EXHIBIT 99.1
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Telewest Communications plc
US GAAP
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AUDITOR'S REPORT
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 as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity 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 United States of America. 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 35 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 is undergoing financial restructuring and this raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to the restructuring 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 Group
adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other
Intangible Assets, in 2002.
As discussed in note 3 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
26 March 2003
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Telewest Communications plc
US GAAP
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CONSOLIDATED STATEMENTS OF OPERATIONS
years ended December 31
(NOTE 2)
2002 2002 2001 2000
Notes $ MILLION(POUND) MILLION (pound) million(pound) million
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REVENUE
Cable television 541 336 329 279
Consumer telephony 797 495 488 445
Internet and other 101 63 40 16
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TOTAL CONSUMER DIVISION 1,439 894 857 740
Business Services Division 455 283 268 248
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TOTAL CABLE DIVISION 1,894 1,177 1,125 988
Content Division 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
Consumer programming expenses (206) (128) (142) (132)
Business and consumer telephony expenses (351) (218) (235) (235)
Content 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 (pound)12 million, (pound)15 million
and (pound)15 million in 2002, 2001 and 2000, respectively,
from related parties) 21 30 19 15 15
Interest expense (including amortization of debt discount) (829) (515) (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 (4,513) (2,804) (1,811) (761)
Income tax benefit 16 45 28 70 6
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NET LOSS (4,468) (2,776) (1,741) (755)
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Basic and diluted loss per ordinary share $(1.56) (POUND)(0.97) (pound)(0.60) (pound)(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.
1
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Telewest Communications plc
US GAAP
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CONSOLIDATED BALANCE SHEET
years ended December 31
(NOTE 2)
2002 2002 2001
Notes $ MILLION(POUND) MILLION (pound) million
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ASSETS
Cash and cash equivalents 628 390 14
Secured cash deposits restricted for more than one year 20 19 12 20
Trade receivables (net of allowance for doubtful accounts
of(pound)12 million and(pound)16 million) 11 193 120 116
Other receivables 8 110 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 9 605 376 547
Property and equipment (less accumulated depreciation of
(pound)3,196 million and(pound)1,873 million) 10 4,182 2,598 3,473
Goodwill (less accumulated amortization of(pound)2,593 million
and(pound)1,148 million) 5 719 447 1,892
Inventory 13 45 28 67
Other assets (less accumulated amortization of(pound)58 million
and(pound)47million) 12 65 40 58
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TOTAL ASSETS 6,609 4,106 6,332
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LIABILITIES AND SHAREHOLDERS' FUNDS
Accounts payable 177 110 109
Other liabilities 14 1,016 631 524
Debt repayable within one year 15 5,878 3,652 -
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Total current liabilities 7,071 4,393 633
Deferred tax 16 137 85 113
Debt 15 2,894 1,798 4,897
Capital lease obligations 328 204 238
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TOTAL LIABILITIES 10,430 6,480 5,881
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MINORITY INTERESTS (2) (1) -
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SHAREHOLDERS' (DEFICIT)/EQUITY
Ordinary shares, 10 xxxxx 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 xxxxx 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 (11,073) (6,880) (4,104)
Accumulated other comprehensive income 19 (18) (11) 37
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(3,819) (2,373) 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 (3,819) (2,373) 451
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 6,609 4,106 6,332
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See accompanying notes to the consolidated financial statements.
