) 25,240 (35,262) -
Average monthly revenue per CATV subscriber (pound)20.81 (pound)20.78 0.1%
We added 25,240 cable television subscribers in the nine-month period ended
September 30, 2004 compared with net losses of 35,262 subscribers for the
nine-month period ended September 30, 2003. The reason for this increase is
primarily due to new product propositions and promotional campaigns, as
discussed above.
Average monthly revenue per CATV subscriber increased by (pound)0.03 or
0.1% from (pound)20.78 for the nine months ended September 30, 2003 to
(pound)20.81 for the nine months ended September 30, 2004 primarily due to
a price rise on our mid-tier product and selected price rises on premium
channels.
CONSUMER TELEPHONY 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
--------------------------------------------------- ---------------- ---------------- -----------
Telephony subscriber net additions/
(disconnections) 34,626 (22,683) -
Average monthly revenue per subscriber (pound)23.81 (pound)24.35 (2.2%)
We added 34,626 residential telephony subscribers in the nine-month period
ended September 30, 2004 compared with net losses of 22,683 subscribers for
the nine-month period ended September 30, 2003. The reason for this
increase is primarily due to more effective marketing, new product
propositions and promotional campaigns, as discussed above.
Average monthly revenue per telephony subscriber decreased by (pound)0.54
or 2.2% from (pound)24.35 for the nine months ended September 30, 2003 to
(pound)23.81 for the nine months ended September 30, 2004 primarily due to
declining usage revenue as a result of mobile substitution, price
reductions on Talk products and continuing reduction in second line
penetration.
CONSUMER INTERNET 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
----------------------------------------------- ---------------- --------------- -----------
BLUEYONDER BROADBAND
Broadband net additions 192,613 105,191 83.1%
Average monthly revenue per broadband
subscriber (pound)22.60 (pound)22.66 (0.3%)
We added 192,613 blueyonder broadband subscribers in the nine-month period
ended September 30, 2004 compared with 105,191 subscribers for the
nine-month period ended September 30, 2003. The reason for this increase is
primarily the launch of our 256Kb product in April 2004 and an increasing
demand for broadband internet.
Average monthly revenue per broadband internet subscriber decreased by
(pound)0.06 or 0.3% from (pound)22.66 for the nine months ended September
30, 2003 to (pound)22.60 for the nine months ended September 30, 2004
primarily due to the introduction of our lower priced 256Kb product.
BUSINESS SALES DIVISION
Business sales division revenue is derived from the delivery of business
communications solutions through a combination of voice, data and managed
solutions services.
BUSINESS SALES DIVISION 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------ ---------------- --------------- -----------
Revenue (in millions)
Business services (pound) 164 (pound) 173 (5.2%)
Carrier services 29 37 (21.6%)
---------------- ---------------
Total Business Sales Division (pound) 193 (pound) 210 (8.1%)
================ ===============
Business sales division revenue decreased by (pound)17 million or 8.1% from
(pound)210 million for the nine months ended September 30, 2003 to
(pound)193 million for the nine months ended September 30, 2004.
Business services revenue (which comprises voice, data and travel revenues)
decreased by (pound)9 million or 5.2% from (pound)173 million for the nine
months ended September 30, 2003 to (pound)164 million for the nine months
ended September 30, 2004. The decrease primarily resulted from an 11% fall
in voice revenue (driven by a fall in minutes of use) and a 36% fall in
legacy travel sector revenues, partially offset by a 14% increase in data
products revenue. Business sales division's revenue was also impacted by
the decline in deferred revenue of (pound)1 million, as discussed above.
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)29 million of revenue for the nine months
ended September 30, 2004 compared with (pound)37 million for the
corresponding period in 2003. Revenues from the carrier services unit tend
to be derived from a relatively small number of high value, short and
long-term contracts and can therefore fluctuate significantly from period
to period. Over recent periods our carrier services unit has been
negatively impacted by a general weakness in the market in which we
operate, a trend which we expect will continue.
CONTENT SEGMENT
The Content segment reported Adjusted EBITDA was (pound)10 million for the
nine months ended September 30, 2004, as compared to (pound)5 million for
the nine months ended September 30, 2003. The increase in Adjusted EBITDA
arose through decreases in operating costs and expenses.
CONTENT SEGMENT REVENUE
Content segment revenue is derived principally from advertising and
subscription revenue from the provision of content to the UK multi-channel
pay-television broadcasting market through our content subsidiary Flextech.
CONTENT SEGMENT 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
--------------------------------------------- ---------------- --------------- -----------
Revenue (in millions)
Subscription revenue (pound) 31 (pound) 29 6.9%
Advertising revenue 41 34 20.6%
Other revenue 9 17 (47.1%)
---------------- ---------------
Net revenue (1) (pound) 81 (pound) 80 1.3%
================ ===============
Share of the net income of UKTV (pound) 12 (pound) 7
Note
(1) Net revenue consists of total revenue (subscription revenue,
advertising revenue, management fees, transactional and interactive revenue
and other revenue) less inter-segment revenues of (pound)7 million for the
nine months ended September 30, 2004 and (pound)8 million for the nine
months ended September 30, 2003.
After the elimination of inter-segment revenues of (pound)8 million for the
nine months ended September 30, 2003 and (pound)7 million for the nine
months ended September 30, 2004, the net revenue of the Content segment
increased period-on-period by (pound)1 million or 1.3%. The increase in net
revenue was principally as a result of increases in subscription and
advertising revenues, partially offset by the loss of other revenue
resulting from the disposal of non-core businesses.
Before the elimination of inter-segment trading between the Content segment
and the rest of our business, Flextech's revenue remained flat at (pound)88
million for both of the nine-month periods ended September 30, 2003 and
2004.
After the elimination of inter-segment revenues, subscription revenue in
the Content segment increased principally as a result of subscriber growth
at BSkyB. We believe subscriber growth is likely to continue.
The Content segment's increased advertising revenue resulted from the
relative viewing strength of its channels, despite increased competition in
the multi-channel market. The UK advertising market is showing signs of
growth after a period of contraction, and we believe that this will drive
continued growth in advertising revenues, to be supplemented by growth in
subscription revenues as pay-television penetration rates improve. The
decrease in other revenue reflects primarily the reduction in the number of
our transponders from two to one, and the resulting loss of sublease
revenue and a reduction in rights revenue.
Our Content segment's share of the net income of UKTV, its joint ventures
with BBC Worldwide, is included in share of net income of affiliates.
