EXHIBIT 99.1
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TELEWEST COMMUNICATIONS PLC
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US GAAP FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WITH RESPECT TO THE THREE AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001.
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TELEWEST COMMUNICATIONS PLC
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PART I: US GAAP FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2001 2001 2000 2001 2001 2000
(note 2) (note 2)
(In millions, except for share data)
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REVENUE
Cable television $ 125.0(POUND) 85.1(POUND) 67.3 $ 357.7(POUND)243.5(POUND)211.5
Consumer telephony 177.0 120.5 107.5 531.5 361.8 325.5
Internet and other 15.7 10.7 3.6 38.2 26.0 9.7
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Total Consumer Division 317.7 216.3 178.4 927.4 631.3 546.7
Business Services Division 97.1 66.1 69.7 296.5 201.8 180.9
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Total Cable Division 414.8 282.4 248.1 1,223.9 833.1 727.6
CONTENT DIVISION (including(pound)7.8m and(pound)1.9m for
the 9 months in 2001 and 2000, respectively, from
related parties) 44.7 30.4 31.8 135.6 92.3 52.3
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TOTAL REVENUE 459.5 312.8 279.9 1,359.5 925.4 779.9
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OPERATING COSTS AND EXPENSES
Consumer programming expenses (including(pound)8.6m
and(pound)5.6m for the 9 months in 2001 and 2000,
respectively, to related parties) 49.8 33.9 31.7 160.7 109.4 101.7
Business and consumer telephony expenses 84.2 57.3 60.1 261.9 178.3 172.2
Content expenses 27.6 18.8 22.1 84.0 57.2 29.8
Selling, general and administrative 178.5 121.5 102.8 548.9 373.6 311.4
Depreciation 172.3 117.3 94.9 508.9 346.4 277.6
Amortization of goodwill 67.1 45.7 43.5 201.1 136.9 99.8
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579.5 394.5 355.1 1,765.5 1,201.8 992.5
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OPERATING LOSS (120.0) (81.7) (75.2) (406.0) (276.4) (212.6)
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OTHER INCOME/(EXPENSE)
Interest income (including(pound)7.1m and(pound)1.3m
for the 9 months in 2001 and 2000, respectively,
from related parties) 5.4 3.7 1.4 17.6 12.0 6.6
Interest expenses (182.2) (124.0) (109.0) (507.1) (345.2) (288.2)
Foreign exchange gains/(losses), net 23.2 15.8 2.2 10.1 6.9 (36.7)
Share of net (losses)/gains of affiliates (10.0) (6.8) 5.1 (2.2) (1.5) 2.3
Minority interest in losses/(gains) of consolidated
subsidiaries, net (0.3) (0.2) - 0.1 0.1 (0.2)
Other losses, net (1.4) (1.0) (0.6) (10.3) (7.0) (1.4)
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LOSS BEFORE INCOME TAXES (285.3) (194.2) (176.1) (897.8) (611.1) (530.2)
Income tax benefit/(charge) during the period 3.4 2.3 (2.2) 10.3 7.0 0.8
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NET LOSS BEFORE EXTRAORDINARY ITEM (281.9) (191.9) (178.3) (887.5) (604.1) (529.4)
Extraordinary loss on extinguishment of debt - - - (21.4) (14.6) -
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NET LOSS FOR THE PERIOD (281.9) (191.9) (178.3) (908.9) (618.7) (529.4)
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BASIC AND DILUTED LOSS PER ORDINARY SHARE:
Before extraordinary loss $ (0.10)(POUND)(0.07)(POUND)(0.06) $ (0.31)(POUND)(0.21)(POUND)(0.20)
After extraordinary loss $ (0.10)(POUND)(0.07)(POUND)(0.06) $ (0.32)(POUND)(0.22)(POUND)(0.20)
Weighted average number of ordinary shares - basic
and diluted (millions) 2,872.4 2,885.4 2,882.3 2,647.6
See accompanying notes to the unaudited condensed consolidated financial
statements.
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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SEPT. 30, SEPT. 30, DEC. 31,
2001 2001 2000
$m (POUND)m (POUND)m
(note 2) AUDITED
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ASSETS
Cash and cash equivalents 5.6 3.8 59.6
Secured cash deposits restricted for more than one year 29.4 20.0 12.0
Trade receivables (net allowance for doubtful accounts of(pound)15.4m in
2001 and(pound)18.7m in 2000) 181.0 123.2 115.5
Other receivables 155.0 105.5 108.2
Prepaid expenses 66.3 45.1 36.9
Investment in affiliates, accounted for under the equity method, and
related receivables 1,104.9 752.1 783.6
Property and equipment (less accumulated depreciation of(pound)1,754.1m
in 2001 and(pound)1,410.4m in 2000) 5,026.4 3,421.4 3,289.5
Goodwill (less accumulated amortization of(pound)413.6m in 2001 and
(pound)291.1m in 2000) 3,964.8 2,698.8 2,802.7
Other intangibles 0.4 0.3 0.5
Programming inventory 53.2 36.2 31.0
Inventory 66.2 45.1 37.8
Other assets (less accumulated amortization of(pound)42.9m in 2001 and
(pound)35.5m in 2000) 106.9 72.8 46.8
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TOTAL ASSETS 10,760.1 7,324.3 7,324.1
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 187.3 127.5 95.6
Other liabilities 642.9 437.6 344.0
Deferred income 152.3 103.7 58.1
Deferred tax 258.0 175.6 182.7
Debt 6,870.5 4,676.7 4,253.7
Capital lease obligations 355.2 241.8 245.5
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TOTAL LIABILITIES 8,466.2 5,762.9 5,179.6
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MINORITY INTEREST 1.2 0.8 (2.1)
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SHAREHOLDERS' EQUITY
Ordinary shares, 10 ▇▇▇▇▇ par value;
4,300.0 million shares authorized and 2,873.0 million shares issued and outstanding
(4,300.0 million authorized and 2,886.0 million shares issued and outstanding in 2000) 422.1 287.3 288.6
Limited voting convertible ordinary shares, 10 ▇▇▇▇▇ par value;
300.0 million shares authorized and 82.5 million shares issued and outstanding
(300.0 million authorized and 62.5 million shares issued and outstanding in 2000) 12.0 8.2 6.2
Additional paid in capital 6,204.6 4,223.4 4,216.8
Other comprehensive income 37.3 25.4 -
Accumulated deficit (4,380.8) (2,982.0) (2,363.3)
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2,295.2 1,562.3 2,148.3
Ordinary shares held in trust for the Telewest Restricted Share Scheme and the
Telewest Long- Term Incentive plan (2.5) (1.7) (1.7)
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TOTAL SHAREHOLDERS' EQUITY 2,292.7 1,560.6 2,146.6
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,760.1 7,324.3 7,324.1
========================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
2001 2001 2000
$m (POUND)m (POUND)m
(note 2)
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NET LOSS (908.9) (618.7) (529.4)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES
Depreciation 508.9 346.4 277.6
Amortization of goodwill 201.1 136.9 99.8
Amortization of deferred financing costs and issue discount on Senior Discount Debentures 110.3 75.1 136.3
Deferred tax credit (10.3) (7.0) -
Unrealized (gain)/loss on foreign currency translation (14.1) (9.6) 36.0
Accrued share-based compensation cost 1.6 1.1 4.9
Extraordinary loss on extinguishment of debt 21.4 14.6 -
Share of net losses of affiliates 2.2 1.5 (2.3)
Minority interests in (profits)/losses of consolidated subsidiaries, net (0.1) (0.1) 0.2
Loss/(gain) on disposal of investments/other assets, net 5.9 4.0 (0.2)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Change in receivables (2.0) (1.4) (38.4)
Change in prepaid expenses (12.1) (8.2) (10.3)
Change in other assets (75.8) (51.6) 6.8
Change in accounts payable 44.1 30.0 54.0
Change in other liabilities 93.6 63.7 13.6
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NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (34.2) (23.3) 48.6
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (553.8) (377.0) (428.6)
Cash paid for acquisition of subsidiaries (9.3) (6.3) (27.9)
Cash acquired with subsidiary undertakings 0.1 0.1 6.3
Disposals of subsidiaries 14.7 10.0 -
Cash disposed with subsidiaries (2.9) (2.0) -
Additional investments in and loans to affiliates (59.5) (40.5) 0.9
Repayments of loans made to joint ventures 57.7 39.3 -
Proceeds from disposals of assets - - 1.5
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NET CASH USED IN INVESTING ACTIVITIES (553.0) (376.4) (447.8)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of borrowings under old credit facilities (212.4) (144.6) (329.4)
Net proceeds from borrowings under new credit facilities 726.0 494.2 -
Repayment of Cable London PLC facility - - (126.0)
Proceeds from issue of Accreting Convertible Notes due 2003 44.1 30.0 -
Proceeds from issue of Senior Convertible Notes due 2005 - - 330.2
Proceeds from issue of Senior Discount Notes and Senior Notes due 2010 - - 543.5
Share issue costs - - (13.0)
Cash paid for credit facility arrangement costs - - (1.3)
Issue costs of Notes - - (19.4)
Placement of restricted deposits (11.8) (8.0) -
Proceeds from exercise of share options 7.9 5.4 3.6
Capital element of finance lease repayments (48.6) (33.1) (16.7)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 505.2 343.9 371.5
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NET DECREASE IN CASH AND CASH EQUIVALENTS (82.0) (55.8) (27.7)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 87.6 59.6 65.2
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 5.6 3.8 37.5
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See accompanying notes to the unaudited condensed consolidated financial
statements.
