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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 MARCH 31, 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.)
incorporation 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 12b2 of the Exchange Act).
[ ] Yes [ X ] No
The number of shares outstanding of the registrant's common stock as of May
10, 2005 was 245,080,629.
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TELEWEST GLOBAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM - 1 FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of March 31, 2005 and December 31,
2004 for the Reorganized Company
Consolidated Statements of Operations for the three months ended
March 31, 2005 for the Reorganized Company and the three months
ended March 31, 2004 for the Predecessor Company
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 for the Reorganized Company and the three months
ended March 31, 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)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
REORGANIZED REORGANIZED
COMPANY COMPANY
----------- ------------
ASSETS
Cash and cash equivalents 87 68
Restricted cash 25 26
Trade receivables 119 108
Other receivables 33 33
Prepaid expenses 34 17
----------- ------------
TOTAL CURRENT ASSETS 298 252
Investments accounted for under the equity method 349 304
Property and equipment, net 2,925 2,974
Intangible assets, net 305 314
Reorganization value in excess of amounts
allocable to identifiable assets 425 425
Programming inventory 32 24
Deferred financing costs (net of amortization
of (pound)1 million; 2004: (pound)0 million) 51 51
----------- ------------
TOTAL ASSETS 4,385 4,344
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 127 93
Other liabilities 427 424
Debt repayable within one year 21 21
Capital lease obligations repayable within one year 43 38
----------- ------------
TOTAL CURRENT LIABILITIES 618 576
Deferred taxes 105 105
Debt repayable after more than one year 1,686 1,686
Capital lease obligations repayable after more than
one year 65 69
----------- ------------
TOTAL LIABILITIES 2,474 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 245,080,629
(2005 and 2004) 1 1
Additional paid-in capital 1,957 1,954
Accumulated other comprehensive loss (1) -
Accumulated deficit (45) (46)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 1,912 1,909
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,385 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)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- ------------
REVENUE
Consumer Sales Division 246 235
Business Sales Division 61 67
----------- ------------
Total Cable Segment 307 302
Content Segment 31 26
----------- ------------
Total revenue 338 328
----------- ------------
OPERATING COSTS AND EXPENSES
Cable segment expenses 69 79
Content segment expenses 20 16
Depreciation 101 94
Amortization 9 -
Selling, general and administrative expenses 115 120
----------- ------------
314 309
----------- ------------
OPERATING INCOME 24 19
OTHER INCOME/(EXPENSE)
Interest income 4 7
Interest expense (including amortization of
debt discount) (29) (109)
Foreign exchange (losses)/gains, net (4) 77
Share of net income of affiliates 6 3
Other, net - (1)
----------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES 1 (4)
Income taxes - -
----------- ------------
NET INCOME/(LOSS) 1 (4)
=========== ============
Basic and diluted loss per share of common stock -
Weighted average number of shares of common stock-
(millions) 245
See accompanying notes to the unaudited consolidated financial statements
TELEWEST GLOBAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN (POUND)MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2005 2004
----------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) 1 (4)
Adjustments to reconcile net income/(loss)
to net cash provided by operating
activities:
Depreciation 101 94
Amortization 9 -
Amortization of deferred financing costs and
debt discount 1 20
Fair value adjustment of interest rate swaps (10) -
Unrealized losses/(gains) on foreign 4 (77)
currency translation -
stock-based compensation expense 3
Share of net income of affiliates (4) (3)
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 (12) (2)
Change in prepaid expenses (18) (5)
Change in other assets (8) (2)
Change in accounts payable 31 15
Change in other liabilities 18 46
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 116 82
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditure (54) (66)
Additional investment in and loans to
affiliates (41) -
Repayment of loans made to affiliates, net 2 3
Proceeds from sale and leaseback 4 -
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (89) (63)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Release of restricted cash 1 -
Repayment of other debt (1) -
Cash paid for loan issue costs (1) -
Principal element of capital lease repayments (7) (12)
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (8) (12)
----------- ------------
Net increase in cash and cash equivalents 19 7
Cash and cash equivalents at beginning of
period 68 427
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 87 434
=========== ============
Supplementary cash flow information:
Cash paid for interest, net (12) (32)
Cash received for income taxes - -
See accompanying notes to the unaudited consolidated financial statements
TELEWEST GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED MARCH 31, 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 Company and its subsidiaries (together "the Group") provide cable
television, telephony and internet services to business and residential
customers in the United Kingdom ("UK"), and broadcast media activities. The
Group's Cable segment derives its cable television revenues from
installation fees, monthly basic and premium service fees and advertising
charges; its telephony revenues from connection charges, monthly line
rentals, call charges, special residential service charges and
interconnection fees payable by other operators; its internet revenues from
installation fees and monthly subscriptions to its internet service
provider.
The Group's Content segment is engaged in broadcast media activities, being
the supply of entertainment content, interactive and transactional services
to the UK pay-television broadcasting market.
2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("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 longlived 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 months ended March 31, 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.
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 SOP 90-7, with effect from July 1, 2004.
Under SOP 90-7, the Company has established a new accounting basis. The
Company has allocated the reorganization value to the Predecessor Company's
then existing assets in conformity with the procedures specified by SFAS
141 "Business Combinations" 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 March 31, 2005 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 EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income available
to shareholders by the weightedaverage number of shares of common stock
outstanding during the period. The period for the purposes of the
calculation of basic and diluted earnings per share is the three months
ended March 31, 2005. Diluted earnings per share is computed by adjusting
the weighted-average number of shares of common stock outstanding during
the period for all dilutive potential shares of common stock outstanding
during the period and adjusting the net income for any changes in income or
loss that would result from the conversion of such potential common stock.
There is no difference in basic and diluted net income per common stock, as
potential common stock equivalents for employee share options are not
included in the computation as their effect is antidilutive. A total of
10,146,123 common stock equivalents in respect of share options and
restricted stock were excluded from the diluted net income per share of
common stock calculation for the three months ended March 31, 2005.
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.
4 ACQUISITION OF ADDITIONAL EQUITY IN SIT-UP LIMITED
On March 23, 2005, Screenshop Limited ("Screenshop"), a wholly-owned
subsidiary of the Company, acquired 1,991,841 preferred shares in sit-up
Limited, (sit-up), representing 19.59% of issued stock along with warrants
to subscribe for a further 565,919 ordinary shares of sit-up, together
representing 21.2% of stock on a fully diluted basis. When combined with
Screenshop's existing 30.3% (28.5% on a fully diluted basis) investment in
sit-up's issued stock, the Company now has a total investment of 49.89% in
the issued stock of sit-up (49.7% on a fully diluted basis). Screenshop
paid (pound)41 million for the 19.59% (21.2% fully diluted) interest, which
resulted in total additional equity method investee goodwill of (pound)37
million.