COMBINED CABLE AND CONTENT SEGMENTS
OPERATING COSTS AND EXPENSES
OPERATING COSTS AND EXPENSES (IN MILLIONS) 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------ ---------------- --------------- -----------
Cable segment expenses (pound) 225 (pound) 240 (6.3%)
Content segment expenses 51 54 (5.6%)
Depreciation 287 294 (2.4%)
Amortization 9 - -
---------------- ---------------
Cost of revenue 572 588 (2.7%)
SG&A (excluding financial restructuring
charges) 340 353 (3.7%)
Financial restructuring charges 21 16 31.3%
---------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES (pound) 933 (pound) 957 (2.5%)
================ ===============
Our operating costs and expenses before depreciation and amortization
decreased due to decreased Cable segment, Content segment and SG&A
expenses.
In total, the Cable segment's expenses decreased by 6.3% in the nine months
ended September 30, 2004 compared with the corresponding period in 2003 and
consist of cable programming expenses for our consumer cable television
services and cable telephony expenses for our consumer and business
telephony products.
Cable programming expenses increased principally as the result of an
increase in the number of our cable television subscribers, increased costs
for additional programming for our digital packages, which have more
channels than their analog counterparts, and the marketing of more premium
programming, offset by 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.
A decrease in cable telephony expenses resulted principally from improved
routing of telephony traffic and a reduction in termination rates for
certain calls. We believe future decreases will depend on a continued
reduction in call termination rates.
The Content segment's expenses consist principally of amortization costs of
programming shown on its television channels and the costs of advertising
sales those channels receive. The Content segment's expenses were 58.0% of
the Content segment's revenues (including inter-segment sales to Telewest)
for the nine months ended September 30, 2004 compared with 61.4% on the
same basis for the nine months ended September 30, 2003. The decrease in
the Content segment's cost of revenue is due to improved efficiency
surrounding programming.
The decrease in depreciation expense was primarily attributable to
decreasing levels of capital expenditure partially offset by the
recognition of increased values of property and equipment following the
adoption of fresh-start accounting with effect from July 1, 2004.
Amortization expense was (pound)9 million for the nine months ended
September 30, 2004 compared to zero in the nine months ended September 30,
2003 and was attributable to the recognition of new intangible assets
following the adoption of fresh-start accounting with effect from July 1,
2004. Under fresh-start accounting, we have valued and begun the
amortization of our customer lists for the first time.
The decrease in SG&A, which includes, among other items, salary and
marketing costs, primarily reflects reductions in payroll costs from
decreasing numbers of employees, lower allowance for doubtful accounts and
net decreases in other overhead expenses, as the Group continues to focus
on cost control and achieve cost efficiencies, partially offset by
(pound)21 million (up from (pound)16 million in the nine months ended
September 30, 2003) of legal and professional costs relating to the
Predecessor Company's financial restructuring incurred during the nine
months ended September 30, 2004.
Stock-based compensation expense for the nine months ended September 30,
2004, was (pound)3 million, as compared to (pound)0 for the nine months
ended September 30, 2003.
We anticipate continued cost reductions, although at a declining rate as
costs are reduced and efficiencies achieved.
Other Income/(Expense)
OTHER INCOME/EXPENSE (IN MILLIONS) 9 MONTHS ENDED 9 MONTHS ENDED %
SEPTEMBER 30, SEPTEMBER 30, INCREASE/
2004 2003 (DECREASE)
------------------------------------------------ ---------------- --------------- -----------
Interest income (pound) 21 (pound) 17 23.5%
Interest expense (including amortisation of
debt discount) (279) (366) (23.8%)
Foreign exchange gains, net 40 84 (52.4%)
Share of net income of affiliates 12 4 200.0%
Other, net (1) - -
---------------- ---------------
TOTAL OTHER INCOME/(EXPENSE), NET (pound) (207) (pound) (261) (20.7%)
================ ===============
The net decrease in other expense resulted principally from decreases in
interest expense and foreign exchange gains on US dollar-denominated debt
following the cancellation of Telewest Communications' indebtedness to Note
and Debenture holders in its financial restructuring in July 2004.
We receive interest income principally from our cash resources and from our
loan to UKTV, our principal affiliate. During the nine months ended
September 30, 2004, we recognized (pound)9 million of interest income from
UKTV, compared to (pound)8 million for the nine months ended September 30,
2003.
Share of net income of affiliates increased primarily due to an increase in
the net share of income of UKTV in the nine months ended September 30,
2004. Our principal affiliated companies for the purpose of our share of
net income of affiliated companies as at September 30, 2004 included the
companies that comprise UKTV and Front Row Television Limited.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Predecessor Company's financial restructuring, on July
14, 2004, the Company became the holding company for substantially all of
the assets and liabilities that comprised the business of the Predecessor
Company. On July 15, 2004, as part of the financial restructuring, the
newly acquired liabilities of the Predecessor Company were reduced by
approximately (pound)3.8 billion to approximately (pound)2.0 billion and
245,000,000 shares of the Company's common stock were issued. The Company
is a holding company with no independent operations or significant assets
other than our investments in Telewest UK. Telewest UK is a holding company
with no independent operations or significant assets other than its
investments in and advances to subsidiaries. In order to meet its
obligations, the Company relies on receiving sufficient cash from Telewest
UK and its subsidiaries. The subsidiaries are restricted by the covenants
in the amended senior secured credit facility from paying dividends,
repaying loans and making other distributions to the Company and Telewest
UK. In particular, the amended senior secured credit facility generally
restricts the funds available to the Company from TCN to (pound)5 million a
year and limits the use of such funds. Future debt instruments may contain
similar restrictions that may prevent the Company from meeting its
obligations.
The businesses now held by the Company have not historically generated
sufficient cash flow from operations to meet their capital expenditure and
debt service requirements. As a result of the Predecessor Company's
financial restructuring, the Group will have significantly lower interest
expense and principal repayment requirements than the Predecessor Company
as a result of the reduction of indebtedness. However, the Group's
businesses will continue to require cash to fund their operations
(including possible operating losses), including the costs of connecting
customers to our network, offering and marketing new services, expanding
and upgrading our network and debt service repayments. In particular, the
Group will need to service interest payments on the amended senior secured
credit facility from cash flow from operations and will need to repay most
of the (pound)1.84 billion outstanding on the amended senior secured credit
facility on or before December 31, 2005. The Group does not expect to be
able to generate sufficient free cash flow to repay that debt on December
31, 2005 and will therefore need to refinance a substantial portion of the
amended senior secured credit facility before that date.