2
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Telewest Communications plc
US GAAP
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CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31
(NOTE 2)
2002 2002 2001 2000
$ MILLION (POUND) MILLION(pound) million (pound) million
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,468) (2,776) (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 -
Impairment of goodwill 2,326 1,445 766 147
Amortization of deferred financing costs and issue discount on
Senior Discount Debentures 166 103 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 157 98 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)
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3
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Telewest Communications plc
US GAAP
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CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31
(NOTE 2)
2002 2002 2001 2000
$ MILLION(POUND)MILLION(pound)million(pound)million
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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
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Telewest Communications plc
US GAAP
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT) AND COMPREHENSIVE LOSS
Ordinary Limited Shares Additional Other Accumulated Total
shares voting held in paid-in Comprehensive deficit
shares trust capital loss
(pound) (pound) (pound) (pound) (pound) (pound) (pound)
million million million million million million million
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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)
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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 - - - - - (2,776) (2,776)
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TOTAL COMPREHENSIVE LOSS (2,824)
Accrued share based compensation
(credit)/cost - - 1 (1) - - -
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BALANCE AT DECEMBER 31, 2002 287 8 - 4,223 (11) (6,880) (2,373)
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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
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 5);
and accounting for debt and financial instruments (see note 4). 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 a majority 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 (`the Scheme Creditors') and bank facility
creditors (`Senior Lenders') to effect a reorganization of the Group's debt.
This will involve, inter alia, 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 25.
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 accounts 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 their 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 15); and
o the need to meet financial and other covenants relating to debt
instruments which have already been issued.
The economic environment and currency in which the Group operates is the UK and
hence its reporting currency is
Pounds Sterling ((pound)). 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 =(pound)1.00, 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.
6
3 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 (pound)2,199 million of unamortized goodwill, (pound)1,892
million of which related to business combinations and (pound)307 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. The
adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial
position or results of operations. As required by SFAS 142, the standard has not
been retroactively applied to the results for the period prior to adoption.
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
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 xxxxxx, changes in fair value are
recorded immediately in earnings.
For derivatives designated as cash flow xxxxxx, 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 xxxxxx, changes
in fair value are recorded in earnings. The Group has not, however, had any fair
value xxxxxx since the adoption of SFAS 133.
7
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES AND HEDGING (CONTINUED)
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The amount of advertising costs
expensed was (pound)52 million, (pound)48 million, and (pound)38 million for the
years ended December 31, 2002, 2001, and 2000, respectively.
8
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
9
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 (pound)11 million,
(pound)10 million and (pound)8 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.
10
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Group does not 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 (pound)15 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 has
not yet determined the impact, if any, the adoption of this standard will have
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 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 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 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.
11
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP (CONTINUED)
OTHER NEW STANDARDS (CONTINUED)
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.
The Group does not believe that the impact the adoption of FIN 46 will have a
material effect on its financial statements.
4 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 XXXXXX
XXXXXX 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.
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 complete 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 (pound)53 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 ((pound)688 million), netting (pound)74 million cash
inflow. In May 2002 the Group terminated further derivative contracts with a
nominal value of $367 million ((pound)253 million) realizing an additional
(pound)30 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 (pound)1.5 billion). Contracts with a nominal value of $1 billion
were settled in cash resulting in an outflow of (pound)28 million. The remaining
contracts with a nominal value of $1.3 billion have yet to be settled for a
total cost of (pound)33 million of which (pound)19 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 twelve-month period ended December 31, 2002, the Group recorded a net
(pound)48 million transfer from cumulative OCI to the Statement of Operations
arising from the dedesignation of derivative contracts as ineffective xxxxxx, as
described above. In the 12-month period ended December 30, 2001, the Group
recorded a (pound)36 million gain in fair value to cumulative OCI, consisting of
a loss of (pound)25 million to short-term derivative liabilities and a (pound)61
million gain to long-term derivative assets.
12
4 FINANCIAL INSTRUMENTS (CONTINUED)
XXXXXX OF VARIABLE RATE DEBT
As described in note 15 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"). Draw downs 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 xxxxxx these
variable cash flows by the use of interest rate swaps. The interest rate swaps
can be summarised as follows:
------------------------- ------------------------- ------------------- ------------------ ---------------------
EFFECTIVE DATES MATURITIES NOTIONAL PRINCIPAL RECEIVES PAYS
1/2/1997 - 7/1/2002 12/31/2003 - 3/31/2005 (pound)900m 6-month LIBOR 5.475% - 7.3550%
------------------------- ------------------------- ------------------- ------------------ ---------------------
In June 2002, the Group reviewed the effectiveness as xxxxxx 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 xxxxxx was no longer appropriate and hedge accounting was
discontinued with immediate effect. The dedesignation of these instruments as
xxxxxx resulted in a transfer of (pound)7 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.
