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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, 2005
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 Identification No.)
ncorporation or organization)
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 8, 2005 was 245,908,212.
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TELEWEST GLOBAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM - 1 FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of September 30, 2005 and December
31, 2004 for the Reorganized Company
Consolidated Statements of Operations for the three months ended
September 30, 2005 and 2004 for the Reorganized Company
Consolidated Statements of Operations for the nine months ended
September 30, 2005 and 2004 for the Reorganized Company, and for
the six months ended June 30, 2004 and the day of July 1, 2004
for the Predecessor Company
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 for the Reorganized Company, and for
the six months ended June 30, 2004 and the day of 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,
2005 2004
------------ --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
------------ --------------
ASSETS
Cash and cash equivalents 260 68
Restricted cash 15 26
Trade receivables 118 108
Other receivables 31 33
Prepaid expenses 38 17
Inventory for re-sale, net 18 -
Other assets 6 -
------------ --------------
TOTAL CURRENT ASSETS 486 252
Investments accounted for under the equity
method 284 304
Property and equipment, net 2,856 2,974
Intangible assets, net 286 314
Reorganization value in excess of amounts
allocable to identifiable assets 426 425
Goodwill 142 -
Programming inventory 31 24
Deferred financing costs (net of amortization
(pound)5 million; 2004: (pound)0 million) 50 51
------------ --------------
TOTAL ASSETS 4,561 4,344
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 139 93
Other liabilities 446 424
Debt repayable within one year 55 21
Capital lease obligations repayable within one year 62 38
------------ --------------
TOTAL CURRENT LIABILITIES 702 576
Other liabilities 9 -
Deferred taxes 105 105
Debt repayable after more than one year 1,761 1,686
Capital lease obligations repayable after more than
one year 47 69
------------ --------------
TOTAL LIABILITIES 2,624 2,436
------------ --------------
MINORITY INTEREST (1) (1)
------------ --------------
SHAREHOLDERS' EQUITY
Preferred stock - US$0.01 par value; authorized
5,000,000 shares, issued none (2005 and 2004) - -
Common stock - US$0.01 par value; authorized
1,000,000,000 shares, issued 245,678,524
(2005) and 245,080,629 (2004) 1 1
Additional paid-in capital 1,965 1,954
Accumulated other comprehensive loss (7) -
Accumulated deficit (21) (46)
------------ --------------
TOTAL SHAREHOLDERS' EQUITY 1,938 1,909
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,561 4,344
============ ==============
See accompanying notes to the unaudited 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,
-------------------------------
2005 2004
------------- --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
---------- ----------
REVENUE
Consumer Sales Division 249 238
Business Sales Division 64 63
---------- ----------
Total Cable Segment 313 301
Content Segment 33 27
sit-up Segment 58 -
---------- ----------
Total revenue 404 328
---------- ----------
OPERATING COSTS AND EXPENSES
Cable segment expenses 71 72
Content segment expenses 19 17
sit-up segment expenses 44 -
Depreciation 99 103
Amortization 10 9
Selling, general and administrative expenses 128 117
---------- ----------
371 318
---------- ----------
OPERATING INCOME 33 10
OTHER INCOME/(EXPENSE)
Interest income 6 6
Interest expense (38) (49)
Foreign exchange (losses)/gains, net (1) -
Share of net income of affiliates 4 4
---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES 4 (29)
Income tax benefit 1 -
---------- ----------
NET INCOME/(LOSS) 5 (29)
========== ==========
Basic and diluted earnings/(loss) per share of
common stock (pound)0.02 (pound)(0.12)
Weighted average number of shares of common
stock - (millions) 245 245
See accompanying notes to the unaudited consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN (POUND)MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NINE MONTHS NINE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 JUNE 30
2005 2004 2004
------------ ------------ -----------
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
------------ ------------ -----------
REVENUE
Consumer Sales Division 757 238 470
Business Sales Division 188 63 130
------------ ----------- -----------
Total Cable Segment 945 301 600
Content Segment 96 27 54
sit-up Segment 82 - -
------------ ----------- -----------
Total revenue 1,123 328 654
------------ ----------- -----------
OPERATING COSTS AND EXPENSES
Cable segment expenses 210 72 153
Content segment expenses 56 17 34
sit-up segment expenses 61 - -
Depreciation 301 103 184
Amortization 28 9 -
Selling, general and administrative
expenses 362 117 244
------------ ----------- -----------
1,018 318 615
------------ ----------- -----------
OPERATING INCOME 105 10 39
OTHER INCOME/(EXPENSE)
Interest income 17 6 15
Interest expense (including
amortization of debt discount) (108) (49) (230)
Foreign exchange (losses)/gains, net (8) - 40
Share of net income of affiliates 17 4 8
Other, net 1 - (1)
------------ ----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES 24 (29) (129)
Income tax benefit/(charge) 1 - (1)
------------ ----------- -----------
NET INCOME/(LOSS) 25 (29) (130)
============ =========== ===========
Basic and diluted earnings/(loss) per
share of common stock (pound)0.10 (pound)(0.12)
Weighted average number of shares of
common stock - (millions) 245 245
JULY 1,
2004
-----------
PREDECESSOR
COMPANY
-----------
Fresh-start adoption - investments (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 unaudited consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
NINE MONTHS NINE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 JUNE 30
2005 2004 2004 JULY 1, 2004
------------- -------------- ------------ --------------
REORGANIZED REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------- -------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) 25 (29) (130) -
Adjustments to reconcile net
income/(loss) to net cash provided by
operating activities:
Depreciation 301 103 184 -
Amortization 28 9 - -
Amortization of deferred financing
costs and debt discount 5 - 30 -
Deferred tax charge - - 1 -
Fair value adjustment of interest rate swaps (10) - - -
Accretion expense 2 - - -
Unrealized losses/(gains) on foreign
currency translation 8 - (40) -
Stock-based compensation expense 8 3 - -
Share of net income of affiliates (12) (4) (8) -
Profit on disposal of assets (1) - - -
Amounts written off investments - - 1 -
Changes in operating assets and
liabilities, net of effect of
acquisition of subsidiaries:
Change in receivables (6) (7) 9 -
Change in prepaid expenses (20) 5 (25) -
Change in other assets (14) (2) (3) -
Change in accounts payable 21 10 27 -
Change in other liabilities 15 (16) 124 -
Income tax paid for unprovided tax
contingency at fresh-start (1) - - -
------------- -------------- ------------ --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 349 72 170 -
------------- -------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditure (173) (50) (127) -
Proceeds from disposal of fixed assets 2 - - -
Cash paid for acquisition of
subsidiaries, net of cash acquired (108) - - -
Repayment/(advance) of loans made to
affiliates, net 13 6 (4) -
Disposal of affiliate - - 7 -
Proceeds from sale and leaseback 13 - - -
------------- -------------- ------------ --------------
NET CASH USED IN INVESTING ACTIVITIES (253) (44) (124) -
------------- -------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Release/(placement) of restricted cash 11 14 2 (36)
Proceeds from new debt 110 - - -
Repayment of debt (6) - - (160)
Cash paid for financing costs (4) - - (22)
Principal element of capital lease
repayments (31) (10) (23) -
Proceeds from issuance of common stock 4 - - -
Proceeds from the issue of a
subsidiary's redeemable preferred stock 12 - - -
------------- -------------- ------------ --------------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES 96 4 (21) (218)
------------- -------------- ------------ --------------
Net increase/(decrease) in cash and
cash equivalents 192 32 25 (218)
Cash and cash equivalents at beginning
of period 68 - 427 452
Cash and cash equivalents transferred
from Predecessor Company to
Reorganized Company - 234 - (234)
------------- -------------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD 260 266 452 -
============= ============== ============ ==============
Supplementary cash flow information:
Cash paid for interest, net (75) (39) (61) -
Cash received for income taxes, net 2 - 2 -
See accompanying notes to the unaudited consolidated financial statements
TELEWEST GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 2005
1 ORGANIZATION, HISTORY AND DESCRIPTION OF BUSINESS
Telewest Global, Inc. (the "Company") was incorporated in Delaware on
November 12, 2003, as a wholly owned subsidiary of Telewest Communications
plc ("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 plc and
Telewest UK to acquire substantially all the assets of plc. 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 plc (collectively the "Reorganized Company").
The business of the Company and its subsidiaries (together "the Group" or
"Telewest") comprises (a) providing cable television, telephony and
internet services to business and residential customers in the United
Kingdom ("UK"), (b) broadcast media activities, and (c) retail of consumer
products, primarily by means of televised shopping programs using an
auction-based format.
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.
On May 12, 2005, Telewest acquired a controlling interest in sit-up Limited
("sit-up"). Telewest completed the acquisition of 100% of the ordinary
shares of sit-up on July 7, 2005. sit-up markets and retails a wide variety
of consumer products, primarily by means of televised shopping programs
using an auction-based format. sit-up represents a third independent
segment of the Group in addition to the cable and content segments. Prior
to May 12, 2005, Telewest owned approximately 49.9% of sit-up.
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 ("GAAP") 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. The Group's significant estimates and
assumptions include: impairment of goodwill and long-lived assets;
capitalization of labor and overhead costs; accounting for debt and
financial instruments and valuation of assets and liabilities under
fresh-start reporting. Actual results could differ from these estimates.
Operating results for the three and nine months ended September 30, 2005
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with GAAP have been condensed
or omitted pursuant to instructions, rules and regulations prescribed by
the SEC. These unaudited consolidated financial statements and the related
footnotes should be read in conjunction with the audited consolidated
financial statements and the related footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, as filed
with the SEC on March 22, 2005.
TELEWEST GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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.
As a result of the completion of the Predecessor Company's financial
restructuring on July 15, 2004, the Company adopted fresh-start reporting
in accordance with Statement of Position 90-7, Reporting by Entities in
Reorganization under the Bankruptcy Code, ("SOP 90-7"), with effect from
July 1, 2004.
Under SOP 90-7, the Company established a new accounting basis. The Company
allocated the reorganization value to the Predecessor Company's then
existing assets in conformity with the procedures specified by Statement of
Financial Accounting Standards ("SFAS") No. 141 Business Combinations
("SFAS 141") and recorded the Predecessor Company's then existing
liabilities at their respective values. As a result of the application of
fresh-start reporting, 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.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory for re-sale
Inventory, primarily consisting of consumer goods for re-sale, is valued at
the lower of cost or market value using the first-in, first-out ("FIFO")
method. This valuation requires us to make judgments, based on currently
available information, about obsolete, slow-moving or defective inventory.
Based upon these judgments and estimates, which are applied consistently
from period to period, we adjust the carrying amount of our inventory for
re-sale to the lower of cost or market value.
Derivative instruments and hedging activities
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,
"(SFAS 133") 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 net income/(loss).
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 until the hedged transaction occurs and are then
recorded within net income/(loss). The ineffective portion of a hedge is
immediately recorded in earnings. For derivatives designated as fair value
hedges, changes in fair value are recorded within net income/(loss).
We seek to reduce our exposure to adverse interest rate fluctuations on
borrowings under the bank facilities principally through interest rate
swaps. On March 1, 2005 the Group carried out an evaluation of its
derivative instruments and hedging activities and as a result designated
certain interest rate swap contracts as cash flow hedges (see note 9,
"Debt").
We seek to mitigate the foreign exchange risk presented by our Euro- and US
Dollar-denominated indebtedness through cross currency swaps. Our cross
currency swaps are not designated as hedges.
We use derivative financial instruments solely to hedge specific risks and
do not hold them for trading purposes.
Other significant accounting policies
A summary of all other significant accounting policies, which have been
consistently applied by the Group during the three and nine months ended
September 30, 2005, is disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2004 as filed with the SEC on March 22, 2005.
4 EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income available
to shareholders by the weighted-average number of shares of common stock
outstanding during the periods. The periods for the purposes of the
calculation of basic and diluted earnings per share are the three months
ended September 30, 2005 and 2004, and the nine months ended September 30,
2005. Diluted earnings per share is computed by adjusting the
weighted-average number of shares of common stock outstanding during the
periods for all dilutive potential shares of common stock outstanding
during the periods and adjusting the net income for any changes in income
or loss that would result from the conversion of such potential common
stock.
Earnings per share data for the Predecessor Company has not been provided,
as it would not be meaningful in the context of the current capital
structure.
5 ACQUISITION OF ADDITIONAL EQUITY IN SIT-UP LIMITED
On May 12, 2005, Telewest acquired a controlling interest in sit-up for an
aggregate purchase price of approximately (pound)103 million, including
fees, all paid in cash. Telewest completed the acquisition of 100% of the
ordinary shares of sit-up on July 7, 2005. sit-up markets and retails a
wide variety of consumer products, primarily by means of televised shopping
programs using an auction-based format. Prior to May 12, 2005, Telewest
owned approximately 49.9% of sit-up.
The acquisition of the controlling interest was funded with proceeds from
borrowings of (pound)110 million under senior secured facilities of the
Company's Flextech subsidiaries. Subsequent to the acquisition of the
controlling interest on May 12, 2005, sit-up is treated as a consolidated
subsidiary of Telewest and sit-up's results of operations have been
consolidated with Telewest's. Prior to that date, Telewest accounted for
its investment in sit-up using the equity method of accounting. Telewest
has recorded the acquisition of sit-up as a step acquisition, and
accordingly, sit-up's assets and liabilities have been recorded at amounts
equal to (1) 50.1% of estimated fair value at the date of acquisition plus
(2) 49.9% of historical carrying value. The (pound)89 million excess of
purchase price over the estimated fair value of 50.1% of sit-up's assets
and liabilities combined with Telewest's historical equity method goodwill
of (pound)53 million have been recorded as goodwill in the accompanying
consolidated balance sheet.
Telewest's total investment in sit-up of (pound)166 million is comprised of
(pound)63 million of its historical equity method investment, including
goodwill, and (pound)103 million representing the purchase price of the
remaining 50.1% interest. This total investment has been provisionally
allocated to sit-up's assets and liabilities as follows:
(POUND) MILLION
----------------
Current assets, including cash and cash
equivalents of (pound)37 million 51
Property and equipment 6
Intangible assets subject to amortization - customer
relationships -
Intangible assets not subject to amortization:
Trademarks -
Goodwill 142
Other liabilities (33)
----------------
166
----------------
The foregoing allocation is based on preliminary estimates and may be
subject to adjustment upon receipt of additional information in respect of
leases and intangible assets, which the Company is currently awaiting.