The Group anticipates that its principal sources of funds will be proceeds
from the amended senior secured credit facility, additional vendor
financing, where available, possible strategic sales of assets, cash in
hand and cash flow from operating activities. Future actual funding
requirements could exceed currently anticipated requirements. Differences
may result from higher-than-anticipated costs, including higher interest
costs on our amended senior secured credit facility as a result of higher
interest rates generally, higher capital expenditure and/or lower than
anticipated revenues. Actual costs, capital expenditure and revenues will
depend on many factors, including, among other things, consumer demand for
voice, video, data and internet services, the impact on the business of new
and emerging technologies, the extent to which consumer preference develops
for cable television over other methods of providing in-home entertainment,
the development of the interactive e-commerce market, consumer acceptance
of cable telephony as a viable alternative to British Telecommunications'
telephony services, the continued downward pressure on telephony margins
and the general economic environment.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Contractual obligations and other commercial commitments as at September
30, 2004 are summarized in the tables below.
---------------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------
TOTAL LESS THAN 1 1 - 3 YEARS 3 - 5 YEARS AFTER 5 YEARS
YEAR
(POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION
---------------------------------------------------------------------------------------
Debt 1,847 1 1,844 1 1
Capital lease obligations 113 39 63 11 -
Operating leases 131 13 25 20 73
Unconditional purchase obligations 34 34 - - -
Other long-term obligations - - - - -
---------------------------------------------------------------------------------------------------------------------------------
Total contractual obligations 2,125 87 1,932 32 74
---------------------------------------------------------------------------------------------------------------------------------
The following table includes information about other commercial commitments
as of September 30, 2004. Other commercial commitments are items that the
Group could be obligated to pay in the future. They are not required to be
included in the balance sheet.
---------------------------------------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
---------------------------------------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------------------------
TOTAL LESS THAN 1 1 - 3 YEARS 3 - 5 YEARS AFTER 5 YEARS
YEAR
(POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION
---------------------------------------------------------------------------------------
Guarantees (1) 17 6 11 - -
---------------------------------------------------------------------------------------------------------------------------------
(1) Consists of performance guarantees of (pound)6 million due in less than
one year and lease guarantees of (pound)11 million due in one to three
years.
AMENDED SENIOR SECURED CREDIT FACILITY
On July 15, 2004, Telewest Communications plc and certain subsidiaries
entered into a series of agreements comprising an amendment to the senior
secured credit facility of the Predecessor Company. TCN is the primary
borrower under the amended senior secured credit facility. On July 15,
2004, committed facilities of (pound)2.03 billion, of which (pound)1.84
billion were fully drawn, were outstanding. The committed credit facilities
are comprised of the following four tranches:
o "Tranche A" term credit facilities in an aggregate principal amount of
(pound)1,695 million, maturing on December 31, 2005;
o "Tranche B" revolving credit facilities in an aggregate principal
amount of (pound)140 million, maturing on December 31, 2005;
o "Tranche C" overdraft facilities in an aggregate principal amount of
(pound)50 million, maturing on December 31, 2005; and
o "Tranche D" term credit facilities in an aggregate principal amount of
(pound)145 million, maturing on June 30, 2006.
Tranche D also contemplates the provision of additional uncommitted
facilities in an aggregate principal amount of (pound)125 million, of which
(pound)20 million will be freely available and (pound)105 million will only
be available to be drawn down by TCN with the prior written consent of the
lenders holding at least two-thirds in value of the total commitments.
Interest
Tranches A and B bear interest at a rate of: (a) LIBOR plus (b) the
mandatory cost (if applicable) (a rate set by a fixed formula based on
applicable English statutory banking regulations or their EU counterparts)
plus (c) the applicable margin as indicated below, and Tranche C bears
interest at the relevant overdraft lender's fluctuating base rate plus the
applicable margin, as follows:
TOTAL SENIOR DEBT TO CONSOLIDATED ANNUALIZED TCN GROUP
NET OPERATING CASH FLOW (AS DEFINED IN THE AMENDED APPLICABLE MARGIN
SENIOR SECURED CREDIT FACILITY) -----------------
TRANCHE A TRANCHE B TRANCHE C
------------ ------------- ------------
Greater than or equal to 5:1 4.00% 5.50% 4.00%
Less than 5:1 but greater than or equal to 4.5:1 3.50% 5.00% 3.50%
Less than 4.5:1 but greater than or equal to 4:1 3.00% 4.50% 3.00%
Less than 4:1 2.50% 4.00% 2.50%
The margin for the initial six months following the effective date of the
schemes is 3.00% for Tranches A and C and 4.50% for Tranche B. Thereafter,
the margin will be set for each interest period at the beginning of such
interest period by reference to the ratio of TCN's Total Senior Debt to
Consolidated Annualized TCN Group Net Operating Cash Flow in the most
recent quarterly management accounts delivered to the Senior Lenders. If
TCN has failed to deliver the relevant management accounts, the margin will
revert to the highest base in the grid.
Tranche D bears interest at a rate of: (a) LIBOR plus (b) the mandatory
cost (if applicable) plus (c) 5.00%.
If TCN fails to pay any sum on its due date with respect to the facilities,
the default interest rate will be 1% higher than the normal interest rate
for the relevant tranche.
Affirmative Covenants
The Company and its subsidiaries are subject to a number of affirmative
covenants under the amended senior secured credit facility, including
restrictions on the Company's ability to act as other than a holding
company, carry on a business or own material assets. In addition, TCN is
subject to financial maintenance tests, including the following liquidity,
coverage and leverage ratio tests and restrictions on its ability to make
payments to the Company or Telewest UK.
o the ratio of TCN's Total Senior Debt to Consolidated Annualized TCN
Group Net Operating Cash Flow for each quarterly period below cannot
exceed a stated ratio, which decreases each quarter from 5.40 for the
quarter ended June 30, 2004 to 4.05 for the quarter ending December
31, 2005.
o the ratio of Consolidated TCN Group Net Operating Cash Flow to Total
Senior Debt interest charges for each two consecutive quarters cannot
be less than a stated ratio, which increases for each six-month period
from 2.05 for the six months ended June 30, 2004 to 3.15 for the six
months ending December 31, 2005.
o the maximum total capital expenditure for each four consecutive
quarters cannot exceed a maximum amount that decreases from (pound)400
million for the twelve months ended June 30, 2004 to (pound)365
million for the twelve monthS ending December 31, 2005.