13
4 FINANCIAL INSTRUMENTS (CONTINUED)
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
2002 31, 2001
CARRYING AMOUNT FAIR VALUE Carrying amount Fair value
(POUND) MILLION (POUND) MILLION (pound) million (pound) 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 282 282 268 268
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.
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
(pound)160 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.
14
5 IMPAIRMENT OF ASSETS
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 Divisions. 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 business and in the value of the affiliated undertaking
UKTV. The carrying amount of goodwill, fixed assets and the investments in the
affiliated undertakings were written down to fair value, resulting in a charge
of (pound)1,445 million against goodwill, an impairment of (pound)841 million
against fixed assets and a charge of (pound)88 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.
6 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 (pound)4 million. The acquisition
has been accounted for using the purchase method of accounting. Goodwill arising
on the acquisition was (pound)7 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 (pound)1,978 million. This comprised 601 million shares
of 10p each and acquisition costs of (pound)31 million. The value attributed to
the shares issued was 323.85p per share, being the average share market price
for a five day period around December 17, 2000, the day the terms of the
acquisitions were agreed to and announced. The acquisition was accounted for
using the purchase method of accounting. The goodwill arising on acquisition of
Flextech was (pound)1,382 million. As described in note 5, the Group has
undertaken an impairment review of goodwill. As a result of the review, a charge
of (pound)413 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 (pound)254
million. The terms of the Accreting Convertible Notes are described in note 15
to these financial statements.
Upon completion of the acquisition, the Company issued a (pound)220 million
Accreting Convertible Note to DT in consideration for:
o Eurobell's entire issued share capital, (pound)72 million
o the assignment of an inter-company loan previously owed by Eurobell to
DT, (pound)128 million, and
o a cash payment remitted to Eurobell by DT shortly after the
acquisition, (pound)20 million.
Subsequently, on January 15, 2001 DT remitted a further cash payment, (pound)30
million, to Eurobell and the Company issued an additional Accreting Convertible
Note to DT for (pound)30 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
(pound)3.5 million Accreting Convertible Note, dated April 2, 2001 was issued to
DT. This deferred consideration was accrued for at December 31, 2000.
Goodwill of (pound)1 million arose on the acquisition.
If the Company had acquired Flextech and Eurobell on January 1, 2000 the Group's
net loss of (pound)755 million and loss per share of (pound)0.28 would have been
(pound)820 million and (pound)0.28, respectively.
15
7 SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was (pound)287 million, (pound)335 million and (pound)164
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 6 to the consolidated financial statements.
Year ended December 31
2002 2001 2000
(POUND) MILLION (pound) million (pound) 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 (pound)17 million. The Group entered into no vendor financing
arrangements during the year, but had a remaining financed balance of (pound)11
million at December 31, 2002. At December 31, 2002, the Group had accrued a
further (pound)57 million of capital expenditure for property and equipment.
8 OTHER RECEIVABLES At December 31
2002 2001
(POUND) MILLION (pound) million
----------------------------------------------------------------------------
Interconnection receivables 7 2
Accrued income 32 68
Other 29 27
Foreign currency swap - 15
----------------------------------------------------------------------------
68 112
----------------------------------------------------------------------------
Accrued income primarily represents telephone calls made by Cable Division
subscribers and income accrued under Business Services Division contracts that
have not been billed as at the accounting period end.
