SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): SEPTEMBER 2, 2004
LIBERTY MEDIA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-20421 84-1288730
(Commission File Number) (I.R.S. Employer Identification No.)
12300 LIBERTY BLVD.
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (720) 875-5400
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
( ) Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
( ) Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
( ) Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
( ) Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 8.01. OTHER EVENTS
On July 13, 2004, Telewest Communications plc ("Telewest"), Telewest
Global, Inc. and Telewest UK Limited entered into a transfer agreement
(the "Transfer Agreement"). The Transfer Agreement provides for the
transfer of substantially all of the assets of Telewest (including the
shares in Telewest Communications Networks Limited and its other
operating companies, but excluding the shares in Telewest Finance
(Jersey) Limited and one share of Telewest Global, Inc's. common stock)
to Telewest UK Limited. The asset transfer contemplated by the Transfer
Agreement was completed on July 14, 2004. On July 15, 2004, Telewest's
financial restructuring (the "Telewest Restructuring") became
effective. As a result, all outstanding notes and debentures of
Telewest and Telewest Finance (Jersey) Limited have been cancelled. A
total of 241,325,000 shares, or 98.5%, of Telewest Global, Inc's.
common stock were distributed by an escrow agent to the holders of
Telewest's and Telewest Finance (Jersey) Limited's notes and debentures
and certain other scheme creditors. The remaining 3,675,000 shares, or
1.5%, of Telewest Global, Inc's. common stock were distributed to
Telewest's existing shareholders. As part of the financial
restructuring, Telewest Communications Networks Limited, a subsidiary
of Telewest until its transfer to Telewest Global, Inc. on July 14,
2004, also completed the amendment of its senior secured credit
facility. The amended facility provides for fully committed facilities
of Pound Sterling2,030 million.
Telewest's financial statements as of December 31, 2002 and 2001 and
for the three years then ended (the "2002 Financial Statements") are
included in Liberty Media Corporation's ("Liberty") Annual Report on
Form 10-K for the year ended December 31, 2003 pursuant to Rule 3-09 of
Regulation S-X as promulgated by the Securities and Exchange
Commission, and may be incorporated by reference into certain
registration statements filed by Liberty in the future. Accordingly,
Telewest is revising its 2002 Financial Statements to include
disclosure related to the Telewest Restructuring. The revised financial
statements are included herein.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibit
23 Consent of KPMG Audit plc
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: September 2, 2004
LIBERTY MEDIA CORPORATION
By: /s/ Christopher W. Shean
-------------------------------------
Name: Christopher W. Shean
Title: Senior Vice President
and Controller
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
to the board of directors and shareholders of Telewest Communications plc
--------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Telewest
Communications plc and subsidiaries (the Group) as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
equity/(deficit) and comprehensive income and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements on pages 2 to 39 present
fairly, in all material respects, the financial position of Telewest
Communications plc and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the Group
will continue as a going concern. As discussed in note 2 to the financial
statements, the Group has suffered recurring losses, has a net shareholders
deficit and is undergoing financial restructuring and this raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in note 3 to the consolidated financial statements, the 2002
consolidated financial statements have been restated.
As discussed in note 4 to the consolidated financial statements, the Group
adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other
Intangible Assets, in 2002.
As discussed in note 4 to the consolidated financial statements, the Group
changed its method of accounting for derivative instruments and hedging
activities in 2001.
KPMG AUDIT PLC
Chartered Accountants
Registered Auditor
London, England
March 26, 2003, except for note 3, which is as of January 16, 2004.
1
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
years ended December 31
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(NOTE 2)
2002 2002
RESTATED RESTATED 2001 2000
NOTES $ MILLION L MILLION L MILLION L MILLION
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REVENUE
Consumer Sales Division
Cable television 541 336 329 279
Consumer telephony 797 495 488 445
Internet and other 101 63 40 16
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1,439 894 857 740
Business Sales Division 455 283 268 248
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TOTAL CABLE SEGMENT 1,894 1,177 1,125 988
Content Segment 171 106 129 81
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TOTAL REVENUE 2,065 1,283 1,254 1,069
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OPERATING COSTS AND EXPENSES
Cable programming expenses 206 128 142 132
Cable telephony expenses 351 218 235 235
Content segment expenses 113 70 83 46
Depreciation 797 495 469 423
Impairment of fixed assets 1,353 841 -- --
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Cost of sales 2,820 1,752 929 836
Selling, general and administrative expenses 846 526 497 445
Amortization of goodwill -- -- 183 147
Impairment of goodwill 2,326 1,445 766 --
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5,992 3,723 2,375 1,428
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OPERATING LOSS (3,927) (2,440) (1,121) (359)
OTHER INCOME/(EXPENSE)
Interest income (including L12 million, L15 million and L15 million
in 2002, 2001 and 2000, respectively, from related parties) 22 30 19 15 15
Interest expense (including amortization of debt discount) (850) (528) (487) (385)
Foreign exchange gains/(losses), net 343 213 -- (15)
Share of net losses of affiliates and impairment (190) (118) (216) (15)
Other, net 58 36 (3) (3)
Minority interests in losses of consolidated subsidiaries, net 2 1 1 1
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LOSS BEFORE INCOME TAXES (4,534) (2,817) (1,811) (761)
Income tax benefit 17 45 28 70 6
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NET LOSS (4,489) (2,789) (1,741) (755)
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Basic and diluted loss per ordinary share $ (1.56) L (0.97) L (0.60) L (0.28)
Weighted average number of ordinary shares outstanding (millions) 2,873 2,873 2,880 2,705
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All income is derived from continuing operations.
See accompanying notes to the consolidated financial statements.
2
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
years ended December 31
------------------------------------------------------------------------------------------------------------------------------------
(NOTE 2)
2002 2002
RESTATED RESTATED 2001
NOTES $ MILLION L MILLION L MILLION
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ASSETS
Cash and cash equivalents 628 390 14
Secured cash deposits restricted for more than one year 21 19 12 20
Trade receivables (net of allowance for doubtful accounts
of L12 million and L16 million) 193 120 116
Other receivables 9 110 68 112
Prepaid expenses 43 27 33
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Total current assets 993 617 295
Investment in affiliates, accounted for under the equity
method, and related receivables 10 605 376 547
Property and equipment (less accumulated depreciation of
L3,196 million and L1,873 million) 11 4,182 2,598 3,473
Goodwill (less accumulated amortization of L2,593 million
and L1,148 million) 6 719 447 1,892
Inventory 14 45 28 67
Other assets (less accumulated amortization and write offs of L76 million
and L47 million) 13 47 29 58
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TOTAL ASSETS 6,591 4,095 6,332
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LIABILITIES AND SHAREHOLDERS' FUNDS
Accounts payable 177 110 109
Other liabilities 15 1,019 633 524
Debt repayable within one year 16 8,762 5,444 --
Capital lease obligations repayable within one year 124 77 --
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Total current liabilities 10,082 6,264 633
Deferred tax 17 137 85 113
Debt repayable after more than one year 16 10 6 4,897
Capital lease obligations repayable after more than one year 204 127 238
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TOTAL LIABILITIES 10,433 6,482 5,881
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MINORITY INTERESTS (2) (1) --
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SHAREHOLDERS' (DEFICIT)/EQUITY
Ordinary shares, 10 pence par value; 4,300 million authorized; 2,873 and 2,886
million issued
in 2002 and 2001 respectively 462 287 287
Limited voting convertible ordinary shares, 10 pence par value; 300 million
authorized and 82 million and 63 million
outstanding in 2002 and 2001 respectively 13 8 8
Additional paid in capital 6,797 4,223 4,224
Accumulated deficit (11,094) (6,893) (4,104)
Accumulated other comprehensive (loss)/income 20 (18) (11) 37
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(3,840) (2,386) 452
Ordinary shares held in trust for the Telewest
Restricted Share Scheme and the Telewest Long-Term
Incentive Plan -- -- (1)
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TOTAL SHAREHOLDERS' (DEFICIT)/EQUITY (3,840) (2,386) 451
------------------------------------------------------------------------------------------------------------------------------------
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 6,591 4,095 6,332
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See accompanying notes to the consolidated financial statements.
3
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31
------------------------------------------------------------------------------------------------------------------------------------
(NOTE 2)
2002 2002
RESTATED RESTATED 2001 2000
$ MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,489) (2,789) (1,741) (755)
Adjustments to reconcile net loss to net cash provided/(utilized)
by operating activities
Depreciation 797 495 469 423
Impairment of fixed assets 1,353 841 -- --
Amortization of goodwill -- -- 183 147
Impairment of goodwill 2,326 1,445 766 --
Amortization and write off of deferred financing costs and issue discount on Senior
Discount Debentures 184 114 99 147
Deferred tax credit (45) (28) (70) --
Unrealized (gain)/loss on foreign currency translation (343) (213) (10) 20
Non-cash accrued share based compensation (credit)/cost (2) (1) 1 5
Share of net (profits)/losses of affiliates and impairment (16) (10) 216 15
Loss on disposal of assets 148 92 4 --
Minority interests in losses of consolidated subsidiaries -- -- (1) (1)
Changes in operating assets and liabilities net of effect of
acquisition of subsidiaries
Change in receivables 31 19 25 (8)
Change in prepaid expenses 10 6 6 (19)
Change in accounts payable 27 17 3 (2)
Change in other liabilities 160 100 62 70
Change in other assets 24 15 1 (46)
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NET CASH PROVIDED/(UTILIZED) BY OPERATING ACTIVITIES 165 103 13 (4)
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (721) (448) (548) (527)
Cash paid for acquisition of subsidiaries, net of cash acquired -- -- (6) (24)
Additional investments in and loans to affiliates -- -- (26) (10)
Repayment of loans made to joint ventures (net) 14 9 9 3
Proceeds from disposal of assets 2 1 2 2
Disposal of subsidiary undertaking, net of cash disposed 23 14 8 --
Disposal of associate undertaking, net of cash disposed 95 59 -- --
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NET CASH USED IN INVESTING ACTIVITIES (587) (365) (561) (556)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of share options -- -- 6 3
Share issue costs -- -- -- (13)
Proceeds from issue of Senior Discount Notes and Senior Notes 2010 -- -- -- 544
Proceeds from issue of Senior Convertible Notes 2005 -- -- -- 330
Proceeds from issue of Accreting Convertible Notes 2003 -- -- 30 20
Issue costs of Notes and credit facility arrangement costs -- -- (41) --
Net proceeds from maturity of forward contracts 122 76 -- 107
Release/(placement) of restricted deposits 13 8 (8) --
Repayments from borrowings under old credit facilities (3) (2) (824) (141)
Repayment of SMG equity swap (53) (33) -- --
Proceeds/(repayment) from borrowings under new credit facility 1,030 640 1,393 (260)
Capital element of finance lease repayments (82) (51) (54) (35)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,027 638 502 555
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Net increase/(decrease) in cash and cash equivalents 605 376 (46) (5)
Cash and cash equivalents at beginning of year 23 14 60 65
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CASH AND CASH EQUIVALENTS AT END OF YEAR 628 390 14 60
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See accompanying notes to the consolidated financial statements.