If the Consolidated TCN Group Net Operating Cash Flow exceeds the projected
Consolidated TCN Group Net Operating Cash Flow contained in the long-range
plan, then the maximum total capital expenditure for the immediately
following twelve-month period will be increased by 50% of the difference
between the actual and projected net operating cash flow. This covenant
will cease to apply when the ratio of Total Senior Debt to Consolidated
Annualized TCN Group Net Operating Cash Flow for that twelve-month period
ending on a quarterly date is less than 4.0, but will be reinstated if the
ratio is subsequently greater than or equal to 4.0 on any subsequent
quarterly date. All capitalized terms in this sub-paragraph are defined in
the loan agreement for the amended senior secured credit facility.
o the minimum financial contribution (being the consolidated revenues of
TCN less the consolidated actual direct costs of TCN) for each two
consecutive quarters cannot be less than a minimum amount that
increases for each six-month period, from (pound)430 million for the
six months ended June 30, 2004 to (pound)505 million for the six
months ending December 31, 2005.
This covenant ceases to apply when the ratio of Total Senior Debt to
Consolidated Annualized TCN Group Net Operating Cash Flow for any quarterly
period is less than 4.0, but will be reinstated if the ratio is
subsequently greater than or equal to 4.0 on any subsequent quarterly date.
Negative Covenants
We and our subsidiaries will be subject to a number of negative covenants
under the amended senior secured credit facility, including restrictions on
our and our subsidiaries' ability to, among other things:
o incur liens;
o engage in mergers and make acquisitions;
o sell assets;
o guarantee obligations;
o issue shares;
o lend money;
o enter into hedging arrangements;
o incur additional indebtedness;
o change the nature of our business;
o enter into transactions with affiliates;
o carry on business in the United States;
o redeem or repurchase equity or any other share capital;
o terminate, sell, transfer or finance certain joint ventures; and
o prepay certain indebtedness.
Mandatory Prepayment Events
We are also subject to a number of mandatory prepayment events under the
amended senior secured facility, including:
o the use of excess cash flow (as defined in the amended senior secured
facility) to repay amounts outstanding on the amended senior secured
credit facility, if certain financial ratios are not met;
o repayment of all the facilities if any person or group becomes the
beneficial owner, directly or indirectly, of 30% or more of the voting
stock or 30% or more of the economic interest of the Company, the
majority of the members of the Company's board of directors are not
continuing directors (as that term is defined in the facility), or
there is a merger, amalgamation, consolidation or other similar
arrangement involving TCN or certain affiliates of TCN;
o the use, under certain circumstances, of all or a portion of the net
cash proceeds of any permitted sale or disposals of assets (including
our Flextech subsidiary and certain specified joint ventures with the
BBC) to repay amounts outstanding on the amended senior secured credit
facility;
o the use, under certain circumstances, of all or a portion of the net
cash proceeds of debt or equity offerings or certain types of finance
leases and/or vendor financing arrangements to repay amounts
outstanding on the amended senior secured credit facility.
For additional information on our amended senior secured credit facility,
you should read the Loan Agreement filed as an exhibit to the registration
statement Form S-1 filed with the SEC on July 16, 2004.
SUBSEQUENT EVENTS
On November 2, 2004, our subsidiary TCN executed a commitment letter (the
"Commitment Letter") for new (pound)1.8 billion credit facilities (the
"Facilities"). Drawings under the Facilities together with cash on hand are
planned to be used to repay all outstanding borrowings under the Group's
existing (pound)2.03 billion amended senior secured credit facility. The
proposed Facilities consist of five tranches, one of which is a revolving
facility in the amount of (pound)100 million. It is not expected that an
immediate drawdown will occur under the revolving facility. TCN is the
primary borrower under the new facilities which will be guaranteed by
Telewest UK and several of TCN's subsidiaries (the "Guarantors") and
underwritten by Barclays Capital, BNP Paribas, Citigroup Global Markets
Limited, Credit Suisse First Boston, Deutsche Bank AG London and Royal Bank
of Scotland.
The commitment letter and the summary terms and conditions thereto (the
"Term Sheet") set out the terms and conditions on which the mandated lead
arrangers named therein will arrange and the underwriters named therein
will underwrite a bank financing (the "Financing") on behalf of TCN and its
direct and indirect subsidiaries and associated partnerships (together, the
"TCN Group"). The commitment of each of the mandated lead arrangers and
underwriters to arrange and underwrite, respectively, the facilities
contemplated by the Financing is subject to customary conditions, including
the negotiation of finance documentation on terms satisfactory to the
mandated lead arrangers and the underwriters and the execution and delivery
of the documentation by the parties thereto. In addition, any of the
mandated lead arrangers and the underwriters may terminate their respective
obligations under the commitment letter under certain circumstances,
including:
(a) on or after the close of business in London on January 31, 2005,
unless the first drawdown under the Facilities has occurred on or
before that date; and
(b) if a change occurs after the date hereof which has or is
reasonably likely to have, a material adverse effect on the
business, assets, operations or financial condition of the TCN
Group taken as a whole.
Certain changes to the Facilities and their terms may occur during the
syndication process.
All capitalized terms not defined have the meaning given to them in the
Commitment Letter and the Term Sheet.
The Facilities are expected to be comprised of the following five tranches:
(a) A 7-year amortizing term loan facility of a maximum amount of
(pound)700,000,000, available in Sterling in a single drawing,
amortizing semi-annually starting June 30, 2005 ("Tranche A");
(b) An 8-year repayment multi-currency term loan facility in a
maximum amount of (pound)425,000,000, available in Euro, U.S.
Dollars and/or Sterling in a single drawing, payable in two equal
installments 7 1/2 and 8 years after the date that the Senior
Facilities are entered into (the "Closing Date") ("Tranche B");
(c) A 9-year repayment multi-currency term loan facility in a maximum
amount of (pound)325,000,000, available in Euro, U.S. Dollars
and/or Sterling in a single drawing, payable in two equal
installments 8 1/2 and 9 years after the Closing Date ("Tranche
C" and, together with Tranche A and Tranche B, the "Senior Term
Facilities");
(d) A 7-year revolving loan facility in a maximum amount of
(pound)100,000,000, available in Sterling (the "Revolving
Facility" and, together with the Senior Term Facilities, the
"Senior Facilities"); and
(e) A 9 1/2-year bullet repayment multi-currency second lien term
loan facility in a maximum amount of (pound)250,000,000,
available in Euro, U.S. Dollars and/or Sterling in a single
drawing, payable 9 1/2 yEARS after the Closing Date (the "Second
Lien Facility" and, together with the Senior Facilities, the
Facilities).
Any prepayment of the Second Lien Facility within 12 months after the
Closing Date ("Non-Call Period") will be subject to payment of a make-whole
premium based on customary market standards. After the end of the Non-Call
Period, prepayment may be made in whole or in part, subject to a prepayment
premium equal to the following percentages of the principal amount of the
Second Lien Facility being prepaid: (i) 2.00% prior to the second
anniversary of the Closing Date, (ii) 1.00% after the second anniversary of
the Closing Date but prior to the third anniversary of the Closing Date,
and (iii) 0.00% thereafter.