Screenshop is in the process of acquiring the remaining equity of sit-up.
Details of this acquisition are disclosed in note 11 - Subsequent events.
5 PROPERTY AND EQUIPMENT
MARCH 31, DECEMBER 31,
2005 2004
--------------- ---------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
Land and buildings 76 76
Cable and ducting 2,339 2,310
Electronic equipment 653 632
Other equipment 158 156
--------------- ---------------
3,226 3,174
Less: Accumulated depreciation (301) (200)
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 2,925 2,974
--------------- ---------------
During the three months ended March 31, 2005, the Company entered into
(pound)4 million of capital leases in respect of sale and leaseback
arrangements for equipment related to the implementation of Video-on-Demand
(VOD).
6 INTANGIBLE ASSETS
MARCH 31, 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 (27) (18)
--------------- ---------------
INTANGIBLE ASSETS, NET 305 314
--------------- ---------------
Customer lists are amortized over a period of eight years from fresh-start
date, July 1, 2004. Trade names are deemed to have indefinite lives, and
therefore, no amortization is expensed. The carrying value of trade names
is subject to an annual impairment review or more frequently should events
occur that indicate that an impairment is likely. Customer lists are
amortized over a period of eight years from fresh-start date, July 1, 2004.
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 84
---------------
271
---------------
7 DEBT
MARCH 31, DECEMBER 31,
2005 2004
--------------- ---------------
REORGANIZED REORGANIZED
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
--------------- ---------------
New bank facility 20 20
Other debt 1 1
--------------- ---------------
Debt repayable within one year 21 21
New bank facility repayable after
more than one year 1,681 1,680
Other debt repayable after more
than one year 5 6
--------------- ---------------
Total debt 1,707 1,707
--------------- ---------------
On May 10, 2005, the Company's content subsidiaries entered into a new
senior secured bank facility to partly finance the acquisition of sit-up.
Details of the new bank facility are disclosed in note 11 - Subsequent
events.
8 COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
At March 31, 2005, the Group had cash restricted as to use of (pound)25
million (December 31, 2004: (pound)26 million), representing cash which
provides security for leasing obligations and cash held by plc to settle
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.
VAT PROCEEDING
A proceeding relating to the VAT status of Cable Guide and Zap magazines
was instituted on June 29, 2001 by the Commissioners of Customs and Excise
against Telewest Communications Group Limited and Telewest Communications
(Publications) Limited. This proceeding was heard between October 21 and
October 25, 2002 before the VAT and Duties Tribunal and as a result a
judgment was passed down on January 21, 2003, which resulted in the
provision of (pound)16 million against revenue in the consolidated
financial statements of our predecessor, Telewest Communications. The item
arose in respect of VAT payable in the period from January 2000 to July
2002. The magazines have since ceased publication. Therefore, the item
represented the full extent of our predecessor's VAT liability in respect
of its magazine operations. The VAT tribunal held that our predecessor's
arrangements to protect the zero-rated VAT status of Cable Guide and Zap
magazines could, in principle, be effective in creating a separate supply
by Telewest Communications (Publications) Limited, which was not ancillary
to the supply of pay-television services. However, in practice, the steps
taken by our predecessor were held to be insufficient to make the
arrangements effective. Our predecessor appealed this decision in the High
Court in November 2003. The appeal was unsuccessful and our predecessor
submitted a further appeal against the High Court's decision, which was
heard by the Court of Appeal in the week commencing November 8, 2004. The
Court of Appeal's judgment was received on February 10, 2005 and found in
our favor on all points. The Commissioners of Customs and Excise have
applied for leave to make a further appeal to the House of Lords. On April
7, 2005 we received (pound)17,155,785 from the Commissioners of Customs and
Excise. This amount is repayable should a future appeal by the
Commissioners of Customs and Excise to the House of Lords prove successful.
Although repayment of the cash received may be required, the cash is not
restricted as to use and therefore will be reported as cash and cash
equivalents for the three and six months ended June 30, 2005.
9 STOCK-BASED COMPENSATION
Under the fair value recognition provisions of 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. The cost is recognized
using the graded-vesting attribution method. The Reorganized Company has
recognized (pound)3 million of stock-based compensation expense during the
three months ended March 31, 2005, (three months ended March 31, 2004:
(pound)0) as a result of awards granted over 10,146,123 shares of the
Company's common stock following completion of the Predecessor Company's
financial restructuring. 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
amount indicated below:
THREE MONTHS
ENDED MARCH 31,
2004
------------------
PREDECESSOR
COMPANY
(POUND) MILLION
------------------
Net loss as reported (4)
Less: pro forma employee compensation cost related to stock
options -
------------------
Pro forma net loss (4)
------------------
The following table summarizes the fair values of the options and
restricted stock outstanding at March 31, 2005:
RESTRICTED
STOCK OPTIONS STOCK
---------------- ------------- --------------- -------------- ---- -------------- ----------
EXERCISE PRICE (US$) (4) 13.70(1) 13.70(2) 13.70(3) 16.00(2) 0.01(1)
Number outstanding at
beginning of period 7,653,629 11,711 900,969 - 911,117 325,628
Granted 28,378 - - 240,880 7,353 93,485
Exercised - - - - - -
Forfeited (27,027) - - - - -
Number outstanding at
end of period 7,654,980 11,711 900,969 240,880 918,470 419,113
For options/restricted stock
granted in the period:
Weighted average fair value
at grant date (US$) 5.73 - - 4.88 15.99 16.00
Weighted average fair value
at grant date (pound) 3.06 - - 2.61 8.54 8.55
Weighted average share price
at date of grant (US$) 16.00 - - 16.00 16.00 N/A
Weighted average expected
life (years) 3.3 - - 3.4 3.3 N/A
Weighted average expected
Volatility (%) 35 - - 36 35 N/A
Weighted average risk-free
rate (%) 3.4 - - 3.4 3.4 N/A
Weighted average expected
Dividend yield (%) 0.0 - - 0.0 0.0 N/A
(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.
The fair value of options and restricted stock has been translated to
pounds sterling ((pound)) at the US$ to (pound) exchange rate prevailing on
the date of each grant.
The weighted-average remaining contractual life for options outstanding at
March 31, 2005 is 9.3 years.
10 SEGMENT INFORMATION
We operate in two segments: Cable and Content. Our chief operating
decision-maker receives performance and subscriber data for the Cable
segment (including telephony, television and internet product lines),
however support, service and network costs are compiled only at the Cable
segment level. The Content segment supplies TV programming to the UK
pay-television broadcasting market and its operating results, which are
naturally separate from the Cable segment, are regularly reviewed by the
chief operating decision-maker. Revenues derived by the Content segment
from the Cable segment are eliminated on consolidation.
