Annual report 1996 The 4.3 million households in Telewest Communications’ seven franchise areas and three affiliate groups represent 24% of the UK homes under cable licence. Telewest is steadily building out its advanced broadband cable network. Gathering

No other telecommunications system matches cable’s capacity and flexibility in delivering television and telephone services today and digital multi-media services tomorrow.

CONTENTS 2 The facts & figures 4 Cable into the future 6 Chairman’s statement 8 Chief Executive’s statement 10 Operational review 24 Financial review 32 Board of directors 34 Operating statistics 36 Financial statements under UK GAAP 67 Financial statements under US GAAP 87 Five year summary 88 Shareholder information 89 Advisers 89 Glossary of terms TELEWEST COMMUNICATIONS plc • 1

Telewest Communications is playing a leading role in the development of UK communications services.

A major force within a dynamic, evolving industry, Telewest made significant progress in 1996 as a leading supplier of entertainment, telecommunications and information services to UK homes and businesses. momentum

• Focus on customers is unlocking value in Telewest’s network

• Uniform branding and new marketing strategies are raising market penetration and revenues

• Increased network size and capability are enhancing Telewest’s operating efficiency, market influence and product strength 2•TELEWEST COMMUNICATIONS plc

A year of expansion has strengthened Telewest Communications’ presence in key markets.

Our network is 65% built out and we achieved positive operating cashflow. A third of the homes we pass subscribe to one or more of our services and both penetration and revenue are increasing. The facts

TELEWEST OWNED AND OPERATED FRANCHISE AREAS AND HOMES

SCOTLAND 631,461

NORTH EAST 354,098 AFFILIATED COMPANIES (Equity Interest) NORTH WEST 828,694 Birmingham Cable MIDLANDS 129,551 634,839 Cable Corporation 49,639 SOUTH WEST 511,215 Cable London 222,044 LONDON SOUTH 420,703 SOUTH EAST 493,140 TELEWEST COMMUNICATIONS plc • 3

65% OF NETWORK NOW COMPLETED

2.5m HOMES PASSED IN TOTAL

590,000 HOMES PASSED IN 1996

6,700km OF CABLE LAID IN PAST 12 MONTHS & figures

769,000 RESIDENTIAL CUSTOMERS

7.6 PERCENTAGE POINT REDUCTION IN TELEVISION CHURN

33.5%HOUSEHOLD PENETRATION

67,823 BUSINESS TELEPHONE LINES 4

INTERNET - DIGITAL fastest access COMPRESSION

LOCAL TELEVISION NEAR VIDEO ON news, sports, politics DEMAND

INTERACTIVE HOME GAMES BANKING

Residential PAY-PER-VIEW HOME SHOPPING

HIGH DAILY VIEWING, MULTIPLE TV AND VIDEO PENETRATION

EARLY ACCEPTANCE OF PAY-PER-VIEW

UK TELEPHONY USAGE INCREASING Cable into

Telewest Communications’ broadband cable is able to carry multiple, simultaneous, two-way communications into the home or office, whether by voice, data or video; this contrasts with the current narrowband capability of traditional copper telephone lines. 5

INTRANETS E-MAIL

EDUCATION TELECONFERENCING

SWITCHED DATA INTERNET COMMUNICATIONS fastest access

Business INTEGRATED CUSTOMISED PRICING FIXED/MOBILE VOICE AND BILLING AND DATA COMMUNICATIONS

ANTICIPATED £6.3BN UK MARKET IN 1997

UK DATA SERVICES EXPANDING AT 30% PA

UK VOICE SERVICES EXPANDING AT 3% PA the future

Cable outstrips other delivery systems through one simple fact – it carries a sophisticated two-way, future-proof connection right into the home or office. Telewest has built this capability for over 2.5 million homes in the UK. Currently cable is proving its versatility with integrated telephony, television and internet supply. Soon, with the arrival of more advanced products such as high speed data and digital services, Telewest will be able to roll out further new services both swiftly and cost-effectively. Construction has already begun on an interfranchise backbone broadband network to enhance delivery of services across the network. 6 • TELEWEST COMMUNICATIONS plc

Chairman’s Statement

Telewest Communications has delivered a solid and consistent performance despite operating in a complex and competitive environment. This environment is seeing dramatic technological change in preparation for the launch of digital services. I am confident that Telewest is positioned to take full advantage of the opportunities created by this change and further consolidate its position in the UK.

FRED VIERRA CHAIRMAN TELEWEST COMMUNICATIONS plc • 7

“We see digital services as a UK communications revolution which will dramatically broaden customer choice and enhance their lifestyles”

Telewest ended the year with an increase of 45% in residential year we laid 6,700 km of cable so extending our network telephony lines, 32% more residential television customers and to reach 65% of our owned and operated franchise homes. a 69% increase in business telephony lines. Our total number Due to effective project management, scale and scope, Telewest of customers rose from 588,390 to 789,637, an increase remains one of the industry’s most cost-effective builders. of 34%. This led to a substantial increase in revenues from During 1996 we completed a £1.2 billion syndicated bank £144.8 million to £290.3 million. In particular, I am pleased that facility which should provide the financing requirements for our business telephony revenues rose by 98% to £34.6 million, substantially all of our existing build. indicating success in serving this valuable sector. Residential We see digital services as a UK communications revolution telephony penetration increased by 1.5% to 27.5%. These which will dramatically broaden customer choice and enhance results, which for the first time include the SBCC results for the their lifestyles as interactive products such as home banking full year, were achieved against a backdrop of the estimated come on line. We are planning the introduction of digital £550 million regulatory led price cuts and win-back advertising services and equipment in 1997 and the completion of our campaign by BT. broadband interfranchise network by mid-1998. In this context However, despite the impressive growth in telephony and on- we are evaluating the funding requirements and considering line services, our television penetration only increased by 0.7% debt financing opportunities. to 22.6%. Whilst the amount of this increase is disappointing, During the year Alan Michels left the Company to return the overall trend is improving across the industry. The decrease to the United States and we wish him well. Stephen Davidson, in television churn from 41.0% to 33.4% was encouraging formerly Finance Director, was recently confirmed as Chief although we recognise the need to continue to concentrate on Executive and we welcome the arrival of Charles Burdick, this area. In the light of these statistics Telewest has developed formerly of US WEST as our Finance Director. He has been and is implementing wide-ranging strategies to focus on the closely associated with Telewest for several years. issues of customer value and flexibility in television services. Having led industry consolidation through our 1995 merger Positive results were evident in the final quarter of the year, which with SBCC, our strategy now is to build on our existing were again achieved even though BSkyB conducted an aggressive customer base and continue to improve our operations. pre-Christmas national promotion offering free satellite dishes We believe continued improvement here will help stimulate and installation with the purchase of certain domestic goods. investor interest in our sector. As planned, we achieved positive operating cash flow in The announcement of the applicants for a digital terrestrial the year which is a very encouraging result. television licence received much publicity, however, there We are operating in a tough competitive environment is no doubt that cable is still the most flexible and powerful and therefore support the recent regulatory developments such distribution system for telecommunications, entertainment and as the inclusion of a fair trading clause in telecoms licences and on-line services. Digital terrestrial television aims to deliver in OFTEL’s contribution to the conditional access licensing regime. over a year’s time only a fraction of what cable delivers today. These developments are commented on in more detail in the We will be working hard to convey these messages to Operational Review. investors and customers alike in 1997 and are confident that We accelerated our build in line with budget. During the we will continue our momentum. 8 • TELEWEST COMMUNICATIONS plc

Chief Executive’s Statement

Telewest Communications’ success depends upon the expansion of our customer base and the quality of the relationships those customers have with Telewest. As independent research has confirmed, we must continue to focus on improving consumer awareness, value for money and customer service. These objectives are fundamental to our strategy and the operational plans we have developed. During the year, we took significant steps towards achieving these objectives.

STEPHEN DAVIDSON CHIEF EXECUTIVE TELEWEST COMMUNICATIONS plc • 9

“We face major challenges and opportunities with confidence and a clear strategy”

To increase customer value for money, we have introduced Digital will provide us with the much increased channel new products and services such as Centrex, Number capacity enabling us to offer exciting new services to Portability, Pay-Per-View, Internet access and Teleplus (our customers, including near video on demand, home shopping, integrated phone and television package). We have also home banking and pay-per-view. concentrated on raising the standard of customer service. We are connecting our franchises with high capacity fibre In support of all these measures, we have expanded and links to create an interfranchise network which will provide refined our advertising and promotional activities. We have a number of significant benefits. This network, due to be rebranded all the Company’s operating businesses under the completed in mid 1998, will enable the distribution of digital name of Telewest Communications; this is an important first services, provide private circuits to many more potential stage towards establishing a recognised national brand. business customers and reduce interconnect costs. Although We are already seeing the benefits of implementing these the price of interconnect capacity is declining for voice traffic, strategies. In the final quarter Telewest gained an additional there is considerable demand for the broader bandwidth our 70,000 cable television customers and 127,000 over the year. network will supply. Residential telephony lines increased by 45%, with a rise Customers tell us they want more flexibility and choice in penetration of 1.5% to 27.5%. There was considerable in multi-channel television. Therefore in 1997 aside from demand for the innovative pay-per-view events during the the introduction of digital and other services we shall also year. Our business communications services had a particularly attempt to restructure certain of our programme supply strong year: revenues rose by 98%, customers increased to arrangements to gain more flexibility in the way we are 21,000 and we won several significant, high-profile contracts. permitted to make services available to customers. We believe The independent OFTEL statistics report showed that across cable operators, programme suppliers and customers can a broad range of measures Telewest has improved customer benefit from this. service. As our Chairman has highlighted, digital terrestrial Although we made considerable progress in a number television has received a great deal of attention, yet, for the of areas, we did not succeed in meeting all our objectives. reasons already mentioned, we believe cable is obviously the Cable TV penetration remained flat for much of the year, more attractive medium for customers. However, this attention though the welcome upturn in the final quarter coinciding has increased public awareness of multi-channel TV which with the roll-out of Teleplus gives ground for optimism. benefits Telewest and it should be remembered that of the The pioneering launch of number portability experienced 399,000 new subscribers BSkyB gained in the last quarter some initial operational difficulties; however by the end of of 1996, two thirds came via cable. the year, the service had been introduced in 4 out of the This is a crucial year in our development. We face major 7 regional franchise areas. challenges and opportunities with confidence and a clear In 1997 we expect to develop the momentum gained in strategy for the year ahead. 1996. Telewest will additionally implement three major new projects – digital, our interfranchise network and an upgraded customer management software system. 10 • TELEWEST COMMUNICATIONS plc Customers

In October 1996, Dedicated retail outlets, Telewest teamed up such as the Telewest with Live TV for Communications store in exclusive Live Telford, are designed to Coverage of the build customer awareness UEFA cup-tie between through a high street Liverpool FC and Sion. presence and to help Over 50% of strengthen relationships Telewest’s audience with customers. This in Liverpool tuned in. complements our direct sales, direct marketing and telemarketing.

Telewest was the first European cable operator to launch the SEGA games channel. This 24-hour, interactive channel is proving popular with customers.

Better value telecommunications services are a key benefit of switching to cable. TELEWEST COMMUNICATIONS plc • 11

We are establishing clear strategies for promoting customer loyalty through value for money, an unrivalled diversity of products, easy access, introduction to emerging services and higher quality customer service.