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
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ORDINARY LIMITED SHARES ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING HELD PAID-IN COMPREHENSIVE DEFICIT
SHARES IN TRUST CAPITAL INCOME
(POUND)m (POUND)m (POUND)m (POUND)m (POUND)m (POUND)m (POUND)m
(note 5)
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BALANCE AT DECEMBER 31, 2000 288.6 6.2 (1.7) 4,216.8 - (2,363.3) 2,146.6
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Net loss for the period - - - - - (618.7) (618.7)
Unrealized gain/(loss) on derivative
instruments:
Transition adjustment at January 1, 2001 - - - - (15.8) - (15.8)
Current period increase in fair value, net - - - - 40.5 - 40.5
Exchange gain on re-translation of overseas
investment - - - - 0.7 - 0.7
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TOTAL COMPREHENSIVE INCOME - - - - 25.4 (618.7) (593.7)
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Re-designation of ordinary shares (2.0) 2.0 - - - - -
Share-based compensation cost - - - 1.1 - - 1.1
Shares issued under exercise of share options 0.7 - - 4.7 - - 5.4
Unrealized gain on sale of shares by a
subsidiary - - - 0.8 - - 0.8
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BALANCE AT SEPTEMBER 30, 2001 287.3 8.2 (1.7) 4,223.4 25.4 (2,982.0) 1,560.6
====================================================================================
See accompanying notes to the unaudited condensed consolidated financial
statements.
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITIES
The principal activities of Telewest Communications plc ("Telewest", the
"Company", "we", "our", and "us") are the provision of voice, video, data and
internet services across multiple platforms and the supply of content and
services to the United Kingdom ("UK") pay-television and on-line markets.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principals
in the United States of America ("US GAAP"). The preparation of financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 20-F for the year ended December
31, 2000 as filed with the Securities and Exchange Commission on June 29, 2001.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements have been prepared on a basis substantially
consistent with the audited financial statements and contain adjustments, all of
which are of a normal recurring nature, to present fairly its financial position
as of September 30, 2001 and its results of operations and cash flows for the
three and nine-month periods ended September 30, 2001 and 2000. Interim
results are not necessarily indicative of results for the financial year.
The economic environment in which Telewest operates is the UK, and hence
its reporting currency is Pound sterling ((pound)). Certain financial
information as of and for the three and nine-month periods ended September 30,
2001 has been translated into US dollars ($), with such US dollar amounts being
unaudited and presented solely for the convenience of the reader, at the rate of
$1.4691 = (pound)1.00, the Noon Buying Rate of the Federal Reserve Bank of New
York on Friday September 28, 2001. The presentation of the US dollar amounts
should not be construed as a representation that the Pound sterling amounts
could be so converted into US dollars at the indicated or at any other rate.
The unaudited condensed consolidated financial statements include the
accounts of the Company and those of all majority-owned subsidiaries (the
"Group"). All significant inter-company accounts have been eliminated upon
consolidation.
Flextech Plc ("Flextech") was acquired on April 19, 2000 and consolidated
into the Group from that date, consequently its results are included in the
statements of operations and cash flows for the three-month periods ended
September 30, 2001 and 2000, the nine-month period ended September 30, 2001 and
in respect of the nine-month period ended September 30, 2000 from April 19,
2000.
Eurobell (Holdings) PLC ("Eurobell") was acquired on November 1, 2000 and
consolidated into the Group from that date. Consequently its results are
included in the statements of operations and cash flows for the three and
nine-month periods ended September 30, 2001 but not in the three and nine-month
periods ended September 30, 2000.
On May 30, 2001 the Company acquired Rapid Travel Solutions Limited
("Rapid") for (pound)5.5 million, subject to certain conditions, to be paid over
the next two and half years. Consequently, Rapid's results are included in the
statements of operations and cash flows from the date of acquisition but not in
the three and nine-month periods ended September 30, 2000.
On April 24, 2001, the Group invested (pound)14.8 million into sit-up
Limited ("sit-up") and sold Screenshop, a wholly owned television shopping
service, to sit-up for (pound)10.0 million. As a result of these transactions,
the Group has a 38% stake in the enlarged sit-up business and accounts for its
share of the results of that business as an affiliate.
3. SEGMENTAL INFORMATION
The Company applies Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-making group is the Board of
Directors. The operating segments are managed separately because each operating
segment represents a strategic business unit that offers different products and
services in different markets. We operate in two main segments: Cable and
Content. The Cable segment of our business is managed by four reportable units:
Cable Television, Consumer Telephony, Internet and Other, and Business Services.
The Internet and Other unit includes sale of internet subscriptions to our
Internet Service Provider ("ISP"), the sale of cable publications and the sale
of advertising airtime. The Content segment provides entertainment content,
interactive, and transactional services to the UK pay-television and on-line
markets.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our financial
statements. The Company changed the structure of its segmental analysis table
with effect from September 30, 2001 and certain corresponding information from
the previous year has been restated to reflect the change in structure.
The following tables present summarized financial information relating to
the reportable segments for the three and nine-month periods ended September 30,
2001 and 2000, respectively:
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED SEGMENTAL INFORMATION
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3 MONTHS 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2001 2001 2000 2001 2001 2000
(note 2) (note 2)
(In millions)
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CABLE
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Cable television $ 125.0 (pound) 85.1 (pound) 67.3 $ 357.7 (pound) 243.5 (pound) 211.5
Consumer telephony 177.0 120.5 107.5 531.5 361.8 325.5
Internet and other 15.7 10.7 3.6 38.2 26.0 9.7
Business Services Division 97.1 66.1 69.7 296.5 201.8 180.9
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THIRD PARTY REVENUE 414.8 282.4 248.1 1,223.9 833.1 727.6
Operating costs and expenses (293.7) (199.9) (180.9) (914.2) (622.3) (555.3)
Depreciation (168.7) (114.8) (92.6) (494.8) (336.8) (273.9)
Amortization of goodwill (30.1) (20.5) (20.5) (90.2) (61.4) (61.4)
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OPERATING LOSS (77.7) (52.8) (45.9) (275.3) (187.4) (163.0)
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Additions to property & equipment 226.2 154.0 149.1 691.9 471.0 471.2
Total assets ** 7,671.3 5,221.8 5,146.4 7,671.3 5,221.8 5,146.4
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CONTENT
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Content Division 48.1 32.7 33.7 146.8 99.9 56.4
Inter-segmental * (3.4) (2.3) (1.9) (11.2) (7.6) (4.1)
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THIRD PARTY REVENUE 44.7 30.4 31.8 135.6 92.3 52.3
Operating costs and expenses (46.4) (31.6) (35.8) (141.3) (96.2) (59.8)
Depreciation (3.6) (2.5) (2.3) (14.1) (9.6) (3.7)
Amortization of goodwill (37.0) (25.2) (23.0) (110.9) (75.5) (38.4)
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OPERATING LOSS (42.3) (28.9) (29.3) (130.7) (89.0) (49.6)
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Additions to property & equipment 1.5 1.0 4.0 4.4 3.0 4.0
Total assets ** 3,088.8 2,102.5 2,177.7 3,088.8 2,102.5 2,177.7
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TOTAL
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Cable television 125.0 85.1 67.3 357.7 243.5 211.5
Consumer telephony 177.0 120.5 107.5 531.5 361.8 325.5
Internet and other 15.7 10.7 3.6 38.2 26.0 9.7
Business Services Division 97.1 66.1 69.7 296.5 201.8 180.9
Content Division 48.1 32.7 33.7 146.8 99.9 56.4
Inter-segmental * (3.4) (2.3) (1.9) (11.2) (7.6) (4.1)
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TOTAL REVENUE 459.5 312.8 279.9 1,359.5 925.4 779.9
Operating costs and expenses (340.1) (231.5) (216.7) (1,055.5) (718.5) (615.1)
Depreciation (172.3) (117.3) (94.9) (508.9) (346.4) (277.6)
Amortization of goodwill (67.1) (45.7) (43.5) (201.1) (136.9) (99.8)
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OPERATING LOSS (120.0) (81.7) (75.2) (406.0) (276.4) (212.6)
Other expense (165.3) (112.5) (100.9) (491.8) (334.7) (317.6)
Income tax benefit/(charge) 3.4 2.3 (2.2) 10.3 7.0 0.8
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NET LOSS BEFORE EXTRAORDINARY LOSS (281.9) (191.9) (178.3) (887.5) (604.1) (529.4)
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Additions to property & equipment 227.7 155.0 153.1 696.3 474.0 475.2
Total assets ** 10,760.1 7,324.3 7,324.1 10,760.1 7,324.3 7,324.1
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* Inter-segmental revenues are revenues from programming sales in our Content
Division which are costs of programming in our Cable Division and are
eliminated on consolidation.