Tranches A, B and C and the Revolving Facility will bear interest at a rate
of (a) EURIBOR (for any Euro-denominated advance) or LIBOR (for any advance
denominated in another currency) plus (b) the applicable cost of complying
with any reserve requirements plus an applicable margin. The applicable
margin for Tranche A and the Revolving Facility is 2.25%, for Tranche B
2.75% and for Tranche C 3.25%. The applicable interest rate for the Second
Lien Facility will be determined based on market conditions.
In addition the applicable margin for Tranche A and the Revolving Facility
is subject to a margin ratchet based upon the ratio of Consolidated Net
Borrowings to Consolidated Annualized TCN Group Net Operating Cash Flow
ranging between 1.50% and 2.25%. The applicable margin for the Tranche B
shall be subject to a margin ratchet such that, from and after the first
quarter date occurring at least 6 months after the closing date on which
the ratio of Consolidated Net Borrowings to Consolidated Annualized TCN
Group Net Operating Cash Flow (each of the above terms to be defined in the
Senior Facilities Agreement) is less than or equal to 3.0 to 1.0, the
Tranche B margin shall be reduced by 25 basis points.
The TCN Group will be subject to customary financial, affirmative and
negative covenants under the Facilities. The TCN Group is also subject to a
number of customary mandatory prepayment events.
The descriptions of the Commitment Letter and the Term Sheet set forth
above are qualified in their entirety by the complete text of those
documents. Closing of the Facilities is expected prior to January 31, 2005.
Definitive documentation for the Facilities (which is currently subject to
completion) will be filed subsequently to closing.
CAPITAL EXPENDITURE
(in millions)
THREE THREE NINE SIX NINE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER JUNE SEPTEMBER
30, 2004 30, 2003 30, 2004 30, 2004 30, 2003
------------ ------------- ------------ -------------
------------
REORGANIZED PREDECESSOR COMBINED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANIES COMPANY COMPANY
------------ ------------- ------------ ------------ -------------
Additions to property
and equipment (pound) 51 (pound) 55 (pound) 157 (pound) 106 (pound) 159
------------ ------------- ------------ ------------ -------------
The decrease in additions to property and equipment for the three months
ended September 30, 2004 as compared to the corresponding period in the
prior year resulted primarily from reduced network spend and falling
electronic equipment prices. The decrease in additions to property and
equipment for the nine months ended September 30, 2004 as compared to the
nine months ended September 30, 2003 was also due to reduced network spend
and falling electronic equipment prices. 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.
Notwithstanding that capital expenditures have decreased marginally in 2004
over 2003, we expect to continue to have significant capital needs in the
future. With the majority of our network construction complete and
substantially all network upgrades necessary for the delivery of telephony
and digital services complete, it is anticipated that 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),
new product development and the replacement of network assets at the end of
their useful lives. It is anticipated that capital expenditures for the
remainder of 2004 will be slightly, but not significantly, higher than that
for 2003, and are expected to be in the region of (pound)225 million in
total compared with (pound)223 in the year 2003. Capital expenditures for
the fiscal year 2005 are expected to be in the range of (pound)240 million
to (pound)270 million, due primarily to new product development
expenditure, including Video On demand and Personal Video Recorder
services, as well as billing system upgrades and capacity upgrades to our
IP network.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
THREE THREE NINE SIX NINE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER JUNE SEPTEMBER
30, 2004 30, 2003 30, 2004 30, 2004 30, 2003
------------ ------------- ------------ ------------ -------------
REORGANIZED PREDECESSOR COMBINED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANIES COMPANY COMPANY
------------ ------------- ------------ ------------ -------------
Net cash provided by
operating activities (pound) 72 (pound) 60 (pound) 242 (pound) 170 (pound) 196
Net cash used in
investing activities (44) (58) (168) (124) (150)
Net cash provided
by/(used in)
financing activities 4 (13) (235) (21) (42)
------------ ------------- ------------ ------------ -------------
Net increase/
(decrease) in cash
and cash equivalents 32 (11) (161) 25 4
Cash and cash
equivalents at
beginning of period - 405 427 427 390
Cash and cash
equivalents
transferred from
Predecessor Company
to Reorganized
Company 234 - - - -
------------ ------------- ------------ ------------ -------------
Cash and cash
equivalents at end
of period (pound) 266 (pound) 394 (pound) 266 (pound) 452 (pound) 394
------------ ------------- ------------ ------------ -------------
For the nine months ended September 30, 2004, we had a net cash inflow from
operating activities of (pound)242 million compared with a net inflow of
(pound)196 million for the nine months ended September 30, 2003. The
increase in net cash provided by operating activities resulted principally
as a result of improvements in operating income, and reduced working
capital.
We incurred a net cash outflow from investing activities of (pound)168
million for the nine months ended September 30, 2004 compared with
(pound)150 million for the nine months ended September 30, 2003. This
increase arose principally as a result of reduced loan repayments received
from affiliates. Net cash outflow includes the total net cash inflow from
affiliates of (pound)9 million for nine months ended September 30, 2004
compared with (pound)23 million for the nine months ended September 30,
2003. Capital expenditure accounted for (pound)177 million of the total in
the nine months ended September 30, 2004 compared with (pound)173 million
in the same period in 2003. The additions in the nine months ended
September 30, 2004 were principally a result of IP or broadband network
capacity upgrades and new subscriber installations in connection with the
roll-out of digital television and broadband internet services. At
September 30, 2004, approximately 94% of the homes passed and marketed in
our addressable areas were capable of receiving our digital television and
broadband internet services.
Net cash used in financing activities totaled (pound)235 million for the
nine months ended September 30, 2004 compared with (pound)42 million for
the nine months ended September 30, 2003. In the nine months ended
September 30, 2004 we released (pound)16 million of restricted deposits and
paid (pound)33 million for the capital element of finance lease repayments,
compared with (pound)41 million of capital element of finance lease
repayments made in the nine months ended September 30, 2003. On July 1,
2004, in connection with its financial restructuring, the Predecessor
Company repaid (pound)160 million credit advance on our senior secured
facility, placed (pound)36 million in restricted deposits and paid the
balance of the amendment fee on its amended senior secured facility of
(pound)22 million.
As of September 30, 2004, we had cash and cash equivalents of (pound)266
million on a consolidated basis (excluding (pound)11 million that was
restricted as to use to providing security for leasing obligations and
(pound)22 million that was restricted as to use in the liquidation of the
Predecessor Company). Cash balances decreased by (pound)128 million for the
nine months ended September 30, 2004 mainly as a result of the repayment of
the credit advance offset by increased net cash provided by operating
activities. As of September 30, 2003, we had cash balances of (pound)394
million (excluding (pound)13 million that was restricted, as noted above).