4
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT) AND
COMPREHENSIVE LOSS
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ORDINARY LIMITED SHARES ADDITIONAL OTHER ACCUMULATED TOTAL
SHARES VOTING HELD IN PAID-IN COMPREHENSIVE DEFICIT
SHARES TRUST CAPITAL LOSS
L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 228 6 (2) 2,328 -- (1,608) 952
Ordinary shares issued on exercise of share options -- -- -- 3 -- -- 3
Shares issued to acquire Flextech Plc net of issue
costs 60 -- -- 1,873 -- -- 1,933
Accrued share based compensation cost -- -- -- 5 -- -- 5
Unrealised gain on deemed disposal of shares in an
affiliate -- -- -- 7 -- -- 7
Net loss -- -- -- -- -- (755) (755)
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BALANCE AT DECEMBER 31, 2000 288 6 (2) 4,216 -- (2,363) 2,145
Unrealised gain/(loss) on derivative financial instruments:
Cumulative effects of accounting change -- -- -- -- (16) -- (16)
Amounts reclassified into earnings -- -- -- -- (5) -- (5)
Current period increase in fair value -- -- -- -- 57 -- 57
Net loss -- -- -- -- -- (1,741) (1,741)
------
TOTAL COMPREHENSIVE LOSS (1,705)
Unrealised gain on deemed partial disposal of
investment -- -- -- -- 1 -- 1
Ordinary shares issued on exercise of share options 1 -- 1 6 -- -- 8
Gain on retranslation of investment in an overseas
subsidiary -- -- -- 1 -- -- 1
Redesignation of ordinary shares (2) 2 -- -- -- -- --
Accrued share based compensation cost -- -- -- 1 -- -- 1
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BALANCE AT DECEMBER 31, 2001 287 8 (1) 4,224 37 (4,104) 451
Unrealised gain/(loss) on derivative financial instruments:
Amounts reclassified into earnings -- -- -- -- (48) -- (48)
Net loss (restated) -- -- -- -- -- (2,789) (2,789)
------
TOTAL COMPREHENSIVE LOSS (RESTATED) (2,837)
Accrued share based compensation (credit)/cost -- -- 1 (1) -- -- --
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BALANCE AT DECEMBER 31, 2002 (RESTATED) 287 8 -- 4,223 (11) (6,893) (2,386)
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There was no other comprehensive income in the year ended December 31, 2000.
See accompanying notes to the consolidated financial statements.
5
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
1 ORGANIZATION AND HISTORY
Telewest Communications plc ("the Company") and its subsidiary undertakings
(together "the Group") provide cable television, telephony and internet services
to business and residential customers in the United Kingdom ("UK"). The Group
derives its cable television revenues from installation fees, monthly basic and
premium service fees and advertising charges. The Group derives its telephony
revenues from connection charges, monthly line rentals, call charges, special
residential service charges and interconnection fees payable by other operators.
The Group derives its internet revenues from installation fees and monthly
subscriptions to its ISP. The cable television, telephony and internet services
account in 2002 for approximately 26%, 61% and 5%, respectively, of the Group's
revenue.
The Group is also engaged in broadcast media activities, being the supply of
entertainment content, interactive and transactional services to the UK pay-TV
broadcasting market. The Content Division accounts in 2002 for approximately 8%
of the Group's revenue.
2 BASIS OF PREPARATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Group's significant estimates and assumptions include capitalisation of labor
and overhead costs; impairment of goodwill and long-lived assets (see note 6);
and accounting for debt and financial instruments (see note 5). Actual results
could differ from those estimates.
The financial statements are prepared on a going concern basis, which the
directors believe to be appropriate for the following reasons:
Following the directors' decision on September 30, 2002 not to pay the interest
on certain of the Group's bonds and other hedging instruments, the Group is now
in default of its bonds and its Senior Secured Facility.
These liabilities are now due for repayment in full and the Group is negotiating
with its bondholder creditors and bank facility creditors to effect a
reorganization of the Group's debt. This will involve, among other things, the
conversion of bond debt to equity and the renegotiation of existing bank
facilities. The directors believe the amended facilities will provide the Group
with sufficient liquidity to meet the Group's funding needs after completion of
the Financial Restructuring. Further details of the planned Financial
Restructuring are included in note 23.
In order for the Financial Restructuring to be effective, the Scheme Creditors
need to approve the plans by the relevant statutory majority. In addition, the
Group's shareholders need to approve the proposed share capital reorganization.
The directors are of the opinion that the status of negotiations of the
financial restructuring will lead to a successful outcome and that this is
sufficient grounds for issuing the annual financial statements under the
assumption of going concern.
The effect on the financial statements as presented, of the going concern basis
of preparation being inappropriate, is principally that the book value of
tangible fixed assets and investments would be restated from their present value
in use to a net realizable value. Whilst the directors believe that the net
realizable values would be lower than the current value in use there is
insufficient information available for the directors to quantify the difference.
The Group faces the following significant risks and uncertainties about:
o its continued ability to raise finance to fund its operations;
o its successful execution of its long term business plan, which in turn
will affect the Group's ability to raise further finance under the
Senior Secured Facility (see note 16); and
o the need to meet financial and other covenants relating to debt
instruments which have already been issued.
6
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
The economic environment and currency in which the Group operates is the United
Kingdom and therefore its reporting currency is Pounds Sterling (L). Certain
financial information for the year ended December 31, 2002 has been translated
into US Dollars ($), with such US Dollar amounts being unaudited and presented
solely for the convenience of the reader, at the rate of $1.6095 =L1.00, the
Noon Buying Rate of the Federal Reserve Bank of New York on December 31, 2002.
The presentation of the US Dollar amounts should not be construed as a
representation that the Pounds Sterling amounts could be so converted into US
Dollars at the rate indicated or at any other rate.
3 RESTATEMENT
Subsequent to the issuance of our consolidated financial statements as of and
for the year ended December 31, 2002, we have determined the need to adjust the
classification of debt previously reflected as non-current in the consolidated
balance sheet at December 31, 2002 and write off deferred financing costs as at
December 31, 2002 relating to the restated debt. The adjustment of debt
reclassifies L1,792 million from non-current "Debt repayable after more than one
year" to "Debt repayable within one year". The write off of deferred financing
costs decreases other assets and increases interest expense and net loss as at
and for the year ended December 31, 2002 by L11 million. There was no impact on
the 2001 Consolidated Financial Statements.
These adjustments have been made because the Company recently determined that
the effect of non-payment of a hedge contract of L10.5 million in 2002 triggered
a default on an additional L1,792 million of bond debt as at December 31, 2002.
We have also determined the need to accrue additional interest of L2 million
relating to additional interest for bonds in default as at December 31, 2002.
This adjustment increases net loss, interest expense and other liabilities by L2
million as at and for the year ended December 31, 2002.
RESTATEMENT IMPACT ON
BALANCE SHEET (IN L MILLIONS) DECEMBER 31, 2002
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As Reported As Restated
Other assets 40 29
Total assets 4,106 4,095
Debt repayable within one year 3,652 5,444
Other liabilities 631 633
Total current liabilities 4,393 6,264
Debt repayable after more than one year 1,798 6
Accumulated deficit (6,880) (6,893)
Total shareholders' (deficit)/equity (2,373) (2,386)
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RESTATEMENT IMPACT
FOR THE YEAR ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (IN L MILLIONS, EXCEPT PER SHARE DATA) DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
As Reported As Restated
Interest expense (515) (528)
Net loss (2,776) (2,789)
Basic and diluted loss per ordinary share L (0.97) L (0.97)
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RESTATEMENT IMPACT ON
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) AND COMPREHENSIVE LOSS (IN L MILLIONS) DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
As Reported As Restated
Total comprehensive loss (2,824) (2,837)
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7
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
those of its majority-owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated upon consolidation. All acquisitions have
been accounted for under the purchase method of accounting. Under this method,
the results of subsidiaries and affiliates acquired in the year are included in
the consolidated statement of operations from the date of acquisition.
IMPAIRMENT OF LONG LIVED ASSETS AND GOODWILL
The Group applies Statement of Financial Accounting Standard ("SFAS") No. 144,
Accounting for the Impairment or disposal of Long-Lived Assets. The Group
adopted, from January 1, 2002 SFAS 144 which requires that long-lived assets and
certain identifiable intangibles, including goodwill, to be held and used by an
entity, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Indications of impairment are determined by reviewing undiscounted projected
future cash flows. If impairment is indicated, the amount of the impairment is
the amount by which the carrying value exceeds the fair value of the assets.
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires all business combinations undertaken after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity- method
investments will also no longer be amortized upon adoption of SFAS 142, but will
be subject to impairment testing as part of the investment to which it relates
in accordance with Accounting Principles Board Opinion No. ("APB") 18, The
Equity Method of Accounting for Investments in Common Stock. Separable
intangible assets that do not have indefinite lives will continue to be
amortized over their estimated useful lives and will be subject to review for
impairment in accordance with SFAS 144 (see below). The amortization provisions
of SFAS 142 apply to goodwill and intangible assets acquired after June 30,
2001. For goodwill and intangible assets acquired prior to July 1, 2001, the
Group was required to adopt SFAS 142 effective January 1, 2002. As of January 1,
2002 the Group had L2,199 million of unamortized goodwill, L1,892 million of
which related to business combinations and L307 million of which related to
equity-method investments.
Impairment under SFAS 142 is measured using a two-step approach, initially based
on a comparison of the reporting unit's fair value to its carrying value; if the
fair value is lower, then the second step compares the implied fair value of the
goodwill with its carrying value to determine the amount of the impairment. In
connection with SFAS 142's transitional goodwill impairment evaluation, the
Statement required the Company to perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption of January 1,
2002. The Company compared the individual carrying value of its two reporting
units, Cable and Content, to their respective fair values. The fair values of
the respective reporting units were determined from an analysis of discounted
cash flows based on the Company's budgets and long-range plan. The discounted
cash flow analysis was performed at a reporting unit level. At January 1, 2002
the fair values of both reporting units were greater than their respective
carrying values and therefore the adoption of SFAS 142 on January 1, 2002, had
no impact on the Company's financial position or results of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash.
DERIVATIVES AND HEDGING
At January 1, 2001 the Company adopted SFAS 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS 137 and SFAS 138. SFAS 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires the recognition at fair value of all derivative
8
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
instruments as assets or liabilities in the Company's balance sheet. The
accounting treatment of changes in fair value is dependent upon whether or not a
derivative instrument is designated a hedge and if so, the type of hedge and its
effectiveness as a hedge.
For derivatives, which are not designated as hedges, changes in fair value are
recorded immediately in earnings.
For derivatives designated as cash flow hedges, changes in fair value on the
effective portion of the hedging instrument are recorded within other
comprehensive income ("OCI") until the hedged transaction occurs and are then
recorded within earnings. Changes in the ineffective portion of a hedge are
recorded in earnings. For derivatives designated as fair value hedges, changes
in fair value are recorded in earnings. The Group has not, however, had any fair
value hedges since the adoption of SFAS 133.
The Group discontinues hedge accounting for derivative financial instruments
when it is determined that the derivative instrument is no longer effective in
offsetting changes in the cash flows of the hedged item; the derivative
instrument expires or is sold; the derivative instrument is no longer designated
as a hedging instrument, because it is unlikely that a forecasted transaction
will occur; a hedged firm commitment no longer meets the definition of a firm
commitment; or its management determines that designation of the derivative
instrument as a hedging instrument is no longer appropriate. The tests for
determining the effectiveness of a cash flow hedge compare on a strict basis the
amount and timing of cash flows on the underlying economic exposure with the
cash flows of the derivative instrument.
Upon discontinuation of cash flow hedge accounting, the net gain or loss
attributable to the hedging instrument, which has been reported in OCI to the
date of discontinuation, continues to be reported in OCI until the date the
hedged transaction impacts earnings. This occurs unless it is probable that the
hedged transaction will not occur by the end of the originally specified time
period. If the hedged transaction is not expected to occur, the net gain or loss
is reclassified from OCI to earnings upon discontinuation.
Prior to adoption of SFAS 133 the Group had the following accounting policies in
respect of financial instruments. Foreign currency forward contracts, options
and swaps, which were used to reduce the exchange risk on the principal amounts
and early call premiums on certain foreign currency borrowings, were recorded on
the balance sheet at their fair value. Gains and losses arising from changes in
fair value were recorded concurrently within earnings. Such gains and losses
were offset by gains and losses arising from retranslating the principal amounts
of the foreign currency borrowings.
The Group also used foreign currency forward contracts and cross currency
interest rate swaps to reduce its exposure to adverse changes in exchange rates
associated with the interest payments on certain foreign currency borrowings.
Such foreign currency forward contracts and cross currency interest rate swaps
were accounted for using the accruals method.
The Group also used interest rate swap agreements and an interest rate collar to
manage interest rate risk on the Group's borrowings. Net income or expense
resulting from the differential between exchanging floating and fixed interest
payments was recorded within the consolidated statement of operations on an
accruals basis from the effective date of the interest rate swap agreements and
interest rate collar.