** Total assets comparatives are as of December 31, 2000.
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TELEWEST COMMUNICATIONS PLC
US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHARE-BASED COMPENSATION COST
Share-based compensation cost for employee share options is measured over
the period of the performance criteria for such options under "Accounting for
Stock Issued to Employees" ("APB 25") as the excess, if any, of the quoted
market price of a company's share over the amount an employee must pay to
acquire the shares.
During the three and nine-month periods ended September 30, 2001 the
Company's share price continued to fluctuate. No net compensation charge or
credit was recorded in respect of employee share options in the three-month
period ended September 30, 2001 compared with a credit of (pound)0.4 million for
the three-month period ended September 30, 2000 and a compensation charge of
(pound)1.1 million was recorded in the nine-month period ended September 30,
2001 compared with a charge of (pound)4.9 million in the nine-month period ended
September 30, 2000. Share-based compensation cost will continue to fluctuate
depending on the Company's share price movement.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS 137 and 138. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires the recognition at fair value of all derivative instruments as assets
or liabilities in the Company's balance sheet. The accounting treatment of
changes in fair value is dependent upon whether or not a derivative instrument
is designated as a hedge and if so, the type of hedge. For derivatives
designated as cash flow ▇▇▇▇▇▇, changes in fair value are recognized in other
comprehensive income ("OCI") until the hedged item is recognized in earnings.
For derivatives designated as fair value ▇▇▇▇▇▇, changes in fair value are
recognized immediately in earnings.
The Company ▇▇▇▇▇▇ interest rate risk and foreign currency risk on its
Senior Secured credit facility and US dollar-denominated debt instruments
through the use of interest swaps, forward foreign exchange contracts and
foreign currency swaps. The purpose of the derivative instruments is to provide
a measure of stability over the Company's exposure to movements in interest
rates and the Pound sterling to the US dollar exchange rate. The majority of the
Company's derivative instruments are designated as cash flow ▇▇▇▇▇▇.
Adoption of SFAS 133 on January 1, 2001 resulted in the Company recording
(pound)15.8 million of decline in fair value to accumulated OCI, consisting of a
decline of (pound)27.8 million to short-term derivative liabilities and a
(pound)12.0 million gain to long-term derivative assets.
During the nine-month period ended September 30, 2001, the Company
recorded a (pound)40.5 million gain in fair value to accumulated OCI, consisting
of a (pound)9.4 million gain to short-term derivative liabilities and a
(pound)49.9 million gain to long-term derivative assets.
6. DEBT
On March 16, 2001, the Company entered into a new senior secured credit
facility with a syndicate of 26 banks for up to (pound)2.25 billion to replace
the existing (pound)1.5 billion senior secured credit facility and the
(pound)200.0 million Flextech facility. The first drawdown under the facility
was used to repay the old senior secured credit facility and the Flextech
facility. The loan agreement governing the senior secured credit facility
initially provided for (pound)2.0 billion to be made available by the syndicate
of banks with provisions allowing the Company to raise a further (pound)250.0
million from institutional investors. On October 17, 2001, the Company announced
that GE Capital Structured Finance Group Limited, an affiliate of GE Capital,
had agreed to lend the Company (pound)125.0 million as part of the additional
(pound)250.0 million facility. Borrowings under the new senior secured credit
facility are secured on the assets of the Company, including the partnership
interests and shares of subsidiaries, and bear interest at between 0.5% and
2.25% above LIBOR (depending on the ratio of borrowing to quarterly annualized
consolidated net operating cash flow). The terms of the new facility restrict
transfers or disposals of assets from certain subsidiary companies. These
restrictions relate to the type and value of the consideration that can be
accepted. The Company's ability to borrow under the facility is subject to,
among other things, its compliance with the financial and other covenants and
borrowing conditions contained therein.
Following the replacement of our old senior secured credit facility and
the Flextech facility, the Company recorded an extraordinary loss of (pound)14.6
million due to the write-off of the bank facility fees which were being deferred
and written off over the life of those facilities.
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US GAAP UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 11, 2001, Telewest Communications Holdco Limited, a subsidiary of
the Company, and The Toronto-Dominion Bank, London Branch ("TD") entered into a
secured loan transaction. TD lends a fluctuating amount of money to Telewest
Communications Holdco Limited based on the value of the Company's shareholding
in Scottish Media Group plc ("SMG") on certain valuation dates. In return the
Company arranged for a charge over the Group's share in SMG to be granted to TD.
The initial amount borrowed under this transaction was (pound)49.2 million and
is being used for general corporate purposes.
7. COMMITMENTS AND CONTINGENCIES
The Company is 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 position or results of operations.
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PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Set forth below is a discussion of our results of operations and financial
condition for the three and nine-month periods ended September 30, 2000 and 2001
based upon financial information prepared in accordance with US GAAP.
References in this discussion to the "Group," "we," "us," and "our," are
to Telewest and its consolidated subsidiaries as at, or for, the specified date
or period.
RESULTS OF OPERATIONS
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 2001
Our merger with Flextech plc ("Flextech") was completed on April 19, 2000
and accordingly the results of Flextech have been consolidated from that date.
Our acquisition of Eurobell (Holdings) PLC ("Eurobell") from Deutsche
Telekom AG ("DT") was completed on November 1, 2000 and accordingly the results
of Eurobell have been consolidated from that date.
REVENUE
Our consolidated revenue increased by (pound)32.9 million or 11.8% from
(pound)279.9 million in the three-month period ended September 30, 2000 to
(pound)312.8 million in the three-month period ended September 30, 2001 and by
(pound)145.5 million or 18.7% from (pound)779.9 million in the nine-month period
ended September 30, 2000 to (pound)925.4 million in the nine-month period ended
September 30, 2001. The increase was attributable to the merger with Flextech
(approximately (pound)40.0 million for the nine-month period ended September 30,
2001), the Eurobell acquisition (approximately (pound)18.0 million for the
three-month period ended September 30, 2001 and approximately (pound)52.0
million for the nine-month period ended September 30, 2001), growth in our
residential services revenue in the three and nine-month periods ended September
30, 2001 and growth in our Business Services Division in the nine-month period
ended September 30, 2001.
RESIDENTIAL SERVICES REVENUE (CONSUMER DIVISION)
Residential services revenue represents a combination of cable television
("CATV") revenue, consumer cable telephony revenue and internet and other
income.