- -------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
---------- ---------
REORGANIZED PREDECESSOR
COMPANY COMPANY
(POUND) MILLION (POUND) MILLION
---------- ---------
CABLE SEGMENT
Consumer Sales Division revenue 246 235
Business Sales Division revenue 61 67
---------- ---------
THIRD PARTY REVENUE 307 302
Operating costs and expenses (before financial
restructuring charges) (179) (188)
---------- ---------
ADJUSTED EBITDA including inter-segment costs 128 114
Inter-segment costs (1) 3 3
---------- ---------
ADJUSTED EBITDA 131 117
---------- ---------
CONTENT SEGMENT
Content Segment revenue 34 29
Operating costs and expenses (before financial
restructuring charges) (28) (21)
---------- ---------
ADJUSTED EBITDA including inter-segment
revenues 6 8
Inter-segment revenues (1) (3) (3)
---------- ---------
ADJUSTED EBITDA 3 5
---------- ---------
RECONCILIATION TO OPERATING INCOME
Cable Segment Adjusted EBITDA 131 117
Content Segment Adjusted EBITDA 3 5
---------- ---------
134 122
Financial restructuring charges - (9)
Depreciation (101) (94)
Amortization (9) -
---------- ---------
OPERATING INCOME 24 19
========== =========
(1) Inter-segment revenues are revenues of our Content Segment which are
costs in our Cable Segment and which are eliminated on consolidation.
11 SUBSEQUENT EVENTS
On March 23, 2005, Screenshop, a wholly owned subsidiary of the Company,
acquired approximately 21.2% (on a fully diluted basis) of the share
capital of sit-up for approximately (pound)41 million, bringing its total
holding of sit-up's share capital to approximately 49.7% (on a fully
diluted basis). Pursuant to agreements entered into on May 6, 2005 and a
subsequent offer to sit-up shareholders, Screenshop has acquired or
offered to acquire the remaining shares of sit-up not already owned by it
for an aggregate consideration of approximately (pound)97.5 million. As a
result, as of May 12, 2005, Screenshop had acquired or had agreed to
acquire more than 96% of the share capital of sit-up. In accordance with
English law, Screenshop now has the right to compulsorily acquire any
shares that are not sold to it pursuant to the offer. The company expects
to complete the acquisition of 100% of the sit-up equity in June 2005. In
addition, sit-up's existing management will remain with the company
following completion of the acquisition.
The acquisition of sit-up is being financed in part by a new (pound)130
million senior secured bank facility entered into on May 10, 2005 by the
Company's content subsidiaries. The 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 is undrawn at the
date hereof. The term loans are to be repaid in semi-annual installments
commencing December 31, 2005, with final maturity on June 30, 2009.
FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q constitute "forward-looking
statements" which we believe to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance,
including, but not limited to, strategic plans, potential growth
(including penetration of developed markets and opportunities in emerging
markets), product introductions and innovation, meeting customer
expectations, planned operational changes (including product
improvements), expected capital expenditures, future cash sources and
requirements, liquidity, customer service improvements, cost savings and
other benefits of acquisitions or joint ventures - potential and/or
completed - that involve known and unknown risks, uncertainties and other
factors that may cause our or our businesses' actual results, levels of
activity, performance or achievements to be materially different from
those expressed or implied by any forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as
"may," "will," "could," "would," "should," "expect," "plan," "anticipate,"
"intend," "believe," "estimate," "predict," "potential," or "continue," or
the negative of those terms or other comparable terminology.
There are a number of important factors that could cause our actual
results and future development to differ materially from those expressed
or implied by those forward-looking statements. These factors include
those discussed under the caption "Risk Factors" in the 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, an indirectly wholly owned subsidiary 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 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
three months ended March 31, 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 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
include a gain on the extinguishment of its outstanding notes and
debentures. The Company's future indebtedness and related
interest expense has been substantially reduced.
o The Company adopted fresh-start 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 has established a new
accounting basis, and recorded its existing assets and
liabilities at their respective fair values. As a result of the
application of fresh-start reporting, the Company's balance
sheets as at March 31, 2005 and December 31, 2004 and results of
operations for the three months ended March 31, 2005 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.
We have the same segments as our predecessor.
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 the roll-out of digital video recorder ("DVR") enabled set-top
boxes expected in the second half of 2005.
RECENT DEVELOPMENTS
On March 23, 2005, we acquired approximately 21.2% of the fully-diluted
share capital of sit-up Limited (sit-up) for approximately (pound)41 million,
bringing our total holding of sit-up's share capital to approximately
49.7% (on a fully diluted basis). Pursuant to agreements entered into on
May 6, 2005 and a subsequent offer to sit-up shareholders, we have
acquired or offered to acquire the remaining shares of sit-up we do not
already own for an aggregate consideration of approximately (pound)97.5
million. As a result, as of May 12, 2005, we had acquired or had agreed
to acquire more than 96% of the share capital of sit-up. In accordance
with English law, we now have the right to compulsorily acquire any shares
that are not sold to us pursuant to the offer. We expect to complete the
acquisition of 100% of the sit-up equity in June 2005.
sit-up is a UK-based interactive television retailer that operates a
number of home shopping television channels, including several auction
based shopping channels. sit-up's channels are carried on all of the UK's
digital platforms: BskyB, NTL, Freeview and Telewest.
The acquisition of sit-up is being financed in part by a new (pound)130 millIon
senior secured bank facility entered into on May 10, 2005 by Telewest's
content subsidiaries. The 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 is undrawn at the date hereof.
The term loans are to be repaid in semi-annual installments commencing
December 31, 2005, with final maturity on June 30, 2009.
RESULTS OF OPERATIONS
The following represents a discussion of results of operations for the
three months ended March 31, 2005, compared to the three months ended
March 31, 2004. The results of operations for the three months ended March
31, 2005 represent our results, and the results of operations for the
three months ended March 31, 2004 represent those of our predecessor.
We operate in two segments: cable and content. Our chief operating
decision-maker receives performance and subscriber data for the cable
segment (including telephony, television and internet product lines);
however, support, service and network costs are compiled only at the cable
segment level. The content segment supplies TV programming to the UK
pay-television broadcasting market and its operating results, which are
naturally separate from the cable segment, are regularly reviewed by the
chief operating decision-maker. Revenues derived by the content segment
from the cable segment are eliminated on consolidation.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Consolidated combined revenue increased by (pound)10 million or 3.0% from
(pound)328 million for the three months ended march 31, 2004 to (pound)338
million for the three months ended march 31, 2005. the increase was
attributable to a (pound)5 million or 1.7% increase in cable segment
revenues and a (pound)5 million or 19.2% increase in content segment
revenue.