16
9 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 - 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
(POUND) MILLION (pound) 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
(POUND) MILLION (pound) million (pound) 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
-----------------------------------------------------------------------------------------------------------------------------------
At December 31
2002 2001
(POUND) MILLION (pound) 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
realisable value. This resulted in (pound)42 million being written off the
carrying value of the investment. The investment in SMG plc was subsequently
sold in November 2002 realising a gain of (pound)1 million.
17
10 PROPERTY AND EQUIPMENT
Land Buildings Cable and ducting Electronic Other equipment Total
(pound) (pound) (pound) equipment (pound) (pound)
million million million (poiund)million million 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
----------------------------------------------------------------------------------------------------------------------------------
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 (pound)18 million and (pound)14 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.
11 VALUATION AND QUALIFYING ACCOUNTS
Additions
charged to
Balance at Acquisition of costs and Balance at
January 1 subsidiaries expenses Deductions December 31
(pound) million (pound) million (pound) million (pound) million (pound) 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
-----------------------------------------------------------------------------------------------------------------------------------
18
12 OTHER ASSETS
The components of other assets, net of amortization, are as follows: At December 31
2002 2001
(POUND) MILLION (pound) million
----------------------------------------------------------------------------------------------------------------------
Deferred financing costs of debentures 11 22
Deferred financing costs of Senior Secured Facility 29 36
----------------------------------------------------------------------------------------------------------------------
40 58
----------------------------------------------------------------------------------------------------------------------
13 INVENTORY
At December 31
2002 2001
(POUND) MILLION (pound) million
----------------------------------------------------------------------------------------------------------------------
Raw materials and consumables - 1
Inventories of spare capacity and duct held for resale 4 36
Programming inventory 24 30
----------------------------------------------------------------------------------------------------------------------
28 67
----------------------------------------------------------------------------------------------------------------------
14 OTHER LIABILITIES
Other liabilities are summarized as follows: At December 31
2002 2001
(POUND) MILLION (pound) million
----------------------------------------------------------------------------------------------------------------------
Deferred income 111 114
Accrued construction costs 64 67
Accrued programming costs 21 24
Accrued interconnect costs 17 39
Accrued interest 220 111
Accrued staff costs 10 35
Accrued expenses 42 41
Other liabilities 146 93
----------------------------------------------------------------------------------------------------------------------
631 524
----------------------------------------------------------------------------------------------------------------------
19
15 DEBT
Debt is summarized as follows at December 31, 2002 and 2001:
Weighted average
interest rate 2002 2001
2002 2001 2000 (POUND) MILLION (pound) 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 9.25% 9.25% 9.25% 287 261
Senior Discount Notes 2009 9.875% 9.875% 9.875% 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
------------------------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES
---------------------------------- ------- --------------- ------------------------- ------------------------ ---------------
Principal Original maturity date Earliest redemption Interest rate
m date
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, 2001 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, 2001 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 xxxxx 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 xxxxx 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 xxxxx 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 (pound)30 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 (pound)3.5 million
Accreting Convertible Notes 2003, dated April 2, 2001, were issued to DT.
The unamortized portion of the discounts on issue on the Senior Discount Notes
2009 and Senior Discount Notes 2010 was (pound)73 million and (pound)58 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.
20
15 DEBT (CONTINUED)
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 default event under the terms of these four bonds.
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 (pound)2 billion,
of which (pound)1,855 million was drawn down at December 31, 2002. The Group is
also able to raise a further (pound)250m as part of the institutional investors
of which (pound)145 million was drawn down at December 31, 2002. The first draw
downs 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 on certain of its
Debentures and Notes, it is in default on the Senior Secured Facility.
The Group is renegotiating its bank facilities and debt financing arrangements.
Further details of the Financial Restructuring are included in note 25.
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 (pound)11 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 (pound)7 million.