Subsequent to the acquisition of the controlling interest in sit-up,
1,000,000 redeemable preference shares were issued by sit-up to certain of
its key management personnel for a consideration of (pound)12 million.
These shares are redeemable over the next two years, 500,000 in 2006 and
500,000 in 2007. The redemption value of these preference shares is linked
to the earnings of sit-up for the fiscal years ending December 31, 2005 and
2006, with related redemption taking place in 2006 and 2007, respectively.
The following unaudited pro forma information for Telewest and its
consolidated subsidiaries for the nine months ended September 30, 2005 was
prepared assuming the acquisition of sit-up and the related financing
occurred on January 1, 2005, for the period ended September 30, 2005. These
pro forma amounts are not necessarily indicative of operating results that
would have occurred if the sit-up acquisition had occurred on January 1,
2005.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS
(AMOUNTS IN (POUND)MILLIONS, EXCEPT SHARE AND ENDED
PER SHARE DATA) SEPTEMBER 30,
2005
-------------
REORGANIZED
COMPANY
-------------
REVENUE
Consumer Sales Division 757
Business Sales Division 188
-------------
Total Cable Segment 945
Content Segment 96
sit-up Segment 156
-------------
Total revenue 1,197
-------------
OPERATING COSTS AND EXPENSES
Cable segment expenses 210
Content segment expenses 56
sit-up segment expenses 116
Depreciation 302
Amortization 28
Selling, general and administrative expenses 379
------------
1,091
------------
OPERATING INCOME 106
OTHER INCOME/(EXPENSE)
Interest income 17
Interest expense (including amortization of debt
discount) (110)
Foreign exchange losses, net (8)
Share of net income of affiliates 16
Other, net 1
-----------
INCOME BEFORE INCOME TAXES 22
Income tax benefit 1
-----------
NET INCOME 23
===========
Basic and diluted earnings per share of common stock (pound)0.09
Weighted average number of shares of common stock -
(millions) 245
Pro forma adjustments reflect the revenue, segment expenses, depreciation
and SG&A for sit-up for the period January 1, 2005 to May 11, 2005.
Interest income and expense have been adjusted to reflect the interest
income earned by sit-up during the above period and the additional interest
expense that would have been incurred by Telewest to fund the acquisition
at January 1, 2005. Share of net income of affiliates has been adjusted to
reverse the equity accounting of sit-up for the period presented.
Pro forma financial information for the three months ended September 30,
2005 has not been presented as sit-up is a consolidated subsidiary of the
Reorganized Company during this period, therefore there are no differences
as compared to the Consolidated Statement of Operations.
Comparable pro forma financial information for the three and nine months
ended September 30, 2004 has not been presented since such pro forma
information would not be meaningful as a result of the financial
restructuring of the Predecessor Company during 2004.
6 PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- --------------
Land and buildings 79 76
Cable and ducting 2,393 2,310
Electronic equipment 713 632
Other equipment 170 156
--------------- --------------
3,355 3,174
Less: Accumulated depreciation (499) (200)
--------------- --------------
PROPERTY AND EQUIPMENT, NET 2,856 2,974
--------------- --------------
During the three and nine months ended September 30, 2005, the Company
entered into capital leases of (pound)11 million and (pound)33 million,
respectively. These leases included (pound)1 million and (pound)13 million,
respectively, relating to sale and leaseback arrangements. These capital
leases are for equipment related to the implementation of Video-on-Demand
(VOD), motor vehicles and other equipment.
7 INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- --------------
Customer lists 298 298
Trade names 34 34
--------------- --------------
332 332
Less: Accumulated amortization (46) (18)
--------------- --------------
INTANGIBLE ASSETS, NET 286 314
--------------- --------------
Customer lists are amortized over a period of eight years from fresh-start
date, July 1, 2004, which represents the estimated customer life as
determined at fresh-start. Trade names are deemed to have indefinite lives,
and therefore, no amortization expense is recognized. 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.
The following table reflects the estimated amortization of existing
intangible assets over the periods indicated:
(POUND) MILLION
Within one year 37
One to two years 38
Two to three years 37
Three to four years 38
Four to five years 37
After five years 65
-----------
252
-----------
8 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS AND GOODWILL
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- --------------
Reorganization value in excess of
amounts allocable to identifiable assets 426 425
Goodwill arising on purchase of sit-up
(see note 5) 142 -
--------------- --------------
568 425
--------------- --------------
The goodwill arising on the acquisition of sit-up is based on a preliminary
estimate of fair values. The value of goodwill may be subject to adjustment
during the allocation period of up to one year from date of acquisition,
upon receipt of additional information in respect of leases and intangible
assets, which the Company is currently awaiting.
9 DEBT
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- --------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- --------------
TCN Group bank facilities 40 20
Flextech Group bank facilities 14 -
Other debt 1 1
--------------- --------------
Debt repayable within one year 55 21
TCN Group bank facilities repayable after
more than one year 1,661 1,680
Flextech Group bank facilities repayable
after more than one year 96 -
Other debt repayable after more than one year 4 6
--------------- --------------
Total debt 1,816 1,707
--------------- --------------
On May 10, 2005, the Company's Flextech subsidiaries entered into a new
senior secured bank facility to finance the acquisition of sit-up, (the
"Flextech Group bank facilities").
This facility consists of (pound)110 million in term loans, which were
fully drawn in connection with the acquisition and a (pound)20 million
revolving credit facility, which was undrawn at September 30, 2005. The
term loans are to be repaid in semi-annual installments commencing December
31, 2005, with final maturity on June 30, 2009. Interest rates on the
facility start at 1.75% above LIBOR with leverage ratchets down to 1% above
LIBOR. The facility is secured by the assets of certain Flextech
subsidiaries and sit-up along with Telewest's 50% share of the issued
equity of UKTV.
The TCN Group debt facilities bear interest at floating rates between 1.50%
(ratchet permitting) and 4.00% above LIBOR, so the Group is exposed to
variable cash flows arising from changes in LIBOR. The Group seeks to
reduce its exposure to adverse interest rate fluctuations on borrowings
under its bank facilities principally through interest rate swaps entered
into by TCN. The Group's interest rate swaps provide for payments at a
fixed rate of interest (ranging from 4.61% to 6.31%) and the receipt of
payments based on a variable rate of interest. These swaps mature on
October 15, 2007. During the second quarter of 2005, TCN entered into
additional interest rate swaps to extend the period the TCN Group bank
facilities were hedged for, by an additional three months to January 2008.
In addition to this, Flextech Broadband Limited entered into an interest
rate swap to mitigate the floating interest rate risk represented by the
new Flextech Group bank facilities. The new interest rate swap hedges
(pound)66 million of notional bank debt and matures on June 30, 2009.
The aggregate amount outstanding under the TCN Group and Flextech Group
bank facilities at September 30, 2005 was (pound)1,811 million and the
aggregate notional principal amount of the interest rate swaps was
(pound)1,065 million.
The TCN interest rate swap contracts entered into in the fourth quarter of
2004 qualified for hedge accounting under SFAS 133 from March 1, 2005.
Consequently any changes in their fair value have been accounted for
through the Statement of Operations for January and February 2005, and
through other comprehensive income when hedge accounting was effective from
March 1, 2005. The two additional interest rate swaps executed in the
second quarter of 2005 also qualify for hedge accounting under SFAS 133
from the date of their execution and changes in fair value have been
accounted for through other comprehensive income when hedge accounting was
effective.
The signing of an Agreement and Plan of Merger with NTL on October 2, 2005
has led the Group to re-assess the likelihood of the underlying forecasted
debt interest payments occurring. The Group reduced its estimate of the
likelihood of the underlying forecasted debt interest payments occurring,
from probable to less than probable. Based on that assessment the Group
discontinued hedge accounting with effect from that date. As a result,
future changes in the fair value of the instruments previously designated
as cash flow hedges will be accounted for as a component of net income
rather than other comprehensive income. At September 30, 2005 these
instruments had a total fair value of (pound)38 million payable by the
Group. The accumulated balance recorded in other comprehensive income in
respect of these instruments was a (pound)7 million loss and a net loss of
(pound)1 million was recognized in interest expense during the nine months
ended September 30, 2005, representing the ineffective component of the
hedge. The accumulated balance recorded in other comprehensive income has
been deferred and will be reclassified into earnings as the forecasted debt
interest payments affect earnings or whenever the Group assesses that it is
probable that the forecasted debt interest payments will not occur.
10. COMPREHENSIVE INCOME/(LOSS)
SFAS 130, "Reporting Comprehensive Income", establishes standards for the
reporting of comprehensive income and its components in the financial
statements. Other comprehensive income/(loss) currently represents gains
and losses on derivative instruments qualifying as cash flow hedges to
hedge the variability of cash flows to be received or paid related to a
recognized asset or liability.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
2005 2004 2005 2004 2004
------------- ------------- ------------- ------------- -----------
REORGANIZED REORGANIZED REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
(POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION
------------- ------------- ------------- ------------- -----------
Net income/(loss)
as reported 5 (29) 25 (29) (130)
Other comprehensive
income/(loss),
net of taxes:
Net gain/(loss)
on derivative
instruments,
net of taxes 7 - (7) - -
------------- ------------- ------------- ------------- -----------
Other comprehensive
income/(loss) 7 - (7) - -
------------- ------------- ------------- ------------- -----------
Total comprehensive
income/(loss),
net of taxes 12 (29) 18 (29) (130)
------------- ------------- ------------- ------------- -----------
11 COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
At September 30, 2005, the Group had cash restricted as to use of (pound)15
million (December 31, 2004: (pound)26 million), representing cash, which
provides security for leasing and other obligations, and cash held in trust
to settle plc restructuring and liquidation expenses.
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.
12 STOCK-BASED COMPENSATION
Under the fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, ("SFAS 123") stock-based 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
awards that vest each year. Compensation cost is recognized using the
graded-vesting attribution method.
The Reorganized Company has recognized (pound)2 million and (pound)8
million of stock-based compensation expense during the three and nine
months ended September 30, 2005, respectively, (three and nine months ended
September 30, 2004: (pound)3 million), as a result of awards granted over
10,208,108 shares of the Company's common stock. 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. In determining
assumptions in respect of the Group's application of SFAS 123, the Group
expects the performance criteria within its option plans to be met. The
performance conditions within the Group's option plans are based on
performance against annual budgets for each year of vesting under the
graded vesting arrangements.
If the Predecessor Company had applied the provisions of SFAS 123, the
Predecessor Company's net loss would have been reported as the pro forma
amounts indicated below:
SIX MONTHS ENDED
JUNE 30,
2004
--------------
PREDECESSOR
COMPANY
(POUND) MILLION
-----------------
Net loss as reported (130)
-----------------
Pro forma net loss (130)
-----------------
The following tables summarize the fair values of the options, restricted
stock and stock appreciation rights for the nine-month period ended
September 30, 2005:
STOCK OPTIONS
-----------------------------------------------------------------------------------------------
EXERCISE PRICE (US$)(4) 13.70(1) 13.70(2) 13.70(3) 16.00(1) 16.00(2) 0.01(1) 22.58(2) 22.58(3)
Number outstanding at
beginning of period 7,653,629 11,711 900,969 - - 911,117 - -
Granted 28,378 - - 42,278 240,880 15,353 154,977 35,251
Exercised (330,427) - (89,426) (2,207) (29,621) (74,006) - -
Forfeited (171,404) - (17,020) - (10,000) - - -
-----------------------------------------------------------------------------------------------
Number outstanding at
end of period 7,180,176 11,711 794,523 40,071 201,259 852,464 154,977 35,251
-----------------------------------------------------------------------------------------------
For options
granted in the period:
Weighted average fair value
at date of grant (US$) 5.73 - - 7.42 4.88 19.33 7.41 6.44
Weighted average fair value
at date of grant ((pound)) 3.06 - - - 2.61 10.67 4.21 4.40
Weighted average share price
at date of grant (US$) 16.00 - - 20.14 19.34 19.34 22.58 22.01
Weighted average expected
life (years) 3.3 - - 3.0 3.4 3.1 3.9 3.7
Weighted average expected
volatility (%) 35 - - 31 36 32 35 32
Weighted average risk-free
rate (%) 3.4 - - 3.7 3.4 3.5 3.8 4.0
Weighted average expected
dividend yield (%) 0.0 - - 0.0 0.0 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 equal to the market price on date of grant.
(3) Stock options with exercise price above market price on date of grant.
(4) All options granted by the Company were at the exercise prices disclosed.
RESTRICTED STOCK
STOCK APPRECIATION
RIGHTS
---------- ------------
Number outstanding at
beginning of period 325,628 -
Granted 94,267 -
Exchanged (5) (245,000) 245,000
Forfeited (5,176) -
---------- ------------
Number outstanding at
end of period 169,719 245,000
---------- ------------
For restricted stock/stock appreciation
rights granted/exchanged in the period:
Weighted average fair value
at date of grant (US$) 16.00 17.68
Weighted average fair value
at date of grant ((pound)) 8.55 9.41
(5) On April 1, 2005, the Company entered into definitive employment and
equity agreements with B. R. Elson, its Acting Chief Executive
Officer. In connection with the execution of the employment agreement,
Mr. Elson and the Company also agreed to substitute an award of
245,000 stock appreciation rights for the 245,000 shares of restricted
stock previously granted to Mr. Elson on July 16, 2004. The stock
appreciation rights vest quarterly in arrears over a 3-year period
commencing on July 1, 2004. On July 19, 2008 or Mr. Elson's
termination of employment, whichever is earlier, each vested stock
appreciation right shall be converted into a stock unit and Mr. Elson
will be paid, for each stock unit, an amount of cash equal to the fair
market value of a share of the Company's common stock on the payment
date. Upon the grant of the stock appreciation rights, the grant of
restricted stock made to Mr. Elson on July 16, 2004 was cancelled. As
at September 30, 2005 the Company has recognised a liability of
(pound)1 million in respect of this stock appreciation rights
arrangement.
The fair values of options, restricted stock and stock appreciation rights
have been translated to pounds sterling ((pound)) at the US$ to (pound)
exchange rate prevailing on the date of each grant.
The weighted-average remaining contractual life for options outstanding at
September 30, 2005 is 8.8 years.