As discussed earlier, on November 2, 2004, we announced that we had
executed a commitment letter for a new (pound)1.8 billion credit facility,
to be used to replace outstanding borrowings under the existing amended
senior secured (pound)2.03 billion credit facility. Assuming that the new
credit facilities are successfully completed at the end of 2004, net cash
interest expense (i.e. after interest income) for the year ending December
31, 2005 is expected to be in the range of (pound)145 million to (pound)155
million, excluding any facility fees. This range could be impacted by any
changes in UK interest rates as only (pound)1 billion of the new facilities
are expected to be covered by interest rate swaps.
OFF-BALANCE SHEET TRANSACTIONS
As of September 30, 2004, we had no off-balance sheet transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are summarized in note 3 to its
consolidated financial statements. As stated above, the Company prepares
its consolidated financial statements in conformity with US GAAP, which
requires it 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. Significant estimates and assumptions include capitalization of
labor and overhead costs, impairment of goodwill and long-lived assets, and
accounting for debt and financial instruments. Actual results could differ
from those estimates.
The Company considers the following policies and estimates to be the most
critical in understanding the assumptions and judgments that are involved
in preparing its financial statements and the uncertainties that could
impact its results of operations, financial condition and cash flows:
o revenue recognition;
o impairment of goodwill and long-lived assets;
o capitalization of labor and overhead costs;
o accounting for debt and financial instruments; and
o valuation of assets and liabilities under fresh-start.
REVENUE RECOGNITION
The Company applies the provisions of SFAS 51, Financial Reporting by Cable
Television Companies in relation to connection and activation fees for
cable television, as well as telephony and internet services, on the basis
that it markets and maintains a unified fiber network through which it
provides all of these services. Consequently, those fees are recognized in
the period of connection to the extent that those fees are less than direct
selling costs. Any excess of connection and activation fees over direct
selling costs is deferred and amortized over the expected customer life.
IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS
All long-lived assets, including goodwill and investments in unconsolidated
affiliates, are evaluated for impairment on the basis of estimated
undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If an
asset is determined to be impaired, it is written down to its estimated
fair market value based on the best information available. Estimated fair
market value is generally measured by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows and those estimates include inherent uncertainties,
including those relating to the timing and amount of future cash flows and
the discount rate used in the calculation. Assumptions used in these cash
flows are consistent with the Company's internal forecasts. If actual
results differ from the assumptions used in the impairment review, the
Company may incur additional impairment charges in the future.
CAPITALIZATION OF LABOR AND OVERHEAD COSTS
The telecommunications and cable industries are highly capital-intensive
and a large portion of the Company's resources is spent on capital
activities. Judgment is sometimes required to determine whether a project
is capital in nature and whether certain costs are directly associated with
a capital project. In particular, determining whether overhead is borne as
a consequence of specific capital activities requires some judgment. The
changing nature of the sectors in which the Company operates and the nature
of its development activities will affect the appropriateness of its
capitalization policy in the future.
ACCOUNTING FOR DEBT AND FINANCIAL INSTRUMENTS
The Company manages its risks associated with foreign exchange rates and
interest rates and may use derivative financial instruments to hedge a
portion of these risks. As a matter of policy, the Company does not use
derivative financial instruments unless there is an underlying exposure
and, therefore, it does not use derivative financial instruments for
trading or speculative purposes. The evaluation of hedge effectiveness is
subject to assumptions and judgments based on the terms and timing of the
underlying exposures. All derivative financial instruments are recognized
in the consolidated balance sheet at fair value. The fair value of the
Company's derivative financial instruments is generally based on quotations
from third-party financial institutions, which are market estimates of fair
value that may differ from the amounts that might be realized if those
instruments were monetized.
VALUATION OF ASSETS AND LIABILITIES UNDER FRESH-START
The adoption of fresh-start reporting has required management to estimate
the reorganization value of the Reorganized Company, the allocation of fair
value to assets and the present value of liabilities to be paid. The
preparation of such valuations requires management to make estimates and
assumptions regarding the expected future after-tax cash flows of the
business, discount rates and the expected outcome of pre-acquisition
contingencies. The valuations determined for fresh-start reporting
represent management's best estimate of the values to be allocated to the
Reorganized Company's assets and liabilities. They have been prepared and
allocated in accordance with Statement of Position (SOP) 90-7, Reporting
by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) and SFAS
141, Business Combinations, respectively.
USE OF NON-US GAAP FINANCIAL MEASURES
(I) ADJUSTED EBITDA
The Company's primary measure of income or loss for each of its reportable
segments is Adjusted EBITDA. Our management, including our chief operating
decision-maker, considers Adjusted EBITDA an important indicator of the
operational strength and performance of our reportable segments. Adjusted
EBITDA for each segment and in total excludes the impact of costs and
expenses that do not directly affect our cash flows or do not directly
relate to the operating performance of that segment. These costs and
expenses include depreciation, amortization, financial restructuring
charges, interest expense, foreign exchange gains/(losses), share of net
income/(loss) from affiliates and income taxes. It is the belief of
management that the legal and professional costs relating to our financial
restructuring are not characteristic of our underlying business operations.
Furthermore management believes that some of the components of these
charges are not directly related to the performance of a single reportable
segment.
Adjusted EBITDA is not a financial measure recognised under US GAAP. This
measure is most directly comparable to the US GAAP financial measure net
income/(loss). Some of the significant limitations associated with the use
of Adjusted EBITDA as compared to net income/(loss) are that Adjusted
EBITDA does not reflect the amount of required reinvestment in depreciable
fixed assets, financial restructuring charges, interest expense, foreign
exchange gains or losses, income taxes expense or benefit and similar items
on our results of operations. We believe Adjusted EBITDA is helpful for
understanding our performance and assessing our prospects for the future,
and that it provides useful supplemental information to investors. In
particular, this non-US GAAP financial measure reflects an additional way
of viewing aspects of our operations that, when viewed with our US GAAP
results and the reconciliations to net income/(loss), shown below, provide
a more complete understanding of factors and trends affecting our business.
Because non-US GAAP financial measures are not standardized, it may not be
possible to compare Adjusted EBITDA with other companies' non-US GAAP
financial measures that have the same or similar names. The presentation of
this supplemental information is not meant to be considered in isolation or
as a substitute for net cash provided by operating activities, operating
income/(loss), net income/(loss), or other measures of financial
performance reported in accordance with US GAAP.