CNN INTERNATIONAL TV5 (FRENCH) NBC QVC - THE HOME EUROPEAN BUSINESS NEWS SHOPPING CHANNEL EURONEWS THE CHRISTIAN CHANNEL THE PARLIAMENTARY SKY SOAP CHANNEL SKY TRAVEL SKY NEWS THE HISTORY CHANNEL TARA TELEVISION SKY SPORTS 1 CARLTON FOOD NETWORK SKY SPORTS 2 CARLTON SELECT SKY SPORTS 3 BLOOMBERG EUROSPORT INFORMATION TV PLAYBOY TV TCC PERFORMANCE - CHALLENGE TV THE ARTS CHANNEL FAMILY LATE THE RACING CHANNEL BBC1 COUNTRY MUSIC BBC2 TELEVISION ITV THE BOX CHANNEL 4 MTV GRANADA PLUS VH-1 GRANADA MEN & MOTORS THE DISNEY CHANNEL ARCADE WITH DMX SKY MOVIES LIVE TV THE MOVIE CHANNEL UK GOLD SKY MOVIES GOLD DISCOVERY CHANNEL HVC TLC THE ADULT CHANNEL SKY ONE TVE INTERNACIONAL TNT (SPANISH) CARTOON NETWORK RAI UNO (ITALIAN) NICKELODEON GRANADA TALK TV PARAMOUNT CHANNEL GRANADA GOOD LIFE TRAVEL CHANNELS: THE LANDSCAPE CHANNEL HOME & GARDEN VISION TV HIGH STREET UK LIVING FOOD & WINE TELEVISION X - HEALTH & BEAUTY THE FANTASY CHANNEL LIVERPOOL LIVE TROUBLE ÉDINBURGH LIVE BRAVO CHANNEL GUIDE SCI-FI CHANNEL CABLE 17 ASIANET CHANNEL ONE SKY TWO CHANNEL ONE AVON DEUTSCHE WELLE CHANNEL ONE LIVERPOOL CNE - THE CHINESE ZEE TV CHANNEL

Telewest customers gain access to one of the widest choices in home entertainment available in the UK. 12 • TELEWEST COMMUNICATIONS plc

OPERATIONAL REVIEW Residential Television Customers 66,413

119,495 179,096 401,469 528,142 Owned and Operated (1995 includes 132,211 Residential services customers added from the acquired SBCC franchises)

92 93 94 95 96

Significant progress during 1996 saw Telewest Autumn had been introduced across all our franchises. Such integration of services offers important gain 194,000 new residential customers, a 34% advantages to both the customer and Telewest. Customers benefit from better value and from the increase on the previous year. The roll-out convenience of having a single provider for different needs. Telewest benefits from the wide customer of Teleplus – our integrated package – base this encourages. Results to date have been very positive. 50% of rebranding of our operations and greater our customers take a packaged service and express considerably higher satisfaction and their churn emphasis on marketing and customer service rate is lower than among purely cable television customers. all contributed to this gain. In 1997 we hope to expand our packaged offering to include options for Internet-dedicated lines. At the same time we will continue to market

AN EXPANDING NATIONAL MARKETPLACE services separately, to attract single interest The UK market for multi-channel television continues customers who can upgrade to additional services to grow, driven by the continued, significant if they so wish. investment of both the cable and satellite distributors

and programme providers. By the end of 1996 over ESTABLISHING OUR NATIONAL BRAND WHILE

5.6m households subscribed to multi-channel TV ENHANCING OUR LOCAL IDENTITY of which 1.9m subscribed via cable. Of the 840,000 In July 1996 we launched Telewest Communications multi-channel TV customers signed up during the as the brand name for all our franchise areas, so year 65% were cable customers of which 26% were linking our operations which had historically Telewest Communications customers. developed under several different names. This Meanwhile the overall UK market for residential integration was a comprehensive task, involving telephony services continues to grow as lower prices the harmonisation of everything from signs encourage increased usage and acceptance of and uniforms to communications and marketing advanced features. Around 750,000 new lines literature. With this process we have begun were switched to cable in 1996, up from 640,000 to establish a recognisable national brand and new lines in 1995. to create a platform for common marketing campaigns.

INTEGRATING PRODUCTS AND SERVICES TO At the same time we re-inforced our regional

MAXIMISE CUSTOMER VALUE identity through steady development of local Customer research confirmed a preference for TV programming and active marketing of our integrated TV/telephony packages, which by last interfranchise telephony services. TELEWEST COMMUNICATIONS plc • 13

Residential Telephone Lines 23,755 55,830

128,530 430,916 627,009 Owned and Operated (1995 includes 164,734 lines added from the acquired SBCC franchises)

92 93 94 95 96

CAPITALISING ON INDUSTRY DEVELOPMENTS services. Cable Internet – our fast-growing Internet The introduction of number portability into several Service Provider (ISP) – was voted one of the UK’s franchises – which allows new customers to keep top three performers by Internet magazine, ahead their existing telephone number whilst changing of longer-established competitors such as their service provider – is enabling Telewest to Compuserve, Demon and BT Internet. Cable Internet attract customers previously reluctant to change was also chosen by a consortium of twenty ISP their number. The process of transferring numbers members to provide national and international between operators in 1997 will become more Internet access services. automated, improving both the speed and quality of this service and will be rolled out to all the “cable modems will attract customers remaining franchises. seeking higher speed of Internet access” Digital technology will revolutionise our product offering in 1997. By utilising cable’s unique return path capabilities (i.e. the ability to carry two-way By the end of the year we had extended Internet voice and data messages) and establishing a access to customers in five of our seven franchise distinctive portfolio of entertainment, information areas. We focus on three markets: dial-up services and transactional services, we aim to offer primarily for residential customers, leased lines for customers an enticing and cost effective gateway business customers throughout the UK and network to what digital technology can offer. We can expect access for wholesale customers such as other ISPs. a broader and more flexible choice of movies, These are early days for our on-line capability, but sports, home shopping, banking from home and already we have established services of recognised pay-per-view movies amongst other innovations. quality and reliability and are steadily increasing our Our success in 1996 with the UK’s first customer base. pay-per-view events demonstrated the potential Our on-line services will be enhanced during 1997 of this emerging market. Over 14% of customers with the launch of cable modems, which offer subscribed to the Bruno v Tyson fight in March 1996 Internet access up to 100 times faster than a and 8% for the Holyfield v Tyson fight in November conventional telephone line and are considerably 1996. The roll-out of digital TV will enable Telewest more cost-effective. We anticipate cable modems to expand the market for pay-per-view services as will attract customers seeking higher speed of well as other services such as near video on demand. Internet access and we will fully exploit the unique advantages of our local broadband loop in

CREATING NEW MARKETS IN ON-LINE AND delivering these services flexibly and cost-effectively.

MULTIMEDIA SERVICES Having already concluded twelve months of testing, In 1996 Telewest made strong progress in Telewest plans to launch cable modems in four of developing the Company’s expertise in on-line our franchise areas by the end of 1997. 14 • TELEWEST COMMUNICATIONS plc Technology

Technology drives our network. Through the introduction of state-of-the-art equipment we are bringing diverse entertainment and information opportunities The simplicity of with rapid data connecting cable into transmission to homes the home disguises and businesses. the sophisticated technology behind the service.

Telewest’s Cable Internet access service appeals to a wide customer base – from domestic customers to business leased line users and other Internet service providers. TELEWEST COMMUNICATIONS plc • 15

Telewest Communications operates in a fast-moving technological environment. From building our state-of-the-art network to delivering attractive products, from providing on-line capability to ensuring seamless service, our success depends on our ability to manage technology dynamically.

The ability to customise channels for local market segments is a key strength of cable operators such as Telewest. Regional facilities such as these serve two roles: to help local advertisers produce commercials and to manage the insertion of local material into generic channels.

Telewest’s interfranchise network will enable us to

DUNDEE connect our franchise areas efficiently, so maintaining quality, EDINBURGH reducing interconnect

UDDINGSTON charges and NEWCASTLE enhancing our ability to introduce new services such as digital.

LEEDS Franchise trunk routes WIGAN Interfranchise network 97 PRESTON Interfranchise network 98

MANCHESTER Using the most LICHFIELD BIRMINGHAM advanced monitoring DUDLEY equipment, the WOLVERHAMPTON

ENFIELD Network Service HAYES BASILDON

CHELTENHAM Centre in Woking, GLOUCESTER Surrey co-ordinates BRISTOL

READINGWOKING technical operations CROYDON GILLINGHAM throughout our telecommunications network. 16 • TELEWEST COMMUNICATIONS plc

OPERATIONAL REVIEW Revenue: Television 20,729 35,875 64,740 Residential services 121,224 £000 (CONTINUED)

93 94 95 96

A NEW APPROACH TO MARKETING OUR SERVICES now extending to our sales staff, installers and In 1996 the Cable Communications Association repair technicians. linked UK cable operators in a nationwide When building out our network we advertising campaign to promote cable services. communicate carefully with local property owners, The results of this campaign were disappointing both to minimise inconvenience and to promote although it was successful in raising awareness. awareness of our offering. Our activity in local Consequently, Telewest has focused on educating communities extends beyond the construction customers about our services and facilitating the and marketing phase and is best evidenced by purchase of those services in the way they find our involvement with schools and colleges. most convenient. Since February 1995 Telewest has offered a free Central to this objective is our move towards cable connection to schools within our franchise creating integrated marketing strategies, which areas. The offer has helped us to develop a positive combine direct sales, telemarketing, direct mail role in the community, and to enhance awareness and retail. As part of this approach we mounted of our product with future customers. four campaigns during the year, spreading In late 1996, in response to calls for affordable awareness of Telewest throughout our franchise access to the Internet for schools, Telewest decided, areas. In communities where our network is most together with the entire cable industry, to provide built out, these integrated strategies enable us to free installation and access to the Internet. Telewest emphasise our core strengths of value, choice will begin connecting schools in our franchise and service. areas in 1997. The decision has received strong endorsement within educational, political and

BUILDING STRONGER RELATIONSHIPS WITH regulatory circles and will further strengthen our

CUSTOMERS position in the communities we serve. We believe that our new marketing approach, with

its emphasis on building awareness and demand TELEWEST’S INTERFRANCHISE NETWORK will help us strengthen our relationships with our We have started developing our own broadband interfranchise network to link our franchises. When complete, this will enable us to carry voice, “Since February 1995 Telewest has offered data and video traffic between our franchises a free cable connection to schools within without the need for separate interconnect our franchise areas.” agreements, thereby providing more efficient carriage of our services. Telewest paved the way for this network by customers. To support this we have introduced gaining UK Government licences as both a national an 8 week training course for telephone-based and international telecommunications operator. customer service representatives. This programme is Development of the network commenced in 1996 TELEWEST COMMUNICATIONS plc • 17

Revenue: Residential 11,261 23,471 57,597

125,013 Telephony £000

93 94 95 96

and 75% should be operational by mid 1997, allow any greater freedom to BT in its pricing with completion planned for mid 1998. without having adequate provisions in place to The interfranchise network will bring valuable control anti-competitive practices and it proposed benefits to Telewest and our customers. We will the inclusion of a fair trading condition in BT’s be able to distribute digital television services licence which came into effect in December 1996, more cost-effectively and have greater control following an unsuccessful legal challenge by BT. over the carriage of traffic. We welcome this development. The same fair trading provisions are now to

CARE FOR THE ENVIRONMENT be included in other licences, including those held As a major infrastructure provider Telewest by Telewest. Therefore, a significant step forward recognises the responsibility to limit disturbance to promote competition has been achieved but to the environment. We take account of those we will continue to push for a wider review of UK responsibilities within our network design and liaise competition legislation. closely with local authorities, and other statutory In a similar vein, the implementation within the bodies, to ensure compliance with requirements UK of the European Advanced Television Standards for construction methods, location of plant, noise Directive, which covers the regulation of conditional and dust emissions and hours of work. Particular access services, will provide us with greater flexibility care is taken when installing cable duct close to launch digital services in the way that we want. to trees. Telewest’s ‘Code of Practice on Trees This is another positive development. in Relation to Cable Laying’ was an industry first However Telewest, along with the rest of the and has been universally welcomed. cable industry, was not satisfied with the outcome Areas of historical importance sometimes require of the Office of Fair Trading review of BSkyB’s extra effort. During the installation of the network position in the wholesale pay TV market. We will in Bath’s ‘World Heritage’ city centre, replacements seek further improvements in this area. for the York stone damaged over the last 200 years were matched and replaced from the lining of an old reservoir in South Wales.