On October 2, 2005, NTL Incorporated, a Delaware corporation ("NTL"),
entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") with the Company and Merger Sub Inc., a Delaware corporation
and a wholly owned subsidiary of NTL ("Merger Subsidiary"). The Merger
Agreement provides among other things that, upon the terms and subject to
the conditions set forth in the Merger Agreement, Merger Subsidiary will
merge with and into Telewest, with Telewest continuing as the surviving
corporation and a wholly owned subsidiary of NTL (the "Merger"). The terms
of the Company's stock option, restricted stock and stock appreciation
rights agreements for certain employees contain provisions that provide for
acceleration of vesting of outstanding unvested stock awards on the
occurrence of an "acceleration event." The Merger represents an
acceleration event as defined by the terms of these agreements and
therefore upon consummation of the Merger, the Company will accelerate
vesting of outstanding unvested stock for certain employees. The impact of
accelerated vesting would be to increase stock-based compensation expense
during the period in which the Merger is consummated as compared to
stock-based compensation expense in the three months ended September 30,
2005.
13 SEGMENT INFORMATION
The Company operates in three segments: cable, content and sit-up. For the
cable segment the chief operating decision-maker receives performance and
subscriber data for each of our 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 sit-up markets and retails a wide
variety of consumer products, primarily by means of televised shopping
programs using an auction-based format. Each of the content and sit-up
segments' operating results, which are separate from the cable segment, are
regularly reviewed separately by the chief operating decision-maker.
Revenues derived by the content segment from the cable segment are
eliminated on consolidation.
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2005 2004
------------- ----------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
------------- ----------------
CABLE SEGMENT
Consumer Sales Division revenue 249 238
Business Sales Division revenue 64 63
------------- ----------------
THIRD PARTY REVENUE 313 301
Operating costs and expenses (before depreciation
and amortization) (181) (183)
------------- ----------------
ADJUSTED EBITDA including inter-segment costs 132 118
Inter-segment costs (1) 3 2
------------- ----------------
ADJUSTED EBITDA 135 120
------------- ----------------
CONTENT SEGMENT
Content Segment revenue 36 29
Operating costs and expenses (before depreciation and
amortization) (27) (25)
ADJUSTED EBITDA including inter-segment revenues 9 4
Inter-segment revenues (1) (3) (2)
------------- ----------------
ADJUSTED EBITDA 6 2
------------- ----------------
SIT-UP SEGMENT
sit-up Segment revenue 58 -
Operating costs and expenses (before depreciation and
amortization) (57) -
------------- ----------------
ADJUSTED EBITDA 1 -
------------- ----------------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 135 120
Content Segment Adjusted EBITDA 6 2
sit-up Segment Adjusted EBITDA 1 -
------------- ----------------
142 122
Depreciation (99) (103)
Amortization (10) (9)
------------- ----------------
OPERATING INCOME 33 10
============= ================
(1) Inter-segment revenues are revenues of our content segment, which are
costs in our cable segment and which are eliminated on consolidation.
NINE MONTHS NINE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
2005 2004 2004
---------------- ---------------- ----------------
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
(POUND) MILLION (POUND) MILLION (POUND) MILLION
---------------- ---------------- ----------------
CABLE SEGMENT
Consumer Sales Division revenue 757 238 470
Business Sales Division revenue 188 63 130
---------------- ---------------- ----------------
THIRD PARTY REVENUE 945 301 600
Operating costs and expenses (before
depreciation, amortization and financial
restructuring charges) (534) (183) (369)
---------------- ---------------- ----------------
ADJUSTED EBITDA including inter-segment
costs 411 118 231
Inter-segment costs (1) 8 2 5
---------------- ---------------- ----------------
ADJUSTED EBITDA 419 120 236
---------------- ---------------- ----------------
CONTENT SEGMENT
Content Segment revenue 104 29 59
Operating costs and expenses (before
depreciation, amortization and financial
restructuring charges) (82) (25) (46)
---------------- ---------------- ----------------
ADJUSTED EBITDA including inter-segment
revenues 22 4 13
Inter-segment revenues (1) (8) (2) (5)
---------------- ---------------- ----------------
ADJUSTED EBITDA 14 2 8
---------------- ---------------- ----------------
SIT-UP SEGMENT
sit-up Segment revenue 82 - -
Operating costs and expenses (before
depreciation, amortization and financial
restructuring charges) (81) - -
---------------- ---------------- ----------------
ADJUSTED EBITDA 1 - -
---------------- ---------------- ----------------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 419 120 236
Content Segment Adjusted EBITDA 14 2 8
sit-up Segment Adjusted EBITDA 1 - -
---------------- ---------------- ----------------
434 122 244
Financial restructuring charges - - (21)
Depreciation (301) (103) (184)
Amortization (28) (9) -
---------------- ---------------- ----------------
OPERATING INCOME 105 10 39
================ ================ ================
(1) Inter-segment revenues are revenues of our content segment, which are
costs in our cable segment and which are eliminated on consolidation.
14 SUBSEQUENT EVENTS
On October 2, 2005, NTL Incorporated, a Delaware corporation ("NTL"),
entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") with the Company and Merger Sub Inc., a Delaware corporation
and a wholly owned subsidiary of NTL ("Merger Subsidiary"). The Merger
Agreement provides among other things that, upon the terms and subject to
the conditions set forth in the Merger Agreement, Merger Subsidiary will
merge with and into Telewest, with Telewest continuing as the surviving
corporation and a wholly owned subsidiary of NTL (the "Merger"). Further
details relating to the Merger and the Merger Agreement are included in a
Form 8-K filed by the Company with the SEC on October 6, 2005.
On October 1, 2005, the Company's Compensation Committee approved
amendments to the outstanding stock options and restricted stock held by
its named executive officers and certain of its other employees. Further
details relating to these amendments are included in a Form 8-K filed by
the Company with the SEC on October 6, 2005.
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
customer net additions and average monthly revenue per customer), product
introductions and innovation, meeting customer expectations, planned
operational changes (including product improvements and the impact of price
increases), expected capital expenditures, future cash sources and
requirements, liquidity, customer service improvements, cost savings and
the 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 Annual Report on Form 10-K for the
year ended December 31, 2004 (No. 000-50886) filed by Telewest Global, Inc.
on March 22, 2005 with the United States Securities and Exchange
Commission, 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
In this Form 10-Q, the terms "we," "the Company," "our" and "Telewest"
refer to Telewest Global, Inc. and its subsidiaries as a combined entity,
except where the context requires otherwise, for instance where we refer to
the operations of our predecessor, Telewest Communications plc, and its
subsidiaries prior to the completion of its financial restructuring on July
15, 2004. The term "our predecessor" refers to Telewest Communications plc
and its subsidiaries as a combined entity, except where the context
requires otherwise. "Telewest UK" refers to Telewest UK Limited, a wholly
owned subsidiary of Telewest. "TCN" refers to Telewest Communications
Networks Limited and "sit-up" refers to sit-up Limited, both indirectly
wholly owned subsidiaries of Telewest.
OVERVIEW
On November 26, 2003, the Company acquired the entire issued share capital
of Telewest UK, a newly formed subsidiary under the laws of England and
Wales.
On July 13, 2004, as part of the financial restructuring of our
predecessor, the Company entered into a transfer agreement with our
predecessor and Telewest UK to acquire substantially all the assets of our
predecessor. The financial restructuring of our predecessor was declared
effective on July 15, 2004 and the Company became the ultimate holding
company for the operating companies of our predecessor. For a further
discussion of financial restructuring refer to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004.
The presentation of the Company's financial results of operations for the
nine months ended September 30, 2005 differs from that of our predecessor
due to the financial restructuring, and it may be difficult to compare the
Company's future performance to the historical performance of our
predecessor. In particular, as a result of the completion of our
predecessor's financial restructuring:
o (pound)3,282 million of notes and debentures and (pound)479
million of unpaid accrued interest reflected on our predecessor'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 our predecessor
included a gain on the extinguishment of its outstanding notes
and debentures. The Company's indebtedness and related interest
expense has been substantially reduced.
o The Company adopted fresh-start reporting 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 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 reporting, the Company's balance sheets as at
September 30, 2005 and December 31, 2004 and results of
operations for the three and nine months ended September 30, 2005
and the three months ended September 30, 2004 are not comparable
in many material respects to the balance sheet and results of
operations reflected in our predecessor's historical financial
statements for periods prior to July 1, 2004.
Following completion of the financial restructuring, we 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") in January
2005 and, following a pilot in December 2005, the national launch of
digital video recorder ("DVR") enabled set-top boxes in the first quarter
of 2006.
On May 12, 2005, Telewest acquired a controlling interest in sit-up for an
aggregate purchase price of approximately (pound)103 million including
fees. Telewest completed the acquisition of 100% of the ordinary shares of
sit-up on July 7, 2005. sit-up markets and retails a wide variety of
consumer products, primarily by means of televised shopping programs using
an auction-based format. Prior to May 12, 2005, Telewest owned
approximately 49.9% of sit-up.
SUBSEQUENT EVENTS
On October 2, 2005, NTL Incorporated, a Delaware corporation ("NTL"),
entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") with the Company and Merger Sub Inc., a Delaware corporation
and a wholly owned subsidiary of NTL ("Merger Subsidiary"). The Merger
Agreement provides among other things that, upon the terms and subject to
the conditions set forth in the Merger Agreement, Merger Subsidiary will
merge with and into Telewest, with Telewest continuing as the surviving
corporation and a wholly owned subsidiary of NTL (the "Merger"). Further
details relating to the Merger and the Merger Agreement are included in a
Form 8-K filed by the Company with the Securities and Exchange Commission
on October 6, 2005.
On October 1, 2005, the Company's Compensation Committee approved
amendments to the outstanding stock options and restricted stock held by
its named executive officers and certain of its other employees. Further
details relating to these amendments are included in a Form 8-K filed by
the Company with the SEC on October 6, 2005.
RESULTS OF OPERATIONS
The following represents a discussion of results of operations for the
three and nine months ended September 30, 2005, compared to the three and
nine months ended September 30, 2004. The results of operations for the
three and nine months ended September 30, 2005 and the three months ended
September 30, 2004 represent our results, and the results of operations for
the nine months ended September 30, 2004 represent those of our predecessor
for the first six months of 2004, prior to its financial restructuring,
combined with our results for the nine months ended September 30, 2004,
("Combined Companies").
We operate in three segments: cable, content and sit-up. For the cable
segment our chief operating decision-maker receives performance and
subscriber data for each of our 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 sit-up markets and retails a wide
variety of consumer products, primarily by means of televised shopping
programs using an auction-based format. Each of the content and sit-up
segments' operating results, which are separate from the cable segment, are
regularly reviewed separately by the chief operating decision-maker.
Revenues derived by the content segment from the cable segment are
eliminated on consolidation.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Consolidated revenue increased by (pound)76 million or 23.2% from
(pound)328 million for the three months ended September 30, 2004 to
(pound)404 million for the three months ended September 30, 2005. The
increase was attributable to a (pound)12 million or 4.0% increase in cable
segment revenue, a (pound)6 million or 22.2% increase in content segment
revenue and a (pound)58 million contribution to revenue from the sit-up
segment.
Cable Segment
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- ---------------
REORGANIZED REORGANIZED %
COMPANY COMPANY INCREASE
--------------- --------------- ---------------
Revenue (in millions)
Consumer sales division (pound) 249 (pound) 238 4.6%
Business sales division 64 63 1.6%
--------------- ---------------
Total cable segment (pound) 313 (pound) 301 4.0%
--------------- ---------------
Cable segment Adjusted EBITDA (pound) 135 (pound) 120 12.5%
--------------- ---------------
Cable segment revenue increased primarily as a result of the increase in
revenue in the consumer sales division.
Cable segment Adjusted EBITDA increased principally as a result of
increases in consumer sales division revenue and a decrease in operating
costs and expenses.
Consumer Sales Division
Consumer sales division revenue represents a combination of consumer cable
television revenue, consumer cable telephony revenue, and consumer internet
revenue.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- ---------------
REORGANIZED REORGANIZED %
COMPANY COMPANY INCREASE
--------------- --------------- ---------------
Revenue (in millions)
Total Consumer Sales Division (pound) 249 (pound) 238 4.6%
=============== =============== ===============
Homes passed and marketed (1) 4,698,067 4,686,799 0.2%
Total customer relationships (2) 1,848,096 1,769,263 4.5%
Customer penetration 39.3% 37.7% 4.2%
Revenue Generating Units ("RGUs") (3) 3,955,205 3,539,185 11.8%
Average monthly revenue per customer (4) (pound)45.17 (pound)45.05 0.3%
Average monthly churn (5) 1.4% 1.2% 16.7%
Customers subscribing to two or more
services 1,459,848 1,338,632 9.1%
Dual or triple penetration 79.0% 75.7% 4.4%
Customers subscribing to three services
("triple play") 647,261 431,290 50.1%
"Triple-play" penetration 35.0% 24.4% 43.4%
Notes:
(1) The number of homes within our service area that can potentially be
served by our network with minimal connection costs. Information
concerning the number of homes "passed" (homes for which we have
completed network construction) or homes "passed and marketed" is
based on physical counts made by us during network construction or
marketing phases.
(2) The number of customers who receive at least one of our television,
telephony or broadband internet services.
(3) Revenue Generating Units ("RGUs"), refer to subscriptions to each of
our analog television, digital television, telephony and broadband
internet services on an individual basis. For example, when we provide
one customer with digital television and broadband internet services,
we record two RGUs. Dial-up internet services, second telephone lines
and additional TV outlets are not recorded as RGUs although they
generate revenue for us.
(4) Average monthly revenue per customer (often referred to as "ARPU" or
"Average Revenue per User") represents the consumer sales division's
total quarterly revenue of residential customers, including
installation revenues, divided by the average number of residential
customers in the quarter, divided by three. The same methodology is
used for television, telephony and broadband internet 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 our addressable areas (known as "Moves and Transfers")
and retain our services are excluded from these churn calculations.
Consumer sales division revenue increased by (pound)11 million or 4.6%. The
increase was primarily from an increase in customer relationships and ARPU,
in each case primarily as a result of a growth in blueyonder broadband
internet penetration.
Consumer television revenue increased for the three months ended September
30, 2005, compared to the three months ended September 30, 2004, primarily
due to an increase in customers, price rises of (pound)1 on our lower-tier
digital packages in November 2004 and selected price rises on our premium
channels, partially offset by a reduction in premium revenue. The increase
in the number of subscribers resulted principally from the growth in the
number of blueyonder broadband internet service subscribers from the third
quarter of 2004 to the third quarter of 2005, and our success in bundling
blueyonder broadband internet services with our television services.