Our residential services revenue increased by (pound)37.9 million or 21.2%
from (pound)178.4 million for the three-month period ended September 30, 2000 to
(pound)216.3 million for the three-month period ended September 30, 2001 and by
(pound)84.6 million or 15.5% from (pound)546.7 million for the nine-month period
ended September 30, 2000 to (pound)631.3 million in the nine-month period ended
September 30, 2001. This increase was attributable to an increase in customer
homes connected and an increase in average monthly revenue per household.
Total customer homes connected increased by 9,916 and 53,271,
respectively, in the three and nine-month periods ended September 30,
2001. Total customer homes connected increased by 165,470 or 10.5% from
1,579,142 at September 30, 2000 to 1,744,612 at September 30, 2001. The increase
in homes connected resulted from the impact of the Eurobell acquisition, which
contributed approximately 84,000 customers at November 1, 2000, the launch of
our Active Digital services and lower churn rates experienced in the nine-month
period ended September 30, 2001 compared with the corresponding period in 2000.
Household penetration increased by 6.0% from 34.9% at September 30, 2000 to
37.0% at September 30, 2001.
Average monthly revenue per household increased by (pound)3.15 or 8.5%
from (pound)37.14 in the three-month period ended September 30, 2000 to
(pound)40.29 for the three-month period ended September 30, 2001 and also by
(pound)2.00 or 5.3% from (pound)37.49 in the nine-month period ended September
30, 2000 to (pound)39.49 in the nine-month period ended September 30, 2001. The
increase in average monthly revenue per household is attributable to an increase
in dual or triple penetration (i.e. the proportion of homes subscribing to any
two or all three of our CATV, residential telephony and high-speed internet
services), higher call volumes in residential telephony, and higher subscriber
revenues generated by our Active Digital versus analogue television services.
Dual or triple penetration, which results from the continued market acceptance
of combined CATV, telephony and high-speed internet packages, grew by 4.2% from
62.9% at September 30, 2000 to 67.8% at September 30, 2001.
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CABLE TELEVISION REVENUE
Cable television revenue increased by (pound)17.8 million or 26.5% from
(pound)67.3 million for the three-month period ended September 30, 2000 to
(pound)85.1 million for the three-month period ended September 30, 2001 and by
(pound)32.0 million or 15.1% from (pound)211.5 million in the nine-month period
ended September 30, 2000 to (pound)243.5 million in the nine-month period ended
September 30, 2001. The increase was principally attributable to an increase in
the number of CATV subscribers connected, higher subscriber revenues generated
by our Active Digital services, price rises across our basic packages which were
introduced from July 1, 2001, and lower churn rates experienced in the
nine-month period ended September 30, 2001 compared with the corresponding
period in 2000, offset in part by lower subscriber revenues from our analogue
services. The competitive nature of the television market will continue to
restrict our ability to increase retail prices.
Total CATV subscribers connected increased by 172,214 or 15.0% from
1,145,765 at September 30, 2000 to 1,317,979 at September 30, 2001. The increase
in subscribers resulted from the continued introduction of Active Digital, the
impact of the Eurobell acquisition, which contributed approximately 51,000
analogue subscribers at November 1, 2000, and lower churn rates experienced in
the nine-month period ended September 30, 2001 compared with the corresponding
period in 2000.
We initiated a national campaign on October 2, 2000 to re-launch our
Active Digital services and by September 30, 2001 we had 765,179 sales and had
an installed base of 641,494 digital customers. Active Digital, comprised of a
wide array of TV and radio channels, pay-per-view movies, interactive services
and TV e-mail, was rolled out in all franchise areas, excluding the recently
acquired Eurobell areas and our Cabletime areas where we currently offer only
analogue services.
At September 30, 2001, 38.8% of all customer homes connected subscribed to
our analogue CATV product and 36.8% subscribed to our Active Digital service.
Excluding the Eurobell areas, our Active Digital services are now taken by 51.1%
of our CATV subscribers compared with 48.9% for analogue subscribers. At
September 30, 2001 approximately 28.0% of our digital households had "set-up",
our TV e-mail account, and approximately 118,000 customers had purchased
keyboards for use with our interactive TV services.
Average monthly revenue per CATV subscriber (combined digital and
analogue) increased by (pound)1.26 or 6.3% from (pound)20.05 for the three-month
period ended September 30, 2000 to (pound)21.31 for the three-month period ended
September 30, 2001 and by (pound)0.32 or 1.6% from (pound)20.29 for the
nine-month period ended September 30, 2000 to (pound)20.61 for the nine-month
period ended September 30, 2001, primarily due to an increase in the number of
our Active Digital subscribers, and price rises across our basic packages which
were introduced from July 1, 2001 (our entry package, which includes digital TV,
telephone line rental, interactive services and TV e-mail increased from
(pound)9.00 to (pound)9.60 while other basic TV packages increased on average by
(pound)2.00 each), offset in part by an increased percentage of subscribers
choosing lower-priced service offerings. Average monthly revenue for digital
CATV subscribers was (pound)23.21 for the nine-month period ended September 30,
2001 compared with (pound)18.99 for analogue CATV subscribers for the same
period.
Product penetration increased 2.7 percentage points from 25.3% at
September 30, 2000 to 28.0% at September 30, 2001 as a result of improved
customer take up of Active Digital packages and a reduction in churn during the
three-month and nine-month periods ended September 30, 2001. As expected, the
increase in the prices of our basic CATV packages resulted in an increase in the
quarterly churn in the three-month period ended September 30, 2001 compared with
that in the three-month period ended June 30, 2001. However, product churn
improved 10.0 percentage points from 28.7% in the twelve-month period ended
September 30, 2000 to 18.7% in the twelve-month period ended September 30, 2001.
This product churn rate is the lowest rolling twelve-month rate we have ever
recorded for CATV churn. We believe that this reduction in churn is principally
attributable to improved customer satisfaction with our products, services and
pricing, and improvements in our customer service.
CONSUMER TELEPHONY REVENUE
Consumer telephony revenue increased by (pound)13.0 million or 12.1% from
(pound)107.5 million for the three-month period ended September 30, 2000 to
(pound)120.5 million for the three month period ended September 30, 2001 and by
(pound)36.3 million or 11.2% from (pound)325.5 million for the nine-month period
ended September 30, 2000 to (pound)361.8 million for the nine-month period ended
September 30, 2001. The increase in consumer telephony revenue was primarily due
to increases in the number of residential telephony customers and lines, offset
in part by marginal decreases in average monthly revenue.
The number of residential telephony customers increased by 165,003 or
11.6% from 1,426,663 at September 30, 2000 to 1,591,666 at September 30, 2001
and the number of residential lines increased by 157,493 or 9.9% from 1,586,934
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TELEWEST COMMUNICATIONS PLC
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at September 30, 2000 to 1,744,427 at September 30, 2001. The increases in the
number of residential telephony customers and residential lines resulted from
the impact of the Eurobell acquisition, which added approximately 77,000
customers and 80,000 lines, respectively, from November 1, 2000, an increase in
product penetration and a decrease in product churn.
Product churn improved by 5.3 percentage points from 22.0% for the
twelve-month period ended September 30, 2000 to 16.7% for the twelve-month
period ended September 30, 2001. This product churn rate is the lowest rolling
twelve-month rate we have ever recorded for telephony churn. We believe the
reduction in churn is principally attributable to improved customer satisfaction
with our products, services and pricing, and improvements in our customer
service.
Consumer telephony product penetration increased to 33.8% as at September
30, 2001 compared with 31.5% as at September 30, 2000. Second line penetration
decreased from 11.2% as at September 30, 2000 to 9.6% as at September 30, 2001,
in part due to the price increases for second lines during the nine-month period
ended September 30, 2001.
Average monthly revenue per line decreased marginally by (pound)0.25 or
1.1% from (pound)22.68 for the three-month period ended September 30, 2000 to
(pound)22.43 for the three-month period ended September 30, 2001 and by
(pound)0.12 or 0.5% from (pound)22.71 for the nine-month period ended September
30, 2000 to (pound)22.59 for the nine-month period ended September 30, 2001.