DEVELOPING REGULATORY ENVIRONMENT In the middle of the year, OFTEL concluded its review of the terms of a new retail price control regime to be imposed upon BT for a further four years from August 1997; the formula of RPI-4.5% will apply principally to residential customers and we are comfortable with this outcome. However, OFTEL recognised that it could not 18 • TELEWEST COMMUNICATIONS plc Communities

With greater choice comes greater need for information. Our sales personnel are skilled at guiding customers through the benefits of cable access.

Local calls are good value and encourage people to use the telephone to communicate with friends around their community. TELEWEST COMMUNICATIONS plc • 19

Our local broadband networks are connecting people with what they need and like. In addition to reaching homes, we are establishing links with local government, shops, businesses and schools, while our local programming is opening up fresh forums for discussion and debate.

In Edinburgh and West Lothian a Telewest-backed cable service, E-cademy, is connecting schools and libraries to a ground-breaking education package which embraces Internet, educational TV and telephony services. The diversity of Telewest’s offering embraces all sectors and age groups in the community.

Telewest’s sponsorship of young local footballers helps build Telewest’s presence in the community. 20 • TELEWEST COMMUNICATIONS plc

OPERATIONAL REVIEW Business Telephone Lines 3,070 7,631 15,560 40,021 67,823 Owned and Operated (1995 includes 8,424 Business services lines added from the acquired SBCC franchises)

92 93 94 95 96

1996 was a tremendous year for our SECURING MAJOR CONTRACTS In a considerable boost to our status as a front rank business communications services. Revenues provider of business telephony services, Telewest was awarded a £2.8m Centrex contract to provide grew by 98%, our customer base rose to Dudley Council with an advanced communication system linking its council offices, schools, libraries 20,882, we won several large, high-profile and housing offices. When fully installed, this broadband fibre-optic voice and data cable network contracts and we expanded our product range will comprise more than 3,500 direct lines and private circuits. with new services which exploit the increasing Other major local government contracts won by Telewest during the year included the provision sophistication of our networks. of systems for Liverpool City Council, South Gloucestershire Council, Chorley Council and Wolverhampton County Council. Among our growing range of large commercial customers,

A YEAR OF RAPID GROWTH Littlewoods selected us to provide the national During 1996 we gained over 6,500 new business telecommunications needs of their distribution customers, an increase of 47% over 1995. Our and telesales department. revenue rose from £17.4m to £34.6m, a yearly

increase of 98%. By the end of the year we NEW PRODUCT LAUNCHES provided services to over 67,800 lines. In the spring of 1996 we successfully launched These figures demonstrate Telewest’s growing our full-feature Centrex service. Centrex provides strength as a high quality supplier for businesses our large business customers with the versatility of a seeking complex voice, data and entertainment private electronic switchboard, without the expense services. They also reflect our growing expertise of buying and operating one themselves. in targeting sectors where we can leverage our technological advantage and maximise revenues. “we successfully launched our full-feature In business services, as throughout our Centrex service” operations, increased build leads to increased revenues. With greater geographic coverage, we can The introduction of our Call Manager service better connect multi-site businesses. For example, enables us to provide smaller customers with similar our London South franchise area, which is now switching capability to Centrex. During the year we almost fully built-out, delivered nearly a third of also extended our range of leased lines and high our total business telephony income from less than speed data links. In September we overcame a a fifth of our customer base. major hurdle in customers’ willingness to transfer to TELEWEST COMMUNICATIONS plc • 21

Revenue: Business 4,908 8,812 17,449 34,562 Telephony £000

93 94 95 96

cable telephony with the launch of number maintain national tariffs, Telewest can customise portability. We expect this to contribute significantly pricing options for individual customers. to both our penetration of the business market and During the year we established dedicated to customer retention. regional teams to emphasise our business In 1996 we also commenced selling Internet telephony services in the local market. Again, this access to business customers in four of our franchise provides Telewest with a vital edge in responding to local needs. “We expect high-speed Internet access We are also benefiting from centralisation. to become an important new revenue In 1996 Telewest realised significant operating stream in coming years.” advantages by centralising many management and support functions for our business services. areas. During 1997 this will be extended throughout Moreover, our evolving interfranchise our network, with a gradual upgrading of telecommunications network will enable us connectivity from narrowband access – over existing to connect business customers from outside telephone lines – to broadband access through cable our franchise areas (enabled by our national modems. We expect high-speed Internet access to Telecommunications Licence) so establishing become an important new revenue stream in Telewest as a niche player in the wider coming years. national market.

EXPLOITING THE TWIN ADVANTAGES OF LOCAL

CONNECTIVITY AND NATIONAL CAPACITY As the telecommunications industry evolves, increasingly attractive opportunities are emerging in the provision of local access. This puts Telewest at a distinct advantage. Our local broadband network enables us to compete effectively for small to medium business customers, particularly in the delivery of advanced data transmission services, demand for which increased last year by 30%. The data market is forecast to be larger than the voice market by the year 2003. We connect business customers with fibre-optic links, so ensuring constantly expandable capacity for current and future services. This is matched by our flexibility in pricing. Where BT must currently 22 • TELEWEST COMMUNICATIONS plc Identity

Bandwidth, our internal magazine, shares ideas, insight and information throughout Telewest’s operations.

On 1 July 1996 we introduced our new name and logo throughout our operations. A uniform Our Teleplus package identity is already of integrated delivering advantages television and through greater telephone services customer recognition provides value to our and clarity in customers and also marketing. helps to build the Telewest identity throughout our franchise areas.

The Cable Guide is issued monthly showing the full line-up, plus articles Scottish premiership and up-to-date news team Dundee United on cable services. is one of several UK teams sponsored by Telewest. TELEWEST COMMUNICATIONS plc • 23

Telewest Communications is building a national brand. From our history of separate franchises, we are developing a united company under one name. Our task is to establish Telewest as the natural choice for supplying communication, entertainment and information services, both now and in years ahead.

This monthly magazine, dedicated to Telewest customers, informs them of new developments in our service.

During 1996 four core advertising campaigns were run in all of our franchise areas emphasising the diversity of our offering.

Telewest is delivering helpful and friendly customer service in its franchise areas. 24 • TELEWEST COMMUNICATIONS plc

Total Gross Profit:

Revenue 54% 58% 57% 58% (revenue less 21,732 41,813 83,064 40,338 72,027 167,788 Financial review 144,784 290,266 £000 direct costs) gross profit (£) gross margin (%) (gross profit divided by revenue)

93 94 95 96 93 94 95 96

To comply with applicable UK and US securities regulations, SUMMARY OF OPERATIONS YEARS ENDED

Telewest Communications plc prepares financial statements 31 DECEMBER 1996 AND 1995. under UK and US generally accepted accounting principles The Group’s consolidated revenue increased by £145.5 million (“GAAP”) both of which are included in this report. Financial or 100% from £144.8 million in 1995 to £290.3 million statements prepared under UK GAAP can be found on pages in 1996. The increase was attributable to the inclusion of the 48 to 66; financial statements prepared under US GAAP can results of the former SBCC franchises for a full year in 1996 be found on pages 67 to 87. and to the larger customer base created by the enlarged The acquisition of SBCC on 3 October 1995 has been Group’s continuing network construction. accounted for in the 1995 consolidated financial statements under the acquisition method of accounting. Therefore the Cable television revenue 1995 consolidated profit and loss account includes the results Cable television revenue increased by 87% from £64.7 million of SBCC from 3 October 1995 to 31 December 1995. The in 1995 to £121.2 million in 1996. The increase was primarily 1996 consolidated profit and loss account includes the results attributable to a 74% increase (from 253,049 to 440,212) of SBCC for the full year. in the average number of customers in 1996 over 1995. In the discussion of the financial results that follows, unless The increase in the average number of customers results from specifically noted, all references to figures are identical under the inclusion for a full year in 1996 of the results of the UK and US GAAP. former SBCC franchises (which contributed an average of 165,855 customers in 1996 compared to an average of 35,192 customers in 1995) and from an increase in the number of homes passed and marketed in the other

CHARLES BURDICK FINANCE DIRECTOR TELEWEST COMMUNICATIONS plc • 25

North East 49% Homes Passed and Percentage Completed South East 37%

South West 71% 1996 build

London South 90%

Midlands 67%

Scotland 78%

North West 68%

Telewest overall 65%

Consolidated financial highlights (all amounts in £million) UK GAAP US GAAP Year ended 31 December 1996 1995 1995 1994 1993 1996 1995 1995 1994 1993 Pro forma Predecessor Pro forma REVENUE Note Businesses

Cable television 121.2 64.7 83.7 35.9 20.7 121.2 64.7 83.7 35.9 20.7 Telephony – residential 125.0 57.6 81.2 23.5 11.3 125.0 57.6 81.2 23.5 11.3 Telephony – business 34.6 17.4 20.6 8.8 4.9 34.6 17.4 20.6 8.8 4.9 Other 9.5 5.1 5.7 3.8 3.4 9.5 5.1 5.7 3.8 3.4

Total revenue 290.3 144.8 191.2 72.0 40.3 290.3 144.8 191.2 72.0 40.3

OPERATING COSTS AND EXPENSES Programming (69.9) (32.2) (42.9) (15.5) (8.4) (69.9) (32.2) (42.9) (15.5) (8.4) Telephony (52.7) (29.5) (38.7) (14.7) (10.2) (52.7) (29.5) (38.7) (14.7) (10.2) Selling, general and administrative (167.3) (105.4) (137.8) (60.4) (32.5) (167.3) (105.4) (137.8) (60.4) (32.5) Depreciation (129.7) (61.5) (82.3) (30.3) (17.6) (129.7) (60.0) (80.8) (30.3) (17.6) Amortisation 1 – ––––(26.1) (7.9) (25.3) (1.8) (0.8)

(419.6) (228.6) (301.7) (120.9) (68.7) (445.7) (235.0) (325.5) (122.7) (69.5)

Operating loss (129.3) (83.8) (110.5) (48.9) (28.4) (155.4) (90.2) (134.3) (50.7) (29.2)

OTHER INCOME (EXPENSE) Share of loss of affiliates (15.2) (12.1) (12.1) (8.5) (7.5) (16.0) (12.8) (12.8) (8.5) (7.5) Financial expenses, net 2 (105.4) (18.8) (25.3) (7.8) (0.7) (90.8) (34.6) (41.1) (6.2) (0.7) Other (1.0) (0.7) (0.7) – – (0.2) 0.1 0.1 – –

Net loss before extraordinary item (250.9) (115.4) (148.6) (65.2) (36.6) (262.4) (137.5) (188.1) (65.4) (37.4) Extraordinary item 3 – ––––– – – 7.3 –

Net loss (250.9) (115.4) (148.6) (65.2) (36.6) (262.4) (137.5) (188.1) (58.1) (37.4)

Note 1 Under UK GAAP goodwill related to acquisitions is written off to reserves at time of purchase. Under US GAAP goodwill is generally amortised over 20 years. Note 2 The accounting treatment for financial instruments is different under UK and US GAAP, as explained in the financial statements. Note 3 Amount represents the unrealised gain embedded in interest rate swaps which were marked to market for US GAAP purposes but not for UK GAAP purposes. Pro forma information has been included for 1995 to demonstrate the effect of including the results of former SBCC franchises for the full year ended 31 December 1995. The pro forma information is not commented upon in the Financial Review. For the purposes of comparison, UK GAAP consolidated financial highlights for 1994 and 1993 are shown to reflect the results of certain predecessor businesses which were acquired by the Group in November 1994. The results of predecessor businesses do not include the results of former SBCC franchises. 26 • TELEWEST COMMUNICATIONS plc