Cable Segment
- -------------
Cable segment revenue increased by (pound)5 million or 1.7% from (pound)302
million for the three months ended March 31, 2004 to (pound)307 million for
the three months ended March 31, 2005. Consumer sales division revenue
increased by (pound)11 million, primarily from growth in internet revenue
together with a marginal increase in cable television revenue, offset by a
marginal decrease in consumer telephony revenue. This was offset by a
decline in business sales division revenue of (pound)6 million due to
decreases in voicE services revenue and carrier and other services.
Cable segment Adjusted EBITDA was (pound)131 million for the three months
ended March 31, 2005, as compared to (pound)117 million for the three
months ended March 31, 2004, an increase of 12.0%. The increase in Adjusted
EBITDA arose through increases in consumer sales division revenue and a
decrease in operating costs and expenses, partially offset by a reduction
in business sales division revenue.
Consumer Sales Division
Consumer sales division revenue represents a combination of consumer cable
television revenue, consumer cable telephony revenue, and consumer
internet revenue.
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
---------------------- --------------------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
---------------------- --------------------- --------------
Revenue (in millions)
Total Consumer Sales Division (pound) 246 (pound) 235 4.7%
====================== =====================
Homes passed and marketed (1) 4,694,480 4,678,182 0.3%
Total customer relationships (2) 1,822,530 1,742,144 4.6%
Customer penetration 38.8% 37.2% 4.3%
Revenue Generating Units ("RGUs") (3) 3,784,835 3,363,240 12.5%
Average monthly revenue per customer (4) (pound)45.34 (pound)45.05 0.6%
Average monthly churn (5) 1.0% 1.0% -
Customers subscribing to two or more services 1,409,998 1,291,141 9.2%
Dual or triple penetration 77.4% 74.1% 4.5%
Customers subscribing to three services ("triple play")
552,307 329,955 67.4%
Triple-play penetration 30.3% 18.9% 60.3%
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 "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.
The increase in consumer sales division revenue resulted from increases in
both total customer relationships and average revenue per customer from the
first quarter of 2004 to the first quarter of 2005, both of which resulted
primarily from an increase in the number of our blueyonder broadband
internet subscribers of 321,409 or 69.1% from March 31, 2004 to March 31,
2005.
Consumer television revenue increased for the three months ended March 31,
2005, compared to the three months ended March 31, 2004, primarily due to
an increase in customers, price rises of (pound)1 on our mid-tier pack from
July 1, 2004 and our digital Starter pack from November 1, 2004 and
selected price rises on our premium channels, offset in part by a decline
in the percentage of our subscribers taking our top basic package
("Supreme") and the percentage taking a second set-top box. The increase in
the number of subscribers resulted principally from the growth in the
number of blueyonder broadband internet service subscribers from the first
quarter of 2004 to the first quarter of 2005, our success in bundling
blueyonder broadband internet services with our television services, and
channels added to certain of our television packages in July 2004.
Consumer telephony revenue decreased for the three months ended March 31,
2005 compared to the three months ended March 31, 2004, primarily due to
continued decline in average monthly revenue per telephony subscriber,
offset in part by an increase in subscribers quarter on quarter.
Consumer internet revenue increased for the three months ended March 31,
2005 compared to the three months ended March 31, 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 (pound)0.29 or 0.6% from (pound)45.05 for the three monthS ended
March 31, 2004 to (pound)45.34 for the three months ended March 31, 2005.
The increase in average monthly revenue per customer was primarily
attributable to an increase in the number of our customers subscribing to
two or more of our services, although average monthly revenue per
subscriber for each of our three services declined on an individual basis.
"Dual" or "triple" penetration grew 3.3 percentage points from 74.1% at
March 31, 2004 to 77.4% at March 31, 2005. "Triple play" penetration grew
11.4 percentage points from 18.9% to 30.3% over the same period. These
increases 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 March 31, 2005, approximately 93.1% of our blueyonder
broadband internet subscribers took at least one of our consumer television
or consumer telephony products and 70.2% took all three services.
During the three months ended March 31, 2005, total residential customer
relationships increased by 22,974 or approximately 1.3%. This increase
resulted principally from the introduction of new products, such as our
256Kb broadband internet service, and promotional campaigns, such as our
"3 for (pound)30" offer and discounted television services for customers who
subscribed to our unmetered telephony products. During May 2005 we
increased the speed of our 256Kb service to 512Kb.
This increase is also reflected in the growth of RGUs, which grew by
113,433 in the three months ended March 31, 2005 compared to growth of
76,534 in the three months ended March 31, 2004. 34% of customer
acquisitions in the three months ended March 31, 2005 took the full
"triple play". Consequently, RGUs per customer increased from 1.93 at March
31, 2004 to 2.08 at March 31, 2005.
Average monthly churn remained flat at 1.0% for the three months ended
March 31, 2005, and continued to reflect tight credit policies, increased
multi-service penetration and improved customer care. For the three months
ending June 30, 2005, churn could be negatively impacted by a seasonal
increase in customers moving home.
We anticipate that further growth in total customer relationships and in
RGUs per customer should lead to overall revenue growth for the consumer
sales division during 2005. However, this 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
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
----------- ----------- --------
Cable television subscribers -
digital 1,149,641 1,029,759 11.6%
Cable television subscribers -
analog 170,846 256,038 (33.3%)
----------- -----------
Total cable television subscribers 1,320,487 1,285,797 2.7%
=========== ===========
Television ready homes passed and
marketed 4,694,480 4,678,182 0.3%
Digital ready homes passed and
marketed 4,451,420 4,386,050 1.5%
Percentage of digital subscribers
to total subscribers 87.1% 80.1% 8.7%
Television penetration 28.1% 27.5% 2.2%
Average monthly revenue per CATV
subscriber (pound)21.12 (pound)21.18 (0.3%)
Average monthly churn 1.4% 1.2% 16.7%
Total consumer television customers and television penetration increased
during the three months ended March 31, 2005. These increases resulted
primarily from promotions which bundled TV with blueyonder broadband
internet and/or consumer telephony services and promotions that offered
discounts on premium channels for customers who bundled TV with our "Talk"
telephony products, together with the effect of new channels added to our
"Starter" and "Essential" television packages in July 2004. Bundled
promotions included "Free TV," which bundled our "Starter" cable television
package with our "Talk Unlimited" and "Talk Evenings and Weekends"
unmetered telephony products, and 3 for (pound)30, which bundled all three
of our primary services.
Our digital television services have been rolled out in all franchise
areas, except for certain of the areas covered by Eurobell Southeast and
Cabletime, where we currently offer only our analog service. We are in the
course of upgrading parts of these areas and now deliver digital services
to approximately 94.7% 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. The migration of analog customers to
digital slowed during the three months ended March 31, 2005 compared to
the three months ended March 31, 2004. 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, 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 decreased marginally by
(pound)0.06 or 0.3% from (pound)21.18 for the three months ended March 31,
2004 to (pound)21.12 for the three months ended March 31, 2005, primarily
due to a decline in the percentage of our subscribers taking our top basic
package ("Supreme") and the percentage taking a second set-top box, offset
in large part by price rises of (pound)1 on our mid-tier pack ("Essential")
from July 1, 2004 and on our entry-level pack ("Starter") from November 1,
2004, and price rises on selected premium channels. We will implement
selected price increases in television from July 1, 2005 which we expect to
have a positive impact on average monthly revenue per customer in the third
quarter of 2005, although they may have an adverse impact on average
monthly churn.