Consumer telephony revenue decreased for the three months ended September
30, 2005 compared to the three months ended September 30, 2004, primarily
due to a continued decline in fixed-line telephony usage, offset in part by
an increase in subscribers, migration to unmetered packages and by selected
price increases.
Consumer internet revenue increased for the three months ended September
30, 2005 compared to the three months ended September 30, 2004, primarily
due to an increase in blueyonder broadband internet subscribers, partially
offset by a decrease in blueyonder broadband internet ARPU.
Overall, the consumer sales division's average monthly revenue per customer
increased primarily due to increased RGUs per customer, driven in large
part by continued growth in blueyonder broadband internet penetration, and
selective television price increases partially offset by declines in
broadband and telephony ARPU.
The increases in "dual or triple penetration" of 3.3 percentage points and
"triple play" penetration of 10.6 percentage points were primarily a result
of the growth in the number of subscribers to our broadband internet
services, who generally also subscribe to one or more of our consumer
television or consumer telephony products. As at September 30, 2005,
approximately 94% of our blueyonder broadband internet subscribers took at
least one additional service of either consumer television or consumer
telephony products and approximately 70% took all three services.
During the three months ended September 30, 2005, total residential
customer relationships increased by 10,905. This increase resulted
principally from promotional campaigns, such as our "Togetherness" campaign
which bundles blueyonder broadband internet or telephony with our
television service.
This increase in total customer relationships and the increases in "dual"
and "triple play" penetration is reflected in the growth of RGUs, which
grew by 81,413 in the three months ended September 30, 2005. Consequently,
RGUs per customer increased from 2.00 at September 30, 2004 to 2.14 at
September 30, 2005. Approximately 38% of customer acquisitions in the three
months ended September 30, 2005 subscribed to the full "triple play".
Average monthly churn increased from 1.2% for the three months ended
September 30, 2004 to 1.4% for the three months ended September 30, 2005
due primarily to an increase in disconnections of customers for non-payment
following subscriber growth in recent periods and an increase in churn
attributable to student and other movers.
We anticipate further growth in total customer relationships, RGUs per
customer and lower churn. However, overall revenue growth for the consumer
sales division is contingent upon, among other things, continued growth in
consumer demand for our service offerings generally, and broadband internet
services in particular, as well as our ability to manage customer churn.
Consumer Television
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ---------------
Cable television subscribers - digital 1,228,164 1,078,623 13.9%
Cable television subscribers - analog 120,408 218,681 (44.9%)
--------------- ---------------
Total cable television subscribers 1,348,572 1,297,304 4.0%
=============== ===============
Television ready homes passed and
marketed 4,698,067 4,686,799 0.2%
Digital ready homes passed and marketed 4,503,909 4,405,162 2.2%
Percentage of digital subscribers to
total subscribers 91.1% 83.1% 9.6%
Television penetration 28.7% 27.7% 3.6%
Average monthly revenue per CATV
subscriber (pound)20.89 (pound) 20.72 0.8%
Average monthly churn 1.8% 1.4% 28.6%
Total consumer television customers and television penetration increased
during the three months ended September 30, 2005. These increases resulted
primarily from promotions, which bundled TV with blueyonder broadband
internet and/or consumer telephony services. Bundled promotions included
"Togetherness," which bundled our "Starter" cable television package with
our broadband internet and/or telephony services.
We are in the process of upgrading parts of the few areas covered by our
network that are not yet digital and we now deliver digital services to
approximately 96% of our network. As a result of this substantially
completed roll-out, our consumer television customers continue to migrate
from our analog services to our digital services, where in aggregate, they
generate higher monthly revenues. We estimate that we will be fully digital
by the end of 2006, at which point we intend to switch off our analog
signal. Switching off the analog signal will free up significant amounts of
bandwidth in our network, which will allow extra capacity for VOD, High
Definition TV (HDTV), broadband speed increases and other services. In
addition, we expect the switch off of our analog signal to simplify our
operations, reduce costs and potentially reduce fault rates and churn.
Average monthly revenue per television subscriber increased primarily due
to price rises of (pound)1 on our lower-tier digital packages in November
2004 and selected price rises on our premium channels during 2004,
partially offset by a reduction in premium revenue. We also implemented
selected television price increases from July 1, 2005, which we expect to
have a positive impact on average monthly revenue per customer, although
they may have an adverse impact on average monthly churn. We plan to
increase prices on some of our digital television packages during 2006.
Average monthly churn increased for the three months ended September 30,
2005 as compared to the corresponding period in 2004 primarily due to an
increase in disconnections of customers for non-payment following
subscriber growth in recent periods and an increase in churn attributable
to student and other movers.
Our VOD roll-out is continuing and as at November 10, 2005 is now available
to approximately 776,000, or 62% of our digital TV subscribers. We plan to
complete the national roll-out by the end of this year, earlier than
initially anticipated. The service is branded "Teleport" and we have
recently expanded the content available, including an increase in the
number of movie titles to over 300. We expect to launch a music on demand
service later this month.
We are planning to pilot a DVR service with a number of customers in early
December 2005. At the same time, we will be pre-registering customers on
our website, ahead of the full national commercial launch early in the
first quarter of 2006. We have branded the service "TV Drive" and it will
be charged at (pound)10 to (pound)15 per month. TV Drive customers will
receive a 160Gb, three tuner, HDTV compatible Scientific Atlanta DVR. For
an extra (pound)5 per month, customers can use their existing digital
set-top box as a second box in the home (additional outlet), representing a
(pound)10 discount on current pricing.
We plan to launch HDTV at the same time, becoming the first platform in the
UK to offer HDTV to our DVR customers. We have recently secured HDTV
content from the BBC and others and we plan to extend this over the coming
months.
We expect these new services to contribute to customer acquisition and
customer retention as they are introduced across our customer base.
Consumer Telephony
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ---------------
"Talk Weekends" (and previously
"3-2-1") telephony subscribers 1,027,271 1,082,125 (5.1%)
"Talk Unlimited" and "Talk Evenings
and Weekends" telephony subscribers 659,176 552,534 19.3%
--------------- ---------------
Total residential telephony subscribers 1,686,447 1,634,659 3.2%
=============== ===============
Telephony ready homes passed and
marketed 4,696,439 4,682,002 0.3%
Telephony penetration 35.9% 34.9% 2.9%
Average monthly revenue per subscriber (pound)22.35 (pound)23.53 (5.0%)
Average monthly churn 1.4% 1.2% 16.7%
The increase in total residential telephony subscribers resulted primarily
from promotions, which bundled residential telephony services with
blueyonder broadband internet and/or television services.
At the start of 2005, we withdrew our "3-2-1" metered telephony package
from sale to new customers, and from July 1, 2005, we migrated all of our
existing "3-2-1" subscribers to "Talk Weekends", which gives subscribers
free local and national calls at weekends. This package is charged at
(pound)10.50 per month compared to (pound)10 per month for the "3-2-1"
service.
"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
also generates higher average revenue per customer from existing
subscribers who migrate from our "Talk Weekends" telephony services.
"Talk Evenings and Weekends," is our telephony package offering unlimited
local and national evening and weekend calls (excluding calls at anytime to
non-geographic, premium rate and mobile telephone numbers, and local and
national calls between 6.00 am and 6.00 pm Monday to Friday) to anywhere in
the UK (including line rental) at a flat monthly rate. In addition, we
offer "Talk International," an "add-on" service, which offers reduced rates
to all international destinations at a fixed monthly rate of (pound)3 per
month, and is available to all of our telephony subscribers. We also offer
"Talk Mobile," which gives subscribers significant discounts on calls to
mobiles for a flat rate of (pound)1.50 per month on top of the usual line
rental charge.
We have continued our strategy of migrating customers to flat rate packages
to minimize the impact of declining telephony usage. As a result of these
efforts, the number of subscribers to our "Talk Unlimited" and "Talk
Evenings and Weekends" flat rate telephony packages continues to increase
at the expense of our "Talk Weekends" services. At September 30, 2005, 39%
of all telephony subscribers were on a "Talk" flat rate package, i.e. "Talk
Unlimited" and "Talk Evenings and Weekends", compared with 34% at September
30, 2004.
The number of telephony subscribers decreased by 2,765 during the three
months ended September 30, 2005. Customer acquisition was impacted as
marketing and promotions during the three months focused more on our
broadband and television services. Telephony remains an important element
of our bundled offering and is likely to have increased focus in future
marketing campaigns.
The decrease in average monthly revenue per telephony subscriber was
primarily due to the declining overall volume of telephony traffic we carry
among consumers who use both fixed-line and mobile phones (known as "call
substitution"), the complete substitution of mobile phones for fixed-line
phones by some customers and reductions in second line penetration as
customers migrate from dial-up internet services to our blueyonder
broadband internet services, partially offset by some selected price
increases.
Average monthly telephony subscriber churn increased primarily due to an
increase in disconnections of customers for non-payment following
subscriber growth in recent periods and an increase in churn attributable
to student and other movers.
Consumer Internet
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ---------------
Consumer internet subscribers:
Blueyonder broadband 920,186 607,222 51.5%
Blueyonder "SurfUnlimited" 49,542 127,745 (61.2%)
Blueyonder pay-as-you-go 23,645 39,196 (39.7%)
--------------- ---------------
Total consumer internet subscribers 993,373 774,163 28.3%
=============== ===============
Blueyonder Broadband:
Broadband ready homes passed and
marketed 4,503,909 4,405,162 2.2%
Broadband internet penetration 20.4% 13.8% 47.8%
Average monthly revenue per broadband
internet subscriber (pound) 19.03 (pound) 21.50* (11.5%)
Average monthly churn 1.5% 1.3% 15.4%
Note:
* Includes a recalculation of the average monthly revenue per broadband
internet subscriber for the three months ended September 30, 2004,
reflecting the full value of promotional discounts offered. The
recalculated average monthly revenue per broadband internet subscriber was
(pound)21.50 for the three months ended September 30, 2004, compared to
(pound)22.27 as previously reported.
The increase in blueyonder broadband internet subscribers and consequent
penetration resulted principally from continued growth in UK consumer
demand for broadband internet products generally, speed increases for our
512Kb and faster services introduced in May and December 2004 (at no extra
cost to our subscribers), and promotions such as "3 for (pound)30," and
"Togetherness" which bundles blueyonder broadband internet with free
"Starter" television and/or our telephony service. During May 2005 we
increased the speed of our lower-tier 256Kb service to 512Kb. As of
September 30, 2005 approximately 49% of our blueyonder broadband internet
customers currently subscribe to our 512Kb lower-tier service (currently in
the process of being upgraded to a 2Mb service) at no additional cost to
these customers.
In September 2005, we began implementing further broadband speed increases.
As at November 10, 2005, approximately 60% of broadband customers had been
upgraded to the higher speeds. We expect that approximately 80% of
broadband customers will be upgraded by the end of the year, with the
remainder expected to be upgraded in the first quarter of 2006. These speed
upgrades will increase the speed of our lowest tier from 512Kb to 2Mb, the
speed of our existing 1Mb to 4Mb and the speeds of our existing 2Mb and 4Mb
tiers to 10Mb. These upgrades are at no extra charge to our customers and
our 4Mb customers will receive a (pound)15 per month price reduction when
they migrate to the 10Mb tier.
Blueyonder broadband internet customers have significantly contributed to
the growth in our average monthly revenue per customer. As at September 30,
2005, 647,261 broadband internet customers, or 35.0% of our total
customers, were "triple play" customers who also took both television and
residential telephony services from us, compared with 431,290 or 24.4% at
September 30, 2004. Blueyonder broadband internet is also successful in
attracting new customers, with approximately 37% of blueyonder broadband
internet installations in the three months ended September 30, 2005
initiating new customer relationships.
Average monthly revenue per broadband subscriber decreased primarily due to
the introduction of the lower-tier 256Kb service (increased to 512Kb during
May 2005 and now being increased to 2Mb) and promotional offers. We expect
that demand for this enhanced lower-tier product will remain strong as it
is upgraded to 2Mb and that, as a result we will continue to experience
subscriber growth. However, as a result of the success of this lower-tier
product and price reductions for our existing 4Mb subscribers, we may also
experience a continued decline in broadband internet ARPU.
Blueyonder broadband internet average monthly churn increased due to an
increase in disconnections of customers for non-payment following
subscriber growth in recent periods and an increase in churn attributable
to student and other movers.
Dial-up internet subscribers to our blueyonder "SurfUnlimited" product,
together with our blueyonder pay-as-you-go metered internet service,
decreased by approximately 94,000 or 56% from approximately 167,000 at
September 30, 2004 to approximately 73,000 at September 30, 2005, as we
continued to migrate our dial-up subscribers to our blueyonder broadband
internet services.
Business Sales Division
Business sales division revenue is derived from the delivery to business
customers of communication solutions, comprising voice, data and managed
services.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ---------------
Revenue (in millions)
Voice services (pound) 35 (pound) 35 -
Data services 20 17 17.6%
Carrier and other services 9 11 (18.2%)
--------------- ---------------
Total business sales division (pound) 64 (pound) 63 1.6%
=============== ===============
Business sales division revenues increased by (pound)1 million for the
three months ended September 30, 2005 as compared to the comparable period
in 2004, despite challenging market conditions. Revenue in the three months
ended September 30, 2005 benefited from a (pound)1 million settlement
received from BT Group plc in respect of rates being applied to SRS
(Special Rate Services) calls during prior periods.
Voice services revenue remained flat, principally as a result of growth
from our SRS Advanced Solutions product offsetting declining usage arising
from data and mobile voice substitution, and price erosion.
Data services revenue increased by (pound)3 million, primarily as a result
of growth in our managed data and ethernet products to our larger business
customers, offset by pricing pressures in the declining private circuits
market. During the fourth quarter of 2004, we launched our "Evolved
Ethernet" product to extend our range of services, and we have seen
continued growth in this area, particularly amongst our public sector
customer base.
Carrier and other services revenue declined by (pound)2 million, as a
result of declines in both carrier services revenues and other services
(principally travel service) revenues. Our carrier services revenue is
derived from the sale of access to our fiber-optic national network to
other carriers and operators. The decline in other services revenue
primarily reflects the decline across the travel sector and the ongoing
move by vertically integrated tour operators to provide their own booking
solutions.
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,
expansion of our presence in the public sector and the sale of managed data
networks to new business customers. We are also in the process of trialling
multimedia over the internet.