MATURITY PROFILE
The Maturity Profile of the Group's long-term debt is as follows:
2002
(POUND) MILLION
--------------------------------------------------------------------
2003 3,652
2004 1
2005 316
2006 -
2007 300
2008 and thereafter 1,181
--------------------------------------------------------------------
5,450
--------------------------------------------------------------------
16 INCOME TAXES
Loss before income taxes is solely attributable to the UK.
The provisions for income taxes follow: 2002 2001 2000
(POUND) MILLION (pound) million (pound) million
--------------------------------------------------------------------------------------------------------------------------
Deferred tax benefit 28 70 6
--------------------------------------------------------------------------------------------------------------------------
21
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 12 - -
Change in valuation allowance 14 34 31
--------------------------------------------------------------------------------------------------------------------------
(4) 4 1
--------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities at December 31,
2002 and 2001 are
summarized as follows:
2002 2001
(POUND) MILLION (pound) 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 (pound)1,647 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.
22
17 SHAREHOLDERS' EQUITY
MOVEMENT IN SHARE CAPITAL
On March 31, 2000 the authorized share capital of the Company was increased to
(pound)460 million divided into 4,300 million ordinary shareS of 10 xxxxx each
and 300 million limited voting convertible ordinary shares of 10p each.
Between May 5 and July 5, 2000 the Company issued 601 million ordinary shares of
10 xxxxx each in consideration for the entire issued share capital of Flextech.
Also in 2000, 4 million ordinary shares of 10 xxxxx each were issued in
consideration of (pound)4.6 million on exercise of employee share options.
During 2001 the Company issued 7 million ordinary shares of 10 xxxxx each upon
exercise of employee share options. Total consideration received was (pound)6
million. In addition the Company redesignated 20 million ordinary shares of 10p
each into 20 million limited voting convertible ordinary shares of 10 xxxxx
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 Take overs 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 result
of the purchase of 20 million ordinary shares of 10 xxxxx each. Prior to the
increase in shareholding, Liberty Media redesignated 20 million ordinary shares
of 10 xxxxx each as limited voting convertible ordinary shares of 10 xxxxx 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.
23
18 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 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
(POUND) MILLION (pound) million(pound) 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 2001 2000
(POUND) MILLION (pound) million(pound) million
------------------------------------------------------------------------------------------------------
Net loss
as reported (2,776) (1,741) (755)
pro forma (2,753) (1,750) (757)
------------------------------------------------------------------------------------------------------
XXXXX Xxxxx Xxxxx
------------------------------------------------------------------------------------------------------
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.
24
18 SHARE-BASED COMPENSATION PLANS (CONTINUED)
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:
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
----------------------------------------------------------------------------------------------------------------------------------
25
18 SHARE-BASED COMPENSATION PLANS (CONTINUED)
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
--------------------------------
Weighted
Number average
outstanding 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
----------------------------------------------------------------------------------------------------------------------------------
26
18 SHARE-BASED COMPENSATION PLANS (CONTINUED)
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.
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 - (pound)1.10 -
----------------------------------------------------------------------------------------------------------------------------------
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(pound)38,000
(2001:(pound)478,000.)
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 - (pound)1.09 (pound)0.24
----------------------------------------------------------------------------------------------------------------------------------
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(pound)nil
(2001:(pound)189,000.)
27
18 SHARE-BASED COMPENSATION PLANS (CONTINUED)
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 - - (pound)2.49
----------------------------------------------------------------------------------------------------------------------------------
Share awards are forfeited due to employees leaving the Group before their share
options become exercisable.
Deferred compensation cost relating to the EPP is(pound)80,000
(2001:(pound)419,000.)
19 ACCUMULATED OTHER COMPREHENSIVE INCOME
2002 2001
GAINS/(LOSSES) ON Gains/(losses) on
MARK TO MARKET OF mark to market of
CASHFLOW XXXXXX cashflow xxxxxx
(POUND) MILLION (pound) million
--------------------------------------------------------------------------- ---------------------- --------------------
Balance at January 1, 2002 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, 2002 (11) 37
--------------------------------------------------------------------------- ---------------------- --------------------
The amounts reclassified into earnings are detailed in note 4.