Average monthly churn increased to 1.4% for the three months ended March
31, 2005 from 1.2% for the corresponding period in 2004 primarily due to
the price rises on our basic and premium television packages in 2004.
We launched VOD services in our Bristol area in the first quarter of 2005
and the next stage of the roll-out is scheduled for early July to
approximately 26,000 subscribers in our Cheltenham area. We plan to
complete the national roll-out of VOD by early 2006. As part of our VOD
roll-out plans we have secured a number of agreements with content
providers for the provision of programming through our VOD service and
negotiations are continuing with other content providers. We continue to
work on our plans for the launch of DVR (Digital Video Recorder) services
later in the year. We expect these new services to contribute to customer
acquisition and customer retention as they are introduced across our
customer base.
Consumer Telephony
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
------------ ----------- --------
"3-2-1" and "Talk Weekends"
subscribers 1,053,226 1,130,171 (6.8%)
"Talk Unlimited" and "Talk
Evenings and Weekends"
subscribers 624,417 481,976 29.6%
------------ -----------
Total residential telephony 1,677,643 1,612,147 4.1%
subscribers ============ ===========
Telephony ready homes passed and
marketed 4,691,704 4,674,932 0.4%
Telephony penetration 35.8% 34.5% 3.8%
Average monthly revenue per
subscriber (pound)23.00 (pound)24.20 (5.0%)
Average monthly churn 1.0% 1.0% -
The increase in total residential telephony subscribers resulted primarily
from promotions which bundled residential telephony services with
blueyonder broadband internet and/or television services (including "Free
TV," which bundled our "Talk Unlimited" and "Talk Evenings and Weekends"
unmetered telephony products with our "Starter" television package, and "3
for (pound)30," which bundled all three of our primary services) and offered
discounts on premium channels for customers who bundled TV with our "Talk"
products.
"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 standard metered telephony services,
"3-2-1."
"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 6.00am and 6.00pm 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
(inc. VAT) per month, and is available to all of our telephony subscribers.
We have continued our strategy of migrating customers to flat rate
packages to minimize the impact of declining telephony usage. As a result,
the number of subscribers to our "Talk Unlimited" and "Talk Evenings and
Weekends" flat rate telephony packages increased 44,969 in the three
months ended March 31, 2005. As a result, 37% of all telephony subscribers
are now on a "Talk" flat rate package.
We recently introduced two further add-on "Talk" products. "Talk Mobile"
gives subscribers significant discounts on calls to mobiles for a flat rate
of (pound)1.50 per month on top of the usual (pound)10.00 line rental
Charge. "Talk Weekends" gives customers free local and national calls at
weekends for (pound)0.50 on top of the usual line rental charge. At the
start of tHE quarter, we withdrew our 3-2-1 metered telephony package from
sale to new customers. From July 1, 2005, we will be migrating all 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 for the existing 3-2-1
service. This move is to further continue our strategy of minimizing the
impact of declining telephony usage.
Telephony penetration increased by 1.3 percentage points to 35.8% at March
31, 2005 from 34.5% at March 31, 2004, principally as a result of the
promotions noted above and the success of our blueyonder broadband
internet services in attracting new "dual"- and "triple-service"
customers.
Average monthly revenue per telephony subscriber decreased by (pound)1.20
or 5.0% from (pound)24.20 for the three months ended March 31, 2004 to
(pound)23.00 For the three months ended March 31, 2005, primarily due to
the declining overall volume of telephony traffic we carry among consumers
who use both fixed-line and mobile phones, 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.
Average monthly telephony subscriber churn remained flat at 1.0% for the
three months ended March 31, 2005, and continued to reflect tight credit
policies, increased "dual"- and "triple-service" penetration and improved
customer care in a market that continues to be highly competitive.
Consumer Internet
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
------------ ----------- --------
Consumer internet subscribers
Blueyonder broadband 786,705 465,296 69.1%
Blueyonder "SurfUnlimited" 85,909 177,250 (51.5%)
Blueyonder pay-as-you-go 29,376 50,953 (42.3%)
------------ -----------
Total consumer internet 901,990 693,499 30.1%
subscribers
============ ===========
Blueyonder Broadband
Broadband ready homes passed and
marketed 4,451,420 4,386,050 1.5%
Broadband internet penetration 17.7% 10.6% 67.0%
Average monthly revenue per
broadband internet subscriber (pound)19.89 (pound)22.29* (10.8%)
Average monthly churn 1.0% 1.0% -
Note:
* Includes a recalculation of the average monthly revenue per broadband
internet subscriber for the three months ended March 31, 2004, reflecting
the full value of promotional discounts offered. The recalculated average
monthly revenue per broadband internet subscriber was (pound)22.29 for the
three months ended March 31, 2004, compared to (pound)22.57 as previously
reported.
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 (available to our existing subscribers since December
2003), 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," which bundles our 256Kb blueyonder broadband
internet service with the television "Starter" package and "Talk Weekends."
During May 2005 we increased the speed of our 256Kb service to 512Kb.
Broadband internet penetration increased, principally as a result of
general growth in broadband internet take-up in the UK, as well as the
introduction of our 256Kb blueyonder internet service, speed increases and
bundling promotions noted above.
Blueyonder broadband internet customers have significantly contributed to
the growth in our average monthly revenue per customer. As at March 31,
2005, 552,307 broadband internet customers, or approximately 30.3% of our
total customers, were "triple play" customers who also took both
television and residential telephony services from us (compared with
329,955 and 18.9% at March 31, 2004). Blueyonder broadband internet is
also successful in attracting new customers, with approximately 41% of
blueyonder broadband internet installations in the three months ended
March 31, 2005, being from new customer relationships.
Average monthly revenue per broadband subscriber decreased by (pound)2.40 or
10.8% primarily due to the introduction of the lower-tier 256Kb service
and promotional offers. During May 2005 we increased the speed of our
256Kb service to 512Kb and we expect that demand for this enhanced product
will remain strong and, as a result, we will continue to experience
subscriber growth. However, as a result we may also experience a continued
decline in broadband internet ARPU.
Blueyonder broadband internet average monthly churn remained flat at 1.0%
for the three months ended March 31, 2005, and continued to reflect tight
credit policies, increased "dual"- and "triple-service" penetration and
improved customer care in a market that continues to be highly competitive.