INVESTMENTS
Generally, investments in partnerships, joint ventures and subsidiaries in which
the Group's voting interest is 20% to 50%, and others where the Group has
significant influence, are accounted for using the equity method. Investments
which do not have a readily determinable fair value, in which the Group's voting
interest is less than 20%, and in which the Group does not have significant
influence, are carried at cost and written down to the extent that there has
been an other-than-temporary diminution in value. The Group accounts for certain
investments in which the Group's ownership is greater than 50% using the equity
method. This method is used for such subsidiaries where the minorities have
substantive participating rights such as veto over key operational and financial
matters and equal representation on the board of directors.
The Group reviews the carrying values of its investments in affiliates,
including any associated goodwill, to ensure that the carrying amount of such
investments are stated at no more than their recoverable amounts. The Group
assesses the recoverability of its investments by determining whether the
carrying value of the investments can be recovered through projected discounted
future operating cash flows (excluding interest) of the operations underlying
the investments. The assessment of the recoverability of the investments will be
impacted if projected future operating cash flows are not achieved. The amount
of impairment, if any, is measured based on the projected discounted future
operating cash flows using a rate commensurate with the risks associated with
the assets.
9
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
ADVERTISING COSTS
Advertising costs are expensed as incurred. The amount of advertising costs
expensed was L52 million, L48 million, and L38 million for the years ended
December 31, 2002, 2001, and 2000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided to write-off
the cost, less estimated residual value, of property and equipment by equal
instalments over their estimated useful economic lives as follows:
Freehold and long leasehold buildings 50 years Other equipment
Cable and ducting 20 years Office furniture and fittings 5 years
Electronic equipment Motor vehicles 4 years
System electronics 8 years
Switching equipment 8 years
Subscriber electronics 5 years
Headend, studio, and playback facilities 5 years
The Group accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems in accordance with SFAS 51
Financial Reporting by Cable Television Companies. Initial subscriber
installation costs are capitalized and depreciated over the life of the network.
DEFERRED FINANCING COSTS
Direct costs incurred in raising debt are deferred and recorded on the
consolidated balance sheet in other assets. The costs are amortized to the
consolidated statement of operations at a constant rate to the carrying value of
the debt over the life of the obligation. Deferred financing costs in respect of
bond debt in default are written off immediately to the consolidated statement
of operations.
MINORITY INTERESTS
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of exchange in
effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
prevailing at the balance sheet date and the gains or losses on translation are
included in the consolidated statement of operations.
REVENUE RECOGNITION
Revenues are recognized as network communication services are provided. Credit
risk is managed by disconnecting services to customers who are delinquent.
Connection and activation fees relating to cable television, telephony and
internet are recognized in the period of connection to the extent that such fees
are less than direct selling costs. Any excess connection and activation fees
over direct selling costs incurred are deferred and amortized over the expected
customer life.
Occasionally the Group sells capacity on its network to other telecommunications
providers. Sales of capacity are accounted for as sales-type leases, operating
leases, or service agreements depending on the terms of the transaction. If
title is not transferred or if the other requirements of sales-type lease
accounting are not met, revenues are recognized rateably over the term of the
agreement.
10
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Programming revenues are recognized in accordance with Statement of Position
("SOP") 00 - 2, Accounting by Producers or Distributors of Films. Revenue on
transactional and interactive sales is recognized as and when the services are
delivered. Advertising sales revenue is recognized at estimated realizable
values when the advertising is aired.
RECOGNITION OF CONTRACT COSTS
Certain of the sales of network capacity referred to above involve the Group
constructing new capacity. Where the Group retains some of this new capacity,
either for subsequent resale or for use within the business, then an element of
the construction costs is retained within inventory or equipment, respectively.
The allocation of construction cost between costs expensed to the statement of
operations and costs capitalized within inventory or equipment is based upon the
ratio of capacity to be sold and to be retained.
PENSION COSTS
The Group operates a defined contribution scheme (the Telewest Communications
plc Pension Trust) or contributes to third-party schemes on behalf of employees.
The amount included in expenses in 2002, 2001 and 2000 of L11 million, L10
million and L8 million, respectively, represents the contributions payable to
the selected schemes in respect of the relevant accounting periods.
INCOME TAXES
Under the asset and liability method of SFAS 109 Accounting for Income Taxes,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered.
The Group recognises deferred tax assets only where it is more likely than not
that the benefit will be realized through future taxable income. Otherwise a
valuation allowance is established to provide against deferred tax assets.
SHARE-BASED COMPENSATION
SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation costs for share-based employee
compensation plans at fair value. The Group has chosen to continue to account
for share-based compensation using the intrinsic value method prescribed in APB
25, Accounting for Stock Issued to Employees and related interpretations.
Accordingly, compensation cost for fixed plan share options is measured as the
excess, if any, of the quoted market price of the Company's shares at the date
of the grant over the amount an employee must pay to acquire the shares.
Compensation cost for variable plan share options is measured each period using
the intrinsic value method until the variable or performance features of the
plan become fixed. Compensation expense is recognized over the applicable
vesting period.
Shares purchased by the trustees in connection with the Telewest Restricted
Share Scheme and certain LTIP awards, are valued at cost and are reflected as a
reduction of shareholders' equity in the consolidated balance sheet. This equity
account is reduced when the shares are issued to employees based on the original
cost of the shares to the trustees.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net loss available to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year. Diluted earnings per share is computed by adjusting
the weighted average number of ordinary shares outstanding during the year for
all dilutive potential ordinary shares outstanding during the year and adjusting
the net loss for any changes in income or loss that would result from the
conversion of such potential ordinary shares. There is no difference in net loss
and number of shares used for basic and diluted net loss per ordinary share, as
potential ordinary share equivalents for employee share options and convertible
debt are not included in the computation as their effect would be to decrease
the loss per share. The number of potential ordinary shares was 393 million, 393
million and 464 million in 2002, 2001 and 2000, respectively.
INVENTORIES
Inventories of equipment, held for use in the maintenance and expansion of the
Group's telecommunications systems, are stated at cost, including appropriate
overheads, less provision for deterioration and obsolescence. Network capacity
and ducting held for resale are stated at the lower of cost and net realizable
value.
11
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP
SFAS 143 Accounting for Asset Retirement Obligations
In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143, which is effective for fiscal years beginning after June
15, 2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, an entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement.
Telewest has evaluated its legal retirement obligations in relation to all of
its tangible long-lived assets and specifically in relation to the buildings
that it occupies and its network assets. Buildings, which are held under
operating leases, do not specify a fixed refurbishment payment, but instead
specify a standard of physical restoration for which Telewest is responsible.
Telewest attempts to maintain properties on an ongoing basis to the standard
required by the lease and consequently would not expect to have significant
additional relevant obligations in respect of its leased properties. Also
Telewest believes that it has no legal or constructive retirement obligations in
relation to its network assets, all located in the United Kingdom, as there is
no legal requirement for Telewest to retire such assets. The Group does not
therefore believe the adoption of SFAS 143 will have a material impact on the
financial statements.
SFAS 145 Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and
Technical Corrections
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB 13, and Technical Corrections". SFAS 145 provides for
the rescission of several previously issued accounting standards, new accounting
guidance for the accounting for certain lease modifications and various
technical corrections that are not substantive in nature to existing
pronouncements. The Group has adopted this standard from January 1, 2002 and
reclassified L15 million from extraordinary items to expense for the year ended
December 31, 2001. No material adjustments have been required in 2002.
SFAS 146 Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, and nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS 146 applies to costs
associated with an exit activity that do not involve an entity newly acquired in
a business combination or with a disposal activity covered by SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". The Group does
not believe the adoption of this statement will have a material impact on its
financial position or results of operations.
SFAS 148 Accounting for Stock Based Compensation--Transition and Disclosure
An amendment of SFAS 123 is effective for the Group for the year ended December
31, 2002. SFAS 148 permits two additional transition methods for entities that
adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results and that those
effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. The Group has adopted the disclosure provisions
of the Statement in these financial statements. The Group has not adopted the
fair value based method of accounting for stock-based employee compensation and
still accounts for these in accordance with APB Opinion 25, Accounting for Stock
Issued to Employees.
Other new standards
In November 2002, the Emerging Issues Task Force issued its consensus on EITF
00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21) on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to the EITF,
in an arrangement with multiple deliverables, the delivered item(s) should be
considered a separate unit of accounting if all of the following criteria are
met: (1) the delivered item(s) has value to the customer on a standalone basis,
(2) there is objective and reliable evidence of the fair value of the
undelivered item(s), and (3) if the arrangement includes a general right of
return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the
12
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
control of the vendor. If all the conditions above are met and there is
objective and reliable evidence of fair value for all units of accounting in an
arrangement, the arrangement consideration should be allocated to the separate
units of accounting based on their relative fair values. The guidance in this
Issue is effective for revenue arrangements entered into in fiscal years
beginning after June 15, 2003. The Group believes that the adoption of EITF
00-21 will not have a material impact on the Group's financial statements.
In November 2002, the FASB issued FASB Interpretation 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ('FIN 45'), which addresses the disclosure to be made by
a guarantor in its financial statements about its obligations under guarantees.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. It requires the guarantor to recognize a
liability for the non-contingent component of the guarantee, this is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The Group has adopted the disclosure
requirements and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date the Company
has not entered into or modified guarantees.
In January 2003, the FASB issued FASB Interpretation 46, Consolidation of
Variable Interest Entities (FIN 46) which interprets Accounting Research
Bulletin (ARB) 51, Consolidated Financial Statements. FIN 46 clarifies the
application of ARB 51 with respect to the consolidation of certain entities
(variable interest entities - 'VIEs') to which the usual condition for
consolidation described in ARB 51 does not apply because the controlling
financial interest in VIEs may be achieved through arrangements that do not
involve voting interests. In addition, FIN 46 requires the primary beneficiary
of VIEs and the holder of a significant variable interest in VIEs to disclose
certain information relating to their involvement with the VIEs. The provisions
of FIN 46 apply immediately to VIEs created after January 31, 2003, and to VIEs
in which an enterprise obtains an interest after that date. FIN 46 applies in
the first fiscal year beginning after June 15, 2003, to VIEs in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
To comply with the transitional provisions of FIN 46, Telewest has evaluated its
existing structures to determine whether it is reasonably likely that it would
be required to consolidate or disclose information about a VIE's nature,
purpose, size and activities, together with Telewest's maximum exposure to loss.
Telewest is also required to disclose the anticipated impact of adoption of FIN
46 on its financial statements.
Telewest has 50% joint venture interests in two affiliates, UKTV, a joint
venture with the BBC, and Front Row Television Limited ("Front Row"), a joint
venture with NTL, both of which are accounted for under the equity method, and
neither of which are considered VIEs. Management believes that both UKTV and
Front Row are businesses as defined by EITF 98-3, Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business,
and FIN 46, Consolidation of Variable Interest Entities (Revised December 2003),
and, accordingly, does not consider that either consolidation or additional
disclosures are required. Telewest does not otherwise make use of traditional
VIE structures in its business and does not currently securitize its receivables
or other financial assets. The Group does not therefore believe that the impact
of the adoption of FIN 46 will have a material effect on its financial
statements.
5 FINANCIAL INSTRUMENTS
The Group holds derivative financial instruments solely to hedge specific risks
and does not hold such instruments for trading purposes. The derivatives are
held to hedge against the variability in cash flows arising from the effect of
fluctuations of GBP:USD exchange rate on the Group's US Dollar-denominated debt
and from changes in interest rates on its variable rate bank debt.
The Group maintains risk management control systems to monitor currency exchange
and interest rate risk attributable to forecasted debt principal payments and
interest rate exposure.
CASH FLOW HEDGES
Hedges of US Dollar denominated debt
The Group has issued US Dollar denominated debt instruments with a range of
maturities. The Group previously hedged the principal amounts of these
instruments up to their first call dates or other such dates where the Group may
at its option redeem the instrument before maturity.
13
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
The Group has increased its foreign exchange risk since the discontinuation of
hedge accounting as described below. The Group continues to monitor this risk
until the Financial Restructuring is completed when the US Dollar-denominated
debt instruments will be swapped for equity and the foreign exchange risk is
minimised.