Although average call volume increased by approximately 34.0% from September 30,
2000 to September 30, 2001, our average revenue per minute decreased by
approximately 26.0% over the same period. While we benefited from a new
increased price structure known as "3-2-1-Free" and a growing number of calls
made to mobile operators, boosting telephony revenue per minute, these factors
were more than offset by the effects of price competition on our telephony
charges and a change in the mix of calls made by our telephony subscribers,
particularly the increases in the percentage of calls, which has increased by
nearly 150.0% since last year, made to Internet Service Providers ("ISPs") at
lower rates (or at no charge in the case of our own blueyonder SurfUnlimited
customers) and free cable-to-cable local calls, which have increased by 12.0%
since September 30, 2000.
INTERNET AND OTHER REVENUE
Internet and other revenue, which arises wholly in our Consumer Division,
increased by (pound)7.1 million or 197.2% from (pound)3.6 million in the
three-month period ended September 30, 2000 to (pound)10.7 million in the
three-month period ended September 30, 2001 and by (pound)16.3 million or 168.0%
from (pound)9.7 million in the nine-month period ended September 30, 2000 to
(pound)26.0 million in the nine-month period ended September 30, 2001. These
increases include an increase in internet income of (pound)6.9 million from
(pound)1.7 million in the three-month period ended September 30, 2000 to
(pound)8.6 million in the three-month period ended September 30, 2001 and an
increase of (pound)16.7 million from (pound)2.7 million in the nine-month period
ended September 30, 2000 to (pound)19.4 million in the nine-month period ended
September 30, 2001.
In February 2000, we launched blueyonder SurfUnlimited, the UK's first
un-metered internet access service. As a result, and together with our
blueyonder Pay-As-You-Go metered internet service, the number of dial-up
internet subscribers increased by 87,948 or 43.3% from 203,096 at September 30,
2000 to 291,044 at September 30, 2001.
Our high-speed internet service for home personal computers, "blueyonder
broadband internet," was launched in March 2000. Pending resolution of some
early technical problems, we suspended active marketing until the start of 2001,
when we began marketing on a national basis. The number of blueyonder broadband
internet subscribers increased by 50,840 from 2,294 at September 30, 2000 to
53,134 at September 30, 2001. With the exception of our Eurobell and Cabletime
areas, we now have full coverage across all of our regions.
We charge either (pound)33.00 per month for blueyonder broadband internet
on a stand-alone basis or (pound)25.00 if it is purchased in addition to our
cable television and/or telephony services. As such, our blueyonder broadband
internet customers significantly contribute to the growth in our average monthly
revenue and 67.4% of our blueyonder broadband internet customers take both cable
television and telephony services from us. These "triple-play" customers have
average monthly revenue of approximately (pound)67.00.
BUSINESS SERVICES REVENUE (BUSINESS DIVISION)
Business services revenue decreased by (pound)3.6 million or 5.2% from
(pound)69.7 million for the three-month period ended September 30, 2000 to
(pound)66.1 million for the three-month period ended September 30, 2001 but
increased by (pound)20.9 million or 11.6% from (pound)180.9 million for the
nine-month period ended September 30, 2000 to (pound)201.8 million for the
nine-month period ended September 30, 2001. The decrease in the three-month
period resulted from lower revenues contributed by our Carrier Services Unit and
a decrease in average monthly revenue per line from our business customers,
offset in part by increases in sales of voice and data services primarily to
Small to Medium-Sized Enterprises ("SMEs"). Excluding our Carrier Services Unit,
revenues increased by (pound)2.3 million or 4.4% from (pound)52.2 million for
the three-month period ended September 30, 2000 to (pound)54.5 million for the
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three-month period ended September 30, 2001 and by (pound)30.2 million or 23.1%
from (pound)130.9 million for the nine-month period ended September 30, 2000 to
(pound)161.1 million for the nine-month period ended September 30, 2001.
Our Carrier Services Unit, which provides national network services to
third parties, thereby exploiting our fixed network investment by providing new
revenues at higher margins, contributed (pound)17.5 million of revenue for the
three-month period ended September 30, 2000 compared with (pound)11.6 million
for the three-month period ended September 30, 2001 and (pound)50.2 million for
the nine-month period ended September 30, 2000 compared with (pound)40.7 million
for the nine-month period ended September 30, 2001. Revenues from this Unit tend
to be derived from a relatively small number of significant, short-term
contracts and therefore fluctuate from quarter to quarter.
Average monthly revenue per line decreased by (pound)5.37 or 12.4% from
(pound)48.69 for the three-month period ended September 30, 2000 to (pound)43.32
for the three-month period ended September 30, 2001 and by (pound)3.87 or 7.9%
from (pound)48.69 for the nine-month period ended September 30, 2000 to
(pound)44.82 for the nine-month period ended September 30, 2001, partly due to
increased competition in the market place and to our acquisition of Eurobell,
which experienced lower average monthly revenues.
The increase in the sale of voice and data services resulted primarily
from an increase in the number of business customers accounts using these
services and the number of lines used by those accounts. Business customer
accounts increased by 8,226 accounts or 13.2% from 62,527 at September 30 2000
to 70,753 at September 30, 2001. Business telephony lines increased by 109,189
lines or 33.9% from 321,785 at September 30, 2000 to 430,974 at September 30,
2001. The Eurobell acquisition contributed approximately 3,900 accounts and
32,000 lines, respectively, at November 1, 2000.
CONTENT DIVISION REVENUE
Our merger with Flextech was completed on April 19, 2000 and the results
for our Content Division were consolidated from that date. Accordingly, no
revenues were included for the period from January 1, 2000 to April 18, 2000.
For the period from April 19, 2000 to September 30, 2000 net revenues of
(pound)52.3 million were recorded and for the nine-month period ended September
30, 2001, net revenues of (pound)92.3 million were recorded. Content Division
revenue decreased by (pound)1.4 million or 4.4% from (pound)31.8 million for the
three-month period ended September 30, 2000 to (pound)30.4 million for the
three-month period ended September 30, 2001, principally due to lower
transactional revenues which decreased following the closure of Flextech's
Florida-based "infomercial" business, HSNDI. This business sold consumer
products via infomercials on U.S. television and was closed during the
three-month period ended September 30, 2001.
For illustrative purposes, based on Flextech's UK GAAP financial
statements, our Content Division's revenue, including its share of the revenue
of UKTV, (our joint venture with BBC World-wide), increased by (pound)1.0
million or 2.2% from (pound)46.2 million for the three-month period ended
September 30, 2000 to (pound)47.2 million for the three-month period ended
September 30, 2001 and by (pound)11.6 million or 8.6% from (pound)135.6 million
for the nine-month period ended September 30, 2000 to (pound)147.2 million for
the nine-month period ended September 30, 2001. The increase for the nine-month
period resulted primarily from an increase in the number of homes which receive
programming from our Content Division by 1.3 million or 14.4% from 9.0 million
homes at September 30, 2000 to 10.3 million at September 30, 2001, offset in
part by lower subscription rates from Sky Digital subscribers. On the same
basis, advertising revenue, including our share of UKTV's advertising revenue,
increased by (pound)0.6 million or 4.2% from (pound)14.4 million in the
three-month period ended September 30, 2000 to (pound)15.0 million in the
three-month period ended September 30, 2001 and by (pound)3.7 million or 8.2%
from (pound)44.9 million for the nine-month period ended September 30, 2000 to
(pound)48.6 million for the nine-month period ended September 30, 2001. Our
share of total United Kingdom TV advertising revenues increased from 2.6% for
the nine-month period ended September 30, 2000 to 3.2% for the nine-month period
ended September 30, 2001 and compares with a decline in UK television national
advertising revenue of 10.2% in the nine-month period ended September 30, 2001
compared to the nine-month period ended September 30, 2000. Our share of basic
pay-television viewing fell from 22.1% in the nine-month period ended September
30, 2000 to 21.1% in the nine-month period ended September 30, 2001.
OPERATING COSTS AND EXPENSES
Our operating costs and expenses, before depreciation and amortization,
increased by (pound)14.8 million or 6.8% from (pound)216.7 million in the
three-month period ended September 30, 2000 to (pound)231.5 million in the
three-month period ended September 30, 2001 and by (pound)103.4 million or 16.8%
from (pound)615.1 million in the nine-month period ended September 30, 2000 to
(pound)718.5 million in the nine-month period ended September 30, 2001,
principally as a result of the Flextech merger, the Eurobell acquisition and
increased selling, general and administrative costs.