In May and December 2004, we increased connection speeds of our top three
broadband internet tiers at no additional cost to our subscribers. As a
result our 512Kb, 1Mb and 2Mb blueyonder broadband internet services were
increased to speeds of 1Mb, 2Mb and 4Mb, respectively. As of March 31,
2005 approximately 60% of our subscriber base took a 1Mb or higher-speed
service.
Dial-up internet subscribers to our blueyonder "SurfUnlimited" product
together with our blueyonder pay-as-you-go metered internet service
decreased by approximately 113,000 or 49.5% from approximately 228,000 at
March 31, 2004 to approximately 115,000 at March 31, 2005, as we continued
to migrate our dial-up subscribers to our blueyonder broadband internet
services.
We believe we are the broadband internet market leader in our addressable
areas (those areas of the UK where consumers are able to receive our
blueyonder broadband internet services) with an approximate 67% market
share as of March 31, 2005.
Business Sales Division
Business sales division revenue is derived from the delivery of business
communications solutions through a combination of voice, data and managed
solutions services.
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
----------- ----------- --------
Revenue (in millions)
Voice services (pound) 33 (pound) 37 (10.8%)
Data services 17 17 -
Carrier and other services 11 13 (15.4%)
----------- -----------
Total Business Sales Division (pound) 61 (pound) 67 (9.0%)
=========== ===========
Business sales division revenue decreased by (pound)6 million or 9.0% as A
result of a decline in voice services revenue and carrier and other
services revenue. Data services revenue remained flat. The decline in
revenues included (pound)1 million arising as a result of the derecognitiOn
of deferred revenues under fresh-start reporting for which no future
contractual performance obligations exist.
Voice services revenue decreased by (pound)4 million or 10.8%, principally
as a result of continued declining usage arising from data and mobile voice
substitution together with a fall in price per minute. As part of our
strategy of introducing new voice products to defend declining telephony
usage, we launched our Carrier Pre-Select product during the second quarter
of 2004 and our SRS (Special Rate Services) Advanced Solutions product
during the third quarter of 2004. We have secured a number of contracts for
these new services.
Data services revenue remained flat at (pound)17 million, primarily as a
result of growth in our managed data and fiber products to our "complex"
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.
Carrier and other services revenue declined by (pound)2 million or 15.4% 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 (for example T-Mobile, a mobile operator).
Revenues from the carrier services unit tend to be derived from a
relatively small number of high value contracts, which have been subject to
renegotiation on renewal. The decline in other services revenue primarily
reflects the decline across the travel sector and the ongoing move by tour
operators to provide their own managed solutions services.
As the market for business services, and in particular business voice
services, remains intensely competitive, we believe that the most
significant opportunities to expand business sales division revenues will
be further penetration of data services to our existing customer base and
expansion of our presence in the public sector market. The success of those
efforts will be primarily contingent upon our ability to offer reliable,
competitively priced services to business and public sector users.
We reorganized the business sales division in 2004 to address the different
needs of our standard and complex customer segments and to focus on costs
and profitability in a highly competitive business market. These changes
resulted in cost savings, which we expect will continue to benefit the
division going forward.
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 our content subsidiary Flextech.
Content segment revenue for the three months ended March 31, 2005 was
(pound)31 million, an increase of (pound)5 million or 19.2%.
The content segment Adjusted EBITDA was (pound)3 million for the three
months ended March 31, 2005, as compared to (pound)5 million for the three
months ended March 31, 2004. The decrease in Adjusted EBITDA arose as a
result of increases in operating costs and expenses, partially offset by an
increase in total segment revenues.
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
------------ ----------- ---------
Revenue (in millions)
Subscription revenue (pound) 11 (pound) 10 10.0%
Advertising revenue 17 13 30.8%
Other revenue 3 3 -
------------ -----------
Net revenue (1) (pound) 31 (pound) 36 19.2%
============ ===========
Number of paying homes receiving
our programming - (millions) 9.7 9.2 5.4%
Share of the net income of UKTV
(in millions) (pound) 5 (pound) 4 25.0%
UK television advertising market
share (2) 5.1% 4.5% 13.3%
Notes
(1) Net revenue consists of total revenue (subscription revenue,
advertising revenue, management fees, transactional and interactive
revenue and other revenue) less inter-segment revenues of (pound)3 million for
the three months ended March 31, 2005 and (pound)3 million for the three months
ended March 31, 2004.
(2) Including 100% of the market share of UKTV.
After the elimination of inter-segment revenues of (pound)3 million for the
three months ended March 31, 2005 and (pound)3 million for the three monthS
ended March 31, 2004, the net revenue of the content segment increased by
19.2% to (pound)31 million due to increases in subscription revenue and
advertising revenue.
After the elimination of inter-segment revenues, subscription revenue
increased (pound)1 million or 10.0%. We believe subscriber growth is likely to
continue.
The content segment's increase in advertising revenue of (pound)4 million or
30.8% resulted primarily from an increase in the UK television advertising
market and the relative viewing strength of its channels, despite
increased competition in the multi-channel market.
Other revenue remained flat at (pound)3 million for the respective three-month
periods ended March 31, 2005 and 2004 and reflects primarily revenue from
UKTV for the provision of advertising sales services.
Our content segment's share of the net income of UKTV, its joint ventures
with BBC Worldwide, is included in share of net income of affiliates.
Combined Cable And Content Segments
Operating Costs and Expenses
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
----------- ----------- ---------
(IN (IN
MILLIONS) MILLIONS)
Cable segment expenses (pound) 69 (pound) 79 (12.7%)
Content segment expenses 20 16 25.0%
Depreciation 101 94 7.4%
Amortization 9 - -
----------- -----------
Cost of revenue 199 189 5.3%
SG&A 115 120 (4.2%)
----------- -----------
Total Operating Costs and Expenses
(pound) 314 (pound) 309 1.6%
=========== ===========
Our total operating costs and expenses increased due to increased content
segment expenses, depreciation and amortization. This was partially offset
by decreased SG&A, due primarily to financial restructuring charges in
2004, which did not occur in 2005 and decreased cable segment expenses.
In total, the cable segment's expenses decreased by 12.7% for the three
months ended March 31, 2005, compared with the corresponding period in
2004 and consist of cable programming expenses for our consumer television
services and cable telephony expenses for our consumer and business
telephony products.
Cable television programming expenses decreased principally as the result
of savings resulting from favorable renegotiations of certain programming
content contracts, partially offset by increased premium channel wholesale
costs.
A decrease in cable telephony expenses resulted principally from reductions
in the interconnection fees for calls to mobiles.