In the three-month period ended March 31, 2002, the Group determined that it was
probable that forecasted future prepayments of principal against outstanding US
Dollar-denominated debt would not occur. Accordingly, the cumulative adjustment
in OCI of L53 million resulting from marking to market the derivative
instruments has been reclassified from OCI to foreign exchange gains in the
Statement of Operations. Subsequent adjustments of the carrying value of these
instruments to fair value are taken directly to the Statement of Operations as
incurred.
In the nine-month period ended September 30, 2002, the Group had the ability to
terminate in-the-money derivative contracts that fluctuate in value. Such
derivative contracts hedged our exposure to fluctuations in the US Dollar/pound
sterling exchange rates on the Group's US Dollar-denominated debt. In March
2002, the Group terminated certain of these derivative contracts with a nominal
value of $999 million (L688 million), netting L74 million cash inflow. In May
2002 the Group terminated further derivative contracts with a nominal value of
$367 million (L253 million) realizing an additional L30 million cash inflow. In
the three-month period ended September 30, 2002, the Group terminated
arrangements with a nominal value of $2.3 billion (approximately L1.5 billion).
Contracts with a nominal value of $1 billion were settled in cash resulting in
an outflow of L28 million. The remaining contracts with a nominal value of $1.3
billion have yet to be settled for a total cost of L33 million of which L19
million was due on October 1, 2002, but the Company deferred such payment and is
considering the payment in the context of its Financial Restructuring.
During the 12-month period ended December 31, 2002, the Group recorded a net L48
million transfer from cumulative OCI to the Statement of Operations arising from
the dedesignation of derivative contracts as ineffective hedges, as described
above. In the 12-month period ended December 31, 2001, the Group recorded a L36
million gain in fair value to cumulative OCI, consisting of a loss of L25
million to short-term derivative liabilities and a L61 million gain to long-term
derivative assets.
HEDGES OF VARIABLE RATE DEBT
As described in note 16 to the consolidated financial statements, the Group has
a Senior Secured Facility with a syndicate of banks and a further amount from an
Institutional Tranche ("Institutional Tranche"). Drawdowns under the Senior
Secured Facility and the Institutional Tranche bear interest at 0.75% to 2.00%
above LIBOR and up to 4% above LIBOR respectively, so the Group is exposed to
variable cash flows arising from changes in LIBOR. The Group hedges these
variable cash flows by the use of interest rate swaps. The interest rate swaps
can be summarised as follows:
NOTIONAL
EFFECTIVE DATES MATURITIES PRINCIPAL RECEIVES PAYS
------------------------------------------------------------------------------------------------------------------------------------
1/2/1997 - 7/1/2002 12/31/2003 - 3/31/2005 L900m 6-month LIBOR 5.475% - 7.3550%
------------------------------------------------------------------------------------------------------------------------------------
In June 2002, the Group reviewed the effectiveness as hedges of the derivative
instruments hedging our exposure to fluctuations in interest rates on its
long-term bank debt. The review concluded that continued designation of these
instruments as hedges was no longer appropriate and hedge accounting was
discontinued with immediate effect. The dedesignation of these instruments as
hedges resulted in a transfer of L7 million from cumulative OCI to interest
expense within the Statement of Operations. Any movements in the value of the
derivatives after June 2002 are recorded within interest expense.
The Group continues to hedge some of its interest rate risk on its Senior
Secured Facility through the use of interest rate swaps. The purpose of the
derivative instruments is to provide a measure of stability over the Company's
exposure to movements in sterling interest rates on its sterling denominated
bank debt.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures about Fair Value of Financial Instruments requires
disclosure of an estimate of the fair values of financial instruments. SFAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement, and therefore cannot be
determined precisely. Changes in assumptions could significantly affect the
estimates.
14
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
At December 31, 2002 the Group's significant financial instruments include cash
and cash equivalents, trade receivables, interest rate swaps, trade payables and
short-term and long-term debt instruments. The following table summarizes the
fair value of certain instruments held by and obligations of the Group. The fair
value of the other financial instruments held by the Group approximates their
recorded carrying amount due to the short maturity of these instruments and
these instruments are not presented in the following table:
AT DECEMBER 31, AT DECEMBER 31,
2002 2001
CARRYING FAIR VALUE CARRYING FAIR VALUE
AMOUNT AMOUNT
L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS - ASSETS
Foreign exchange forward contracts -- -- 131 131
Foreign currency swaps -- -- 15 15
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS - LIABILITIES
Interest rate swap agreements (34) (34) (25) (25)
Foreign exchange forward contracts -- -- (4) (4)
------------------------------------------------------------------------------------------------------------------------------------
DEBT OBLIGATIONS
Accreting Convertible Notes 2003 282 62 268 268
Senior Convertible Notes 2005 311 130 344 234
Senior Debentures 2006 186 39 206 155
Senior Convertible Notes 2007 300 63 300 174
Senior Discount Debentures 2007 955 200 1,059 803
Senior Notes 2008 217 46 226 185
Senior Discount Notes 2009 563 108 505 308
Senior Notes 2010 394 83 378 315
Senior Discount Notes 2010 222 46 185 136
Senior Secured Facility 2,000 2,000 1,360 1,360
Other debt 20 20 66 66
------------------------------------------------------------------------------------------------------------------------------------
The estimated fair values of the financial instruments specified above are based
on quotations received from independent, third-party financial institutions and
represent the net amounts receivable or payable to terminate the position. The
estimated fair values of the Debentures and Notes are also based on quotations
from independent third-party financial institutions and are based on discounting
the future cash flows to net present values using appropriate market interest
rates prevailing at the year end.
MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
Market risk is the sensitivity of the value of the financial instruments to
changes in related currency and interest rates.
As described above, the Group terminated its portfolio of derivative financial
instruments which were used to hedge its exposure to fluctuations in the USD:
GBP exchange rate. Consequently the Group is exposed to fluctuations in the
value of its US Dollar-denominated debt obligations.
15
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Generally, the Group is not exposed to such market risk arising on its interest
rate derivative financial instruments because gains and losses on the underlying
assets and liabilities offset gains and losses on the financial instruments.
The Group may be exposed to potential losses due to the credit risk of
non-performance by the financial institution counterparties to its portfolio of
derivative financial instruments. However such losses are not anticipated as
these counterparties are major international financial institutions and the
portfolio is spread over a wide range of institutions.
Temporary cash investments also potentially expose the Group to concentrations
of credit risk, as defined by SFAS 133. At December 31, 2002 the Group had L160
million on deposit with a major international financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Group's customer base.
6 IMPAIRMENT OF ASSETS AND GOODWILL
During the year ended December 31, 2002, the Group undertook an impairment
review of its network assets, of goodwill arising on recent acquisitions and of
its investments in affiliates acquired in recent years. The review covered the
Cable and Content reporting units. The principal reasons for the review were: a
share price decline indicative of a fall in the values of the underlying assets
and a softening of the ad-sales market, declining revenue growth and a lower
than expected customer take-up of additional services.
The review found evidence of impairment in the value of goodwill arising on the
core Cable and Content reporting units and in the value of the affiliated
undertaking UKTV. The carrying amounts of goodwill, fixed assets and the
investments in the affiliated undertakings were written down to fair value,
resulting in a charge of L1,445 million against goodwill, an impairment of L841
million against fixed assets and a charge of L88 million against the investments
in affiliated undertakings. These charges have been included in the statement of
operations within impairment of goodwill, impairment of fixed assets and share
of net losses of affiliates and impairment, respectively. The estimated fair
value of the goodwill and the investment in UKTV was based on projected future
cash flows at a post-tax discount rate of 11.5% which the Group believes is
commensurate with the risks associated with the assets. The projected future
cash flows were determined using the Company's ten-year plan for the business,
with a terminal value which takes into account analysts' and other published
projections of future trends across pay-TV platforms, including the total
television advertising market.
The changes in the carrying amount of goodwill for the years ended December 31,
2002 and 2001 by reporting unit are as follows:
CABLE CONTENT TOTAL
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2001 1,394 1,409 2,803
Addition in year 11 -- 11
Amortization in year (83) (73) (156)
Impairment of goodwill -- (766) (766)
------------------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 1,322 570 1,892
Impairment of goodwill (1,016) (429) (1,445)
------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 306 141 447
------------------------------------------------------------------------------------------------------------------------------------
Amortization expense related to goodwill was L183 million (including L27 million
related to equity investment goodwill) for the year ended December 31, 2001
(L147 million for the year ended December 31, 2000). The following table
reconciles previously reported net income as if the provisions of SFAS 142 were
in effect in 2001 and 2000:
16
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002
RESTATED 2001 2000
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Net loss
Reported net loss (2,789) (1,741) (755)
Add back amortization of goodwill -- 183 147
------------------------------------------------------------------------------------------------------------------------------------
Adjusted net loss (2,789) (1,558) (608)
------------------------------------------------------------------------------------------------------------------------------------
PENCE PENCE PENCE
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per share
Reported net loss per share (97) (60) (28)
Add back amortization of goodwill -- 6 5
------------------------------------------------------------------------------------------------------------------------------------
(97) (54) (23)
Adjusted net loss per share
------------------------------------------------------------------------------------------------------------------------------------
7 BUSINESS COMBINATIONS
On May 30, 2001, the Group acquired 51% of the issued share capital of Rapid
Travel Solutions Limited ("Rapid Travel") and was granted a series of call
options by, and granted a series of put options to, the vendors in respect of
the balance of 49%. Assuming that either party exercises these options, the
Group will acquire the remainder of the share capital in tranches ending on
November 30, 2003 for total consideration of L4 million. The acquisition has
been accounted for using the purchase method of accounting. Goodwill arising on
the acquisition was L7 million.
If the Group had acquired Rapid Travel at the beginning of 2000 and 2001, the
Group's results would not have been materially different from the actual results
as disclosed in these financial statements.
On April 19, 2000 the Company acquired the entire issued share capital of
Flextech Plc ("Flextech"), a company engaged in broadcast media activities, for
a total consideration of L1,978 million. This comprised 601 million shares of
10p each and acquisition costs of L31 million. The value attributed to the
shares issued was 323.85 pence per share, being the average share market price
for a five day period around December 17, 2000, the day the terms of the
acquisition were agreed to and announced. The acquisition was accounted for
using the purchase method of accounting. The goodwill arising on acquisition of
Flextech was L1,382 million. As described in note 16, the Group has undertaken
an impairment review of goodwill. As a result of the review, a charge of L429
million has been made.
On November 1, 2000 the Company acquired the entire issued share capital of
Eurobell (Holdings) PLC ("Eurobell"), from Deutsche Telekom ("DT") and agreed to
pay initial and deferred consideration to DT, (as discussed below), in the form
of 5% Accreting Convertible Notes due 2003. The aggregate principal amount of
such Notes, following agreement of the deferred consideration, is L254 million.
The terms of the Accreting Convertible Notes are described in note 16 to these
financial statements.
Upon completion of the acquisition, the Company issued a L220 million Accreting
Convertible Note to DT in consideration for:
o Eurobell's entire issued share capital, L72 million
o the assignment of an inter-company loan previously owed by Eurobell to
DT, L128 million, and
o a cash payment remitted to Eurobell by DT shortly after the acquisition,
L20 million.
Subsequently, on January 15, 2001 DT remitted a further cash payment, L30
million, to Eurobell and the Company issued an additional Accreting Convertible
Note to DT for L30 million.
In addition under the terms of the acquisition, the Company was obliged to
provide deferred consideration, contingent on Eurobell's turnover for the year
ended December 31, 2000 exceeding a certain target. As a result, an additional
L3.5 million Accreting Convertible Note, dated April 2, 2001 was issued to DT.
This deferred consideration was accrued for at December 31, 2000.
Goodwill of L1 million arose on the acquisition.
If the Company had acquired Flextech and Eurobell on January 1, 2000 the Group's
net loss of L755 million and loss per share of L0.28 would have been L820
million and L0.28, respectively.
17
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
8 SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was L287 million, L335 million and L164 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
During 2002 there were no significant non-cash investing activities. The amounts
stated for 2001 represent the purchase of Rapid Travel. The amounts stated for
2000 represent the purchase of Flextech and Eurobell. These transactions are
described in note 7 to the consolidated financial statements.