Gross Profit:

59% 57% 50% 42% Residential Television 12,326 20,375 32,546 51,318 (revenue less programming expenses) gross profit (£) gross margin (%) (gross profit divided by revenue)

93 94 95 96

franchises (from 1,142,860 at 31 December 1995 to competitor in residential telephony, which were offset by 1,460,463 at 31 December 1996). increases in line rental rates. The Group intends to continue Average monthly revenue per cable television customer to reduce per minute call tariffs as necessary to compete increased 8% from £21.32 in 1995 to £22.95 in 1996. effectively and to seek to mitigate the revenue impact of these This was a result of an increase in the basic channel charge reductions through higher line rentals and increased call implemented in December 1995 and the additional revenue volumes resulting from increased marketing. generated from pay-per-view programming. This was, The increase in business telephony revenue in 1996 however, partially offset by a decrease in the average number over 1995 was primarily attributable to a 114% increase of premium channels purchased per customer due to the (from 24,681 to 52,849) in the average number of business inclusion for a full year in 1996 of the results of the former telephony lines in 1996, which was partially offset by an SBCC franchises which historically have had a lower average 8% decrease in the average monthly revenue per business number of premium channels purchased per customer. line, from £58.92 in 1995 to £54.50 in 1996. This decrease was attributable to price reductions in per minute call charges Telephony revenue in response to competition and increased sales of Centrex, Telephony revenue increased by 113% from £75.0 million in a new business telecommunications product which provides 1995 to £159.6 million in 1996. more lines to customers but has a lower average monthly Residential telephony revenue increased by 117% from revenue per line. £57.6 million in 1995 to £125.0 million in 1996. Business Other revenue increased by 89% from £5.0 million in 1995 telephony revenue increased by 98% from £17.4 million in to £9.5 million in 1996. Other revenue is derived primarily 1995 to £34.6 million in 1996. from management services provided to Affiliated Companies, The increase in residential telephony in 1996 over 1995 cable publications and network management services provided was primarily due to a 119% increase (from 234,400 to to other operators, and advertising sales. 514,156) in the average number of residential lines. This increase resulted from the inclusion for a full year in 1996 of Operating costs and expenses the results of the former SBCC franchises (which contributed The Group’s consolidated operating costs and expenses an average of 229,751 lines in 1996 compared to an average (which include direct costs of programming and interconnection; of 45,117 lines in 1995), and from an increase in the number selling, general and administrative expenses; depreciation of homes passed and marketed in the other franchises (from expense and amortisation expense) increased by 84% from 968,863 at 31 December 1995 to 1,380,484 at 31 December £228.6 million in 1995 to £419.6 million in 1996. (90% 1996). The revenue increase from the growth in the average under US GAAP from £235.0 million in 1995 to £445.7 million number of residential lines was slightly offset by a 1% in 1996.) decrease in the average monthly revenue per residential line, Programming fees are the largest component of the Group’s from £20.48 in 1995 to £20.26 in 1996. This decrease was operating costs in providing cable television services. The Group mainly attributable to price reductions in per minute call obtains most of its programming under contracts which charges in response to price cutting by BT, the Group’s main provide for payments based upon the number of customers. TELEWEST COMMUNICATIONS plc • 27

Gross Profit:

37% 54% 61% 67% Combined Telephony 5,966 17,569 45,520

107,003 (revenue less telephony expenses) gross profit (£) gross margins (%) (gross profit divided by revenue)

93 94 95 96

As a percentage of cable television revenues, programming increased 116% from £60 million under US GAAP. This costs increased from 50% in 1995 to 58% in 1996 as a result increase was principally attributable to capital expenditure of programming fee increases, providing more channels associated with the Group’s continuing construction activities, in the basic cable television package with no price increase a full year of depreciation expense recorded in the former and the inclusion for a full year in 1996 of the results of SBCC franchises, and a reduction in the estimated useful lives the former SBCC franchises which have higher per channel of certain network assets in 1996 as set out in Note 1 to the programming costs. UK GAAP financial statements and Note 3 to the US GAAP Interconnection charges are the largest component of the financial statements. Under US GAAP, amortisation expense Group’s telephony operating costs in providing telephony increased from £7.9 million in 1995 to £26.1 million in 1996 services. As a percentage of telephony revenue, telephony primarily due to a full year of amortisation of the goodwill operating costs decreased from 39% in 1995 to 33% in arising on the acquisition of SBCC in October 1995. Under 1996 as line rental income, which incurs no third party cost, UK GAAP, all goodwill arising on acquisitions is directly represented a larger proportion of total average revenue per written off to reserves. line in 1996 than in 1995. Interconnection charges in 1996 also were reduced by credits relating to interconnection Other income (expense) charges from earlier periods which have been calculated based The Group’s share of the net losses of its Affiliated Companies on revised estimates of prevailing interconnection charges accounted for under the equity method, principally in the UK. Birmingham Cable Corporation Limited and Cable London plc, Selling, general and administrative expenses, which include, was £15.2 million and £12.1 million in 1996 and 1995, among other items, salary and marketing costs, decreased respectively, under UK GAAP. (£16.0 million and £12.8 million as a percentage of revenue from 73% in 1995 to 58% in in 1996 and 1995, respectively, under US GAAP due to a 1996. The majority of this improvement is due to the rapid difference in the classification of tax expense.) growth in revenues and continued reduction in support costs Financial expenses, net, under UK GAAP consist primarily of per customer, with the balance – accounting for 5 percentage interest expense of £96.8 million in 1996 (£23.8 million in points of the year-on-year reduction – due to revised estimates 1995), and foreign exchange losses of £25.9 million in 1996 used in determining the proportion of labour and overhead (£4.7 million in 1995) offset in part by interest income earned costs which are capitalised as network assets. The Group on short-term investments and loans to Affiliated Companies expects that selling, general and administrative expenses will of £17.2 million in 1996 (£15.6 million in 1995). Under continue to decline as a percentage of revenue as revenues US GAAP, financial expenses consist primarily of interest increase and the efficiency gains of its fixed cost base are expense of £105.2 million in 1996 (£26.6 million in 1995), increasingly exploited. Total labour and overhead costs and foreign exchange losses of £2.8 million in 1996 capitalised in 1996 were £54.0 million, compared to (£14.6 million in 1995) offset in part by interest income £26.6 million in 1995. earned on short-term investments and loans to Affiliated Depreciation expense increased 111% from £61.5 million Companies of £16.7 million in 1996 (£15.6 million in 1995). in 1995 to £129.7 million in 1996 under UK GAAP and In 1995, financial expenses under UK GAAP also included 28 • TELEWEST COMMUNICATIONS plc

an accounting loss on the sale of interest rate swaps of customers (from 139,371 to 253,049) resulting from the £5.5 million (£8.6 million under US GAAP). inclusion, for the post-acquisition period only, of the former Interest expense increased by £73.0 million in 1996 SBCC franchises which contributed 148,987 customers at the (£78.6 million under US GAAP) primarily as a result of the year end and an increase in the number of homes passed and interest payments and accrued interest expense on the Senior marketed in other franchises (from 805,475 to 1,142,860). Debentures and the Senior Discount Debentures, issued by Average monthly revenue was flat at £21.33 in 1994 and the Group in October 1995; the debentures are more fully £21.32 in 1995 with the impact of lower SBCC pricing described in the following discussion on Liquidity and Capital offsetting the increase of 3.4% in the price of the Group’s Resources. The foreign exchange losses under UK GAAP in service packages in December 1994 and an increase in the 1996 primarily relate to the amortisation of the foreign premium channels per customer. Rates charged in the former currency option premium which hedges the Senior Discount SBCC franchises were increased in December 1995 to be more Debentures and the amortisation of exchange losses arising consistent with the rates in other franchises. on the translation of the debentures to Sterling using the Telephony revenue more than doubled from £32.3 million contracted exchange rate of the option. It is the Group’s in 1994 to £75.0 million in 1995. policy to hedge non-Sterling denominated borrowings to Residential telephony increased by 145% (from £23.5 reduce or eliminate exchange rate exposure. The foreign million to £57.6 million) primarily due to a 190% increase in exchange losses under US GAAP in 1996 arose principally the average number of residential lines during the year (from from the re-translation of the US Dollar denominated 80,933 to 234,400) resulting from the inclusion, for the post- debentures to Pounds Sterling using the 31 December 1996 acquisition period only, of the former SBCC franchises which exchange rate and marking the associated hedging contributed 194,217 lines at the year end and an increase instruments to their market value at 31 December 1996. in the number of homes passed and marketed in other franchises (from 580,708 to 968,863). This increase was

SUMMARY OF OPERATIONS partially offset by a 15% decrease in the average monthly

YEARS ENDED 31 DECEMBER 1994 AND 1995 revenue per line (from £24.16 to £20.48). This decrease was The Group’s consolidated revenue increased from £72.0 million mainly attributable to the inclusion of the former SBCC in 1994 to £144.8 million in 1995 as a result of the larger franchises which had a lower average monthly revenue per customer base created through both the Group’s continuing line and price reductions in per minute call charges in network construction and the inclusion of the results of response to price cutting from BT. In December 1995 line the former SBCC franchises from their acquisition date on rental rates in the former SBCC franchises were increased to 3 October 1995. be more consistent with the rates in other franchises. Business telephony revenue increased by 98% (from £8.8 Revenue million to £17.4 million) primarily due to a 127% increase in Cable television revenue increased by 80% from £35.9 million the average number of business telephony lines during the in 1994 to £64.7 million in 1995. This increase was year (from 10,852 to 24,681), which was partially offset by a attributable to an 82% increase in the average number of 13% decrease in the average monthly revenue per business TELEWEST COMMUNICATIONS plc • 29

line (from £67.66 to £58.92). This decrease was attributable to Other income (expense) the inclusion of the former SBCC franchises, which have The Group’s share of the net losses of the Affiliated historically marketed their services to smaller businesses which Companies was £8.5 million and £12.8 million for 1994 and had a lower average monthly revenue per line, and price 1995, respectively. reductions in per minute call charges in response to competition. Financial expenses, net, under UK GAAP, consisted Other revenue increased 29% during 1995 and is derived principally of interest expense of £23.8 million (£10.1 million primarily from management fees for services provided to in 1994), an accounting loss on the sale of interest rate swaps Affiliated Companies, cable publications and network of £5.5 million (£nil in 1994), exchange losses on foreign management services provided to other operators and currency translation of £4.7 million (£nil in 1994) offset by advertising sales. interest income earned on short-term investments and loans to Affiliated Companies of £15.6 million (£2.3 million in Operating costs and expenses 1994). Under US GAAP, financial expenses consisted of Programming costs as a percentage of cable television revenue interest expense of £26.6 million (£10.1 million in 1994), increased from 43% in 1994 to 50% in 1995 as a result of loss on the sale of interest rate swaps of £8.6 million (£nil in more channels being provided to customers and a higher 1994), and exchange losses on foreign currency translation of premium to basic channel ratio. These costs are generally £14.6 million (£nil in 1994). Interest expense and exchange higher for premium channels than for basic channels. As a losses on foreign currency translation increased primarily as a percentage of telephony revenue, interconnection charges result of the finance costs payable on the Senior Debentures declined from 46% in 1994 to 39% in 1995 as line rental and the Senior Discount Debentures. income, which incurs no third party cost, represented a larger proportion of total average revenue per line in 1995 than LIQUIDITY AND CAPITAL RESOURCES in 1994. During the year, the Group entered into a £1.2 billion senior Selling, general and administrative expenses decreased as secured credit facility with a syndicate of banks (the “Senior a percentage of revenue from 84% in 1994 to 73% in 1995. Secured Facility”). The Senior Secured Facility will be used to A portion of labour and overhead costs are capitalised as they finance the capital expenditure, working capital requirements relate to the construction of the network. Total labour and and other permitted related activities for the construction and overhead costs capitalised in 1995 amounted to £26.6 million, operation of the wholly owned telephony and television compared to £22.8 million in 1994. The increase in franchises of the Group; to fund the payment of cash interest depreciation expense of 103% in 1995 under UK GAAP on the Senior Debentures and Senior Discount Debentures (as (98% under US GAAP) was the result of capital expenditure described below); to fund the repayment of existing secured associated with the Group’s construction activities. Under borrowings of the Group in respect of the London South and US GAAP, amortisation expense increased from £1.8 million in South West Regional Franchise Areas; to fund loans to or 1994 to £7.9 million in 1995 primarily due to the amortisation investments in Affiliated Companies; to fund the acquisition of the goodwill arising on the acquisition of SBCC. Under and subsequent construction of local delivery operators/ UK GAAP, this goodwill has been written off to reserves. franchises; and to refinance advances and the payment of 30 • TELEWEST COMMUNICATIONS plc