Consumer programming expenses increased by (pound)2.2 million or 6.9% from
(pound)31.7 million for the three-month period ended September 30, 2000 to
(pound)33.9 million for the three-month period ended September 30, 2001,
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representing 14.6% of total operating costs before deprecation and amortization
for both the three-month periods ended September 30, 2000 and 2001. Consumer
programming expenses increased by (pound)7.7 million or 7.6% from (pound)101.7
million for the nine-month period ended September 30, 2000 to (pound)109.4
million for the nine-month period ended September 30, 2001, representing 15.2%
of total operating costs before depreciation and amortization for the nine-month
period ended September 30, 2001, a decrease from 16.5% for the corresponding
period in the previous year. Increased consumer programming expenses were
principally the result of the increased costs of programming for our digital
packages, which have more channels than their analogue counterparts, and were
largely offset by lower programming expenses resulting from an increase in the
number of our television subscribers choosing to subscribe to packages with
fewer or no premium channels, the elimination on consolidation of programming
fees paid for Flextech content following the Flextech merger, and continuing
favourable trends in distribution. As a percentage of cable television revenues,
programming expenses decreased from 47.2% for the three-month period ended
September 30, 2000 to 39.8% for the three-month period ended September 30, 2001
and from 48.1% for the nine-month period ended September 30, 2000 to 44.9% for
the nine-month period ended September 30, 2001. Not accounting for the Flextech
merger and the resulting consolidation of programming expenses, programming
expenses would have decreased from 51.6% in the three-month period ended
September 30, 2000 to 42.5% in the three-month period ended September 30, 2001
and decreased from 51.4% in the nine-month period ended September 30, 2000 to
48.0% in the nine-month period ended September 30, 2001.
Business and consumer telephony expenses decreased by (pound)2.8 million
or 4.7% from (pound)60.1 million in the three-month period ended September 30,
2000 to (pound)57.3 million in the three-month period ended September 30, 2001,
and represented 24.8% of total operating costs before depreciation and
amortization in the three-month period ended September 30, 2001, a decrease from
27.7% in the three-month period ended September 30, 2000. Business and consumer
telephony expenses increased by (pound)6.1 million or 3.5% from (pound)172.2
million in the nine-month period ended September 30, 2000 to (pound)178.3
million in the nine-month period ended September 30, 2001, and represented 24.8%
of total operating costs before depreciation and amortization in the nine-month
period ended September 30, 2001, a decrease from 28.0% in the nine-month period
ended September 30, 2000. These costs are principally payments to third-party
network providers for terminating calls that originate on our networks (i.e.
interconnection charges). As a percentage of consumer telephony and business
services revenues, telephony expenses decreased from 33.9% for the three-month
month period ended September 30, 2000 to 30.7% for the three-month period ended
September 30, 2001 and from 34.0% for the nine-month period ended September 30,
2000 to 31.6% for the nine-month period ended September 30, 2001. These
decreases resulted principally from increased telephony penetration and the
resulting increase in volume of traffic terminating on our network and was in
part offset by the Eurobell acquisition and by the increase in the proportion of
our total traffic terminating on mobile networks or third-party ISPs where
interconnection charges result in higher unit termination costs.
The Content Division's cost of sales was (pound)18.8 million or 61.8% of
the Content Division's revenues for the three-month period ended September 30,
2001 and (pound)57.2 million or 62.0% for the nine-month period ended September
30, 2001. The Content Division's cost of sales consists principally of
amortization costs of programming shown on its TV channels, direct costs
associated with its advertising revenues, and costs of products sold through its
web and transactional services.
Selling, general and administrative expenses ("SG&A") which include, among
other items, salary and marketing costs, increased by (pound)18.7 million or
18.2% from (pound)102.8 million in the three-month period ended September 30,
2000 to (pound)121.5 million in the three-month period ended September 30, 2001.
This increase primarily reflected higher employee costs, together with the
impact of the acquisition of Eurobell. SG&A increased by (pound)62.2 million or
20.0% from (pound)311.4 million in the nine-month period ended September 30,
2000 to (pound)373.6 million in the nine-month period ended September 30, 2001.
This increase primarily reflected the impact of the Eurobell and Flextech
acquisitions, the increase in employment costs due to an increase in headcount
between September 30, 2000 and 2001 and the expense associated with the launch
of our digital and hi-speed internet products and was partially offset by a
decrease in employee share-based compensation costs to a charge of (pound)1.1
million in the nine-month period ended September 30, 2001 from a charge of
(pound)4.9 million in the nine-month period ended September 30, 2000.
Share-based compensation costs will continue to fluctuate depending on the
movement of our share price. Excluding share-based compensation costs, SG&A
increased as a percentage of total operating costs before depreciation and
amortization from 48.8% in the three-month period ended September 30, 2000 to
52.5% in the three-month period ended September 30, 2001 but decreased from
52.4% in the nine-month period ended September 30, 2000 to 51.3% in the
nine-month period ended September 30, 2001. After capitalization to related
property and equipment, staff costs increased to (pound)74.1 million for the
three-month period ended September 30, 2001 from (pound)53.9 million for the
three-month period ended September 30, 2000 and to (pound)200.1 million for the
nine-month period ended September 30, 2001 from (pound)103.0 million for the
nine-month period ended September 30, 2000, reflecting an increase of some 1,500
employees on a base of approximately 9,800 as at September 30, 2000. This
increase in employees reflects the enlarged Group, continuing focus on customer
service and requirements to support our continued introduction of high-speed
internet and digital television services.
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Total labor and overhead costs capitalized in connection with new
subscriber installations and enhancement to our networks increased by (pound)5.0
million or 11.2% from (pound)44.8 million for the three-month period ended
September 30, 2000 to (pound)49.8 million for the three-month period ended
September 30, 2001 and by (pound)18.7 million or 14.6% from (pound)127.8 million
for the nine-month period ended September 30, 2000 to (pound)146.5 million for
the nine-month period ended September 30, 2001. The level of capitalized labor
and overhead costs increased primarily as a result of increases in installations
of Active Digital in 2001 and costs for other services related to our growing
subscriber base.
Depreciation expense increased by (pound)22.4 million or 23.6% from
(pound)94.9 million for the three-month period ended September 30, 2000 to
(pound)117.3 million for the three-month period ended September 30, 2001 and by
(pound)68.8 million or 24.8% from (pound)277.6 million for the nine-month period
ended September 30, 2000 to (pound)346.4 million for the nine-month period ended
September 30, 2001. The increase is attributable to the increased capital
expenditure associated with the roll-out of Active Digital, the Eurobell
acquisition and the merger with Flextech.
Amortization expense increased by (pound)2.2 million or 5.1% from
(pound)43.5 million for the three-month period ended September 30, 2000 to
(pound)45.7 million for the three-month period September 30, 2001 and by
(pound)37.1 million or 37.2% from (pound)99.8 million for the nine-month ended
September 30, 2000 to (pound)136.9 million for the nine-month period ended
September 30, 2001, primarily as a result of the merger with Flextech.
OTHER INCOME/(EXPENSE)
Other expense, net of income, decreased by (pound)0.9 million or 0.9% from
(pound)105.4 million for the three-month period ended September 30, 2000 to
(pound)104.5 million for the three-month period ended September 30, 2001 and
increased by (pound)8.0 million or 2.5% from (pound)318.3 million for the
nine-month period ended September 30, 2000 to (pound)326.3 million for the
nine-month period ended September 30, 2001. This consisted primarily of interest
expense and was partially offset by an increase in net foreign exchange gains on
re-translation of (pound)13.6 million from (pound)2.2 million for the
three-month period ended September 30, 2000 to (pound)15.8 million for the
three-month period ended September 30, 2001 and by an increase of (pound)43.6
million from a net loss of (pound)36.7 million for the nine-month period ended
September 30, 2000 to a net gain of (pound)6.9 million for the nine-month period
ended September 30, 2001.
Interest expense increased by (pound)15.0 million or 13.8% from
(pound)109.0 million for the three-month period ended September 30, 2000 to
(pound)124.0 million for the three-month period ended September 30, 2001 and by
(pound)57.0 million or 19.8% from (pound)288.2 million for the nine-month period
ended September 30, 2000 to (pound)345.2 million for the nine-month period ended
September 30, 2001, primarily as a result of the additional interest expense
incurred from additional borrowing to fund the roll-out of digital television
and high-speed internet products, acquisitions and general working capital,
offset in part by lower interest rates on our borrowings under our bank
facilities. The additional borrowing included our Senior Convertible Notes due
2005, issued in July 2000, and our Accreting Convertible Notes due 2003, issued
in connection with the acquisition of Eurobell.