YEAR ENDED DECEMBER 31
2002 2001 2000
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Acquisitions:
Assets -- 1 1,104
Liabilities assumed -- (2) (172)
Debt assumed -- -- (261)
------------------------------------------------------------------------------------------------------------------------------------
Net (liabilities)/assets (contributed)/ assumed -- (1) 671
Less:
Goodwill arising -- 7 1,383
------------------------------------------------------------------------------------------------------------------------------------
-- 6 2,054
------------------------------------------------------------------------------------------------------------------------------------
Share consideration/capital contribution -- -- 1,946
Debt consideration -- -- 75
Purchase of shares -- 2 --
Option consideration -- 4 --
Direct costs of acquisition -- -- 33
------------------------------------------------------------------------------------------------------------------------------------
-- 6 2,054
------------------------------------------------------------------------------------------------------------------------------------
In 2002 the Group entered into capital lease obligations with a total capital
value of L17 million. The Group entered into no vendor financing arrangements
during the year, but had a remaining financed balance of L11 million at December
31, 2002. At December 31, 2002, the Group had accrued a further L57 million of
capital expenditure for property and equipment.
9 OTHER RECEIVABLES
AT DECEMBER 31
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Interconnection receivables 7 2
Accrued income 32 68
Other 29 27
Foreign currency swap -- 15
------------------------------------------------------------------------------------------------------------------------------------
68 112
------------------------------------------------------------------------------------------------------------------------------------
18
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Accrued income primarily represents telephone calls made by Cable Division
subscribers and Business Services Division customers that have not been billed
as at the accounting period end. The period of time over which billings have not
been billed varies between two days and four weeks.
10 INVESTMENTS
The Group has investments in affiliates accounted for under the equity method at
December 31, 2002 and 2001 as follows:
PERCENTAGE OWNERSHIP AT DECEMBER 31
2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Front Row Television Limited 50.0% 50.0%
UKTV 50.0% 50.0%
Blue Yonder Workwise Limited 100.0% 70.0%
SMG -- 16.9%
------------------------------------------------------------------------------------------------------------------------------------
During the year Blue Yonder Workwise Limited became a wholly owned subsidiary of
the Group. No goodwill arose on the acquisition.
Summarized combined financial information for such affiliates which operate
principally in the cable television, broadcasting and interactive media
industries is as follows:
AT DECEMBER 31
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
COMBINED FINANCIAL POSITION
Current assets 61 162
Property and equipment, net -- 54
Intangible assets, net -- 112
Other assets, net 31 7
------------------------------------------------------------------------------------------------------------------------------------
Total assets 92 335
------------------------------------------------------------------------------------------------------------------------------------
Current liabilities 42 133
Debt 176 66
Other liabilities -- 557
Owners' equity (126) (421)
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 92 335
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
2002 2001 2000
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
COMBINED OPERATIONS
Revenue 128 408 406
Operating expenses (103) (324) (343)
------------------------------------------------------------------------------------------------------------------------------------
Operating profit 25 84 63
Interest expense (12) (38) (30)
------------------------------------------------------------------------------------------------------------------------------------
Net profit 13 46 33
------------------------------------------------------------------------------------------------------------------------------------
19
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
AT DECEMBER 31
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
THE GROUP'S INVESTMENTS IN AFFILIATES ARE COMPRISED AS FOLLOWS:
Goodwill -- 27
Loans 208 260
Share of net assets 168 260
------------------------------------------------------------------------------------------------------------------------------------
376 547
------------------------------------------------------------------------------------------------------------------------------------
On September 4, 2002 the investment in SMG plc, a listed investment in an
associated undertaking, was reclassified as a current asset investment at net
realizable value. This resulted in L42 million being written off the carrying
value of the investment. The investment in SMG plc was subsequently sold in
November 2002 realizing a gain of L1 million.
11 PROPERTY AND EQUIPMENT
CABLE AND ELECTRONIC OTHER
LAND BUILDINGS DUCTING EQUIPMENT EQUIPMENT TOTAL
L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
ACQUISITION COSTS
Balance at January 1, 2002 6 133 3,186 1,424 597 5,346
Additions -- 7 269 135 50 461
Disposals -- (2) -- -- (11) (13)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 6 138 3,455 1,559 636 5,794
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Balance at January 1, 2002 -- 45 894 661 273 1,873
Charge for the year -- 10 159 223 103 495
Impairment -- 39 678 90 34 841
Disposals -- (2) -- -- (11) (13)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 -- 92 1,731 974 399 3,196
------------------------------------------------------------------------------------------------------------------------------------
2002 NET BOOK VALUE 6 46 1,724 585 237 2,598
------------------------------------------------------------------------------------------------------------------------------------
20
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
CABLE AND ELECTRONIC OTHER
LAND BUILDINGS DUCTING EQUIPMENT EQUIPMENT TOTAL
L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
ACQUISITION COSTS
Balance at January 1, 2001 6 119 2,630 1,393 552 4,700
Additions -- 14 556 31 52 653
Disposals -- -- -- -- (7) (7)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 6 133 3,186 1,424 597 5,346
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Balance at January 1, 2001 -- 35 546 605 225 1,411
Charge for the year -- 10 348 56 55 469
Disposals -- -- -- -- (7) (7)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 -- 45 894 661 273 1,873
------------------------------------------------------------------------------------------------------------------------------------
2001 NET BOOK VALUE 6 88 2,292 763 324 3,473
------------------------------------------------------------------------------------------------------------------------------------
Cable and ducting consists principally of civil engineering and fiber optic
costs. In addition, cable and ducting includes net book value of
pre-construction and franchise costs of L18 million and L14 million as of
December 31, 2002 and 2001, respectively. Electronic equipment includes the
Group's switching, headend and converter equipment. Other equipment consists
principally of motor vehicles, office furniture and fixtures and leasehold
improvements.
12 VALUATION AND QUALIFYING ACCOUNTS
ADDITION
CHARGED TO
BALANCE AT ACQUISITION OF COSTS AND BALANCE AT
JANUARY 1 SUBSIDIARIES EXPENSES DEDUCTIONS DECEMBER 31
L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
2002 Deferred tax valuation allowances 901 -- 382 -- 1,283
Allowance for doubtful accounts 16 -- -- (4) 12
------------------------------------------------------------------------------------------------------------------------------------
2001 Deferred tax valuation allowances 733 -- 168 -- 901
Allowance for doubtful accounts 19 -- 3 (6) 16
------------------------------------------------------------------------------------------------------------------------------------
2000 Deferred tax valuation allowances 491 38 204 -- 733
Allowance for doubtful accounts 13 5 14 (13) 19
------------------------------------------------------------------------------------------------------------------------------------
13 OTHER ASSETS
The components of other assets, net of amortization and write offs, are as
follows:
AT DECEMBER 31
2002
RESTATED 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Deferred financing costs of debentures -- 22
Deferred financing costs of Senior Secured Facility 29 36
------------------------------------------------------------------------------------------------------------------------------------
29 58
------------------------------------------------------------------------------------------------------------------------------------
During the year L11 million of deferred financing costs of debentures were
written off in connection with bond debt default.
21
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
14 INVENTORY
AT DECEMBER 31
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Raw materials and consumables -- 1
Inventories of spare capacity and duct held for resale 4 36
Programming inventory 24 30
------------------------------------------------------------------------------------------------------------------------------------
28 67
------------------------------------------------------------------------------------------------------------------------------------
15 OTHER LIABILITIES
Other liabilities are summarized as follows:
AT DECEMBER 31
2002
RESTATED 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Deferred income 111 114
Accrued construction costs 64 67
Accrued programming costs 21 24
Accrued interconnect costs 17 39
Accrued interest 222 111
Accrued staff costs 10 35
Accrued expenses 42 41
Other liabilities 146 93
------------------------------------------------------------------------------------------------------------------------------------
633 524
------------------------------------------------------------------------------------------------------------------------------------
16 DEBT
Debt is summarized as follows at December 31, 2002 and 2001:
WEIGHTED AVERAGE INTEREST RATE 2002 2001
2002 2001 2000 L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Accreting Convertible Notes 2003 5% 5% 5% 282 268
Senior Convertible Notes 2005 6% 6% 6% 311 344
Senior Debentures 2006 9.625% 9.625% 9.625% 186 206
Senior Convertible Notes 2007 5.25% 5.25% 5.25% 300 300
Senior Discount Debentures 2007 11% 11% 11% 955 1,059
Senior Notes 2008 11.25% 11.25% 11.25% 217 226
Senior Discount Notes 2009 9.875% 9.875% 9.875% 287 261
Senior Discount Notes 2009 9.25% 9.25% 9.25% 276 244
Senior Notes 2010 9.875% 9.875% 9.875% 394 378
Senior Discount Notes 2010 11.375% 11.375% 11.375% 222 185
Senior Secured Facility 6.223% 7.265% 7.553% 2,000 1,360
Other debt 6.7% 6.767% 7.432% 20 66
------------------------------------------------------------------------------------------------------------------------------------
5,450 4,897
------------------------------------------------------------------------------------------------------------------------------------
22
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTES AND DEBENTURES
PRINCIPAL AT
MATURITY ORIGINAL MATURITY EARLIEST REDEMPTION INTEREST
MILLION DATE DATE RATE
-----------------------------------------------------------------------------------------------------------------------------------
Accreting Convertible Notes 2003 GBP 294 November 1, 2003 November 1, 2003 5%
Senior Convertible Notes 2005 USD 500 July 7, 2005 July 7, 2003 6%
Senior Debentures 2006 USD 300 October 1, 2006 October 1, 2000 9.625%
Senior Convertible Notes 2007 GBP 300 February 19, 2007 March 9, 2003 5.25%
Senior Discount Debentures 2007 USD 1,537 October 1, 2007 October 1, 2000 11%
Senior Notes 2008 USD 350 November 1,2008 November 1, 2003 11.25%
Senior Discount Notes 2009 GBP 325 April 15, 2009 April 15, 2004 9.875%
Senior Discount Notes 2009 USD 500 April 15, 2009 April 15, 2004 9.25%
Senior Notes 2010 GBP 180 February 1, 2010 February 1, 2005 9.875%
Senior Notes 2010 USD 350 February 1, 2010 February 1, 2005 9.875%
Senior Discount Notes 2010 USD 450 February 1, 2010 February 1, 2005 11.375%
-----------------------------------------------------------------------------------------------------------------------------------
The Debentures and Notes are unsecured liabilities of the Group.
The Senior Convertible Notes 2005 are convertible into 114 million ordinary
shares of the Group at a conversion price of 288 pence per ordinary share.
Conversion is at the holders' option at any time up to the close of business on
June 22, 2005. The Senior Convertible Notes 2007 are convertible into 92 million
ordinary shares of the Group at a conversion price of 325 pence per ordinary
share. Conversion is at the holders' option at any time up to close of business
on February 2, 2007. If Notes are called for redemption prior to maturity, each
holder has the right to convert Notes into ordinary shares. The Accreting
Convertible Notes 2003 are convertible into 162 million ordinary shares of the
Group at an initial conversion price of 156.56 pence per ordinary share.
Conversion is at maturity at the holder's option, but the Group can elect to
settle in cash at any time, in whole but not in part, at 100% of the accreted
value provided that for a certain 10 day period prior to redemption, the price
per ordinary share has been at least 130% of the average conversion price in
effect on each day during the 10 day period.
On January 15, 2001, DT remitted a cash payment of L30 million to its former
subsidiary Eurobell, under the terms of the acquisition of Eurobell by the
Company on November 1, 2000. In consideration the Company issued additional
Accreting Convertible Notes 2003 for the same amount. In addition, under the
terms of the acquisition, the Company was obliged to provide deferred
consideration, contingent on Eurobell's turnover for the year ended December 31,
2000 exceeding a certain target. As a result additional L3.5 million Accreting
Convertible Notes 2003, dated April 2, 2001, were issued to DT.
The unamortized portion of the discounts on issue of the Senior Discount Notes
2009 and Senior Discount Notes 2010 was L73 million and L58 million
respectively. The discount on issue is being amortized up to the first call
dates of the bonds, such as to produce a constant rate of return on the carrying
amount.