interest, fees and expenses in respect of the Senior Secured to fixed interest rate payments in the range of 7.835% – Facility. 7.975%. The swap agreements, which commence in early The Senior Secured Facility is divided into two tranches, the 1997, have a five-year maturity and a notional principal first, (tranche A), is available on a revolving basis for up to amount which adjusts upwards on a semi-annual basis £300 million, reducing to £100 million by 30 June 1998, with to a maximum of £750 million. full repayment by 31 December 1998. The second tranche, On 3 October 1995, the Group raised £734 million through

5 (tranche B), is available on a revolving basis concurrently with the issue of $300 million principal amount of 9 ⁄8% Senior the first tranche for an amount up to 6.5 times the trailing, Debentures due 2006 (the “Senior Debentures”) and $1,536 rolling six month annualised consolidated net operating cash million principal amount at maturity of 11% Senior Discount flow, gradually reducing throughout the period of the facility Debentures due 2007 (the “Senior Discount Debentures”). to 4 times by 1 January 2000. Thereafter, the amount Interest on the Senior Debentures is payable semi-annually and outstanding under the facility converts to a term loan commenced on 1 April 1996; interest on the Senior Discount amortising over 5 years. The aggregate drawing at any time Debentures will be payable semi-annually commencing on under both tranches cannot exceed £1.2 billion. Borrowings 1 April 2001. The proceeds of the issue were used by the under the Senior Secured Facility are secured by assets, Group to fund general working capital, capital expenditures and including the partnership interests and shares of subsidiaries additional investments in Affiliated Companies, to repay a of the Group, and bear interest at 2.25% above LIBOR for credit facility entered into by a Group company and to purchase tranche A and between 0.5% and 1.875% above LIBOR the currency hedge arrangements as described below. (depending on the ratio of borrowings to the trailing, rolling The Group’s principal hedge instruments are a combined six month annualised consolidated net operating cash flow) foreign currency and interest rate swap (“Foreign Currency for tranche B. The Group’s ability to borrow under the Senior Swap”) and a foreign currency option. The Foreign Currency Secured Facility is subject to, among other things, its Swap fully hedges against adverse exchange rate fluctuations compliance with the financial and other covenants and on the principal amount of the Senior Debentures and the borrowing conditions contained therein, and the failure associated interest payments. The foreign currency option to comply with such covenants could result in all such provides protection against exchange rate fluctuations on the amounts outstanding under the facility becoming due and Senior Discount Debentures below a rate of $1.452: £1, and payable. In October 1996, the first drawdown in the amount allows the Group to benefit from positive exchange rate of £100 million was made under tranche A of the Senior movements. Both hedging instruments provide protection up Secured Facility. Further drawdowns of £50 million under to 1 October 2000, the early redemption date of the Senior tranche A and £50 million under tranche B were made Debentures and the Senior Discount Debentures. early in 1997. The Group’s results may be materially influenced by future The Group has entered into certain delayed-starting interest exchange rate movements, particularly in the US GAAP rate swap agreements in order to manage interest rate risk financial statements, due to the requirement that the hedge on the Senior Secured Facility. The interest rate swaps convert instruments and the debentures are marked to their market floating rate interest payable on drawdowns under the facility value at the end of the financial period. TELEWEST COMMUNICATIONS plc • 31

The Group generated a net cash inflow/(outflow) from 1994, the cash inflow was generated by drawdowns under a operating activities of £28.5 million, (£10.2) million, and former revolving credit facility, cash contributions made by the (£1.9) million in 1996, 1995 and 1994, respectively, under former joint venturers to the Company, and proceeds arising UK GAAP. On a US GAAP basis, net cash provided by/(used in) from the initial public offering of the Company in November operating activities was £18.1 million, (£6.6) million and 1994, the latter of which was used in part to repay earlier (£9.2) million in 1996, 1995 and 1994, respectively. The drawdowns under the former revolving credit facility. difference between UK and US GAAP is principally due to a Cash balances at 31 December 1996 were £79.1 million. difference in the classification of interest on the cash flow The Group currently expects that the anticipated funding statement. requirements (after taking into account current cash The Group incurred net cash outflow from investing activities and deposit balances and anticipated revenues) required to of £483.2 million, £265.8 million and £231.9 million substantially complete the construction of the owned and in 1996, 1995 and 1994, respectively. The Group’s principal operated network (including the recently acquired franchises investing activities continue to be the construction of the of Worcester and Southport), to fund the Group’s operations, to network, the provision of funding to the Affiliated Companies, upgrade older portions of the network, and to pay interest on and, in the year ended 31 December 1996, the acquisition of a the Group’s debt will be provided by the Senior Secured Facility. franchise covering the Worcester area from Bell Cablemedia plc There can be no assurance that the Group will not elect to use for £9.8 million. Total expenditure on fixed assets was alternative funding sources or that the Group’s current £515.6 million, £269.1 million and £215.5 million in 1996, anticipated funding requirements will be in line with 1995 and 1994, respectively. The increase in expenditure expectations. The Group is continually evaluating investment was largely a result of the inclusion for a full year in 1996 of opportunities as the market for cable services in the UK the expenditure relating to the construction of the network in the develops and such opportunities may require additional former SBCC franchises. The Group expects to continue to have funding. The Group has announced its intention to develop significant funding requirements for the foreseeable future to an interfranchise network and to launch digital services and construct its network. in this context is evaluating the funding requirements and Cash inflow from financing activities was £79.0 million, considering debt financing opportunities.

£480.8 million and £482.5 million in 1996, 1995 and 1994, SAFE HARBOR STATEMENT UNDER THE US PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: respectively. The discussion above and contained elsewhere in this report includes certain forward In 1996, the cash inflow from financing activities was looking statements that involve risks and uncertainties that could lead to actual results that are significantly different from those anticipated by the Group. These risks and principally generated through the £100.0 million drawdown uncertainties relate to, among other things, the extent consumer preference develops for cable television over other methods of providing in-home entertainment and for under the Senior Secured Facility which was partially offset by the Group a viable alternative to BT and others as a provider of telephony service; the ability of the Group to manage growth and expansion; the ability of the Group costs of £18.4 million incurred to arrange the facility; in 1995, to construct its network in a cost efficient and timely manner; the ability of the the cash inflow was generated by net proceeds of £734.2 Group to raise additional financing if there is a material adverse change in the Group’s anticipated revenues or expenses; the ability of the Group to respond to changes or million arising from the issue of the debentures which were increases in competition and adverse changes in government regulation; the extent programming is available at reasonable costs; adverse changes in the price of telephony partially used to purchase the associated currency hedges and interconnection; disruptions in supply of services and equipment, and the performance of the Affiliated Companies (which are not controlled by the Group). to repay a credit facility entered into by a Group company; in 32 • TELEWEST COMMUNICATIONS plc

Board of Directors

From left to right, front row: F. A. Vierra, S. J. Davidson, V. M. Hull (Company Secretary) and C. J. Burdick. Back row: Lord Griffiths of Fforestfach, A.W. P. Stenham, A. G. Ames, Lord Borrie QC, C. M. Lillis and A. N. Singer. In absentia are: J. H. Atterbury III and J. O. Robbins. TELEWEST COMMUNICATIONS plc • 33

F. A. Vierra, 65, is the non- J. H. Atterbury III, 48, is a Lord Griffiths of Fforestfach, Executive officers: executive Chairman of the non-executive Director. He is the 55, is a non-executive Director. Board. He is an Executive President and Chief Executive He is an International Adviser C. J. Burdick Vice President of Tele- Officer of SBC International at Goldman Sachs International. Finance Director Communications Inc and Vice Operations. Prior to this he was Previously he served as Head of G. R. Cheetham Chairman and Chief Executive President of SBC’s Telemex the Prime Minister’s Policy Unit Vice President of Business Officer of Tele-Communications operations and President and from 1985 to 1990 and was a Services International Inc. He is Chief Executive Officer of Director of The Bank of England. S. J. Davidson responsible for all international Southwestern Bell Telecom. He is a non-executive Director Chief Executive Officer cable and programming He is also a Director of Téléfonos of Herman Miller Inc., V. M. Hull operations for Tele- de Mexico. VTR S.A. of Chile, Times Newspaper Holdings Ltd, General Counsel and Company Communications International. Transcell, a French Cellular Servicemaster Limited and Secretary He also serves as Chairman of company and Amdocs Inc. English, Welsh and Scottish B. D. Langham TeleWest Europe Group, a joint Railways. Senior Vice President of Digital venture between TCI and US Lord Borrie QC, 65, is a Services WEST which operates cable non-executive Director. C. M. Lillis, 55, is a non- L. C. Rexroth television networks in Norway, He is President of the Institute executive Director. He is Chief Operations Officer Sweden and Hungary, and is a of Trading Standards Executive Vice President of J. H. Watson non-executive Director of Administration. Previously he was US WEST, Inc and President Vice President of Network Flextech plc. the Director General of the and Chief Executive Officer of Services Office of Fair Trading. He also US WEST Media Group. He is R. P. Wilson A. W. P. Stenham, 65, is the serves as a non-executive also a member of the Board of Senior Vice President of non-executive Deputy Chairman Director of Woolwich plc, Representatives of Time Warner Residential Services of the Board and Chairman of The Mirror Group plc, which has Entertainment Company, L.P. the Audit Committee. Since an interest in Live TV and Three 1990 he has been Chairman of Valleys Water plc. J. O. Robbins, 54, is a non- Arjo Wiggins Appleton plc. executive Director. He is the He is also a non-executive C. J. Burdick, 45, is the Finance President and Chief Executive Director of The Rank Director appointed in February Officer of Cox Communications, Organisation PLC, Standard 1997. He was Acting Chief Inc. He is a past chairman of the Chartered PLC and Unigate PLC. Financial Officer from September US National Cable Television 1996. Prior to this he was Vice Association and currently serves A. G. Ames, 52, is a non- President Finance and Assistant on its executive committee. executive Director and Chairman Treasurer at US WEST Inc. Prior He is a Director of Teleport of the Remuneration Committee. to joining US WEST in 1990, Communications and NCR He is President and Chief he worked in Treasury and Corporation. He is also Chairman Executive Officer of US WEST Corporate Development roles at, of the 1995 Policy Owners International Inc. Previously inter alia, Time Warner and Examining Committee of he was President and Carnation International. Northwest Mutual Life Insurance Chief Executive Officer of US Company. WEST Communications, Inc. He is S. J. Davidson, 41, is the Chief also Director of Albertsons Inc Executive Officer. Initially A. N. Singer, 45, is a non- and Tektronix Inc. and a non- appointed Finance Director in executive Director. He is President executive Director of Flextech plc. January 1993 he became Chief and Chief Operating Officer Executive Officer in February of Tele-Communications 1997. Previously he worked International Inc and is for four years at Bankers Trust responsible for the management Company in London where he and development of its was a Managing Director with international cable, telephony responsibility for clients in the and programming operations. media business throughout Previously Mr Singer was Europe. He was previously Senior President and Chief Executive Vice President of Corporate Officer of United Artists Finance and Treasurer of Lorimar Entertainment (Programming) Telepictures Inc. Limited. He is also a non- executive Director of Flextech plc and Scottish Television plc. 34 • TELEWEST COMMUNICATIONS plc