Content Segment
---------------
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 the content subsidiaries of
Flextech.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- ---------------
REORGANIZED REORGANIZED %
COMPANY COMPANY INCREASE
--------------- --------------- ---------------
Revenue (in millions)
Subscription revenue (pound) 11 (pound) 10 10.0%
Advertising revenue 18 14 28.6%
Other revenue 4 3 33.3%
-------------- ---------------
Net content segment revenue (1) (pound) 33 (pound) 27 22.2%
=============== ===============
Content segment Adjusted EBITDA (pound) 6 (pound) 2 200.0%
-------------- ---------------
Number of paying homes receiving our
programming - (millions) 9.5 9.4 1.1%
Share of the net income of UKTV (in
millions) (pound) 5 (pound) 3 66.7%
UK television advertising market share(2) 5.1% 4.6% 10.9%
Notes
(1) Net content segment revenue consists of total revenue (subscription
revenue, advertising revenue, management fees, transactional and
interactive revenue and other revenue) less inter-segment revenues of
(pound)3 million for the three months ended September 30, 2005 and
(pound)2 million for the three months ended September 30, 2004.
(2) Including 100% of the market share of UKTV.
Content segment revenue increased as a result of increases in subscription,
advertising and other revenue. Before the elimination of inter-segment
revenues of (pound)3 million for the three months ended September 30, 2005
and (pound)2 million for the three months ended September 30, 2004, the
revenue of the content segment increased by 24.1% to (pound)36 million due
primarily to increases in subscription and advertising revenue.
The increase in subscription revenue resulted primarily from increased
numbers of homes taking multi-channel TV services including the content
segment's wholly owned channels.
The increase in advertising revenue resulted primarily from an increase in
market share, driven by improved viewing share of Flextech channels,
together with an increase in absolute market revenue, despite increased
competition in the multi-channel market.
Other revenue increased principally as a result of increased consumer
product sales and program rights sales to international broadcasters.
Content segment Adjusted EBITDA increased primarily as a result of the
increase in segment revenue partially offset by increases in operating
costs.
We expect that the content segment's Adjusted EBITDA in the fourth quarter
of 2005 will be impacted by extra programming costs. We expect programming
costs in the fourth quarter to increase by more than (pound)10 million as
compared to the third quarter, as we invest in enriched programming in
common with other UK broadcasters to drive advertising revenue growth in
2006. As a result, we expect Adjusted EBITDA to be at a similar level to
the fourth quarter of 2004, when it showed a loss of (pound)1 million.
Following this investment in programming and the increased costs of the
Christmas season, we would expect an increase in revenue and Adjusted
EBITDA in the first quarter of 2006 compared to the fourth quarter of 2005,
as we have experienced historically.
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.
sit-up Segment
--------------
sit-up segment revenue is derived from the retail sales of consumer
products by means of televised shopping programs using an auction-based
format.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ------------
(IN MILLIONS) (IN MILLIONS
sit-up segment revenue (pound) 58 (pound) - -
--------------- --------------- ------------
sit-up segment Adjusted EBITDA (pound) 1 (pound) - -
--------------- --------------- ------------
sit-up segment revenue for the three months ended September 30, 2005 was
(pound)58 million.
The sit-up segment Adjusted EBITDA was (pound)1 million for the three
months ended September 30, 2005, representing revenue of (pound)58 million,
offset by sit-up segment expenses of (pound)44 million and SG&A of
(pound)13 million.
No comparative US GAAP financial information is available for the sit-up
segment, as sit-up only became a consolidated subsidiary of the Group from
May 12, 2005.
sit-up is typically a seasonal business with the fourth quarter expected to
generate more revenue and Adjusted EBITDA as compared to each of the first
three quarters.
sit-up has been affected by the difficult operating conditions currently
being experienced in the UK retail market. As a result, sit-up has
experienced pressure on product margins, which has impacted Adjusted
EBITDA. Adjusted EBITDA was also impacted during the three months ended
September 30, 2005 by extra supply chain costs incurred in advance of the
Christmas season, sit-up's prime selling period.
If these retail conditions persist in the fourth quarter we would expect
fourth quarter Adjusted EBITDA to be below that reported by sit-up in the
fourth quarter of 2004.
sit-up launched a third live-auction channel in July 2005, speed auction
tv, on Sky, NTL and Telewest networks in addition to its established bid-up
tv and price-drop tv channels.
Combined cable, content and sit-up Segments
-------------------------------------------
Operating Costs and Expenses
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ------------
(IN MILLIONS) (IN MILLIONS
Cable segment expenses (pound) 71 (pound) 72 (1.4%)
Content segment expenses 19 17 11.8%
sit-up segment expenses 44 - -
Depreciation 99 103 (3.9%)
Amortization 10 9 11.1%
--------------- ---------------
243 201 20.9%
SG&A 128 117 9.4%
--------------- ---------------
Total Operating Costs and Expenses (pound) 371 (pound) 318 16.7%
=============== ===============
Our total operating costs and expenses increased due to the consolidation
of sit-up segment expenses and SG&A together with increased content segment
expenses. This was partially offset by lower depreciation and cable segment
expenses.
The cable segment's expenses consist principally of cable programming
expenses for our consumer television services and cable telephony expenses
for our consumer and business telephony products. These decreased primarily
due to reductions in the interconnection charges we pay for calls to
mobiles and a reduction in overall telephony call volumes.
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 52.8% of
the content segment's revenues, including inter-segment sales to the cable
segment for the three months ended September 30, 2005 compared with 58.6%
on the same basis for the three months ended September 30, 2004. This
decrease is due principally to the improvements in all revenue lines offset
by flat amortization costs of programming aired in the quarter.
The increase in the content segment's expenses is primarily due to
increased programming costs in its sales operation.
The sit-up segment's expenses consist primarily of the cost of purchasing
the products sold on its televised shopping programs and totalled (pound)44
million for the three months ended September 30, 2005.
The increase in SG&A, which includes, among other items, salary and
marketing costs, primarily reflects the consolidation of SG&A expenses in
our sit-up segment, partially offset by decreased SG&A in our cable
segment.
Stock-based compensation expense ("SBCE") of (pound)2 million was incurred
in the three months ended September 30, 2005 compared to (pound)3 million
in the corresponding period in 2004 and is included in SG&A. SBCE arises as
a result of options, restricted stock and stock appreciation rights issued
by us to our employees. SBCE is accounted for in accordance with SFAS 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SBCE is a non-cash
item.
The terms of the Company's stock option, restricted stock and stock
appreciation rights agreements for certain employees contain provisions
that provide for acceleration of vesting of outstanding unvested stock
awards on the occurrence of an "acceleration event." The Merger represents
an acceleration event as defined by the terms of these agreements and
therefore upon consummation of the Merger, the Company will accelerate
vesting of outstanding unvested stock for certain employees. The impact of
accelerated vesting would be to increase SBCE during the period in which
the Merger is consummated as compared to SBCE in the three months ended
September 30, 2005.
Other Income/(Expense)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED REORGANIZED INCREASE/
COMPANY COMPANY (DECREASE)
--------------- --------------- ------------
(IN MILLIONS) (IN MILLIONS)
Interest income (pound) 6 (pound) 6 -
Interest expense (38) (49) (22.4%)
Foreign exchange losses, net (1) - -
Share of net income of affiliates 4 4 -
------------- -------------
Total other income/(expense), net (pound) (29) (pound) (39) (25.6%)
============= =============
The net decrease in other expense resulted principally from decreased
interest expense following the refinancing of our bank debt in December
2004.
Because of a significant reduction in the amount of our non-sterling
denominated indebtedness, we do not expect that foreign exchange gains or
losses will materially affect our results of operations in 2005. We also
expect that interest expense for 2005 will be lower than for prior periods
due to the completion of our financial restructuring in July 2004 and the
refinancing of our bank debt in December 2004. This reduction will be
partially offset by the interest expense on borrowings under our new
Flextech facility.
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, 2005 and 2004, we recognized (pound)3 million of interest
income from UKTV.
Share of net income of affiliates increased primarily due to an increase in
net income of UKTV in the three months ended September 30, 2005. Our
principal affiliated companies for the purpose of our share of net income
of affiliated companies as at September 30, 2005 included the companies
that comprise UKTV and Front Row Television Limited.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Consolidated revenue increased by (pound)141 million or 14.4% from
(pound)982 million for the nine months ended September 30, 2004 to
(pound)1,123 million for the nine months ended September 30, 2005. The
increase was attributable to a (pound)44 million or 4.9% increase in cable
segment revenues, a (pound)15 million or 18.5% increase in content segment
revenue and an (pound)82 million contribution to revenue from the sit-up
segment since May 12, 2005.
The increase in consolidated revenue and cable segment revenues included a
one-time credit of (pound)16 million resulting from the recovery of Value
Added Tax (VAT) from HM Customs and Excise, which had been the subject of a
court case and subsequent appeals since 2002. A (pound)16 million charge
was taken against revenue in 2002 when the case commenced. Excluding this
one-time VAT recovery, consolidated revenue would have increased by
(pound)125 million or 12.7% from (pound)982 million to (pound)1,107
million. Excluding the VAT recovery and the consolidated revenue of sit-up,
consolidated revenue for the nine months ended September 30, 2005 would
have increased by (pound)43 million or 4.4% from (pound)982 million to
(pound)1,025 million.
Cable Segment
-------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- --------------- %
REORGANIZED COMBINED INCREASE/
COMPANY COMPANIES (DECREASE)
--------------- --------------- ------------
Revenue (in millions)
Consumer sales division (pound) 757 (pound) 708 6.9%
Business sales division 188 193 (2.6%)
------------- ------------
Total cable segment (pound) 945 (pound) 901 4.9%
------------- ------------
------------- ------------
Cable segment Adjusted EBITDA (pound) 419 (pound) 356 17.7%
------------- ------------
Cable segment revenue increased principally due to growth in revenue in the
consumer sales division. Excluding the VAT recovery described above, cable
segment revenue would have increased by (pound)28 million or 3.1% from
(pound)901 million for the nine months ended September 30, 2004 to
(pound)929 million for the nine months ended September 30, 2005. Excluding
the impact of the VAT recovery, the increase was primarily from growth in
internet revenue together with an increase in cable television revenue,
offset by a decrease in consumer telephony revenue and a decline in
business sales division revenue of (pound)5 million.
Cable segment Adjusted EBITDA increased principally as a result of
increases in consumer sales division revenue (including the VAT recovery)
and a decrease in operating costs and expenses, as a result, in part, of a
rates (local government tax) rebate of (pound)4 million, partially offset
by a reduction in business sales division revenue. Excluding the VAT
recovery and the rates rebate, Adjusted EBITDA would have been (pound)399
million for the nine months ended September 30, 2005, an increase of
(pound)43 million or 12.1%.
Consumer Sales Division
Consumer sales division revenue represents a combination of consumer cable
television revenue, consumer cable telephony revenue, and consumer internet
revenue.
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------- ---------------
REORGANIZED COMBINED %
COMPANY COMPANIES INCREASE
--------------- --------------- ------------
Revenue (in millions)
Total Consumer Sales Division (pound) 757 (pound) 708 6.9%
============== =============
Average monthly revenue per customer (1) (pound) 46.09 (pound) 45.03 2.4%
Average monthly revenue per customer
(excluding impact of the (pound)16 million
VAT recovery) (2) (pound) 45.14 (pound) 45.03 0.2%
Average monthly churn (3) 1.2% 1.1% 9.1%
Notes:
(1) Average monthly revenue per customer (often referred to as "ARPU" or
"Average Revenue per User") represents the consumer sales division's
total nine months' revenue of residential customers, including
installation revenues, divided by the average number of residential
customers in the nine months, divided by nine. The same methodology is
used for television, telephony and broadband internet ARPU.
(2) Excludes the (pound)16 million VAT recovery from consumer sales
division revenue.
(3) Average monthly churn represents the total number of customers who
disconnected during the nine months divided by the average number of
customers in the nine months, divided by nine. Subscribers who move
premises within our addressable areas (known as "Moves and Transfers")
and retain our services are excluded from these churn calculations.
Total consumer sales division revenue for the nine months ended September
30, 2005 includes (pound)16 million recovery of VAT, described above.
Excluding the VAT recovery, consumer sales division revenue would have
increased by (pound)33 million or 4.7%. The increase resulted primarily
from increases in both total customer relationships and average revenue per
customer in the first nine months of 2005 as compared to the first nine
months of 2004, both of which resulted primarily from an increase in the
number of our blueyonder broadband internet subscribers.
Consumer television revenue increased primarily due to a one-time VAT
recovery of (pound)16 million, an increase in customers, price rises of
(pound)1 on our lower-tier digital packages in November 2004 and selected
price rises on our premium channels. The increase in the number of
subscribers resulted principally from the growth in the number of
blueyonder broadband internet service subscribers, and our success in
bundling blueyonder broadband internet services with our television
services.
Consumer telephony revenue decreased for the nine months ended September
30, 2005 compared to the nine months ended September 30, 2004, primarily
due to continued decline in fixed-line telephony usage, offset in part by
an increase in subscribers, migration to unmetered packages and by selected
price increases.
Consumer internet revenue increased for the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004, primarily due to
an increase in blueyonder broadband internet subscribers, partially offset
by a decrease in blueyonder broadband internet ARPU.
Overall, the consumer sales division's average monthly revenue per customer
increased due principally to the one-time VAT recovery of (pound)16
million.
Overall, the consumer sales division's average monthly revenue per customer
(excluding impact of the (pound)16 million VAT recovery) increased slightly
due principally to an increase in the number of our customers subscribing
to two or more of our services, although average monthly revenue per
subscriber for our consumer telephony and broadband internet services
declined on an individual basis.
During the nine months ended September 30, 2005, total residential customer
relationships increased by 48,540 or approximately 2.7%. This increase
resulted principally from the increased penetration of blueyonder broadband
internet.
The increase in total customer relationships is reflected in the growth of
RGUs, which grew by 283,803 or approximately 7.7% in the nine months ended
September 30, 2005 compared to growth of 252,479 in the nine months ended
September 30, 2004. Approximately 38% of customer acquisitions in the nine
months ended September 30, 2005 took the full "triple play".
Average monthly churn increased primarily as a result of an increase in
disconnections of customers for non-payment following subscriber growth in
recent periods and an increase in churn attributable to student and other
movers.