In the three and nine-month periods ended September 30, 2000,
foreign exchange gains or losses, net, which arose principally from the
re-translation to Pound sterling of our US dollar-denominated Debentures and
Notes using the period end exchange rate and marking associated derivative
instruments to their market value, were recognized within earnings. As of
January 1, 2001 we adopted Statement of Financial Accounting Standards No. 133
("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS 137 and SFAS 138. The majority of our derivatives associated
with our US dollar-denominated Debentures and Notes have been designated as cash
flow ▇▇▇▇▇▇ which to date have been effective. The effect is that the gains or
losses arising from re-translating these US dollar-denominated Debentures and
Notes and from marking their associated derivative instruments to market value
are recorded in other comprehensive income ("OCI") and will be recognized within
earnings when these hedged transactions take place, or if the ▇▇▇▇▇▇ become
ineffective. In the three and nine-month periods ended September 30, 2001
foreign exchange gains, net, arise principally from re-translating those of our
US dollar-denominated Debentures and Notes which do not qualify for hedge
accounting and marking their associated derivative instruments to market value.
Interest receivable and similar income increased by (pound)2.3 million
from (pound)1.4 million in the three-month period ended September 30, 2000 to
(pound)3.7 million in the three-month period ended September 30, 2001 and by
(pound)5.4 million from (pound)6.6 million for the nine-month period ended
September 30, 2000 to (pound)12.0 million for the nine-month period ended
September 30, 2001.
Our share of the net gains or losses of our affiliated companies,
accounted for under the equity method of accounting, decreased by (pound)11.9
million from a gain of (pound)5.1 million for the three-month period ended
September 30, 2000 to a loss of (pound)6.8 million for the three-month period
ended September 30, 2001. Our share of net gains or losses of our affiliated
companies decreased by (pound)3.8 million from a gain of (pound)2.3 million for
the nine-month period ended September 30, 2000 to a loss of (pound)1.5 million
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for the nine-month period ended September 30, 2001. These decreases resulted
principally from generally lower contributions from our affiliated companies,
including, UK Gold Holdings Limited, UK Channel Management Limited, Scottish
Media Group plc, TV Travel Shop Limited, blueyonder Workwise Limited and sit-up
Limited.
Other losses, net, amounting to (pound)1.0 million and (pound)7.0 million
arising in the three and nine-month periods ended September 30, 2001,
respectively, arose as a result of the disposal of certain investments and
compare with losses of (pound)0.6 million and (pound)1.4 million for the
three and nine-month periods ended September 30, 2000, respectively.
Following the replacement of our old senior secured credit facility and
the Flextech facility during the three-month period ended March 31, 2001, we
recorded an extraordinary loss of (pound)14.6 million due to the write-off of
the bank facility fees which were being deferred and written-off over the life
of those facilities.
LIQUIDITY AND CAPITAL RESOURCES
Since our initial public offering in 1994, we have financed the capital
costs of our network construction, our operations and our investments in General
Cable PLC ("General Cable"), Birmingham Cable Corporation Limited ("Birmingham
Cable"), Cable London PLC ("Cable London"), Flextech Plc ("Flextech"), Eurobell
(Holdings) PLC ("Eurobell") and in affiliated companies, primarily from:
o the proceeds of the initial public offering of our ordinary shares
((pound)414.2 million, net of fees);
o borrowings under syndicated bank facilities (an aggregate
of(pound)1,135.0 million outstanding at September 30, 2001);
o the issuance in October 1995 of $300.0 million principal amount of
Senior Debentures due 2006 and $1,536.4 million principal amount at
maturity of Senior Discount Debentures due 2007;
o the issuance in November 1998 of $350.0 million principal amount of
Senior Notes due 2008;
o the issuance in February 1999 of(pound)300.00 million principal amount
of Senior Convertible Notes due 2007;
o the issuance in April 1999 of(pound)325.0 million principal amount at
maturity and $500.0 million principal amount at maturity of Senior
Discount Notes due 2009;
o the issuance in January 2000 of $450.0 million principal amount at
maturity of Senior Discount Notes due 2010 and(pound)180.0 million
principal amount and $350.0 million principal amount of Senior Notes
due 2010;
o the issuance in July 2000 of $500.0 million Senior Convertible Notes
due 2005;
o the issuance in September 1998 of ordinary shares as partial funding
for the General Cable merger ((pound)241.1 million);
o the issuance in November 1999 of ordinary shares under a rights issue
to fund the Cable London acquisition ((pound)415.5 million);
o the issuance to Deutsche Telekom ("DT") in November 2000, January 2001
and May 2001, respectively, of an aggregate of (pound)253.5 million
Accreting Convertible Notes due 2003 as consideration for its 100%
interest in Eurobell;
o the raising of a(pound)49.2 million loan, secured by a charge over the
Group's shares in SMG; and
o cash from operations.
Where appropriate, we also use finance leasing to fund the provision of
certain equipment and finance provided by vendor companies. At September 30,
2001 these amounted to (pound)286.2 million, compared with (pound)215.6 million
at September 30, 2000.
For the nine-month period ended September 30, 2001, we incurred a net cash
outflow from operating activities of (pound)23.3 million compared with a net
cash inflow of (pound)48.6 million in the same period in 2000. This net change
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is principally due to the larger size of the Group, particularly in respect of
fees paid in respect of the new senior secured credit facility, described above,
and additional interest expense in line with increased Group borrowings.
We incurred a net cash outflow from investing activities of (pound)376.4
million for the nine-month period ended September 30, 2001 compared with
(pound)447.8 million for the nine-month period ended September 30, 2000, a
decrease of (pound)75.0 million or 16.7%. Capital expenditures accounted for
(pound)377.0 million of the total in 2001 compared with (pound)428.6 million in
2000. This decrease in capital expenditure is principally due to a reduction in
costs related to our roll-out of Active Digital and high-speed internet
products. The significant majority of our capital expenditure relating to the
initial roll-out of these products was incurred in 2000 as we substantially
completed all network upgrades necessary for delivery of these products. As a
result these costs have declined and capital expenditure in the nine-month
period ended September 30, 2001 has mostly been driven by customer acquisition
activities.
Net cash provided by financing activities totalled (pound)343.9 million
for the nine-month period ended September 30, 2001 compared with (pound)371.5
million for the corresponding period in the previous year. For the nine-month
period ended September 30, 2001, net cash provided by financing activities
includes the repayment on March 16, 2001 of (pound)810.0 million and
(pound)122.0 million under our old senior secured credit facility and the
Flextech facility, respectively, with a drawdown from our new Senior Secured
credit facility. In connection with our acquisition of Eurobell, on January 15,
2001, DT remitted a cash payment of (pound)30.0 million to Eurobell and we
issued an additional Accreting Convertible Note for the same amount.
We anticipate that our principal uses of cash in the future will be to
fund operating losses and capital expenditure, to make appropriate investments
and to service debt. Although we expect to continue to incur operating losses,
we anticipate that they will begin to reduce as we realise the expected benefits
of our roll-out of digital television and high-speed internet services which we
believe will increase product penetration, increase revenue per customer in our
residential, business and content markets, and achieve the cost-efficiencies of
delivering these services over our owned broadband network. We also expect to
have significant capital needs in the future. Nevertheless, with substantially
all of our network construction complete and substantially all network upgrades
necessary for delivery of digital services complete, we anticipate that our
capital expenditures will be largely driven by connecting new subscribers and
the launch of new products, and consequently, will vary depending upon the
take-up of our services.
We anticipate that our principal sources of funds in the future will be
cash flow from operating activities, proceeds from bank facilities, additional
vendor financing and cash in hand. Our future actual funding requirements could
exceed currently anticipated requirements. Differences may result from
higher-than-anticipated costs or capital expenditure and/or lower than
anticipated revenues. Our actual costs, capital expenditures and revenues will
depend on many factors, including, inter alia, consumer demand for voice, video,
data and internet services, the impact on our business of new and emerging
technologies, the extent to which consumer preference develops for cable
television over other methods of providing in-home entertainment, the
development of the interactive e-commerce market, consumer acceptance of cable
telephony as a viable alternative to British Telecommunications plc's telephony
services, and the continuance of downward pressure on telephony margins.