Operating Statistics – Owned & Operated and Affiliated Franchises As at 31 December 1996

Total Owned London South North South North and Operated South West East Scotland East West Midlands Group

Residential Cable Television Homes passed and marketed 360,091 327,998 162,559 447,316 162,499 505,695 369,795 2,335,953 Residential television customers 82,827 70,606 32,518 97,250 44,634 116,466 83,841 528,142 Penetration rate 23.0% 21.5% 20.0% 21.7% 27.5% 23.0% 22.7% 22.6% Churn rate 33.1% 31.9% 32.9% 36.6% 29.1% 32.5% 34.5% 33.4% Average monthly revenue per customer £25.27 £22.62 £23.27 £24.95 £23.67 £20.84 £20.80 £22.95

Residential Telephony Homes passed and marketed 336,270 328,116 159,398 394,201 162,499 504,455 369,795 2,254,734 Residential telephone customers 61,151 89,900 48,650 98,735 48,654 153,152 120,135 620,377 Penetration rate 18.2% 27.4% 30.5% 25.0% 29.9% 30.4% 32.5% 27.5% Residential telephone lines 63,443 91,437 48,653 101,069 48,769 153,152 120,486 627,009 Churn rate 15.4% 11.1% 16.4% 18.8% 19.0% 24.1% 17.4% 19.6% Average monthly revenue per customer £26.50 £20.34 £17.93 £20.44 £21.11 £19.67 £17.89 £20.26

Business Telephony Business telephone customers 4,054 4,139 1,271 3,024 974 5,041 2,379 20,882 Business telephone lines 18,543 13,843 2,627 8,164 3,443 12,324 8,879 67,823 Average number of lines per customer 4.6 3.3 2.1 2.7 3.5 2.4 3.7 3.2 Average monthly revenue per line £64.82 £44.51 £51.49 £53.18 £71.98 £50.86 £46.67 £54.48 TELEWEST COMMUNICATIONS plc • 35

Telewest Owned & Birmingham Cable Cable London The Cable Corporation Operated & Equity Equity Equity Affiliated Total Interest Total Interest Total Interest Group on [100%] [27.5%] [100%] [50.0%] [100%] [16.5%] Equity Basis

Residential Cable Television Homes passed and marketed 378,653 104,130 296,416 147,912 231,726 38,234 2,626,229 Residential television customers 111,645 30,702 67,477 33,671 42,928 7,084 599,599 Penetration rate 29.5% – 22.8% – 18.5% – 22.8% Churn rate ––––––– Average monthly revenue per customer –––––––

Residential Telephony Homes passed and marketed 369,512 101,616 296,416 147,912 231,354 38,173 2,542,435 Residential telephone customers 105,128 28,910 57,495 28,690 49,234 8,124 686,101 Penetration rate 28.5% – 19.4% – 21.3% – 27.0% Residential telephone lines 105,128 28,910 59,074 29,478 49,234 8,124 693,521 Churn rate ––––––– Average monthly revenue per customer –––––––

Business Telephony Business telephone customers 2,994 823 2,560 1,277 1,912 315 23,297 Business telephone lines 11,302 3,108 9,259 4,620 18,290 3,018 78,569 Average number of lines per customer 3.8 – 3.6 – 9.6 – 3.4 Average monthly revenue per line ––––––– 36 • UK GAAP TELEWEST COMMUNICATIONS plc Financial statements under UK GAAP

Contents

37 Report of the directors 40 Report of the remuneration committee 44 Corporate governance 47 Auditors’ report 48 Consolidated profit and loss account 49 Consolidated balance sheet 50 Company balance sheet 51 Consolidated cash flow statement 52 Reconciliation of movements in equity shareholders’ funds 53 Notes forming part of the financial statements TELEWEST COMMUNICATIONS plc UK GAAP • 37 Report of the Directors

1. Financial statements Mr Burdick was appointed Acting Chief Financial Officer of the The Directors have pleasure in submitting their annual report Company on 30 October 1996 and Finance Director on together with the consolidated financial statements of the 12 February 1997. Company and its subsidiary undertakings for the year ended 31 December 1996. In accordance with the Company’s Articles of Association, each of the Directors will retire from office at the Annual The UK GAAP financial statements are set out on pages 48 General Meeting and each will offer himself for re-election to 66 and the Auditors’ report thereon, on page 47. The at the Annual General Meeting. US GAAP financial statements are set out on pages 69 to 86 and the Auditors’ report thereon, on page 68. 7. Board committees

The acquisition of SBCC on 3 October 1995 has been a) Remuneration Committee accounted for in the 1995 consolidated results under the The Remuneration Committee is comprised solely of non- acquisition method of accounting. Therefore, the 1995 executive Directors: Mr Ames (Chairman of the Committee), consolidated profit and loss account includes the results of Mr Singer and Mr Stenham. Mr Ames and Mr Singer SBCC from 3 October 1995 to 31 December 1995. The 1996 represent affiliates of U S WEST Inc. (“US WEST affiliates”) consolidated profit and loss account includes the results of and TCI International Inc (“TCI affiliates”) respectively. SBCC for the full year. Mr Stenham is an independent non-executive Director. The affiliates of SBC International Inc (“SBC affiliates”) 2. Principal activities and business review and an affiliate of Cox Communications Inc (“Cox affiliate”) The Chairman’s Statement on pages 6 and 7, the Chief are entitled to appoint an observer to attend meetings of Executive’s Statement on pages 8 and 9, the Operational the Committee. Review on pages 10 to 23 and the Financial Review on pages 24 to 31 form part of this report. Information on likely future b) Audit Committee developments of the business of the Group and its activities The Audit Committee is comprised solely of non-executive is to be found in those sections. The principal activities Directors: Mr Stenham (Chairman of the Committee), of the Group are the provision of cable television, Mr Ames, Mr Atterbury, Lord Griffiths and Lord Borrie QC. telephony and on-line services as more fully described Mr Ames and Mr Atterbury represent the US WEST affiliates in the Operational Review. and SBC affiliates respectively. Mr Stenham, Lord Griffiths and Lord Borrie QC are independent non-executive Directors. 3. Post balance sheet events The TCI affiliates are entitled to be represented on the There were no material post balance sheet events between the Committee but have agreed not to appoint a representative end of the financial year and the date of this Report. for so long as the SBC affiliates and the Cox affiliate are represented. During such period, the TCI affiliates are entitled 4. Dividends to appoint an observer to attend meetings, the observer being The Directors have not recommended the payment of a Mr Vierra. dividend in respect of the Telewest shares for the financial year ended 31 December 1996. No dividend was recommended for payment for the financial year ended 31 December 1995.

5. Fixed assets Movements in fixed assets are given in note 12 to the UK GAAP consolidated financial statements on page 57.

6. Directors Details of all the Directors of the Company, including the non-executive Directors, appear on pages 32 and 33.

On 31 July 1996, Mr Michels resigned as a Director and Chief Executive Officer of the Company. Details of the compensation paid to Mr Michels are given on page 42.

Mr Davidson was appointed Acting Chief Executive Officer of the Company on 31 July 1996 and Chief Executive Officer on 12 February 1997. 38 • UK GAAP TELEWEST COMMUNICATIONS plc Report of the Directors

8. Directors’ interests

Directors’ interests (all of which are beneficial) in Telewest shares1 as at 31 December 1996 were as follows: a) Directors’ share interests

Telewest shares under option5

31 Dec Granted Date of 31 Dec Option 1995 during 1996 grant 1996 price

Stephen Davidson 475,1832 475,183 166,8803 171.5p 107,5793 6 March 1996 141p 274,4593 11,5004 11,500 150p

Notes: 1 None of the Directors are or have been interested in the convertible preference share capital of the Company. Mr Burdick owns 20,000 Telewest shares in the form of ADRs. The interests of the Directors described herein have not changed between the end of the financial year and the date of this report. 2 The award was made in January 1995 pursuant to the Telewest Restricted Share Scheme (described on page 41) following completion of the initial public offering in respect of Telewest shares. The shares will normally be released for no payment in January 1998. Mr Davidson is deemed to be interested in 3,937,080 Telewest shares purchased for the Telewest Restricted Share Scheme because he is a potential beneficiary of grants of such shares pursuant to the scheme. 3 These options are held under the Telewest Executive Share Option Schemes (described on page 41) and are exercisable (subject to the satisfaction of a performance condition) in respect of those granted in 1995 between 17 June 1998 and 15 June 2002, and in respect of those granted in 1996, between 12 March 1999 and 10 March 2006. 4 These options are held under the Telewest Employee Share Save Scheme and (described on page 41) are normally exercisable after 1 February 2000. 5 The 348,001 options over Telewest shares held by Mr Michels under the Telewest Executive Share Option Schemes became exercisable (subject to the rules of the schemes) on the date of his resignation as a Director of the Company on 31 July 1996. The 434,787 Telewest shares awarded under the Telewest Restricted Share Scheme will be transferred to Mr Michels. Further details are given in the Report of the Remuneration Committee on page 42. 6 For details of options to be granted to Mr Burdick after the date of this report see page 42 of the Report of the Remuneration Committee.

The option prices are all higher than the middle market price on 31 December 1996, which was 124p and the range during the year was 117.5p to 188.5p. More information on share price movements during the year is given in Shareholder Information on page 88.

Save as disclosed above, no right to subscribe for shares in the Company or its subsidiaries was granted to or exercised by a Director, nor any member of his immediate family during 1996.

Save as disclosed above, the Directors had no interests in the Company’s issued share capital or the issued share capital of its subsidiaries at the dates given above. b) Directors’ interests in material contracts The Group obtains a significant amount of its cable television programming from providers in which Flextech plc (approximately 50.9% of whose share capital is owned by affiliates of TCI and approximately 7.4% of whose share capital is owned by affiliates of US WEST) and other affiliated companies of TCI and US WEST own interests in or manage. Mr Vierra, Mr Singer and Mr Ames are non-executive Directors of Flextech plc. The Group also obtains cable television programming from providers (including UK Gold) in which the Cox affiliate is interested.