Consumer Television
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
REORGANIZED COMBINED %
COMPANY COMPANIES INCREASE
------------- ------------- ---------
Average monthly revenue per CATV subscriber (pound) 22.25 (pound) 20.81 6.9%
Average monthly revenue per CATV
subscriber (excluding impact of the
(pound)16 million VAT recovery) (pound) 20.93 (pound) 20.81 0.6%
Average monthly churn 1.6% 1.3% 23.1%
Total consumer television customers and television penetration increased
during the nine months ended September 30, 2005. Total consumer television
customers increased by 35,747 or 2.7% in the nine months ended September
30, 2005 compared with 25,240 net additions in the nine months ended
September 30, 2004. These increases resulted primarily from promotions,
which bundled TV with blueyonder broadband internet and/or consumer
telephony services.
Average monthly revenue per television subscriber increased primarily due
to a one-time VAT recovery of (pound)16 million.
Average monthly revenue per television subscriber (excluding impact of the
(pound)16 million VAT recovery) increased marginally, primarily due to the
impact of price rises in July and November 2004 and July 2005.
Average monthly churn increased, primarily due to an increase in
disconnections of customers for non-payment following subscriber growth in
recent periods and an increase in churn attributable to student and other
movers.
Consumer Telephony
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE
COMPANY COMPANIES (DECREASE)
------------- ------------- ---------
Average monthly revenue per subscriber (pound) 22.59 (pound) 23.81 (5.1%)
Average monthly churn 1.2% 1.1% 9.1%
Total residential telephony subscribers increased by 26,106 or 1.6% in the
nine months ended September 30, 2005 compared with 34,626 net additions in
the nine months ended September 30, 2004. The decline in customer
acquisition was impacted by higher churn and by marketing and promotions
during the three months ended September 30, 2005 which focused more on our
broadband and television services. Telephony remains an important element
of our bundled offering and is likely to have increased focus in future
marketing campaigns.
The increase in total residential telephony subscribers resulted primarily
from promotions, which bundled residential telephony services with
blueyonder broadband internet and/or television services and offered
discounts on premium channels for customers who bundled TV with our "Talk"
products.
Average monthly revenue per telephony subscriber decreased, primarily due
to the declining overall volume of telephony traffic we carry among
consumers who use both fixed-line and mobile phones (known as "call
substitution"), the complete substitution of mobile phones for fixed-line
phones by some customers and reductions in second line penetration as
customers migrate from dial-up internet services to our blueyonder
broadband internet services, partially offset by some selected price
increases.
The number of subscribers to our "Talk Unlimited" and "Talk Evenings and
Weekends" flat rate telephony packages increased by 79,728 in the nine
months ended September 30, 2005 compared to 96,975 in the nine months ended
September 30, 2004, as a result, in part, of our continued strategy to
migrate customers to our flat rate products.
Average monthly telephony subscriber churn increased primarily due to an
increase in disconnections of customers for non-payment following
subscriber growth in recent periods and an increase in churn attributable
to student and other movers.
Consumer Internet
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE/
COMPANY COMPANIES (DECREASE)
------------- ------------- ---------
Average monthly revenue per broadband
internet subscriber (pound) 19.43 (pound) 22.08* (12.0%)
Average monthly churn 1.3% 1.2% 8.3%
Note:
* Includes a recalculation of the average monthly revenue per broadband
internet subscriber for the nine months ended September 30, 2004,
reflecting the full value of promotional discounts offered. The
recalculated average monthly revenue per broadband internet subscriber was
(pound)22.08 for the nine months ended September 30, 2004, compared to
(pound)22.60 as previously reported.
Total blueyonder broadband internet subscribers increased by 221,950 or
31.8% in the nine months ended September 30, 2005 compared with 192,613 net
additions in the nine months ended September 30, 2004.
The increase in blueyonder broadband internet subscribers resulted
principally from continued growth in UK consumer demand for broadband
internet products generally, the introduction of our lower-tier 256Kb
service in March 2004, speed increases for our 512Kb and faster services
introduced in May and December 2004, and promotions such as "3 for
(pound)30," which bundles our 512Kb blueyonder broadband internet service
with the television "Starter" package and "Talk Weekends", and
"Togetherness" which bundles blueyonder broadband internet with our
television "Starter" package.
In September 2005, we began implementing further broadband speed increases.
As at November 10, 2005, approximately 60% of broadband customers had been
upgraded to the higher speeds. We expect that approximately 80% of
broadband customers will be upgraded by the end of the year, with the
remainder expected to be upgraded in the first quarter of 2006. These speed
upgrades will increase the speed of our lowest tier from 512Kb to 2Mb, the
speed of our existing 1Mb to 4Mb and the speeds of our existing 2Mb and 4Mb
tiers to 10Mb. These upgrades are at no extra charge to customers and our
4Mb customers will receive a (pound)15 per month price reduction when they
migrate to the 10Mb tier.
Blueyonder broadband internet customers have significantly contributed to
the growth in our average monthly revenue per customer. Blueyonder
broadband internet is also successful in attracting new customers, with
approximately 43% of blueyonder broadband internet installations in the
nine months ended September 30, 2005, being from new customer
relationships, compared with approximately 36% in the nine months ended
September 30, 2004.
Average monthly revenue per broadband subscriber decreased, primarily due
to the introduction of the lower-tier 256Kb service (increased to 512KB
during May 2005 and now being increased to 2Mb) and promotional offers. We
expect that demand for this enhanced lower-tier product will remain strong
as it is upgraded to 2Mb and that, as a result we will continue to
experience subscriber growth. However, as a result of the success of this
lower-tier product and price reductions for our existing 4Mb subscribers,
we may also experience a continued decline in broadband internet ARPU.
Blueyonder broadband internet average monthly churn increased due to an
increase in disconnections of customers for non-payment following
subscriber growth in recent periods and an increase in churn attributable
to student and other movers.
Dial-up internet subscribers to our blueyonder "SurfUnlimited" product,
together with our blueyonder pay-as-you-go metered internet service,
decreased by approximately 68,000 or 48.2% in the nine months ended
September 30, 2005 compared to approximately 66,000 in the nine months
ended September 30, 2004 as we continued to migrate our dial-up subscribers
to our blueyonder broadband internet services.
Business Sales Division
Business sales division revenue is derived from the delivery to business
customers of communication solutions, comprising voice, data and managed
services.
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE/
COMPANY COMPANIES (DECREASE)
------------- ------------- ----------
Revenue (in millions)
Voice services (pound) 102 (pound) 105 (2.9%)
Data services 56 52 7.7%
Carrier and other services 30 36 (16.6%)
------------- -------------
Total business sales division (pound) 188 (pound) 193 (2.6%)
============= =============
Business sales division revenue decreased as a result of declines in voice
services revenue and carrier and other services revenue, partially offset
by an increase in data services revenue.
Voice services revenue decreased, principally as a result of continued
declining usage arising from data and mobile voice substitution together
with price erosion being partially offset by new revenue streams from our
SRS Advanced Solutions product.
Data services revenue increased, primarily as a result of growth in sales
of our managed data and ethernet products to our larger business customers,
offset by pricing pressures in the declining private circuits market.
During the fourth quarter of 2004, we launched our "Evolved Ethernet"
product to extend our range of services, and we have seen growth in this
area.
Carrier and other services revenue decreased as a result of declines in
both carrier services revenues and other services (principally travel
service) revenues. The decline in other services revenue primarily reflects
the decline across the travel sector and the ongoing move by vertically
integrated tour operators to provide their own booking solutions.
Content Segment
---------------
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 the content subsidiaries of
Flextech.
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
REORGANIZED COMBINED %
COMPANY COMPANIES INCREASE
------------- ------------- ----------
Revenue (in millions)
Subscription revenue (pound) 33 (pound) 31 6.5%
Advertising revenue 51 41 24.4%
Other revenue 12 9 33.3%
------------- -------------
Net content segment revenue(1) (pound) 96 (pound) 81 18.5%
============= =============
Content segment Adjusted EBITDA (pound) 14 (pound) 10 40.0%
------------- -------------
Share of the net income of UKTV (in
millions) (pound) 17 (pound) 12 41.7%
UK television advertising market share(2) 5.0% 4.4% 13.6%
Notes
(1) Net content segment revenue consists of total revenue (subscription
revenue, advertising revenue, management fees, transactional and
interactive revenue and other revenue) less inter-segment revenues of
(pound)8 million for the nine months ended September 30, 2005 and (pound)7
million for the nine months ended September 30, 2004.
(2) Including 100% of the market share of UKTV.
Content segment revenue increased as a result of increases in subscription,
advertising and other revenue.
Before the elimination of inter-segment revenues of (pound)8 million for
the nine months ended September 30, 2005 and (pound)7 million for the nine
months ended September 30, 2004, the revenue of the content segment
increased by 18.2% to (pound)104 million.
Subscription revenue increased primarily due to increased numbers of homes
taking multi-channel TV services including the content segment's channels.
Before the elimination of inter-segment revenues, subscription revenue
increased by 7.9% to (pound)41 million due to increased numbers of
multi-channel homes taking pay-TV services including content segment's
channels.
The increase in advertising revenue resulted primarily from an increase in
absolute market revenue and market share, driven by improved viewing share
of both Flextech and UKTV channels, despite increased competition in the
multi-channel market.
Other revenue increased by (pound)3 million or 33.3% for the nine-month
period ended September 30, 2005, as compared to the comparable period in
2004 due primarily to increased consumer product sales and program sales to
international broadcasters.
Content segment Adjusted EBITDA increased for the nine months ended
September 30, 2005 as compared to the comparable period in 2004, as a
result of increased subscription, advertising and other revenues being
partially offset by an increase in operating costs.
We expect that the content segment's Adjusted EBITDA in the fourth quarter
of 2005 will be impacted by extra programming costs. We expect programming
costs in the fourth quarter to increase by more than (pound)10 million as
compared to the third quarter, as we invest in enriched programming in
common with other UK broadcasters to drive advertising revenue growth in
2006. As a result, we expect Adjusted EBITDA to be at a similar level to
the fourth quarter of 2004, when it showed a loss of (pound)1 million.
Following this investment in programming and the increased costs of the
Christmas season, we would expect an increase in revenue and Adjusted
EBITDA in the first quarter of 2006 compared to the fourth quarter of 2005,
as we have experienced historically.
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.
sit-up Segment
--------------
sit-up segment revenue is derived from the retail sales of consumer
products by means of televised shopping programs using an auction-based
format.
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE
COMPANY COMPANIES (DECREASE)
------------- ------------- ----------
(IN MILLIONS) (IN MILLIONS)
sit-up segment revenue (pound) 82 (pound) - -
------------- -------------
sit-up segment Adjusted EBITDA (pound) 1 (pound) - -
------------- -------------
sit-up segment revenue for the period from May 12, 2005 to September 30,
2005 was (pound)82 million. The sit-up segment Adjusted EBITDA was (pound)1
million for the period May 12, 2005 to September 30, 2005, representing
revenue of (pound)82 million, offset by sit-up segment expenses of
(pound)61 million and SG&A of (pound)20 million.
No comparative US GAAP financial information is available for the sit-up
segment, as sit-up only became a consolidated subsidiary of the Group from
May 12, 2005.
sit-up is typically a seasonal business with the fourth quarter expected to
generate more revenue and Adjusted EBITDA as compared to each of the first
three quarters.
sit-up has been affected by the difficult conditions currently being
experienced in the UK retail market. As a result, sit-up has experienced
pressure on product margins, which has impacted Adjusted EBITDA. Adjusted
EBITDA was also impacted during the three months ended September 30, 2005
by extra supply chain costs incurred in advance of the Christmas season,
sit-up's prime selling period.
If these difficult retail conditions persist in the fourth quarter we would
expect fourth quarter Adjusted EBITDA to be below that reported by sit-up
in the fourth quarter of 2004.
Combined cable, content and sit-up Segments
Operating Costs and Expenses
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE
COMPANY COMPANIES (DECREASE)
------------- ------------- ----------
(IN MILLIONS) (IN MILLIONS)
Cable segment expenses (pound) 210 (pound) 225 (6.7%)
Content segment expenses 56 51 9.8%
sit-up segment expenses 61 - -
Depreciation 301 287 4.9%
Amortization 28 9 211.1%
------------- -------------
656 572 14.7%
SG&A 362 361 0.3%
------------- -------------
Total Operating Costs and
Expenses (pound) 1,018 (pound) 933 9.1%
============= =============
Our total operating costs and expenses increased primarily due to the
consolidation of sit-up segment expenses and SG&A from May 12, 2005, and
increased content segment expenses, depreciation and amortization. This was
partially offset by decreased cable segment expenses and SG&A due primarily
to financial restructuring charges in 2004, which did not occur in 2005.
The cable segment's expenses decreased primarily due to favorable
renegotiations of certain cable television programming content contracts,
reductions in the interconnection charges we pay for calls to mobiles and a
reduction in overall call volumes.
The increase in the content segment's expenses is primarily due to
increased programming amortization, particularly on our most popular
channel, LIVINGtv, together with increases in the costs of music rights
used on our channels and increased sales costs. We expect to continue to
grow our investment in programming during 2005.
The content segment's expenses were 53.8% of the content segment's
revenues, including inter-segment sales to the cable segment for the nine
months ended September 30, 2005 compared with 58.0% on the same basis for
the nine months ended September 30, 2004. This decrease is due primarily to
an improvement in the overall efficiency and quality of our channels, which
are attracting a disproportionately greater share of advertising revenues
compared to the increased programming investment required to drive that
revenue growth.
The sit-up segment's expenses were (pound)61 million for the period May 12,
2005 to September 30, 2005.
The increase in depreciation expense was primarily attributable to the
recognition of increased values of property and equipment following the
adoption of fresh-start reporting with effect from July 1, 2004, partially
offset by the decreasing levels of capital expenditure.
Amortization expense was attributable to the recognition of new intangible
assets following the adoption of fresh-start reporting with effect from
July 1, 2004. Under fresh-start reporting, we have valued and are now
amortizing our customer lists.
The small increase in SG&A, which includes, among other items, salary and
marketing costs, primarily reflects the consolidation of SG&A expenses of
our sit-up segment since May 12, 2005. The sit-up segment related expenses
of (pound)20 million, increased SG&A in our content segment and stock-based
compensation expense, were partially offset by a decrease in financial
restructuring charges from (pound)21 million in the nine months ended
September 30, 2004 to (pound)0 in the nine months ended September 30, 2005.