The indentures under which the Debentures and Notes were issued contain various
covenants, which among other things, restrict the ability of the Group to incur
additional indebtedness, pay dividends, create certain liens, enter into certain
transactions with shareholders or affiliates, or sell certain assets. As part of
its refinancing, the Group elected not to pay: the interest due on October 1,
2002 on its Senior Debentures 2006 and its Senior Discount Debentures 2007; the
interest due on November 1, 2002 on its Senior Notes 2008; and the interest due
on January 7, 2003 on its Senior Convertible Notes 2005. The non-payment of
interest constitutes a
23
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
default event under the terms of these four bonds. As a consequence of the
non-payment of hedge contracts of L10.5 million, all of the remaining bonds were
also in default as at December 31, 2002.
SENIOR SECURED FACILITY
On March 16, 2001 the Group entered into a new senior secured credit facility
(the "Senior Secured Facility") with a syndicate of banks for L2 billion, of
which L1,855 million was drawn down at December 31, 2002. The Group is also able
to raise a further L250m from institutional investors (the "Institutional
Tranche") of which L145 million was drawn down at December 31, 2002. The first
drawdowns under the Senior Secured Facility were used to repay amounts owed
under the old senior secured credit facilities.
Borrowings under the Senior Secured Facility are secured on the assets of the
Group including the partnership interests and shares of subsidiaries and bear
interest at 0.75% to 2.0% over LIBOR (depending on the ratio of borrowings to
quarterly, annualized, consolidated net operating cash flow). Borrowings under
the Institutional Tranche bear interest at up to 4% above LIBOR.
The Senior Secured Facility contains cross-default clauses with other debt
instruments. As a result of the Group being in default of its Debentures and
Notes, it is in default on the Senior Secured Facility. In addition, on March
14, 2003, Telewest notified its Senior Lenders that, as a result of the
exceptional items incurred in 2002 and their impact on Telewest's net operating
cash flow, it would breach certain financial covenants under its bank facility
in respect of the quarter ended December 31, 2002.
The Group is renegotiating its bank facilities and debt financing arrangements.
Further details of the Financial Restructuring are included in note 23.
VENDOR FINANCING
The Group has entered into vendor financing arrangements to fund its purchase of
equipment from certain suppliers. Under the terms of these arrangements the
Group defers payment for periods up to 36 months. Interest is charged on these
arrangements at a rate that is fixed for the life of the arrangements. The
balance on these arrangements at December 31, 2002 was L11 million.
SMG LOAN
On July 11, 2001, the Group entered into a contract with Toronto Dominion Bank
("TD"), whereby TD provided a loan to the Group, in return for security over 55%
of the Group's shareholding in SMG plc. The loan was fully repaid during the
year following the sale of the Group's investment in SMG.
BANK LOANS
Bank loans are property loans secured on certain freehold land and buildings
held by the Group. The balance at December 31, 2002 was L7 million.
MATURITY PROFILE
As a consequence of the defaults referred to above, the Group's long-term debt
has been disclosed as repayable within one year. The original Maturity Profile
of the Group's long-term debt was as follows:
2002
L MILLION
------------------------------------------------------------------------------------------------------------------------------------
2003 3,652
2004 1
2005 316
2006 --
2007 300
2008 and thereafter 1,181
------------------------------------------------------------------------------------------------------------------------------------
5,450
------------------------------------------------------------------------------------------------------------------------------------
24
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
17 INCOME TAXES
Loss before income taxes is solely attributable to the United Kingdom.
The provisions for income taxes follow:
2002 2001 2000
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax benefit 28 70 6
------------------------------------------------------------------------------------------------------------------------------------
A reconciliation of income taxes determined using the statutory UK rate of 30%
(2001: 30%) to the effective rate of income tax is as follows:
YEAR ENDED DECEMBER 31
2002 2001 2000
% % %
------------------------------------------------------------------------------------------------------------------------------------
Corporate tax at UK statutory rates (30) (30) (30)
Write down of goodwill 15 -- --
Change in valuation allowance 14 26 31
------------------------------------------------------------------------------------------------------------------------------------
(1) (4) 1
------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities at December 31, 2002 and 2001 are
summarized as follows:
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets relating to:
Fixed assets 763 410
Net operating loss carried forward 494 465
Other--investments 26 26
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset 1,283 901
Valuation allowance (1,283) (901)
Investments in affiliates (85) (113)
------------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY PER BALANCE SHEET (85) (113)
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002 the Group estimates that it has, subject to Inland Revenue
agreement, net operating losses ("NOLs") of L1,647 million available to relieve
against future profits. This excludes capital allowances on assets which are
available to the Group, but have not been claimed.
A valuation allowance of 100% has been provided due to a history of operating
losses and management's belief that the likelihood of realizing the benefit of
the deferred tax asset is not more likely than not.
The NOLs have an unlimited carry forward period under UK tax law, but are
limited to their use to the type of business which has generated the loss.
25
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
18 SHAREHOLDERS' EQUITY
MOVEMENT IN SHARE CAPITAL
On March 31, 2000 the authorized share capital of the Company was increased to
L460 million divided into 4,300 million ordinary shares of 10 pence each and 300
million limited voting convertible ordinary shares of 10 pence each.
Between May 5 and July 5, 2000 the Company issued 601 million ordinary shares of
10 pence each in consideration for the entire issued share capital of Flextech.
Also in 2000, 4 million ordinary shares of 10 pence each were issued in
consideration of L4.6 million on exercise of employee share options.
During 2001 the Company issued 7 million ordinary shares of 10 pence each upon
exercise of employee share options. Total consideration received was L6 million.
In addition the Company redesignated 20 million ordinary shares of 10 pence each
into 20 million limited voting convertible ordinary shares of 10 pence each.
LIMITED VOTING CONVERTIBLE ORDINARY SHARES
The ordinary shares and the limited voting convertible ordinary shares have the
same rights, except that the limited voting convertible ordinary shares do not
confer the right to vote on resolutions to appoint, reappoint, elect or remove
directors of Telewest. No application will be made for the limited voting
convertible ordinary shares to be listed or dealt in on any stock exchange.
Holders of limited voting convertible ordinary shares are entitled to convert
all or some of their limited voting convertible ordinary shares into fully paid
ordinary shares, provided that the conversion would not result in a change of
control of the Company for the purposes of the indentures governing certain
Notes and Debentures. The limited voting convertible ordinary shares are
convertible into ordinary shares at the Company's option at any time, subject to
certain conditions. The sole holders of the limited voting convertible ordinary
shares are Liberty Media and Microsoft.
Members of the Liberty Media Group and/or the Microsoft Group can redesignate
all or any of their ordinary shares into limited voting convertible ordinary
shares. This is to ensure that, on any future purchase of ordinary shares by
members of the Microsoft Group and/or members of the Liberty Media Group, they
will, at that time, be able to re-designate such number of their then existing
holding of ordinary shares so as to avoid a change of control of the Company for
the purposes of the Notes and Debentures.
Future purchases of ordinary shares and/or limited voting convertible ordinary
shares by members of the Liberty Media Group and/or the Microsoft Group will,
however, be subject to Rule 9 of the UK's City Code on Takeovers and Mergers
because both classes of shares are treated as voting shares for that purpose.
Under Rule 9, when any person acquires, whether by a series of transactions over
a period of time or not, shares which (taken together with shares held or
acquired by persons acting in concert with him) carry 30% or more (but less than
50%) of the voting rights of a public company, that person is normally required
to make a general offer to shareholders for the entire share capital of the
company then in issue. Any person, or group of persons acting in concert, owning
shares carrying 50% or more of the voting rights of a public company, subject to
their own individual limits, is free to acquire further shares in that public
company without giving rise to the requirement to make a general offer for the
entire issued share capital of that company.
In May 2001, Liberty Media increased its shareholding in the Company as a result
of the purchase of 20 million ordinary shares of 10 pence each. Prior to the
increase in shareholding, Liberty Media redesignated 20 million ordinary shares
of 10 pence each as limited voting convertible ordinary shares of 10 pence each.
As a result Liberty Media and Microsoft's combined shareholdings remained below
50% of the issued ordinary share capital, above which level a change of control
for the purposes of the Group's debt securities may occur.
19 SHARE-BASED COMPENSATION PLANS
At December 31, 2002, the Company operated five types of share-based
compensation plans: the Executive Share Option Schemes, the Sharesave Schemes,
the Telewest Restricted Share Scheme ("RSS"), the Telewest Long Term Incentive
Plan ("LTIP") and an Equity Participation Plan ("EPP").
The Company applies APB 25 and related interpretations in accounting for its
share-based compensation plans. Compensation cost is recognized over the
estimated service period in respect of performance based share option grants to
the extent that the market value of
26
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
the Company's ordinary shares exceeds the exercise price at the earlier of the
vesting date or the Balance Sheet date. Compensation cost is recognized for
awards over ordinary shares made under the RSS since the awards have no exercise
price. Compensation cost is recognized over the estimated service period in
respect of the LTIP to the extent that the market value of the Company's
ordinary shares exceeds the exercise price at the earlier of the vesting date or
the Balance Sheet date.
Compensation cost recognized for share option grants and awards is as follows:
2002 2001 2000
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
LTIP (1) -- 5
Executive Share Option Scheme -- 1 2
EPP -- 1 1
------------------------------------------------------------------------------------------------------------------------------------
(1) 2 8
------------------------------------------------------------------------------------------------------------------------------------
During the year, no options or awards were granted over any ordinary shares of
the Company. If compensation costs for share option grants and awards under the
RSS, LTIP, Executive Option Schemes and EPP had been determined based on their
fair value at the date of grant for 2001 and 2000 consistent with the method
prescribed by SFAS 123, the Group's net loss and basic and diluted loss per
share would have been adjusted to the pro forma amounts set out below:
2002
RESTATED 2001 2000
L MILLION L MILLION L MILLION
-----------------------------------------------------------------------------------------------------------------------------------
Net loss
as reported (2,789) (1,741) (755)
pro forma (2,766) (1,750) (757)
------------------------------------------------------------------------------------------------------------------------------------
PENCE PENCE PENCE
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share
as reported (97) (60) (28)
pro forma (96) (61) (28)
------------------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant in all plans was estimated as at the date of
grant using a Black-Scholes option-pricing model. The model used a
weighted-average, risk-free interest rate of 5.5% and 5.8% for grants in 2001
and 2000 respectively, and an expected volatility of 55% and 30%, respectively.
The Group does not expect to pay a dividend on its ordinary shares at any time
during the expected life of any outstanding option. The Group expects options to
be held until maturity.
PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS
The Group has two performance-based share option plans: the 1995 (No. 1)
Executive Share Option Scheme and the 1995 (No. 2) Executive Share Option
Scheme. Under both plans, certain officers and employees are granted options to
purchase ordinary shares of the Company. The exercise price of each option
generally equals the market price of the Company's ordinary shares on the date
of grant. The options are exercisable between three and ten years after the date
of the grant with exercise conditional on the Company's shares out-performing by
price the FTSE100 Index over any three-year period preceding exercise. The
Company may grant options for up to 295 million ordinary shares.
A summary of the status of the Company's performance-based share option plans as
of December 31, 2002, 2001, and 2000 and changes during the years ended on those
dates are presented below:
27
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 97,699,837 136.4p 52,503,409 173.2p 17,028,622 110.0p
Adjustments during the year -- -- -- -- 4,457,322 143.8p
Granted -- -- 53,709,994 98.8p 35,154,239 205.1p
Exercised -- -- (1,210,816) 78.2p (2,501,964) 114.9p
Forfeited (7,642,594) 126.0p (7,302,750) 134.3p (1,634,810) 208.8p
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 90,057,243 137.3p 97,699,837 136.4p 52,503,409 173.2p
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 36,358,298 141.4p 16,577,655 132.0p 14,938,772 129.8p
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted
during the year -- 69.7p 33.9p
------------------------------------------------------------------------------------------------------------------------------------
The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options.
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
The following table summarizes information about the Company's performance-based
share option plans outstanding at December 31, 2002.