Save as disclosed herein, there has been no contract of significance subsisting during the year under review to which the Company or its subsidiaries was a party and in which any Director was materially interested. TELEWEST COMMUNICATIONS plc UK GAAP • 39

9. Share capital national origin, sex, marital status or religious beliefs. Full As at 11 March 1997, there were 927,567,600 issued consideration is given to applications for employment from Telewest shares and 1,392 holders of record and 1,533,361 disabled persons who are able to demonstrate that they have issued ADSs and 11 ADS holders of record. Details of all the necessary aptitudes and abilities. If individuals become changes in the share capital during the financial year are disabled during employment and they are unable to continue set out in note 20 to the UK GAAP consolidated financial to perform their jobs, consideration is given to retraining for statements on pages 61 and 62. alternative jobs. The importance of staff training is recognised at all levels. Each operating company is responsible for 10. Substantial shareholdings consulting with its staff on a regular basis and provides a The TCI affiliates and the US WEST affiliates each own 50% of common awareness of its business aims and performance TW Holdings Inc., which itself owns the beneficial interest in to maximise the staff’s involvement in the Group’s affairs. 492,223,500 Telewest shares (approximately 53% of the Information is provided to employees, as required, on matters Telewest shares) and 265,276,500 convertible preference of concern to them. shares (approximately 53% of the issued convertible preference shares). The SBC affiliates own 91,997,480 Telewest shares The Group aims to attract and retain employees of the highest (approximately 10% of the Telewest shares) and 115,395,104 calibre and this is encouraged through participation in various convertible preference shares (approximately 23% of the performance related bonus schemes including the employee issued convertible preference shares). The Cox affiliate owns share schemes described on pages 40 to 42 of the Report of 91,997,480 Telewest shares (approximately 10% of the the Remuneration Committee. Telewest shares) and 115,395,104 convertible preference shares (approximately 23% of the issued convertible preference 14. Directors’ and officers’ liability insurance shares). The convertible preference shares are convertible, The Company maintains insurance to cover Directors’ and subject to certain restrictions, into Telewest shares on a one for Officers’ liability as referred to in Section 310(3)(a) of the one basis. The Telewest shares and the convertible preference Companies Act 1985. shares owned by the TCI affiliates and the US WEST affiliates each represent approximately 26.7% of the Company’s total 15. Auditors issued share capital and the Telewest shares and convertible A resolution to reappoint the retiring auditors, KPMG Audit Plc, preference shares owned by the SBC affiliates and the Cox and to authorise the Directors to fix their remuneration will be affiliate represent, in aggregate, approximately 29% of the proposed at the Annual General Meeting. Company’s total issued share capital. 16. Annual General Meeting The Company has not been notified of other interests of 3% The resolutions to be proposed at the Annual General Meeting or more of its ordinary share capital as at 11 March 1997. to be held at 10.00 am (UK time) on Friday, 9 May 1997 at The Grocers Hall, Princes Street, London EC2R 8AD appear 11. Creditors in the Notice provided with this document together with an The Group agrees payment terms with its suppliers when it explanatory circular. enters into binding purchase contracts. The Group seeks to abide by the payment terms agreed with suppliers whenever it is satisfied that the supplier has provided the goods or On behalf of the Board services in accordance with the agreed terms and conditions. The Group does not have a standard code which deals specifically with the payment of suppliers. V HULL LLB Company Secretary 12. Donations The Group made total charitable donations of £21,066 in the 11 March 1997 year (1995: £63,570) and no political donations.

13. Employment policies Registered Office: Genesis Business Park, Albert Drive, Woking, The Group does not discriminate between employees or Surrey GU21 5RW. potential employees on the grounds of colour, race, ethnic or Registered in England: No 2983307. 40 • UK GAAP TELEWEST COMMUNICATIONS plc Report of the Remuneration Committee

1. Compliance i) Base salary and benefits The Report of the Study Group on Directors’ Remuneration Salaries are established by the Committee by reference to chaired by Sir Richard Greenbury was published on 17 July those prevailing in the employment market generally for 1995. A principal component of its recommendations was a executives of comparable status, responsibility and skills. Code of Best Practice (the “Code”). The following report by To assist in determining the comparability of positions and the Remuneration Committee complies with this Code and competitive market pricing, the Group uses executive with Section A of the Best Practice Provisions on remuneration compensation salary surveys prepared by recognised independent committees as annexed to the Listing Rules of the London compensation consulting firms in the UK. The Group uses Stock Exchange. Full consideration has also been given to surveys that specifically cover the UK cable communications Section B of the Best Practice Provisions regarding remuneration industry, as well as surveys of comparable companies of similar policy, service contracts and compensation, as annexed to the size in similar industries. In general, and because of the Listing Rules of the London Stock Exchange. The Report is also competitive nature of the market, the Group seeks to set in line with requirements under US securities laws applicable to overall executive compensation levels to rank between the remuneration committee reports. Further information on mid-market and upper quartile of the survey data. senior executive remuneration as required by US law can be found in the proxy statement accompanying this document. Salary reviews are generally determined by the Committee on an annual basis. Adjustments in base salary, if any, occur 2. Composition after a formal appraisal process, taking account of individual The members of the Committee are given on page 37 in the performance, changes in job responsibilities, changes in the Report of the Directors. The Committee submits reports marketplace and general economic conditions in the UK. regularly to the full board of Directors concerning its activities and decisions. It has written terms of reference which include Benefits for senior executives typically include a car (or a the assessment and approval of the remuneration of the cash payment in lieu thereof) and payment of its operating executive Directors and senior executives. The Board determines expenses and fuel, and life, disability and health insurance. the remuneration of the non-executive Directors. The benefits are not pensionable.

3. Remuneration policy for the executive Directors and ii) Annual cash bonuses senior executives The Group’s Short-Term Incentive Plan (the “STIP”) provides a) General policy each executive with an opportunity to earn an annual cash The Group aims to attract, motivate and retain high calibre award (which is not pensionable) based upon the achievement executives by rewarding them with competitive salary and of short-term Group targets (ie, one financial year) and benefit packages which are linked to both individual and individual contributions to Group results. These targets are set business performance. These packages are based on the Group’s by the Remuneration Committee at the commencement of philosophy of emphasising pay-for-performance. The Group each financial year. Under the STIP, the executive has an award recognises the pressures for short-term as well as long-term opportunity expressed as a percentage of base salary. For performance and seeks to provide an appropriate balance. The executive Directors, the award is up to 25% of salary for Group uses a market-based four-tiered salary structure for its achieving target, rising to a maximum of 50% of salary if the executive employees. Each executive is assigned to one of Group exceeds its STIP target. The 1996 STIP awards to the these four tiers based on his or her level of responsibility and executive Directors and senior executives represented position in relation to others inside and outside the Group. approximately 49.5% of the targeted bonus amount. The amount of the STIP is based upon the extent to which the The Committee believes that the Group’s current remuneration Group achieves certain specified objectives and, in the case policy (including the proposed new share plans described of the executive Directors, the extent to which the executive below) appropriately aligns the Group’s executive compensation Directors meet certain specified personal objectives. In 1996, with the performance of the Group and shareholder interests the STIP objectives related to the achievement of targets set and offers competitive compensation for its executives. in respect of growth, quality of operations (measured by The Committee does not believe in compensating for poor customer satisfaction surveys), operating cash flow, net cash performance and does not reward unsatisfactory performance. flow and personal objectives. The objective is to have payout In the case of early termination of employment, it is the tied to Group performance, thereby providing higher than Committee’s policy to seek to mitigate any liability. targeted payouts for better than expected performance and lower than targeted payouts for performance below the b) Remuneration components targeted levels. For executive Directors and senior executives, There are four components to the executive remuneration bonus payments are based on the performance of the Group package: base salary and benefits, annual cash bonus, as a whole. Those employed within franchises receive bonuses long-term incentive arrangements and pension. based on the performance within the employing franchise. TELEWEST COMMUNICATIONS plc UK GAAP • 41

iii) Long-term incentive arrangements 4. Proposed arrangements The Group operates the following long-term share and option It is proposed that two new share plans be introduced. incentive plans: The Telewest Restricted Share Scheme Shareholder approval will be sought for the introduction of (designed to operate in conjunction with an Employee Share these share plans at the 1997 AGM. A summary of the rules Ownership Plan (“ESOP”)); an Inland Revenue approved for both plans can be found in the 1997 AGM Notice. executive share option scheme, the Telewest 1995 (No.1) A brief description is set out below. Executive Share Option Scheme; an unapproved executive share option scheme, the Telewest 1995 (No.2) Executive a) Equity Participation Plan (“EPP”) Share Option Scheme; a share save scheme and a profit Under the STIP, executives may be due a cash bonus. The EPP sharing scheme designed for Inland Revenue approval. provides that, at the Remuneration Committee’s discretion, an executive can use up to 50% of the bonus payable to him (or The Telewest Restricted Share Scheme was designed to replace such lower percentage as the Remuneration Committee may a cash bonus scheme in operation prior to the initial public determine), after deduction of tax, to buy Telewest shares offering in November 1994 and for this reason, exercise of the (“bonus shares”). He must deposit the bonus shares with the award is not subject to the satisfaction of a performance Trustee of the existing Telewest ESOP. In return, the executive condition. Under this scheme, awards were made over is provisionally allocated for no payment a matching number of Telewest shares to senior executives based on a percentage Telewest shares (after grossing up the value of the bonus shares). of salary and for no consideration. At the time of the initial public offering Mr Davidson was granted an award over Alternatively, at the Remuneration Committee’s discretion, 475,183 Telewest shares. Awards generally vest over a three the executive can agree to forego up to 50% of the bonus year period with, in the case of Mr Davidson, a final vesting payable to him (or such lower percentage as the Remuneration date of January 1998. Awards under the scheme are made by Committee may determine), before deduction of tax, and the ESOP Trustees following recommendations made by the receive instead a conditional right to acquire Telewest shares Remuneration Committee and are designed to retain and (“bonus shares”). In return the executive is provisionally motivate senior executives. allocated a matching number of Telewest shares for no payment.

The executive share option schemes also form part of the In each of the above cases, provided the bonus shares are Group’s long-term incentive arrangements. Options over retained for three years and the executive remains employed Telewest shares are granted in phases, generally on a one by the Group for three years, the bonus and matching shares times salary basis up to a maximum of four times salary would thereafter be released to the executive. and exercise is subject to a performance condition, namely out-performance of the FT-SE 100 Index over any three-year b) Long-Term Incentive Plan period preceding exercise. Under the LTIP, which will operate on an annual basis, an executive will be awarded the provisional right to receive, The option arrangements relating to Mr Davidson are set out for no payment, a number of Telewest shares with a value on page 38 of the Report of the Directors. equating to a percentage of his/her base salary. The shares will not vest unless certain performance criteria, based on total The Inland Revenue approved share save scheme is designed shareholder return (“TSR”) are met. The percentage of salary to incentivise employees which enables the Company to grant will be determined by the Remuneration Committee and will options to employees to purchase Telewest shares at a be up to 100% of base salary for executive Directors. The 20% discount to market price. These options can be exercised award is divided equally, with vesting of 50% depending on only with funds saved by employees over time in a qualified the Company’s TSR meeting a performance condition relating savings account. to the TSR of FT-SE 100 companies, and the remaining 50% depending on the Company’s TSR meeting a performance It is proposed to replace the Telewest Restricted Share Scheme condition relating to the TSR of a group of comparative with a new Long-Term Incentive Plan (“LTIP”) for future share companies (including cable, broadcasting and awards to executive Directors and senior executives. It is telecommunications companies listed on the London Stock intended that following its introduction executives in the new Exchange and cable companies operating in the UK and listed plan will not be granted further options under the executive on Nasdaq), in each case over a three year period. If the share option schemes (subject to exceptions at the discretion Company’s TSR is in the top quartile of the FT-SE 100 over that of the Remuneration Committee). In future, options under period, the executive will receive 50% of the number of these schemes will generally be awarded to employees not shares awarded to him; if the Company’s TSR is 50th place in participating in the LTIP. It is also intended that, if the LTIP is the FT-SE 100, the executive will receive 12.5% of the number introduced, no further awards will be made under the of shares awarded to him; if below 50th place in the FT-SE 100, Telewest Restricted Share Scheme. the executive will receive nothing in respect of this portion of the award. Similarly, if the Company’s TSR is in the top quartile 42 • UK GAAP TELEWEST COMMUNICATIONS plc Report of the Remuneration Committee