The content segment's expenses consist principally of amortization costs of
programming shown on its television channels and the costs of advertising
sales those channels receive. The content segment's expenses were 58.8% of
the content segment's revenues, including inter-segment sales to the cable
segment for the three months ended March 31, 2005 compared with 55.2% on
the same basis for the three months ended March 31, 2004. The increase in
the content segment's expenses is primarily due to increased programming
amortization, particularly on our most popular channel, LIVINGtv. We are
continuing to grow our investment in programming during 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 accounting with effect from July 1, 2004, 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 decrease in SG&A, which includes, among other items, salary and
marketing costs, primarily reflects the decrease in financial
restructuring charges from (pound)9 million to (pound)0, partially offset by
stock-based compensation expense.
Stock-based compensation expense ("SBCE") of (pound)3 million was incurred in
the three months ended March 31, 2005 and is included in SG&A. SBCE arises
as a result of options and restricted stock issued by us. SBCE is
accounted for in accordance with SFAS 123, Accounting for Stock-Based
Compensation. SBCE is a non-cash item. No such expense was incurred in the
three months ended March 31, 2004.
Other Income/(Expense)
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ----------- %
REORGANIZED PREDECESSOR INCREASE/
COMPANY COMPANY (DECREASE)
----------- ----------- ----------
(IN (IN
MILLIONS) MILLIONS)
Interest income (pound) 4 (pound) 7 (42.9%)
Interest expense (including
amortization of debt discount) (29) (109) (73.4%)
Foreign exchange (losses)/gains,
net (4) 77 -
Share of net income of affiliates 6 3 100.0%
Other, net - (1)
----------- -----------
Total other income/(expense), net (pound)(23) (pound)(23)
=========== ===========
The net increase in other expense resulted principally from decreases in
interest expense and 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, and to a
lesser extent, an increase in our share of net income of affiliates.
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.
We receive interest income principally from our cash resources and from our
loan to UKTV, our principal affiliate. During the three months ended March
31, 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 the net share of income of UKTV in the three months ended March 31,
2005. Our principal affiliated companies for the purpose of our share of
net income of affiliated companies as at March 31, 2005 included the
companies that comprise UKTV, sit-up Limited and Front Row Television
Limited.
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 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 March 31, 2005, we had long-term
debt of approximately (pound)1.8 billion, consisting of (pound)1.7 billion
of indebtedness under our bank facilities and (pound)114 million of capital
leases and other debt. Subsequent to March 31, 2005, Telewest's content
subsidiaries entered into a new (pound)130 million senior secured bank
facility. See "Recent Developments" above.
At March 31, 2005, we had cash and cash equivalents of (pound)87 million.
The businesses now held by us have not historically generated sufficient
cash flow from operations to meet their capital expenditure and debt
service requirements. As a result of our predecessor's financial
restructuring and the resulting reduction of indebtedness, we have
significantly lower interest expense and principal repayment requirements
than our predecessor. However, our businesses will continue to 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. In particular, we will
need to service interest payments on our bank facilities from cash flow
from operations and will need to repay or refinance the principal amount
of our debt when due.
We anticipate that our principal sources of funds will be proceeds from
our bank facilities combined with additional vendor and lease financing,
where available, possible strategic sales of assets, cash in hand and cash
flow from operating activities. Future actual funding requirements could
exceed currently anticipated requirements. Differences may result from
higher-than-anticipated costs, including higher interest costs on our bank
facilities as a result of higher interest rates generally, higher capital
expenditure and/or lower than anticipated revenues. Actual costs, capital
expenditure and revenues will depend on many factors, including, among
other things, consumer demand for voice, video, data and internet
services, the impact on the business of new and emerging technologies 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.
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. 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.
Under the new bank facilities, net cash interest expense is expected to be
significantly lower than in previous years, primarily due to our
predecessor's financial restructuring and the related reduction in our
outstanding indebtedness.
The maturity profile of our new bank facilities is as follows:
AT DECEMBER 31,
---------------
REORGANIZED
COMPANY
(POUND) MILLION
---------------
2005 20
2006 55
2007 90
2008 135
2009 160
2010 and thereafter 1,241
---------------
1,701
---------------
All of the Tranches of our debt were drawn in 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 March 31,
2005 are summarized in the tables below.
- ---------------------------------- ------------- ----------------- -------------------- ------------------ --------------------
CONTRACTUAL OBLIGATIONS
- ---------------------------------- ------------- ----------------- -------------------- ------------------ --------------------
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
LESS THAN 1
TOTAL YEAR 1 - 3 YEARS 3 - 5 YEARS AFTER 5 YEARS
(POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION
--------------- ---------------- --------------- ---------------- ------------------
Debt 1,707 21 148 296 1,242
Capital lease obligations 108 43 58 7 -
Operating leases 124 13 24 18 69
Unconditional purchase obligations 47 39 8 - -
- ------------------------------------------ --------------- ---------------- --------------- ---------------- ------------------
Total contractual obligations 1,986 116 238 321 1,311
- ------------------------------------------ --------------- ---------------- --------------- ---------------- ------------------
The following table includes information about other commercial
commitments as of March 31, 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
YEAR 1 - 3 YEARS 3 - 5 YEARS AFTER 5 YEARS
(POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION (POUND) MILLION
- ---------------------------------- --------------- ---------------- --------------- ---------------- ------------------
Guarantees (1) 17 6 11 - -
- ---------------------------------- --------------- ---------------- --------------- ---------------- ------------------
(1) Consists of performance guarantees of (pound)6 million due in less than
one year and lease guarantees of (pound)11 million due in one to three
years.
CAPITAL EXPENDITURE
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- ------------
IN IN
MILLIONS MILLIONS
Capital expenditure (pound) 54 (pound) 66
----------- ------------
The decrease in capital expenditure for the three months ended March 31,
2005 as compared to the corresponding period in the prior year resulted
primarily from reduced CPE costs, increased efficiency in the installation
process and improvements in the supply chain.
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 and DVR 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 in the range of
(pound)230 million to (pound)250 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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2005 2004
----------- ------------
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- ------------
IN MILLIONS IN MILLIONS
Net cash provided by operating
activities (pound) 116 (pound) 82
Net cash used in investing
activities (89) (63)
Net cash used in financing
activities (8) (12)
----------- ------------
Net increase in cash and cash
equivalents 19 7
Cash and cash equivalents at
beginning of period 68 427
----------- ------------
Cash and cash equivalents at end
of period (pound) 87 (pound) 434
----------- ------------
For the three months ended March 31, 2005, we had net cash provided by
operating activities of (pound)116 million compared with (pound)82 million
FOR the three months ended March 31, 2004. The increase in net cash
provided by operating activities in 2005 compared with 2004 resulted
principally as a result of improvements in operating income and reduced
interest payments being partially offset by increased net working capital.