(II) FREE CASH FLOW
The Company's primary measure of cash flow is free cash flow. Free cash
flow is defined as net cash provided by/(used in) operating activities
excluding cash paid for financial restructuring charges; less cash paid for
property and equipment. Our management, including our chief operating
decision-maker, considers free cash flow an important indicator of the
operational performance of our business.
Free cash flow is not a financial measure recognized under US GAAP. This
measure is most directly comparable to the US GAAP financial measure net
cash provided by/(used in) operating activities. The significant limitation
associated with the use of free cash flow as compared to net cash provided
by/(used in) operating activities is that free cash flow does not consider
the amount of cash required to pay financial restructuring charges. We
believe free cash flow is helpful for understanding our performance and it
provides useful supplemental information to investors. Because non-US GAAP
financial measures are not standardized, it may not be possible to compare
free cash flow with other companies' non-US GAAP financial measures that
have the same or similar names. The presentation of this supplemental
information is not meant to be considered in isolation or as a substitute
for net cash provided by/(used in) operating activities, or other measures
of financial performance reported in accordance with US GAAP.
(III) CAPITAL EXPENDITURE (ACCRUAL BASIS)
The Company's primary measure of expenditure for fixed assets is Capital
expenditure (accrual basis). Capital expenditure (accrual basis) is defined
as the purchase of fixed assets as measured on an accrual basis. The
Company's business is underpinned by its significant investment in network
infrastructure and information technology. Management therefore considers
Capital expenditure (accrual basis) an important component in evaluating
the Company's liquidity and financial condition since capital expenditure
is a necessary component of ongoing operations. Capital expenditure
(accrual basis) is most directly comparable to the US GAAP financial
measure cash paid for property and equipment as reported in the
Consolidated Statement of Cash Flows. The significant limitation associated
with the use of Capital expenditure (accrual basis) as compared to cash
paid for property and equipment is Capital expenditure (accrual basis)
excludes timing differences from payments of liabilities related to capital
expenditure. Management excludes this amount from Capital expenditure
(accrual basis) because it is more closely related to the cash management
treasury function than to the Company's management of capital expenditure
for long-term operational performance and liquidity. Management compensates
for this limitation by separately measuring and forecasting working capital
and interest payments.
The presentation of this supplemental information is not meant to be
considered in isolation or as a substitute for other measures of financial
performance reported in accordance with US GAAP accepted in the United
States. These non-US GAAP financial measures reflect an additional way of
viewing aspects of the Company's operations that, when viewed with the
Company's US GAAP results and the accompanying reconciliation to cash paid
for property and equipment, shown below, provide a more complete
understanding of factors and trends affecting the Company's business.
Management encourages investors to review the Company's financial
statements and publicly-filed reports in their entirety and to not rely on
any single financial measure.
(IV) NET DEBT
Net debt is defined as the sum of debt repayable, capital lease obligations
and accrued interest payable on notes and debentures less cash and cash
equivalents. The Company's management, including its chief operating
decision-maker, considers net debt an important measure of the financing
obligations undertaken by the Company.
Net debt is not a financial measure recognized under US GAAP. This measure
is most directly comparable to the US GAAP financial measure, total
liabilities. The significant limitation associated with the use of net debt
as compared total liabilities is that net debt does not consider current
liabilities due in respect of accounts payable and other liabilities. It
also assumes that all of cash and cash equivalents is available to service
debt. The Company believes net debt is helpful for understanding its entire
net debt funding obligations and it provides useful supplemental
information to investors. Because non-US GAAP financial measures are not
standardized, it may not be possible to compare net debt with other
companies' non-US GAAP financial measures that have the same or similar
names. The presentation of this supplemental information is not meant to be
considered in isolation or as a substitute for total liabilities, or other
measures of financial performance reported in accordance with US GAAP.
RECONCILIATIONS OF NON-US GAAP FINANCIAL MEASURES
(AMOUNTS IN (POUND)MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2004 2003
------------- --------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------- --------------
(I) RECONCILIATION OF ADJUSTED EBITDA TO NET LOSS
Adjusted EBITDA 122 110
Financial restructuring charges - (9)
Depreciation (103) (96)
Amortization (9) -
------------- --------------
OPERATING INCOME 10 5
Interest income 6 5
Interest expense (including amortization of debt discount) (49) (119)
Foreign exchange gains, net - 15
Share of net income of affiliates 4 2
Other, net - 1
Income taxes - 2
------------- --------------
NET LOSS (29) (89)
------------- --------------
(II) RECONCILIATION OF FREE CASH FLOW TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Free cash flow 39 6
Deduct cash paid for financial restructuring charges (17) (9)
Add cash paid for property and equipment 50 63
------------- --------------
Net cash provided by operating activities 72 60
------------- --------------
Free cash flow is reported after cash paid for interest, net
and cash received for income taxes
Supplementary cash flow information:
Cash paid for interest, net 39 34
Cash received for income taxes - -
(III) RECONCILIATION OF CAPITAL EXPENDITURE (ACCRUAL BASIS)
TO CASH PAID FOR PROPERTY AND EQUIPMENT
Capital expenditure (accrual basis) 51 55
Changes in capital accruals (1) 8
------------- --------------
Cash paid for property and equipment 50 63
------------- --------------
NINE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER JUNE 30, SEPTEMBER
30, 2004 2004 30, 2003
-------------- ------------ --------------
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
-------------- ------------ --------------
(I) RECONCILIATION OF ADJUSTED EBITDA TO NET LOSS
Adjusted EBITDA 122 244 320
Financial restructuring charges - (21) (16)
Depreciation (103) (184) (294)
Amortization (9) - -
-------------- ------------ --------------
OPERATING INCOME 10 39 10
Interest income 6 15 17
Interest expense (including amortization of debt discount) (49) (230) (366)
Foreign exchange gains, net - 40 84
Share of net income of affiliates 4 8 4
Other, net - (1) -
Income taxes - (1) 4
-------------- ------------ --------------
NET LOSS (29) (130) (247)
-------------- ------------ --------------
(II) RECONCILIATION OF FREE CASH FLOW TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Free cash flow 39 62 38
Deduct cash paid for financial restructuring charges (17) (19) (15)
Add cash paid for property and equipment 50 127 173
-------------- ------------ --------------
Net cash provided by operating activities 72 170 196
-------------- ------------ --------------
Free cash flow is reported after cash paid for interest, net
and cash received for income taxes
Supplementary cash flow information:
Cash paid for interest, net 39 61 122
Cash received for income taxes - (2) -
(III) RECONCILIATION OF CAPITAL EXPENDITURE (ACCRUAL BASIS)
TO CASH PAID FOR PROPERTY AND EQUIPMENT
Capital expenditure (accrual basis) 51 106 159
Changes in capital accruals (1) 21 14
-------------- ------------ --------------
Cash paid for property and equipment 50 127 173
-------------- ------------ --------------
SEPTEMBER DECEMBER
30, 2004 31, 2003
-------------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------------- ------------
(IV) RECONCILIATION OF NET DEBT TO TOTAL LIABILITIES
Net debt 1,694 5,358
Cash and cash equivalents 266 427
-------------- ------------
Total debt 1,960 5,785
Accrued interest payable on notes and debentures - (352)
Accounts payable 130 98
Other liabilities 444 809
Deferred taxes 105 108
-------------- ------------
Total liabilities 2,639 6,448
-------------- ------------
ITEM - 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we were exposed during the nine-month
period ended September 30, 2004 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 notes
and debentures.