SG&A further benefited by (pound)4 million rates (local government tax)
rebate received in our cable segment in the nine months ended September 30,
2005, relating to rates charged on our core network. This rates rebate
related to the period April 1, 2001 to March 31, 2005 and is not expected
to recur in future periods.
Stock-based compensation expense ("SBCE") of (pound)8 million was incurred
in the nine months ended September 30, 2005, compared to (pound)3 million
in the nine months ended September 30, 2004, and is included in SG&A. SBCE
arises as a result of options, restricted stock and stock appreciation
rights issued by us to our employees. SBCE is accounted for in accordance
with SFAS 123. SBCE is a non-cash item. No such expense was incurred in the
first six months of 2004.
The terms of the Company's stock option, restricted stock and stock
appreciation rights agreements for certain employees contain provisions
that provide for acceleration of vesting of outstanding unvested stock
awards on the occurrence of an "acceleration event." The Merger represents
an acceleration event as defined by the terms of these agreements and
therefore upon consummation of the Merger, the Company will accelerate
vesting of outstanding unvested stock for certain employees. The impact of
accelerated vesting would be to increase SBCE during the period in which
the Merger is consummated as compared to SBCE in the nine months ended
September 30, 2005.
Other Income/(Expense)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- ------------- %
REORGANIZED COMBINED INCREASE
COMPANY COMPANIES (DECREASE)
------------- ------------- ----------
(IN MILLIONS) (IN MILLIONS)
Interest income (pound) 17 (pound) 21 (19.0%)
Interest expense (including
amortization of debt discount) (108) (279) (61.3%)
Foreign exchange (losses)/gains, net (8) 40 -
Share of net income of affiliates 17 12 41.7%
Other, net 1 (1) -
------------- -------------
Total other income/(expense), net (pound) (81) (pound) (207) (60.9%)
============= =============
The net decrease in other expense resulted principally from a decrease in
interest expense, partially offset by reduced foreign exchange gains on US
dollar-denominated debt, following the cancellation of our predecessor's
indebtedness to note and debenture holders in its financial restructuring
in July 2004.
The net increase in other income resulted from an increase in our share of
net income of affiliates, whilst interest income in the nine months ended
September 30, 2005 decreased as a result of lower cash and cash equivalents
as compared to the same period in 2004.
Because of a significant reduction in the amount of our non-sterling
denominated indebtedness, we do not expect that foreign exchange gains or
losses will materially affect our results of operations in 2005. We also
expect that interest expense for 2005 will be lower than for prior periods
due to the completion of our predecessor's financial restructuring in July
2004 and the refinancing of our bank debt in December 2004. This reduction
will be partially offset by the interest expense on borrowings under our
new Flextech facility.
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, 2005 and 2004, we recognized (pound)9 million of interest
income from UKTV.
Share of net income of affiliates increased primarily due to an increase in
net income of UKTV in the nine months ended September 30, 2005. Our
principal affiliated companies for the purpose of our share of net income
of affiliated companies for the nine months ended September 30, 2005
included the companies that comprise UKTV and Front Row Television Limited
and sit-up for the period through to May 11, 2005.
LIQUIDITY AND CAPITAL RESOURCES
As a result of our predecessor's financial restructuring, on July 14, 2004,
we became the holding company for substantially all of the assets and
liabilities that comprised the business of Telewest Communications plc and
its subsidiaries. On July 15, 2004, as part of the financial restructuring,
the newly acquired liabilities of our predecessor were reduced by
approximately (pound)3.8 billion to approximately (pound)2.0 billion and
245,000,000 shares of our common stock were issued. At September 30, 2005,
we had long-term debt of approximately (pound)1.9 billion, consisting of
(pound)1.8 billion of indebtedness under our bank facilities and (pound)114
million of capital leases and other debt.
At September 30, 2005, we had cash and cash equivalents of (pound)260
million.
Our businesses require cash to fund their operations, including the costs
of connecting customers to our network, offering and marketing new
services, expanding and upgrading our network, and debt service repayments.
We anticipate that our principal sources of funds will be cash flow from
operating activities and cash in hand, combined with additional vendor and
lease financing, where available undrawn debt facilities, and the possible
strategic sales of assets. Future actual funding requirements could exceed
currently anticipated requirements. Differences may result from, among
other things, higher-than-anticipated costs and capital expenditure. In
addition, we may generate lower than anticipated cash flow from operating
activities, which could negatively impact our ability to meet anticipated
or actual funding requirements. Actual costs, capital expenditure and cash
flow 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 such as voice-over
internet-protocol, the extent to which consumer preference develops for
cable television over other methods of providing in-home entertainment,
adverse changes in the price or availability of telephony interconnection
or cable television programming, consumer acceptance of cable telephony as
a viable alternative to fixed-line network and mobile telephony services,
and the general economic environment.
Pursuant to the Merger Agreement with NTL, the Company has agreed to
certain restrictions on its ability to engage in capital raising activities
prior to the completion of the Merger (see "Subsequent events").
As noted earlier, the recent acquisition of sit-up Limited was financed in
part by a new (pound)130 million senior secured bank facility entered into
on May 10, 2005 by the Company's Flextech subsidiaries. This facility
consists of (pound)110 million in term loans, which were fully drawn in
connection with the acquisition, and a (pound)20 million revolving credit
facility, which remained undrawn at September 30, 2005 (together the
"Flextech Group bank facilities"). Interest rates on the facility start at
1.75% above LIBOR with leverage ratchets down to 1% above LIBOR. The term
loans are to be repaid in semi-annual installments commencing December 31,
2005, with final maturity on June 30, 2009. The facility is secured on the
assets of Flextech and sit-up along with our 50% share of the issued equity
of UKTV.
In December 2004, certain of our subsidiaries and associated partnerships
entered into (pound)1.45 billion senior term facilities, a (pound)100
million revolving loan facility and a (pound)250 million second lien
facility, (together the "TCN Group bank facilities"). The senior term
facilities and the second lien facility were drawn down in full and used
with cash held by TCN to finance the repayment in full of amounts due and
payable on our then existing credit facility, along with fees, costs and
expenses payable in connection with entry into the agreements. The
(pound)100 million revolving loan facility remains available to finance
general working capital requirements and general corporate purposes of the
subsidiaries that comprise the TCN Group.
The senior term facilities and the revolving loan facility each 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 of the senior term
facilities and the revolving loan facility is 2.25% per annum, for Tranche
B of the senior term facilities the applicable margin is 2.50% per annum,
and for Tranche C, the applicable margin is 3.00% per annum. Amounts of
Tranche B or C denominated in US dollars or Euros will bear interest at
0.25% and 0.125%, respectively, less than the relevant pounds sterling
margin. The applicable margin for the second lien facility is 4.00% per
annum. Tranche A and Tranche B of the senior term facilities are subject to
margin ratchets based on certain financial ratios.
The signing of the Merger Agreement with NTL on October 2, 2005 has led the
Group to re-assess the likelihood of the underlying forecasted debt
interest payments occurring. The Group reduced its estimate of the
likelihood of the underlying forecasted debt interested payments occurring,
from probable to less than probable. Based on that assessment the Group
discontinued hedge accounting with effect from that date. As a result,
future changes in the fair value of the instruments previously designated
as cash flow hedges will be accounted for as a component of net income
rather than other comprehensive income. At September 30, 2005 these
instruments had a total fair value of (pound)38 million payable by the
Group. The accumulated balance recorded in other comprehensive income in
respect of these instruments was a (pound)7 million loss and a net loss of
(pound)1 million was recognized in interest expense during the nine months
ended September 30, 2005, representing the ineffective component of the
hedge. The accumulated balance recorded in other comprehensive income has
been deferred and will be reclassified into earnings as the forecasted debt
interest payments affect earnings or whenever the Group assesses that it is
probable that the forecasted debt interest payments will not occur.
Net cash interest for the fiscal year 2005 is expected to be approximately
(pound)110 million.
The maturity profile of the Group's senior secured bank facilities, after
excluding translation differences on cross currency swaps of (pound)6
million, is as follows:
AT SEPTEMBER 30,
2005
----------------
REORGANIZED
COMPANY
(POUND) MILLION
----------------
2005 23
2006 67
2007 120
2008 165
2009 190
2010 and thereafter 1,240
----------------
1,805
----------------
All of the Tranches of the TCN Group bank facilities were drawn in Pounds
Sterling, except for Tranche B and Tranche C, which were drawn as follows:
DRAWN INTEREST RATE
--------------------- -------------------
TRANCHE B (pound)341.7 million LIBOR + 2.50%
US$85 million US LIBOR + 2.25%
(euro)56.7 million EURIBOR + 2.375%
DRAWN INTEREST RATE
--------------------- -------------------
TRANCHE C (pound)261.3 million LIBOR + 3.00%
US$65 million US LIBOR + 2.75%
(euro)43.3 million EURIBOR + 2.875%
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Contractual obligations and other commercial commitments as at September
30, 2005 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 1,816 55 240 355 1,166
Capital lease obligations 109 62 43 4 -
Operating leases 149 17 31 25 76
Unconditional purchase obligations 137 112 23 2 -
-----------------------------------------------------------------------------------------------------------------------------
Total contractual obligations 2,211 246 337 386 1,242
-----------------------------------------------------------------------------------------------------------------------------
The following table includes information about other commercial commitments
as of September 30, 2005.
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) 16 13 2 1 -
-----------------------------------------------------------------------------------------------------------------------------
(1) Consists of performance and other guarantees of (pound)4 million due in
less than one year and (pound)1 million due in one to three years, and
lease guarantees of (pound)9 million due in less than one year, (pound)1
million due in one to three years and (pound)1 million due in three to five
years.
CAPITAL EXPENDITURE
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004
------------------- ------------------
REORGANIZED COMBINED
COMPANY COMPANIES
(POUND) MILLION (POUND) MILLION
------------------- ------------------
Capital expenditure (pound) 173 (pound) 177
------------------- ------------------
The decrease in capital expenditure for the nine months ended September 30,
2005 as compared to the corresponding period in the prior year resulted
primarily from reduced consumer contract installation costs and the phasing
of capital project spend.
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.
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 roll-out, including VOD, (Video-On-Demand),
DVR, Digital Video Recorder), HDTV, (High Definition Television), and VOIP,
(Voice-Over Internet Protocol) services, and the replacement of network
assets at the end of their useful lives.
Capital expenditure for the fiscal year 2005 is expected to be
approximately (pound)230 million, due primarily to new product development
expenditure, including VOD and DVR services, capacity upgrades to our IP
network, and digital upgrades in our Northwest Cabletime networks, as well
as billing system upgrades. Capital expenditure in the three months ended
September 30, 2005 is higher than each of the first two quarters of 2005,
which reflects our faster than expected VOD and broadband speed upgrade
roll-outs and increased expenditures relating to strong TV growth.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004
------------------- ------------------
REORGANIZED COMBINED
COMPANY COMPANIES
(POUND) MILLION (POUND) MILLION
------------------- ------------------
Net cash provided by operating activities (pound) 349 (pound) 242
Net cash used in investing activities (253) (168)
Net cash provided by/(used in) financing activities 96 (235)
------------------- ------------------
Net increase/(decrease) in cash and cash equivalents 192 (161)
Cash and cash equivalents at beginning of period 68 427
------------------- ------------------
Cash and cash equivalents at end of period (pound) 260 (pound) 266
------------------- ------------------
For the nine months ended September 30, 2005, we had net cash provided by
operating activities of (pound)349 million compared with (pound)242 million
for the nine months ended September 30, 2004. The increase in net cash
provided by operating activities in 2005 compared with 2004 was principally
as a result of improvements in operating income and reduced interest
payments, partially offset by increases in working capital.
Net cash used in investing activities was (pound)253 million for the nine
months ended September 30, 2005 compared with (pound)168 million for the
nine months ended September 30, 2004. The increase in 2005 over 2004 arose
principally as a result of the additional investment in sit-up partially
offset by reduced payments for capital expenditure, proceeds from disposal
and sale and leaseback of fixed assets, and increased loan repayments
received from affiliates. Net cash used in investing activities includes
net cash inflow from affiliates of (pound)13 million for the nine months
ended September 30, 2005 compared with net cash inflow of (pound)2 million
for the nine months ended September 30, 2004. The nine months ended
September 30, 2004 benefited from a receipt of an additional (pound)7
million relating to the disposal of an affiliate. Capital expenditure
accounted for (pound)173 million of the total net cash used in investing
activities in the nine months ended September 30, 2005 compared with
(pound)177 million in the corresponding period in 2004.
Net cash provided by financing activities totalled (pound)96 million for
the nine months ended September 30, 2005 compared with net cash used in
financing activities of (pound)235 million for the nine months ended
September 30, 2004, primarily due to the raising of additional finance of
(pound)110 million in respect of the financing of the additional investment
in sit-up in 2005. In the nine months ended September 30, 2004 our
Predecessor Company repaid a (pound)160 million credit advance on its then
senior secured credit facility, placed (pound)36 million in restricted
deposits and paid the balance of the amendment fee on its amended senior
secured credit facility of (pound)22 million.
As of September 30, 2005, we had cash and cash equivalents of (pound)260
million on a consolidated basis (excluding (pound)11 million that was
restricted as to use to providing security for leasing and other
obligations and (pound)4 million that was restricted as to use to settle
restructuring and liquidation expenses of our Predecessor). Cash balances
increased by (pound)192 million for the nine months ended September 30,
2005 mainly as a result of strong operating performance, decreased capital
expenditure and proceeds from disposal and sale and leaseback of fixed
assets, and the consolidation of sit-up's cash and cash equivalents upon
acquisition. As of September 30, 2004, we had cash balances of (pound)266
million (excluding (pound)33 million that was restricted).
OFF-BALANCE SHEET TRANSACTIONS
As of September 30, 2005, we had no off-balance sheet transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are summarized in our consolidated financial
statements, which are included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004. As stated above, we prepare our
consolidated financial statements in conformity with GAAP, which requires
us 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 impairment of goodwill and
long-lived assets, capitalization of labor and overhead costs, accounting
for debt and financial instruments and valuation of assets and liabilities
under fresh-start reporting. Actual results could differ from those
estimates.
We consider the following policies and estimates to be the most critical in
understanding the assumptions and judgments that are involved in preparing
our financial statements and the uncertainties that could impact our
results of operations, financial condition and cash flows:
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 reporting.
IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS
All long-lived assets, including goodwill and investments in unconsolidated
affiliates, are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable (and at least annually for goodwill and intangible assets with
indefinite lives). 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 our internal
forecasts. If actual results differ from the assumptions used in the
impairment review, we may incur additional impairment charges in the
future.
The Company carries out its annual impairment reviews during the fourth
quarter in conjunction with its annual budget process.
CAPITALIZATION OF LABOR AND OVERHEAD COSTS
The telecommunications and cable industries are highly capital-intensive
and a large portion of our 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 judgment. The changing
nature of the sectors in which we operate and the nature of our development
activities will affect the appropriateness of our capitalization policy in
the future.
We capitalize that proportion of labor and overhead costs, which is
directly related to the development, construction and installation of fixed
assets. These costs include payroll and related costs of employees and
support costs such as rent and service costs. We regularly review our
capitalization policy and the nature of the costs being capitalized to
ensure that such costs are directly related to the development,
construction and installation of fixed assets.
ACCOUNTING FOR DEBT AND FINANCIAL INSTRUMENTS
We manage our 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, we do not use derivative financial
instruments unless there is an underlying exposure and, therefore, we do
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 our 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 REPORTING
The adoption of fresh-start reporting as at July 1, 2004 has required
management to estimate our reorganization value, the allocation of fair
value to assets and the present value of liabilities to be paid as at
fresh-start date. 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 our assets and liabilities. They have been prepared and
allocated in accordance with SOP 90-7 and SFAS 141, respectively.
USE OF NON-GAAP FINANCIAL MEASURES
AVERAGE MONTHLY REVENUE PER CUSTOMER OR "HOUSEHOLD ARPU (EXCLUDING IMPACT
OF THE (POUND)16 MILLION VAT RECOVERY)"
For the nine month period, Household ARPU (excluding impact of the
(pound)16 million VAT recovery) represents the consumer sales division's
total nine months' revenue of residential customers, including installation
revenues, but excluding the recovery of (pound)16 million VAT, divided by
the average number of residential customers in the nine months, divided by
nine.
Household ARPU (excluding impact of the (pound)16 million VAT recovery) is
not a financial measure recognized under GAAP. This measure is most
directly comparable to the GAAP financial measure, Household ARPU. The
significant limitation associated with the use of Household ARPU (excluding
impact of the (pound)16 million VAT recovery) as compared to Household ARPU
is that Household ARPU (excluding impact of the (pound)16 million VAT
recovery) does not consider (pound)16 million of revenues received in
respect of recovered VAT. Telewest believes Household ARPU (excluding
impact of the (pound)16 million VAT recovery) is helpful for understanding
the trend in respect of its residential revenues derived from customers
during the period and it provides useful supplemental information to
investors. The VAT recovery is not expected to recur. Because non-GAAP
financial measures are not standardized, it may not be possible to compare
Household ARPU (excluding impact of the (pound)16 million VAT recovery)
with other companies' non-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 Household ARPU,
or other measures of financial performance reported in accordance with
GAAP.
AVERAGE MONTHLY REVENUE PER TELEVISION SUBSCRIBER OR "TELEVISION ARPU
(EXCLUDING IMPACT OF THE (POUND)16 MILLION VAT RECOVERY)"
For the nine month period, Television ARPU (excluding impact of the
(pound)16 million VAT recovery) represents the sum of the consumer sales
division's total nine months' revenue of television subscribers, including
installation revenues, but excluding the recovery of (pound)16 million VAT,
divided by the average number of television subscribers in the nine months,
divided by nine.
Television ARPU (excluding impact of the (pound)16 million VAT recovery) is
not a financial measure recognized under GAAP. This measure is most
directly comparable to the GAAP financial measure, Television ARPU. The
significant limitation associated with the use of Television ARPU
(excluding impact of the (pound)16 million VAT recovery) as compared to
Television ARPU is that Television ARPU (excluding impact of the (pound)16
million VAT recovery) does not consider (pound)16 million of revenues
received in respect of recovered VAT. Telewest believes Television ARPU
(excluding impact of the (pound)16 million VAT recovery) is helpful for
understanding the trend in respect of its television revenues derived from
subscribers during the period and it provides useful supplemental
information to investors. The VAT recovery is not expected to recur.
Because non-GAAP financial measures are not standardized, it may not be
possible to compare Television ARPU (excluding impact of the (pound)16
million VAT recovery) with other companies' non-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 Television ARPU, or other measures of financial performance reported in
accordance with GAAP.
-----------------------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
2005
-----------------------------------------------------------------------------------------------
RECONCILIATION OF HOUSEHOLD ARPU TO HOUSEHOLD ARPU (EXCLUDING IMPACT OF
THE (POUND)16 MILLION VAT RECOVERY)
Consumer sales division revenue in the period (pound)757 million
Average number of residential customers in the period 1,826,491
--------------------
Household ARPU (pound)46.09
--------------------
Consumer sales division revenue in the period (pound)757 million
VAT recovery (pound)(16) million
--------------------
Consumer sales division revenue (excluding (pound)16 million VAT recovery) (pound)741 million
Average number of residential customers in the period 1,826,491
--------------------
Household ARPU (excluding impact of the (pound)16 million VAT recovery) (pound)45.14
--------------------
RECONCILIATION OF TELEVISION ARPU TO TELEVISION ARPU (EXCLUDING IMPACT OF
THE (POUND)16 MILLION VAT RECOVERY)
Consumer television revenue in the period (pound)265 million
Average number of television subscribers in the period 1,325,983
--------------------
Television ARPU (pound)22.25
--------------------
Consumer television revenue in the period (pound)265 million
VAT recovery (pound)(16) million
--------------------
Consumer television revenue (excluding (pound)16 million VAT recovery) (pound)249 million
Average number of television subscribers in the period 1,325,983
--------------------
Television ARPU (excluding impact of the (pound)16 million VAT recovery) (pound)20.93
--------------------
ITEM - 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we were exposed during the three- and
nine-month periods ended September 30, 2005 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 and
Euro-denominated bank facilities.
Our exposure to foreign exchange rate changes was substantially reduced as
a result of the cancellation of all US-dollar denominated notes and
debentures in July 2004 of our predecessor, although we will continue to be
exposed to interest rate and foreign currency exchange rate changes under
our bank facilities.
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 AND QUANTITATIVE DISCLOSURE OF INTEREST RATE RISK
During the fourth quarter of 2004, TCN entered into the TCN Group bank
facilities described briefly above, which are denominated in pounds
sterling, Euros and US dollars and bear interest at variable rates. We seek
to reduce our exposure to adverse interest rate fluctuations on borrowings
under the bank facilities principally through interest rate swaps entered
into by TCN. Our interest rate swaps provide for payments at a fixed rate
of interest (ranging from 4.61% to 6.31%) and the receipt of payments based
on a variable rate of interest. These swaps mature on October 15, 2007.
During the second quarter of 2005, TCN entered into additional interest
rate swaps to extend the period the TCN Group bank facilities were hedged
for, by an additional three months to January 2008. In addition to this,
Flextech Broadband Limited entered into an interest rate swap to mitigate
the floating interest rate risk represented by the new Flextech Group bank
facilities. The new interest rate swap hedges (pound)66 million of notional
bank debt and matures on June 30, 2009.
The aggregate amount outstanding under the TCN Group and Flextech Group
bank facilities at September 30, 2005 was (pound)1,811 million and the
aggregate notional principal amount of the interest rate swaps was
(pound)1,065 million.
The TCN interest rate swap contracts entered into in the fourth quarter of
2004 qualified for hedge accounting under SFAS 133, Accounting for
Derivatives and Hedging Activities, ("SFAS 133") from March 1, 2005.
Consequently any changes in their fair value have been accounted for
through the Statement of Operations for January and February 2005, and
through other comprehensive income when hedge accounting was effective from
March 1, 2005. The two additional interest rate swaps executed in the
second quarter of 2005 also qualify for hedge accounting under SFAS 133
from the date of their execution and changes in fair value have been
accounted for through other comprehensive income when hedge accounting was
effective.
The signing of an Agreement and Plan of Merger with NTL, Inc. on October 2,
2005 led the Group to discontinue hedge accounting with effect from that
date. As a result, future changes in the fair value of our derivative
instruments will be accounted for as a component of net income rather than
other comprehensive income.
Based on our consolidated variable rate debt outstanding at September 30,
2005 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)7 million on our annual interest expense.
QUALITATIVE AND QUANTITATIVE DISCLOSURE OF FOREIGN CURRENCY EXCHANGE RISK
As a result of entering into the TCN Group bank facilities on December 30,
2004, we now have US$150 million and Euro100 million of indebtedness.
Consequently, we are now exposed to fluctuations in exchange rates both on
the repayment of the principal, and also on servicing the debt during the
lifetime of the debt. In order to mitigate the foreign exchange risk
presented by this indebtedness we entered into cross currency swaps on
December 30, 2004. The notional amounts on the cross currency swaps
totalled US$150 million and Euro100 million, and the maturities match the
maturities on the bank debt. The cross currency swaps are floating to
floating, enabling us to pay floating pounds sterling when servicing the
debt, and to buy US dollars and Euros for repaying the debt at a fixed rate
and servicing the debt for the lifetime of the swaps.
We use derivative financial instruments solely to hedge specific risks and
do not hold them for trading or speculative purposes.
SENSITIVITY ANALYSIS
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 on
interest rate swaps and the foreign currency exchange rate on cross
currency swaps have 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 and/or exchange rates to affect fair values
in a manner that varies from the hypothetical amounts disclosed in the
tables 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:
SEPTEMBER 30, 2005
-----------------------------
((POUND) MILLION)
-----------------
HYPOTHETICAL
CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
Interest rate swaps (38) 25
-----------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE RATE RISK - SENSITIVITY ANALYSIS
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate 10% decrease in the US dollar and Euro to pound
sterling exchange rates:
SEPTEMBER 30, 2005
-----------------------------
((POUND) MILLION)
-----------------
HYPOTHETICAL
CHANGE IN
FAIR VALUE FAIR VALUE
---------- ----------
US dollar-denominated long-term debt (85) (9)
Euro denominated long-term debt (68) (8)
Foreign exchange swaps (2) 20
----------------------------------------------------------------
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 US
Securities and Exchange Commission ("SEC"). There were no changes in our
internal control over financial reporting during the quarter ended
September 30, 2005 that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
The Company is not yet an accelerated filer, as defined in Rule 12b-2 of
the Exchange Act. As a result, it is not currently required to comply with
the requirements of Section 404 of the Sarbanes-Oxley Act ("S.404"), as
adopted by the SEC, but expects to be subject to S.404 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 fulfill 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
Other than as set forth below, neither we nor any of our subsidiaries is or
has been engaged in any legal or arbitration proceedings, nor are any such
proceedings pending or threatened by or against them that may have, or have
had during the three months ended September 30, 2005, a significant effect
on our and our subsidiaries' financial position.
VAT PROCEEDING
See Telewest's Form 10-Q for the quarter ended June 30, 2005, as filed with
the SEC on August 11, 2005, for a description of a VAT (Value Added Tax)
proceeding which was recently concluded in Telewest's favor.
ITEM - 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
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
3.1 Restated Certificate of Incorporation of Telewest Global, Inc.
(Incorporated by reference to Telewest Global, Inc's Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
3.2 Restated By-Laws of Telewest Global, Inc. (Incorporated by
reference to Telewest Global, Inc.'s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 14,
2004).
4.1 Form of Certificate of Common Stock of Telewest Global, Inc.
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.2 Rights Agreement, dated March 25, 2004, between Telewest Global,
Inc. and the Bank of New York, a New York trust company
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.3 Registration Rights Agreement dated March 25, 2004, among Telewest
Global, Inc. and holders listed in the signature pages thereto
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.4 Amendment No. 1, dated October 2, 2005, to the Rights Agreement,
dated March 25, 2004, among Telewest Global, Inc. and The Bank of
New York, as Rights Agent.*
10.1 Agreement and Plan of Merger, dated as of October 2, 2005 among
Telewest Global, Inc., and NTL Incorporated and Merger Sub Inc.
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.2 General Form of Amendment to Nonqualified Stock option Agreement
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.3 Form of Amendment Applicable to Options Held by Barry Elson
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.4 Form of Amendment Applicable to Options Held by Eric J. Tveter
with a Per Share Exercise Price of $0.01 (Incorporated by
reference to Telewest Global, Inc.'s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on October 6,
2005).
10.5 General Form of Amendment to Restricted Stock Agreement
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.6 Telewest Global, Inc. Amended and Restated Long-Term Incentive
Plan (Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
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. *
* Filed herewith
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 10, 2005 /s/ Neil Smith
-------------------------------
Name: Neil Smith
Chief Financial Officer
EXHIBIT INDEX
DESCRIPTION
EXHIBIT
NUMBER
3.1 Restated Certificate of Incorporation of Telewest Global, Inc.
(Incorporated by reference to Telewest Global, Inc's Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
3.2 Restated By-Laws of Telewest Global, Inc. (Incorporated by
reference to Telewest Global, Inc.'s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 14,
2004).
4.1 Form of Certificate of Common Stock of Telewest Global, Inc.
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.2 Rights Agreement, dated March 25, 2004, between Telewest Global,
Inc. and the Bank of New York, a New York trust company
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.3 Registration Rights Agreement dated March 25, 2004, among Telewest
Global, Inc. and holders listed in the signature pages thereto
(Incorporated by reference to Telewest Global, Inc.'s Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on March 30, 2004 (Registration No. 333-110815)).
4.4 Amendment No. 1, dated October 2, 2005, to the Rights Agreement,
dated March 25, 2004, among Telewest Global, Inc. and The Bank of
New York, as Rights Agent.*
10.1 Agreement and Plan of Merger, dated as of October 2, 2005 among
Telewest Global, Inc., and NTL Incorporated and Merger Sub Inc.
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.2 General Form of Amendment to Nonqualified Stock option Agreement
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.3 Form of Amendment Applicable to Options Held by Barry Elson
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.4 Form of Amendment Applicable to Options Held by Eric J. Tveter
with a Per Share Exercise Price of $0.01 (Incorporated by
reference to Telewest Global, Inc.'s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on October 6,
2005).
10.5 General Form of Amendment to Restricted Stock Agreement
(Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
10.6 Telewest Global, Inc. Amended and Restated Long-Term Incentive
Plan (Incorporated by reference to Telewest Global, Inc.'s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on October 6, 2005).
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. *
* Filed herewith