Net cash used in investing activities was (pound)89 million for the three
months ended March 31, 2005 compared with (pound)63 million for the three
months ended March 31, 2004. The increase in 2005 over 2004 arose
principally as a result of additional investment in and loans to affiliates
partially offset by reduced payments for capital expenditure and reduced
loan repayments received from affiliates. Net cash used in investing
activities includes net cash inflow from affiliates of (pound)2 million for
three months ended March 31, 2005 compared with (pound)3 million for the
three months ended March 31, 2004. Capital expenditure accounted for
(pound)54 million of the total net cash used in investing activities in the
three months ended March 31, 2005 compared with (pound)66 million in the
same period in 2004. Capital expenditure in the three months ended March
31, 2005 was principally a result of IP and network capacity upgrades and
new subscriber installations in connection with the roll-out of digital
television and broadband internet services. At March 31, 2005,
approximately 94.7% of the homes passed and marketed in our addressable
areas were capable of receiving our digital television and broadband
internet services.
Net cash used in financing activities totaled (pound)8 million for the
three months ended March 31, 2005 compared with (pound)12 million for the
three months ended March 31, 2004. In the three months ended March 31, 2005
we released (pound)1 million of restricted deposits and paid (pound)1
million for loan issue costs, (pound)1 million for repayment of other debt,
and (pound)7 million for the principal element of capital lease repayments,
compared with (pound)12 million of principal element of capital lease
repayments made in the three months ended March 31, 2004.
As of March 31, 2005, we had cash and cash equivalents of (pound)87 million
on a consolidated basis (excluding (pound)11 million that was restricted as
to use to providing security for leasing obligations and (pound)14 million
that was restricted as to use in the liquidation of Telewest
Communications). Cash balances increased by (pound)19 million for the three
months ended March 31, 2005 mainly as a result of strong operating
performance partially offset by increased working capital, capital
expenditure, additional investment in affiliates, and financing payments.
As of March 31, 2004, we had cash balances of (pound)434 million (excluding
(pound)13 million that was restricted).
OFF-BALANCE SHEET TRANSACTIONS
As of March 31, 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.
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
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.
ITEM - 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we were exposed during the three-month
period ended March 31, 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, Telewest Communications,
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 DISCLOSURE OF INTEREST RATE RISK
During the fourth quarter of 2004, TCN entered into the new 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 6.26% to 6.31%) and the receipt of
payments based on a variable rate of interest. The swaps mature on October
15, 2007. The aggregate amount outstanding under the bank facilities at
March 31, 2005 was (pound)1,701 million and the aggregate notional principal
amount of the interest rate swaps was (pound)999 million.
These interest rate swaps contracts now qualify for hedge accounting under
SFAS 133, Accounting for Derivatives and Hedging Activities, 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.
Based on our consolidated variable rate debt outstanding at March 31, 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.
QUANTITATIVE DISCLOSURE OF INTEREST RATE RISK
The analysis below presents the sensitivity of the market value, or fair
value, of our financial instruments to selected changes in market rates
and prices. The sensitivities chosen represent our view of changes that
are reasonably possible over a one-year period. The estimated fair value
of the hedging instruments identified below are based on quotations
received from independent, third-party financial institutions and
represent the net amount receivable or payable to terminate the position,
taking into consideration market rates as of the measuring date and
counterparty credit risk.
The hypothetical changes in the fair value of hedging instruments are
estimated, based on the same methodology used by third-party financial
institutions to calculate the fair value of the original instruments,
keeping all variables constant except that the relevant interest rate has
been adjusted to reflect the hypothetical change. Fair value estimates by
their nature are subjective and involve uncertainties and matters of
significant judgment and therefore cannot be determined precisely.
The amounts generated from the sensitivity analysis are forward-looking
estimates of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from those projected
results due to developments in the global financial markets which may
cause fluctuations in interest rates to affect fair values in a manner
that varies from the hypothetical amounts disclosed in the table below,
which therefore should not be considered a projection of likely future
events and losses. The sensitivity analysis is for information purposes
only. In practice, market rates rarely change in isolation.
INTEREST RATE RISK - SENSITIVITY ANALYSIS
The sensitivity analysis below presents the hypothetical change in fair
value based on an immediate one-percentage point (100 basis points)
increase in interest rates across all maturities:
MARCH 31, 2005
------------------------
((POUND) MILLIONS)
HYPOTHETICAL
CHANGE IN
FAIR VALUE FAIR VALUE
Interest rate swaps (pound) (31) (pound) 22
- ------------------------------------------------
FOREIGN CURRENCY EXCHANGE RISK
As a result of entering into the new 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 sum, 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.
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 March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
The Company is not an accelerated filer, as defined in Rule 12b-2 of the
Exchange Act. As a result, it is required to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act ("S.404"), as adopted by the SEC
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 March 31, 2005, a significant
effect on our and our subsidiaries' financial position.
VAT PROCEEDING
A proceeding relating to the VAT status of Cable Guide and Zap magazines
was instituted on June 29, 2001 by the Commissioners of Customs and Excise
against Telewest Communications Group Limited and Telewest Communications
(Publications) Limited. This proceeding was heard between October 21 and
October 25, 2002 before the VAT and Duties Tribunal and as a result a
judgment was passed down on January 21, 2003, which resulted in the
provision of (pound)16 million against revenue in the consolidated financial
statements of our predecessor, Telewest Communications. The item arose in
respect of VAT payable in the period from January 2000 to July 2002. The
magazines have since ceased publication. Therefore, the item represented
the full extent of our predecessor's VAT liability in respect of its
magazine operations. The VAT tribunal held that our predecessor's
arrangements to protect the zero-rated VAT status of Cable Guide and Zap
magazines could, in principle, be effective in creating a separate supply
by Telewest Communications (Publications) Limited, which was not ancillary
to the supply of pay-television services. However, in practice, the steps
taken by our predecessor were held to be insufficient to make the
arrangements effective. Our predecessor appealed this decision in the High
Court in November 2003. The appeal was unsuccessful and our predecessor
submitted a further appeal against the High Court's decision, which was
heard by the Court of Appeal in the week commencing November 8, 2004. The
Court of Appeal's judgment was received on February 10, 2005 and found in
our favor on all points. The Commissioners of Customs and Excise have
applied for leave to make a further appeal to the House of Lords. On
April 7, 2005 we received (pound)17,155,785 from the Commissioners of Customs
and Excise. This amount is repayable should a future appeal by the
Commissioners of Customs and Excise to the House of Lords prove
successful. Although repayment of the cash received may be required, the
cash is not restricted as to use and therefore will be reported as cash
and cash equivalents for the three and six months ended June 30, 2005.
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).)
Restated By-Laws of Telewest Global, Inc. (Incorporated by
3.2 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 on 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).)
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: May 12, 2005
/s/ Neil Smith
-------------------------------------
Name: Neil Smith
Chief Financial Officer
Exhibit Index
Exhibit Description
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).)
Restated By-Laws of Telewest Global, Inc. (Incorporated by
3.2 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 on 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).)
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