28
20 COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
At December 31, 2002, the Group has cash restricted as to use of (pound)12
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
(POUND) MILLION (pound) million
------------------------------ --------------------------- ---------------
Contracted 13 28
------------------------------ --------------------------- ---------------
In addition the Group has contracted to buy (pound)28 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
(pound) million(pound) million (pound) 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 (pound)44 million and (pound)45 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 (pound)21 million, (pound)19 million and (pound)17
million for the years ended December 31, 2002, 2001 and 2000, respectively and
is included in depreciation expense detailed in note 10.
29
20 COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL AND OPERATING LEASES (CONTINUED)
Future minimum lease payments under capital and operating leases are summarized
as follows as of December 31, 2002:
Capital leases Operating leases
(pound) million (pound) 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
-----------------------------------------------------------------------
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:
(pound) 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 costs Accumulated depreciation NBV
(pound) million (pound) million (pound) 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 (pound)2 million and (pound)2 million
for the years ended December 31, 2002 and 2001 respectively.
CONTINGENT LIABILITIES
The Group has provided performance bonds in respect of its national licence and
to local authorities up to a maximum amount of (pound)7 million (2001: (pound)7
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.
30
21 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.
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 Screenshop Limited ("Screenshop") became a related party when the Group
sold its shareholding in Screenshop to Sit-Up Limited in return for a 39.02%
shareholding in Sit-Up Limited.
NATURE OF TRANSACTIONS
The Group purchases software and consultancy services from Microsoft, on normal
commercial terms. Purchases in the year ended December 31, 2002 amounted to
(pound)1 million (2001: (pound)2 million). The balance outstanding in respect of
these purchases was (pound)nil at December 31, 2002 and 2001.
The Group has billed overheads and costs incurred on their behalf to UKTV, TVT
and Screenshop of (pound)11 million, (pound)1 million and (pound)1 million
(2001: (pound)8 million, (pound)3 million and (pound)1 million) respectively.
The Group has also made a loan to UKTV. Interest charged on this loan was
(pound)12 million (2001: (pound)12 million). Amounts due from UKTV, TVT and
Screenshop at December 31, 2002 were (pound)206 million, (pound)1 million and
(pound)4 million respectively (2001: (pound)217 million, (pound)28 million and
(pound)nil 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
(pound)13 million (2001: (pound)5 million, 2000: (pound)4 million). The balance
due to UKTV at December 31, 2002 was (pound)nil (2001: (pound)2 million).
22 SUBSEQUENT EVENTS
Since the balance sheet date a number of interest payments which became due were
not paid. As a result additional financing arrangements became technically in
default. At the date of issue of these financial statements the Senior
Convertible Notes 2005, Senior Convertible Notes 2007 and Senior Notes 2010 are
technically in default. The total amount of these financing arrangements of
(pound)1,005 million has been classified in these accounts as due after more
than one year.
The Group is renegotiating its bank facilities and debt financing arrangements.
Further details of the proposed Financial Restructuring are included in note 25.
31
23 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2002
------------------------------------------------------------------------------------
TOTAL FOURTH QUARTER* THIRD QUARTER SECOND QUARTER FIRST QUARTER
(POUND) MILLION (POUND) MILLION(POUND) MILLION (POUND) MILLION(POUND) MILLION
--------------------------------------------------------------------------------------------------------------------------------
Revenue 1,283 307 323 334 319
Operating loss (2,440) (2,349) (31) (29) (31)
Finance expenses, net (283) (52) (70) (61) (100)
Net loss (2,776) (2,458) (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
(pound)1,445 million, wrote down the value of its investments in affiliates by
(pound)130 million and recorded a fixed asset impairment of (pound)841million.