Our exposure to foreign exchange rate changes was substantially eliminated
as a result of the cancellation of all of the Predecessor Company's
US-dollar denominated notes and debentures in July 2004, although we will
continue to be exposed to interest rate changes under the amended senior
secured credit facility.
From time to time we use derivative financial instruments solely to reduce
our exposure to these market risks, and we do not enter into these
instruments for trading or speculative purposes.
QUALITATIVE DISCLOSURE OF INTEREST RATE RISK
As part of the Predecessor Company's financial restructuring, TCN entered
into the amended senior secured credit facility described above, which 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 the amended senior secured credit facility principally
through interest rate swaps entered into by TCN. The Reorganized Company's
interest rate swaps taken over from the Predecessor Company provide for
payments by it at a fixed rate of interest (ranging from 5.475% to 5.75%)
and the receipt of payments based on a variable rate of interest. The swaps
have maturities ranging from January 1, 2005 to March 31, 2005. The
aggregate amount outstanding under the amended senior secured credit
facility at September 30, 2004 was (pound)1,840 million and the aggregate
notional principal amount of the interest rate swaps was (pound)400
million.
TCN also entered into new (pound)999 million fixed-for-floating interest
rate swaps maturing on October 14, 2007 in connection with the settlement
during the financial restructuring of certain of the Predecessor Company's
then existing derivative contracts. The interest rate swap contracts
provide for payments at a fixed rate of interest (ranging from 6.2566% to
6.3075%) and do not qualify for hedge accounting under SFAS 133 due to
their maturity being at a date beyond the maturity of the underlying debt
obligations and consequently any changes in its fair value are accounted
for through the income statement.
Based on our consolidated variable rate debt outstanding at September 30,
2004 after taking into account our derivative instruments, we estimate that
a one-percentage point change in interest rates would have an impact of
approximately (pound)4.4 million on our annual interest expense.
QUANTITATIVE DISCLOSURE OF INTEREST RATE 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 sensitivities 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 hypothetical changes in the fair value of hedging instruments are
estimated, based on the same methodology used by third-party financial
institutions to calculate the fair value of the original instruments,
keeping all variables constant except that the relevant interest rate 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.
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 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 - SENSITIVITY ANALYSIS
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:
(in millions) SEPTEMBER 30, 2004
-------------------------------
HYPOTHETICAL
CHANGE IN
FAIR VALUE FAIR VALUE
---------- ------------
Interest rate swaps (pound) (36) (pound) 28
------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE RISK
We have historically held derivative financial instruments solely to hedge
specific risks and have not held these instruments for trading purposes.
The derivatives were 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 notes and debentures. We used 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 dates where we could, at
our option, redeem the instruments before maturity.
As a result of the Predecessor Company's financial restructuring, all of
its US dollar-denominated notes and debentures were cancelled and we have
no outstanding US dollar-denominated indebtedness in relation to these
notes and debentures.
ITEM - 4 CONTROLS AND PROCEDURES
Our Acting Chief Executive Officer and Chief Financial Officer have, with
the participation of management, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the
end of the period covered by this report. Based on that evaluation, the
Acting Chief Executive Officer and Chief Financial Officer have concluded
that such disclosure controls and procedures are effective in permitting us
to comply with our disclosure obligations and ensure that the material
information required to be disclosed is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
SEC. There were no changes in our internal control over financial reporting
during the quarter ended September 30, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
The Company is not an accelerated filer, as defined in Rule 12b-2 of the
Exchange Act. As a result, it is required to comply with the requirements
of S.404 of the Sarbanes-Oxley Act ("S.404"), as adopted by the United
States Securities and Exchange Commission for fiscal years ending on or
after July 15, 2005. The Company therefore expects to file its first
internal control report certification and related attestation report in
respect of S.404 when filing Form 10-K for the year ending December 31,
2005.
The Company has begun work to fulfil the requirements for certification in
respect of internal controls and continues to work towards meeting its
deadline for compliance, as referred to above.
PART II - OTHER INFORMATION
ITEM - 1 LEGAL PROCEEDINGS
The Group is a party to various legal proceedings in the ordinary course of
business which it does not believe will result, in aggregate, in a material
adverse effect on its financial condition or results of operations.
ITEM - 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As part of the Predecessor Company's financial restructuring, on July 19,
2004, an escrow agent completed the distribution of 241,325,000 shares of
the Company's common stock to certain creditors of the Predecessor Company
in exchange for the cancellation of all of the outstanding notes and
debentures of the Predecessor Company and its subsidiary, Telewest Finance
(Jersey) Limited, and 3,675,000 shares of the Company's common stock to the
Predecessor Company's shareholders. The creditors received shares of our
common stock pursuant to an English-court sanctioned scheme of arrangement,
which was exempt from the registration requirements of the Securities Act,
pursuant to Section 3(a)(10) of the Securities Act. The shareholders
received shares of our common stock pursuant to an effective registration
statement on Form S-4 (Registration No. 333-110815). No underwriters were
involved in the issuance and sale of these securities.
ITEM - 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM - 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM - 5 OTHER INFORMATION
None
ITEM - 6 EXHIBITS
Exhibits
10.1 Employment Agreement, dated July 19, 2004, between Anthony
(Cob) Stenham and Telewest Global, Inc.
10.2 Employment Agreement, dated July 19, 2004, between Eric J.
Tveter and Telewest Global, Inc.
10.3 Form of Restricted Stock Agreement
10.4 Form of Directors Non-qualified Stock Option Agreement
10.5 Form of Non-qualified Stock Option Agreement
31.1 Certification of Acting Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Acting Chief Executive Officer pursuant
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Telewest Global, Inc.
---------------------------------------
(registrant)
Date: November 12, 2004
/s/ Neil Smith
---------------------------------------
Name: Neil Smith
Chief Financial Officer