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
---------------------------------------- --------------------------
NUMBER WEIGHTED
OUTSTANDING AVERAGE WEIGHTED NUMBER WEIGHTED
AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2002 LIFE PRICE 2002 PRICE
------------------------------------------------------------------------------------------------------------------------------------
65.7 - 76.8p 13,890,131 7.4 yrs 74.2p 6,307,995 73.3p
81.5 - 82.5p 2,025,479 8.6 yrs 81.7p 257,834 81.7p
84.6 - 99.9p 2,212,140 2.5 yrs 89.2p 2,212,140 89.0p
102.0 - 109.1p 33,133,132 8.2 yrs 103.8p 10,574,594 103.6p
114.0 - 125.9p 11,133,884 7.5 yrs 119.2p 3,890,521 120.1p
130.4 - 142.9p 982,642 4.2 yrs 139.1p 982,642 139.1p
160.0 - 170.0p 1,502,207 7.3 yrs 166.2p 709,386 167.7p
202.4 - 235.0p 23,883,741 7.5 yrs 229.4p 10,638,164 228.5p
237.3 - 249.4p 543,216 7.1 yrs 239.7p 268,467 240.9p
274.3 - 276.5p 361,832 6.4 yrs 276.4p 332,813 276.4p
289.0 - 294.8p 388,839 6.8 yrs 291.2p 183,742 291.7p
------------------------------------------------------------------------------------------------------------------------------------
65.7 - 294.8p 90,057,243 7.6 yrs 137.3p 36,358,298 141.4p
------------------------------------------------------------------------------------------------------------------------------------
28
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
FIXED SHARE OPTION COMPENSATION PLANS
The Company also operates the Sharesave Scheme, a fixed share option
compensation scheme. Under this plan, the Company grants options to employees to
purchase ordinary shares at up to a 20% discount to market price. These options
can be exercised only with funds saved by employees over time in a qualified
savings account. The options are exercisable between 37 and 66 months after
commencement of the savings contracts.
A summary of the status of the Company's fixed share option plan as of December
31, 2002, 2001, and 2000 and the changes during the years ended on those dates
are presented below:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 21,519,334 80.5p 26,635,135 91.1p 11,679,289 116.9p
Adjustments during the year -- -- -- -- 654,868 126.2p
Granted -- -- 9,205,135 60.3p 17,946,934 88.3p
Exercised -- -- (4,380,809) 57.3p (876,216) 98.1p
Forfeited (12,550,048) 82.3p (9,940,127) 100.4p (2,769,740) 187.6p
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 8,969,286 78.0p 21,519,334 80.5p 26,635,135 91.1p
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 36,272 159.1p 72,926 98.0p 4,443,443 57.1p
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted
during the year -- -- -- 33.3p -- 39.1p
------------------------------------------------------------------------------------------------------------------------------------
The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options.
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
The following table summarizes information about the Company's fixed share
options outstanding at December 31, 2002:
OPTIONS OUTSTANDING
---------------------------
NUMBER WEIGHTED
OUTSTANDING AVERAGE
AT REMAINING
DECEMBER 31, CONTRACTUAL
RANGE OF EXERCISE PRICES 2002 LIFE
------------------------------------------------------------------------------------------------------------------------------------
58.5 - 88.3p 8,652,129 2.1 yrs
103.9 - 115.9p 40,262 0.9 yrs
128.6 - 161.9p 24,455 0.5 yrs
191.0 - 236.5p 252,440 0.6 yrs
------------------------------------------------------------------------------------------------------------------------------------
58.5 - 236.5p 8,969,286 2.0 yrs
------------------------------------------------------------------------------------------------------------------------------------
TELEWEST RESTRICTED SHARE SCHEME ("RSS")
The Company operates the RSS in conjunction with an employment trust, the
Telewest 1994 Employees' Share Ownership Plan Trust (the "Telewest ESOP"), which
has been designed to provide incentives to executives of the Company. Under the
RSS, executives may be granted awards over ordinary shares of the Company based
on a percentage of salary. The awards are made for no monetary consideration.
The awards generally vest three years after the date of the award and are
exercisable for up to seven years after the date when they vest.
The compensation charge related to each award is based on the share price of the
ordinary shares on the date the award was made.
29
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
A summary of the status of the RSS at December 31, 2002, 2001, and 2000 and
changes during the years ended on those dates are presented below:
2002 2001 2000
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 530,855 358,316 576,333
Granted -- 248,595 --
Exercised (37,821) (76,056) (131,394)
Forfeited -- -- (86,623)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 493,034 530,855 358,316
------------------------------------------------------------------------------------------------------------------------------------
Awards exercisable at year end 214,114 38,338 86,989
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during the year -- L1.10 --
------------------------------------------------------------------------------------------------------------------------------------
Share awards are forfeited due to employees leaving the Group before their
awards become exercisable.
At December 31, 2002, the 493,034 awards outstanding and the 214,114 awards
exercisable have weighted average remaining contractual lives of 7.4 years and
6.3 years respectively.
Deferred compensation cost relating to RSS is L38,000 (2001: L478,000).
LONG TERM INCENTIVE PLAN ("LTIP")
The LTIP provides for share awards to executive directors and senior executives.
Under the LTIP, an executive will be awarded the provisional right to receive,
for no payment, a number of Telewest shares with a value equating to a
percentage of base salary. The shares will not vest unless certain performance
criteria, based on total shareholder return assessed over a three-year period
are met. The percentage of salary will be determined by the Remuneration
Committee and will be up to 100% of base salary for executive directors.
A summary of the status of the LTIP at December 31, 2002, 2001, and 2000 and
changes during the years ended on those dates are presented below:
2002 2001 2000
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,566,507 2,714,552 4,005,075
Granted -- 910,730 816,175
Exercised (29,502) (1,220,362) (1,152,826)
Forfeited (1,113,733) (838,413) (953,872)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 423,272 1,566,507 2,714,552
------------------------------------------------------------------------------------------------------------------------------------
Awards exercisable at year end 108,569 265,939 1,058,542
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during the year -- L1.09 L0.24
------------------------------------------------------------------------------------------------------------------------------------
30
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Share awards are forfeited due to employees leaving the Group before their share
options become exercisable or due to performance criteria not being met.
Deferred compensation cost relating to the LTIP is Lnil (2001: L189,000).
EQUITY PARTICIPATION PLAN ("EPP")
The Remuneration Committee has provided that, under the EPP, an employee with
two years service or at manager level or above, can use up to 100% of the Short
Term Incentive Plan ("STIP") bonus payable to the employee to acquire Telewest
shares ("bonus shares"). The employee must deposit the bonus shares with the
Trustee of the existing Telewest ESOP. In return, the employee is provisionally
allocated for no payment a matching number of Telewest shares. Provided the
bonus shares are retained for three years and the employee remains employed for
three years, the bonus and matching shares would thereafter be released to the
employee.
A summary of the status of the Company's EPP at December 31, 2002, 2001, and
2000 and the changes during the years ended on those dates are presented below:
2002 2001 2000
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 572,053 1,193,839 1,074,150
Granted -- -- 267,524
Exercised (256,790) (579,430) (130,576)
Forfeited (9,693) (42,356) (17,259)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 305,570 572,053 1,193,839
------------------------------------------------------------------------------------------------------------------------------------
Awards exercisable at year end 123,168 26,443 288,253
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during the year -- -- L2.49
------------------------------------------------------------------------------------------------------------------------------------
Share awards are forfeited due to employees leaving the Group before their share
options become exercisable.
Deferred compensation cost relating to the EPP is L80,000 (2001: L419,000).
20 ACCUMULATED OTHER COMPREHENSIVE INCOME
2002 2001
GAINS/(LOSSES) GAINS/(LOSSES)
ON MARK TO ON MARK TO
MARKET OF MARKET OF
CASH FLOW CASH FLOW
HEDGES HEDGES
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1 37 --
Cumulative effect of accounting change -- (16)
Amounts reclassified into earnings (48) (5)
Current period increase in fair value -- 57
Unrealised gain on deemed partial disposal of investment -- 1
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 (11) 37
------------------------------------------------------------------------------------------------------------------------------------
31
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
The amounts reclassified into earnings are detailed in note 5.
21 COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
At December 31, 2002, the Group has cash restricted as to use of L12 million
which provides security for leasing obligations.
OTHER COMMITMENTS
The amount of capital expenditure authorized by the Group for which no provision
has been made in the consolidated financial statements is as follows:
2002 2001
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Contracted 13 28
------------------------------------------------------------------------------------------------------------------------------------
In addition the Group has contracted to buy L28 million of programming rights
for which the license period has not yet started.
CAPITAL AND OPERATING LEASES
The Group leases a number of assets under arrangements accounted for as capital
leases, as follows:
ACQUISITION ACCUMULATED NET BOOK
COSTS DEPRECIATION VALUE
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002:
Electronic equipment 283 (185) 98
Other equipment 118 (58) 60
At December 31, 2001:
Electronic equipment 290 (187) 103
Other equipment 109 (43) 66
------------------------------------------------------------------------------------------------------------------------------------
Depreciation charged on these assets was L44 million and L45 million for the
years ended December 31, 2002 and 2001 respectively.
The Group leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expense under
such arrangements amounted to L21 million, L19 million and L17 million for the
years ended December 31, 2002, 2001 and 2000, respectively and is included in
depreciation expense detailed in note 11.
Future minimum lease payments under capital and operating leases are summarized
as follows as of December 31, 2002:
CAPITAL OPERATING
LEASES LEASES
L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
2003 89 25
2004 46 18
2005 38 14
2006 29 13
2007 19 12
2008 and thereafter 13 91
------------------------------------------------------------------------------------------------------------------------------------
234
Imputed interest (30)
------------------------------------------------------------------------------------------------------------------------------------
204
------------------------------------------------------------------------------------------------------------------------------------
32
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
It is expected that, in the normal course of business, expiring leases will be
renewed or replaced.
The Group leases capacity on its network to other telecommunications companies.
These leases are accounted for as operating leases and revenues received are
recognized over the life of the leases as follows:
L MILLION
------------------------------------------------------------------------------------------------------------------------------------
2003 5
2004 5
2005 3
2006 1
2007 1
2008 and thereafter 5
------------------------------------------------------------------------------------------------------------------------------------
The assets held under these leases are accounted for as follows:
ACQUISITION ACCUMULATED NET
COSTS DEPRECIATION BOOK VALUE
L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002
Cable and ducting 45 (5) 40
At December 31, 2001
Cable and ducting 45 (3) 42
------------------------------------------------------------------------------------------------------------------------------------
Depreciation charged on these assets was L2 million and L2 million for the years
ended December 31, 2002 and 2001 respectively.
CONTINGENT LIABILITIES
The Group has provided performance bonds in respect of its national license and
to local authorities up to a maximum amount of L6 million (2001: L7 million).
The Group is a party to various other 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.
22 RELATED-PARTY TRANSACTIONS
IDENTITY OF RELEVANT RELATED PARTIES
Liberty Media, Inc ("Liberty") and Microsoft are related parties of the Group,
in that they control or controlled, directly or indirectly, more than 20% of the
voting rights of the Company in 2002, 2001 and 2000.
33
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Flextech up to its acquisition on April 19, 2000 was a related party of the
Group as Liberty owned more than 20% of the voting rights of Flextech.
UKTV is a related party of the Group, as the Group owns 50% of the voting
rights.
TV Travel Group Limited ("TVT") was a related party of the Group, as the Group
owned 37.95% of the voting rights before disposal in 2002.
In 2001 Sit-Up Limited ("Sit-Up ") became a related party when the Group sold
its shareholding in Screenshop to Sit-Up in return for a 36.36% shareholding.
NATURE OF TRANSACTIONS
The Group had a L10 million loan facility with Liberty. Interest charged on this
loan was Lnil in 2001 and L1 million in 2000. The balance due to Liberty at
December 31, 2000 was L17 million including accrued interest and was repaid in
2001.
The Group purchases software and consultancy services from Microsoft, on normal
commercial terms. Purchases in the year ended December 31, 2002 amounted to L1
million (2001: L2 million, 2000: L2 million). The balance outstanding in respect
of these purchases was Lnil at December 31, 2002, 2001 and 2000.