In addition, we continuously review possibilities for accelerating our
delivery of bundled broadband services via a range of existing and new
distribution platforms and, as part of that strategy, we may acquire one or more
companies or their assets. Although we currently expect that the primary
consideration for such acquisitions would be our ordinary shares, we may elect
to fund such acquisitions with the cash proceeds from indebtedness or cash flow
from operating activities. Any such acquisition could increase our funding
requirements.
As of September 30, 2001, we had cash balances of (pound)3.8 million
(excluding (pound)12.0 million that is restricted as to use to providing cash
surety for tax contingent liabilities of former lessors of certain equipment to
General Cable which we acquired in September 1998 and (pound)8.0 million that is
on deposit guaranteeing a temporary overdraft of an affiliated company). As of
September 30, 2001 we had (pound)865 million available to be drawn down under
our Senior Secured credit facility (as defined below).
Following the Flextech merger in April 2000, we had two separate bank
facilities:
o We were party to a(pound)1.5 billion senior secured credit facility;
and
o Flextech and its subsidiaries were party to a(pound)200 million senior
secured credit facility.
On March 16, 2001, we signed new senior secured credit facilities (the
"Senior Secured credit facility") of up to (pound)2.25 billion, (pound)2.0
billion of which has been made available by a syndicate of 26 banks. The terms
of the loan agreement governing the Senior Secured credit facility also allow
the Company to raise a further (pound)250.0 million from institutional
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investors. The first drawdown under this new facility was used to repay our old
senior secured credit facility and the Flextech facility. On October 17, 2001,
the Company announced that GE Capital Structured Finance Group Limited, an
affiliate of GE Capital, had agreed to lend the Company (pound)125.0 million as
part of the additional (pound)250.0 million facility.
Borrowings under the Senior Secured credit facility are secured on our
assets, including partnership interests and shares of subsidiaries, and bear
interest at between 0.5% and 2.25% above LIBOR (depending on the ratio of
borrowings to quarterly annualized consolidated net operating cash flow). The
terms of the new facility restrict transfers or disposals of assets from certain
subsidiary companies. These restrictions relate to the type and value of the
consideration that can be accepted. Our ability to borrow under the Senior
Secured credit facility is subject to, among other things, our compliance with
the financial and other covenants set forth in the loan agreement governing that
facility and failure to comply with those covenants could result in all amounts
outstanding thereunder becoming immediately due and payable.
We may from time to time repurchase our outstanding debt securities for
cash and/or exchange for equity securities, in open market purchases or
privately negotiated transactions. Such repurchases or exchanges will depend on,
among other things, prevailing market conditions and our liquidity requirements.
The amounts of repurchased or exchanged debt securities may be material.
CAPITAL EXPENDITURES
Net additions to property and equipment in the nine-month period ended
September 30, 2001 totalled (pound)474.0 million, a decrease of (pound)1.2
million from (pound)475.2 million for the nine-month period ended September 30,
2000. This net decrease includes approximately (pound)28.0 million of net
additions relating to Eurobell for the nine-month period ended September 30,
2001. Excluding the Eurobell net additions, net additions to property and
equipment for the nine-month period ended September 30, 2001 would have been
(pound)446.0 million, a decrease of (pound)29.2 million or 6.1% from
(pound)475.2 million for the nine-month period ended September 30, 2000. The
Group's capital expenditures have primarily funded the construction of local
distribution networks and the national network, capital costs of installing
customers, and enhancing the network for new product offerings. The additions
were principally a result of network upgrades and new digital set-top boxes and
modems in connection with our roll-out of digital television and high-speed
internet services. At September 30, 2001 our broadband network, including
Eurobell, was capable of providing 77.5% of the homes in our franchises with
both cable television and cable telephony services.
We have substantially completed all network upgrades necessary for
delivery of our digital television and high-speed services. Consequently, we
anticipate that capital expenditures associated with our existing and currently
planned services will be largely driven by connecting new subscribers and the
launch of new products, and will vary depending upon the take-up of our
services.
MARKET RISK
The principal market risks to which we are exposed are:
o Interest rate changes on variable-rate, long-term bank debt; and
o Foreign exchange rate changes, generating translation and transaction
gains and losses on our US dollar-denominated debt instruments.
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. There have been no significant changes in market risk
since December 31, 2000.
GOODWILL ON ACQUISITION
Under UK GAAP, Financial Reporting Standard No.10 requires a group to
review the carrying value of goodwill arising on any acquisition at the end of
the first full financial year following such acquisition. The Company is
undertaking a review process with regard to the goodwill arising as a
consequence of recent acquisitions and this review will be completed in the
three-month period ending December 31, 2001. The Company will also review
goodwill for these acquisitions in the context of applicable US GAAP standards.
These reviews could result in a non-cash goodwill impairment adjustment.
NEW ACCOUNTING STANDARDS APPLICABLE TO THE COMPANY
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS - SFAS 141
AND SFAS 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS 141 requires all business combinations undertaken after June 30,
2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are subject
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to annual review (or more frequently should indications of impairment arise) for
impairment. Separable intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives. The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.
For goodwill and intangible assets acquired prior to July 1, 2001, the Company
is required to adopt SFAS 142 effective January 1, 2002. We are currently
evaluating the effect that the adoption of the provisions of SFAS 142 that are
effective January 1, 2002 will have on our results of operations and financial
position.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS - SFAS 143
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143, which is effective for fiscal years beginning after June
15, 2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. We have not yet decided when we will adopt this new standard.
We will be assessing the impact of this new standard upon our results of
operations and financial position.
ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS - SFAS 144
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". While SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", it retains many of the fundamental provisions of that
Statement. SFAS 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. We have
not yet determined the impact, if any, the adoption of this standard will have
on our financial position or results of operations.
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* * * * * *
SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The discussion above includes certain statements that are, or may be
deemed to be, forward-looking statements within the meaning of the US securities
laws. These forward-looking statements, by their nature, involve risks and
uncertainties because they relate to events and depend on circumstances that may
or may not occur in the future.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed or
implied by those forward-looking statements, including, but not limited to: our
ability to successfully integrate Eurobell and other entities which we may
acquire and to achieve cost savings and synergies we expect to arise therefrom;
the extent to which consumer demand for voice, video, data and internet services
increases; the extent to which Small-to-Medium sized Enterprises accept cable
telephony services as an alternative to those of competing service providers
like British Telecommunications plc ("BT"); the extent to which we are able to
adapt to, and compete with, new and emerging technologies including Asynchronous
Digital Subscriber Line technology; the extent to which consumer preference
develops for cable television over other methods of providing in-home
entertainment; the extent to which consumer preference develops for purchasing
goods and services on the internet and/or using interactive television over
other methods of purchasing such goods and services; the extent to which
consumers accept cable telephony as a viable alternative to telephony services
provided by BT; the extent to which regulatory and competitive pressures in the
UK market continue to reduce prices; our ability to develop and introduce
attractive interactive and high-speed data services in a rapidly changing and
highly competitive business environment; our ability to penetrate markets and
respond to changes in competition; our ability to compete with other Internet
Service Providers ("ISPs"); our ability to compete against digital television
service providers, including British Sky Broadcasting Group plc and ITV Digital
(formerly ONdigital, a joint venture between Carlton Communications plc and
Granada Group plc) by increasing our digital services customer base, and the
impact of our aggressive digital services marketing campaign on our results of
operation and liquidity; our ability to have an impact on, or respond to, new or
changed government regulation; our ability to manage growth and expansion; our
ability to improve operating efficiencies, including through cost reductions;
our ability to upgrade our network in a cost-efficient and timely manner; our
ability to raise additional financing; our ability to refinance our
indebtedness, or that of any business we may acquire; adverse changes in the
price or availability of telephony interconnection or cable television
programming; disruptions in supply of programming, services and equipment,
including the supply of set-top boxes required for our roll-out of digital
services; and the extent to which consumer preference develops for, or shifts
away from, content developed and distributed by our Content Division (formerly
Flextech).