2001
------------------------------------------------------------------------------------
Total Fourth Third Second First
quarter* quarter quarter quarter
------------------------------------------------------------------------------------
(pound) million (pound) million(pound) million (pound) million(pound) million
--------------------------------------------------------------------------------------------------------------------------------
Revenue 1,254 329 312 315 298
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
(pound)766 million and wrote down the value of its investments in affiliates by
(pound)202 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.
24 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 components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The Group's chief operating
decision-making group is the board of directors. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different products and services in different markets.
The Group operates in two main segments: Cable and Content. The Cable segment of
our business can be subdivided, for revenue purposes only, between four product
ranges: Cable Television, Consumer Telephony, Internet and other, and Business
Services. The Internet and Other unit comprises internet sales and sales of
cable publications. The Content segment provides entertainment content,
interactive and transactional services to the UK pay-TV broadcasting market.
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.
32
24 SEGMENTAL INFORMATION (CONTINUED)
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 2001 2000
$ MILLION(POUND) MILLION (pound) million (pound) million
----------------------------------------------------- --------------- -------------- -------------------- ---------------
CABLE
Cable television 541 336 329 279
Consumer telephony 797 495 488 445
Internet and other 101 63 40 16
----------------------------------------------------- --------------- -------------- -------------------- ---------------
TOTAL CONSUMER DIVISION 1,439 894 857 740
Business Services Division 455 283 268 248
----------------------------------------------------- --------------- -------------- -------------------- ---------------
THIRD PARTY REVENUE 1,894 1,177 1,125 988
Operating costs and expenses (1,333) (828) (822) (757)
Depreciation(3) (2,134) (1,326) (453) (392)
Amortization of goodwill(2) (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
Total assets 5,851 3,635 5,093 5,146
----------------------------------------------------- --------------- -------------- -------------------- ---------------
CONTENT
Content division 195 121 143 88
Inter-segmental(1) (24) (15) (14) (7)
----------------------------------------------------- --------------- -------------- -------------------- ---------------
THIRD PARTY REVENUE 171 106 129 81
Operating costs and expenses (183) (114) (135) (101)
Depreciation(3) (16) (10) (16) (31)
Amortization of goodwill(2) (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
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 DIVISION 1,439 894 857 740
Business Services Division 455 283 268 248
----------------------------------------------------- --------------- -------------- -------------------- ---------------
TOTAL CABLE DIVISION 1,894 1,177 1,125 988
Content division 195 121 143 88
Inter-segmental(1) (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 goodwill(2) (2,326) (1,445) (949) (147)
----------------------------------------------------- --------------- -------------- -------------------- ---------------
OPERATING LOSS (3,927) (2,440) (1,121) (359)
Other expense(2) (586) (364) (690) (402)
Income tax benefit 45 28 70 6
----------------------------------------------------- --------------- -------------- -------------------- ---------------
NET LOSS (4,468) (2,776) (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
Total assets 6,609 4,106 6,332 7,324
----------------------------------------------------- --------------- -------------- -------------------- ---------------
(1) Inter-segmental revenues are revenues from sales in our Content Division
which are costs in our Cable Division and are eliminated on consolidation.
(2) In the fourth quarter of 2002, the Group recorded a goodwill impairment
charge of (pound)1,445 million and wrote down the value of its investments
in affiliates by (pound)130 million. In the fourth quarter of 2001, the
Group recorded a goodwill impairment charge of (pound)766 million and wrote
down the value of its investments in affiliates by (pound)202 million.
(3) In the fourth quarter 2002 the Group recorded a fixed asset impairment of
(pound)841 million.
33
25 FINANCIAL RESTRUCTURING
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 (pound)3.5 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 a number of other financing arrangements. Based on one such
default, in respect of non-payment of approximately (pound)10.5 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 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, 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 (pound)2,155 million, comprising term loans of
(pound)1,840 million, (pound)190 million of committed overdraft and
revolving credit facilities and an uncommitted term facility of (pound)125
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.
34