The Group has billed overheads and costs incurred on their behalf to UKTV, TVT
and Sit-Up of L11 million, L1 million and L1 million (2001: L8 million, L3
million and L1 million, 2000: L7 million, L10 million and Lnil) respectively.
The Group has also made a loan to UKTV. Interest charged on this loan was L12
million (2001: L12 million, 2000: L15 million). Amounts due from UKTV, TVT and
Sit-Up at December 31, 2002 were L208 million, L1 million and L4 million
respectively (2001: L218 million, L28 million and Lnil and 2000: L229 million,
L31 million and Lnil respectively).
In the normal course of its business the Group purchases programming from UKTV
on normal commercial terms. Purchases in the year ended December 31, 2002 were
L13 million (2001: L9 million, 2000: L7 million). The balance due to UKTV at
December 31, 2002 was Lnil (2001: L2 million, 2000: Lnil).
23 SUBSEQUENT EVENTS AND FINANCIAL RESTRUCTURING
The Group is renegotiating its bank facilities and debt financing arrangements.
Further details of the proposed Financial Restructuring are as follows:
On September 30, 2002, we announced that we had reached a preliminary agreement
relating to a financial restructuring (the "Financial Restructuring") with an ad
hoc committee of our bondholders ("the Bondholder Committee"). That agreement
provides for the cancellation of all outstanding notes and debentures (the
"Notes"), representing approximately L3.4 billion of indebtedness, issued by the
Company and Telewest Finance (Jersey) Limited and certain other unsecured
foreign exchange hedge contracts (the "Hedge Contracts") of the Company in
exchange for New Ordinary Shares ("New Shares") representing 97% of the issued
share capital of the Company immediately after the Financial Restructuring. The
Company's current ordinary shareholders will receive the remaining 3% of the
Company's issued ordinary share capital.
We also announced on September 30, 2002 that we were deferring payment of
interest under certain of our Notes and the settlement of the Hedge Contracts.
Such non-payment continues and has resulted in defaults under the Group's bank
facilities and its bonds. Based on one such default, in respect of non-payment
of approximately L10.5 million to a Hedge Contract counter-party, that
counter-party has filed a petition for the winding-up of the Company with a UK
court. The Company intends to deal with this claim as part of the overall
restructuring of its unsecured debt obligations and does not believe that the
legal action will delay or significantly impede the Financial Restructuring
process. The Company will of course continue to meet its obligations to its
suppliers and trade creditors and this legal action is expected to have no
impact on customer service.
On January 15, 2003, we announced that we had reached a non-binding agreement
with respect to the terms of amended and restated credit facilities with both
the steering committee of our senior lenders and the Bondholder Committee. In
addition, the terms of these facilities have received credit committee approval,
subject to documentation and certain other issues, from all of our senior
lenders,
34
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
save for those banks which are also creditors by virtue of the unsecured Hedge
Contracts with which we will deal in the overall Financial Restructuring.
The terms of the amended and restated bank facilities are as follows:
o the amended facilities total L2,155 million, comprising term loans of
L1,840 million, L190 million of committed overdraft and revolving credit
facilities and an uncommitted term facility of L125 million;
o the amended facilities do not amortise; and the majority of the
facilities will mature on December 31, 2005 with the balance maturing on
June 30, 2006;
o financial covenants will be re-set to reflect the Company's new business
plan; and
o the pricing on the facilities will be increased to reflect market
sentiment.
These amended facilities will replace the Group's existing bank facilities (the
"Senior Secured Facility") and are, as noted above, conditional on various
matters, including the satisfactory finalisation of arrangements for dealing
with foreign exchange creditors and the completion of our balance sheet
restructuring. These amended credit facilities will provide the Company with
substantial liquidity, which is expected to be sufficient to see the Company
through to cash flow positive after completion of the Financial Restructuring.
Negotiations are continuing with the Bondholder Committee, the Company's senior
lenders and certain other major stakeholders with a view to the timely
completion of the Financial Restructuring.
These financial statements have been prepared on a going concern basis and do
not include any adjustments that would arise as a result of the going concern
basis of preparation being inappropriate. The board of directors have confidence
in the successful conclusion of a restructuring of the Company's balance sheet
(and any required amendments to the Senior Secured Facility) and, together with
and on the basis of cash flow information that they have prepared, the directors
consider that the Group will continue to operate as a going concern for a period
of at least 12 months from the date of issue of these financial statements. Any
restructuring will require the approval of our bankers and various stakeholders.
Inherently, there can be no certainty in relation to any of these matters.
35
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
24 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2002
-------------------------------------------------------
FOURTH
TOTAL QUARTER* THIRD SECOND FIRST
RESTATED RESTATED QUARTER QUARTER QUARTER
L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Revenue 1,283 307 323 334 319
Gross profit (after L841 million fixed asset impairment charge in the
fourth quarter) (469) (764) 97 100 98
Operating loss (2,440) (2,349) (31) (29) (31)
Finance expenses, net (296) (65) (70) (61) (100)
Net loss (2,789) (2,471) (134) (59) (125)
Basic and diluted loss per ordinary share (97p) (86p) (5p) (2p) (4p)
------------------------------------------------------------------------------------------------------------------------------------
* In the fourth quarter the Group recorded a goodwill impairment charge of
L1,445 million, wrote down the value of its investments in affiliates by
L130 million and recorded a fixed asset impairment charge of L841 million.
2001
-------------------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER* QUARTER QUARTER QUARTER
L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
Revenue 1,254 329 312 315 298
Gross profit 325 91 85 83 66
Operating loss (1,121) (844) (83) (87) (107)
Finance expenses, net (472) (131) (104) (95) (142)
Net loss (1,741) (1,122) (192) (185) (242)
Basic and diluted loss per ordinary share (60p) (38p) (7p) (6p) (9p)
------------------------------------------------------------------------------------------------------------------------------------
* In the fourth quarter the Group recorded a goodwill impairment charge of
L766 million and wrote down the value of its investments in affiliates by
L202 million.
Finance expenses include foreign exchange gains and losses on the retranslation
or valuation of US Dollar-denominated financial instruments using period end
exchange rates and market valuations.
25 SEGMENTAL INFORMATION
The Group applies SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 establishes standards for reporting information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are defined as a component of an enterprise that (a)
engages in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance, and (c) for which discrete financial
information is available. The Group's chief operating decision-maker is its
Acting Chief Executive Officer. The Group operates two operating segments; Cable
and Content. The chief operating decision-maker receives disaggregated financial
and subscriber data for the Cable segment, covering; telephony, television and
internet product lines, while support, service and network costs are compiled at
the operating segment level. The internet product lines comprise internet sales
and until November 2002, when the sales ceased, sales of cable publications. The
Content operating segment supplies TV
36
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
programming to the UK pay-TV broadcasting market and its operating results,
which are naturally separate from the Cable operating segment, are regularly
reviewed by the chief operating decision-maker.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. In 2001, the Group
changed the structure of its segmental analysis, and certain corresponding
information from the previous years has been restated to reflect the change in
structure.
The following tables present summarized financial information relating to the
reportable segments for each of the three years ended December 31, 2002:
NOTE 2
2002 2002
RESTATED RESTATED 2001 2000
$ MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
CABLE SEGMENT
Cable television 541 336 329 279
Consumer telephony 797 495 488 445
Internet and other 101 63 40 16
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER SALES DIVISION 1,439 894 857 740
Business Sales Division 455 283 268 248
------------------------------------------------------------------------------------------------------------------------------------
THIRD PARTY REVENUE 1,894 1,177 1,125 988
Operating costs and expenses (1,333) (828) (822) (757)
Depreciation3 (2,134) (1,326) (453) (392)
Amortization of goodwill2 (1,635) (1,016) (82) (86)
------------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (3,208) (1,993) (232) (247)
------------------------------------------------------------------------------------------------------------------------------------
Share of net loss of affiliates -- -- (5) (6)
Additions to property and equipment 737 458 649 587
Investment in affiliates 5 3 2 3
Goodwill 492 306 1,322 1,394
Total assets 5,833 3,624 5,093 5,146
------------------------------------------------------------------------------------------------------------------------------------
37
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2
2002 2002
RESTATED RESTATED 2001 2000
$ MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
CONTENT SEGMENT
------------------------------------------------------------------------------------------------------------------------------------
Content Segment 195 121 143 88
Inter-segmental1 (24) (15) (14) (7)
------------------------------------------------------------------------------------------------------------------------------------
THIRD PARTY REVENUE 171 106 129 81
Operating costs and expenses (183) (114) (135) (101)
Depreciation3 (16) (10) (16) (31)
Amortization of goodwill2 (691) (429) (867) (61)
------------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (719) (447) (889) (112)
------------------------------------------------------------------------------------------------------------------------------------
Share of net loss of affiliates and impairment (190) (118) (211) (9)
Additions to property and equipment 5 3 4 8
Investment in affiliates 600 373 545 781
Goodwill 227 141 570 1,409
Total assets 758 471 1,239 2,178
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
TOTAL
------------------------------------------------------------------------------------------------------------------------------------
Cable television 541 336 329 279
Consumer telephony 797 495 488 445
Internet and other 101 63 40 16
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER SALES DIVISION 1,439 894 857 740
Business Sales Division 455 283 268 248
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CABLE SEGMENT 1,894 1,177 1,125 988
Content Segment 195 121 143 88
Inter-segmental1 (24) (15) (14) (7)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 2,065 1,283 1,254 1,069
Operating costs and expenses (1,516) (942) (957) (858)
Depreciation3 (2,150) (1,336) (469) (423)
Amortization of goodwill2 (2,326) (1,445) (949) (147)
------------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (3,927) (2,440) (1,121) (359)
Other expense2 (607) (377) (690) (402)
Income tax benefit 45 28 70 6
------------------------------------------------------------------------------------------------------------------------------------
NET LOSS (4,489) (2,789) (1,741) (755)
------------------------------------------------------------------------------------------------------------------------------------
Share of net loss of affiliates and impairment (190) (118) (216) (15)
Additions to property and equipment 742 461 653 595
Investment in affiliates 605 376 547 784
Goodwill 719 447 1,892 2,803
Total assets 6,591 4,095 6,332 7,324
------------------------------------------------------------------------------------------------------------------------------------
1 Inter-segmental revenues are revenues from sales in our Content Segment
which are costs in our Cable Segment and are eliminated on consolidation.
2 In the fourth quarter of 2002, the Group recorded a goodwill impairment
charge of L1,445 million and wrote down the value of its investments in
affiliates by L130 million. In the fourth quarter of 2001, the Group
recorded a goodwill impairment charge of L766 million and wrote down the
value of its investments in affiliates by L202 million.
3 In the fourth quarter of 2002 the Group recorded a fixed asset impairment
charge of L841 million.
38
TELEWEST COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
26 EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM'S REPORT
On July 13, 2004, the Company, Telewest Global, Inc. and Telewest UK Limited
entered into a transfer agreement (the "Transfer Agreement"). The Transfer
Agreement provides for the transfer of substantially all of the assets of the
Company (including the shares in Telewest Communications Networks Limited and
its other operating companies, but excluding the shares in Telewest Finance
(Jersey) Limited and one share of Telewest Global, Inc's. common stock) to
Telewest UK Limited. The asset transfer contemplated by the Transfer Agreement
was completed on July 14, 2004. On July 15, 2004, the Company's financial
restructuring became effective. As a result, all outstanding notes and
debentures of the Company and Telewest Finance (Jersey) Limited have been
cancelled. A total of 241,325,000 shares, or 98.5%, of Telewest Global, Inc's.
common stock were distributed by an escrow agent to the holders of the Company's
and Telewest Finance (Jersey) Limited's notes and debentures and certain other
scheme creditors. The remaining 3,675,000 shares, or 1.5%, of Telewest Global,
Inc's. common stock were distributed to the Company's existing shareholders. As
part of the financial restructuring, Telewest Communications Networks Limited, a
subsidiary of the Company until its transfer to Telewest Global, Inc. on July
14, 2004, also completed the amendment of its senior secured credit facility.
The amended facility provides for fully committed facilities of L2,030 million.
39
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23 Consent of KPMG Audit plc