of the group of comparative companies in that period, the year is justified in view of his recent move from the US. executive will receive 50% of the number of shares awarded Mr Burdick’s salary has been agreed at £225,000 and he will to him; if the Company’s TSR is at the median position the be awarded options under the Telewest Executive Share executive will receive 12.5% of the number of shares awarded Option Schemes on the basis of 4 times salary to be granted to him; if below the median position, the executive will receive as soon as practicable and subject to the Rules of the Telewest nothing in respect of that portion of the award. In either test, Executive Share Option Schemes. It is also intended that a proportionate number of shares will be received for Mr Burdick shall participate in the LTIP. intermediate positions. TSR in each case will be calculated by reference to the cash flow generated by dividends, and capital Mr Michels resigned from his position as Chief Executive appreciation on a share purchased at the beginning and sold Officer and from the Board of Directors with effect from at the end of the period. If the executive remains employed by 31 July 1996. He joined the Company in January 1994. the Group, at the end of the third year after the date of grant, At the time of the initial public offering in November 1994, 50% of the vested award will be transferred to the employee Mr Michels entered into a three year, fixed term employment and the balance will be transferred at the end of the fourth agreement with the Company which reflected Mr Michels’ year after the date of grant if the employee remains so anticipated term of employment with the Company. The employed. Company and Mr Michels agreed the early termination of this arrangement which resulted in a payment of £410,268 being Assuming shareholder approval is obtained at the 1997 AGM paid to Mr Michels by the Company which reflected, with for these plans, the Remuneration Committee may, at its mitigation, the unexpired value of Mr Michels’ contract discretion, decide to operate them with effect from (including salary, housing and car allowance and net of 1 January 1997. income taxes). There is a provision for income taxes which is subject to agreement with the Inland Revenue. 5. Pension The Group contributes to personal pension schemes Mr Michels is also entitled to exercise 348,001 options over established by individual employees. The actual contribution of Telewest shares under the Telewest Executive Share Option the Group to such schemes depends on the contribution made Schemes and subject to the rules of the schemes, in respect by the employee and may vary according to length of service. of those granted in 1995 between 1 August 1996 and Generally the Group contribution varies from 3% of an 8 May 1999 and in respect of those granted in 1996 between employee’s salary to a maximum of 12% for executive 1 August 1996 and 10 September 1999 at prices ranging Directors. In addition, there is a money purchase pension from 138p to 173.5p. He is also to receive his award of scheme to which the Group contributes an amount equal to Telewest shares under the Telewest Restricted Share Scheme the employee’s contribution, such contributions varying of 434,787 Telewest shares which shall be transferred between 3% and 6%. The Group’s contribution is based on to him under the rules of the scheme and his contractual the employee’s salary and does not include benefits or bonuses. arrangements.

6. Executive Directors’ agreements Under the current Remuneration Committee policy senior Mr Davidson has agreed to reduce the notice period in his executives have employment agreements with notice periods employment agreement from two years’ to one year’s notice which range from three months to one year, depending on in accordance with the recommendation of the Code. their grade. However, the Remuneration Committee believes that at this stage of the Group’s development it may be necessary to offer 7. Directors’ remuneration executives contracts in excess of one year to attract candidates The aggregate compensation for the Directors is as follows: of the appropriate calibre. In July 1996 Mr Davidson’s salary 1996 1995 was increased to £225,000 from £151,686 to reflect his £’000 £’000 additional responsibilities as Acting Chief Executive Officer, Base Salary and Benefits 530 1,193 following the departure of Mr Michels from the Company. This was increased to £335,000 in February 1997, effective from Annual Bonus – STIP 25 79 July 1996, to reflect his confirmation as Chief Executive Special Bonus – 140 Officer. For the financial year ended 1996, Mr Davidson was Pension 18 24 awarded an annual bonus, pursuant to the STIP, of £25,500. Compensation for loss of office 539 487 1,112 1,923 Mr Burdick has agreed an initial two year, fixed term agreement to continue thereafter until terminated by the Company giving Additional information required under US securities laws with no less than twelve months’ notice to expire on or at any time respect to the compensation of the Directors, the Chief after the end of the initial fixed term. The Remuneration Executive Officer and certain other executives is set out under Committee believes an initial notice period in excess of one the caption “Executive Compensation” in the Proxy Statement. TELEWEST COMMUNICATIONS plc UK GAAP • 43

Directors’ Compensation

Compensation Total emoluments Annual/ for loss of excluding Pension Salaries/fees Taxable Benefits Special Bonuses office Contributions Pension Contributions 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 EXECUTIVE: S J Davidson 236 143 12 12 25 98 – – 273 253 13 10 A Michels 100 160 68 267 – 121 539 – 707 548 5 5 D F Bryan – 145 – 344 – – – 487 – 976 – 9

NON-EXECUTIVE F A Vierra –– –– –– –– –– –– A G Ames – – – – – – – – – – – – A W P Stenham 50 54 – – – – – – 50 54 – – Lord Borrie QC 34 36 – – – – – – 34 36 – – Lord Griffiths 30 32 – – – – – – 30 32 – – J A Atterbury – – – – – – – – – – – – J O Robbins – – – – – – – – – – – – A N Singer – – – – – – – – – – – – C M Lillis – – – – – – – – – – – – Total Board 450 570 80 623 25 219 539 487 1,094 1,899 18 24

Notes: 1 Certain amounts reflected in this table and elsewhere in this section were paid in US dollars, but are represented in this table in pounds, sterling based on an average exchange rate of $1.56 to £1.00 for the year ended 31 December 1996. 2 Mr Michels principal taxable benefits were the provision of £9,841 in respect of his income taxes, housing allowance of £50,638 and use of car of £6,743. 3 Mr Michels’ compensation for loss of office includes a provision for income taxes which is subject to agreement with the Inland Revenue. 4 The 1996 pension contribution for Mr Michels represents a matching contribution to his 401(k) plan. 5 The independent non-executive Directors are paid £1,000 for each Board or Committee meeting they attend in addition to their fees. The executive Directors’ interests in Company share options and restricted share scheme awards are set out on page 38 of the Report to the Directors and proposed awards on page 42 of this report. No non-executive Director has any interests in Telewest shares.

8. Remuneration policy for non-executive Directors The remuneration policy for non-executive Directors consists of fees for their services in connection with Board and Board Committee meetings and, where relevant, for additional services such as chairing a committee. They are not eligible for pension scheme membership and do not participate in any of the Group’s bonus, share option or other incentive schemes. Their remuneration is approved by the Board of Directors.

A G Ames (Chairman) A W P Stenham A N Singer The Remuneration Committee 44 • UK GAAP TELEWEST COMMUNICATIONS plc Corporate governance

In the opinion of the Directors the Company has complied TCI and US WEST, (which for these purposes include TCI, with all applicable aspects of the Cadbury Committee’s US WEST, their affiliates (including TW Holdings Inc) and Code of Best Practice (the “Code”) save that certain of the their permitted transferees), each own 25% or more of the Company’s non-executive Directors (as shown on pages 32 Telewest shares, they will each be entitled to appoint two and 33) represent affiliates of TCI, US WEST, SBC and Cox. Directors to the Board. For so long as affiliates of SBC and Cox each own 8.33% or more of the Telewest shares, each The Company Secretary and the Finance Director are shall be entitled to appoint one Director to the Board. responsible for ensuring that the Board procedures are Mr Vierra and Mr Singer currently represent TCI, Mr Ames followed and that applicable rules and regulations are and Mr Lillis currently represent US WEST, Mr Atterbury complied with and that all Directors have access to the advice and Mr Robbins are the SBC and Cox representatives, and services of the Company Secretary. respectively, Mr Davidson and Mr Burdick are executive Directors of the Company and Mr Stenham, Lord Griffiths 1. Board of Directors and Lord Borrie QC are independent non-executive The Board meets regularly throughout the year. During 1996 Directors. the Board met five times. It retains full and effective control over the Company and monitors the executive management. TCI and US WEST have agreed that, for so long as they Board meetings follow a formal agenda of matters specifically collectively own in excess of 50% of the Telewest shares or reserved for decision by the Board including approving major individually either owns in excess of 30% of the Telewest capital expenditure. The Board is responsible for overall Group shares, they will use their best efforts to ensure that a majority strategy and approving all Group budgets and plans. of Directors are independent of TCI and US WEST.

There is an agreed procedure for Directors to take The quorum for a meeting of the Board consists of the independent professional advice, if necessary, at the majority of the Directors, which must include at least one Company’s expense. designee of each of TCI and US WEST (a “TCI Designated Director” and “US WEST Designated Director”, respectively) 2. Board committees and one independent non-executive Director. TCI and US a) The Audit Committee WEST have agreed that on any matter requiring Board The Audit Committee assists the Board in its duties regarding approval, they will cause the Directors designated by them to the Group’s financial statements and meets with the external vote together as agreed by them (subject to each Director’s auditors. fiduciary duties to the Company), or in the absence of such agreement, to vote together in the manner that would be The Committee meets at least four times a year. It has written most likely to maintain the status quo without materially terms of reference which include review and monitoring of the increasing the Company’s financial obligations or materially accounting policies and reporting requirements of the Group. deviating from its approved budget and business plan. Further details (including membership) appear on page 37 of An affirmative vote of more than two-thirds of the Directors the Report of the Directors. present at any Board meeting is required for decisions on any of the following: acquisition or disposal of any business or part Representatives of the external auditors and the internal of a business outside the ordinary course of business, the auditor attend meetings and have direct access to the approval of annual operating and capital budgets, any members of the Committee at all times. borrowings or the granting of any security interest with a value in excess of £10 million, the issue of any shares The Committee is satisfied with the policies applied during the or the right to acquire any shares, the appointment and year and with the measurement and presentation of financial removal of the Chief Executive Officer or Finance Director information contained in this Annual Report. and the appointment of any person as Director. b) The Remuneration Committee If either the TCI Designated Directors or US WEST Designated The Remuneration Committee has written terms of reference Directors (as the case may be) are precluded from voting on and is responsible for the remuneration policy of senior any matter because of a conflict of interest, the members of executives and Directors. The Committee meets at least four the other shareholder group may vote on such matter as they times a year. Further details (including membership) appear on deem appropriate. On a conflict of interest in relation to TCI page 37 of the Report of the Directors. and US WEST, whichever of the Designated Directors has the conflict will not be required to be part of the quorum and will 3. Board voting arrangements and quorum have no rights to vote in respect of the conflict in question. The Articles of Association of the Company provide that the Notwithstanding this, such Directors will still be entitled to Board shall consist of no less than two Directors and no more attend and be heard on the matter at the relevant Board than twelve Directors. The Articles provide that for so long as Meeting. TELEWEST COMMUNICATIONS plc UK GAAP • 45

TCI and US WEST have agreed that on any matter requiring of responsibility and delegation of authority to executive and shareholder approval, they will vote their shares together in franchise management, who are accountable for the conduct such manner as may be agreed by them or in the absence of and performance of the business within the agreed business such agreement will vote their shares together in such a strategy and subject to the reserved powers and sanctioning manner that would be most likely to continue the status quo, limits laid down by the Board. Management responsibility without materially increasing the Company’s financial is supplemented by accounting, purchasing, and capital obligations or materially deviating from its approved budget expenditure policies and practices applicable across the Group. and business plan. As a result of these ownership and voting arrangements, TCI and US WEST together will generally be b) Financial reporting able to determine the outcome of most matters requiring There is a Group-wide system of planning and budgeting, shareholder approval. with the annual budget approved by the Board. There is frequent reporting of results to each level of management as Any committee appointed by the Board shall include one TCI appropriate, including monthly reporting of actual against Designated Director, one US WEST Designated Director and budget and revised forecasts to executive management, and one independent non-executive Director unless they consent quarterly and annual external reporting in accordance with otherwise. In addition, for so long as SBC and Cox each retain the requirements of the Securities and Exchange Commission the right to appoint a Director they shall together be entitled and the London Stock Exchange. Key issues on financial to appoint one representative and one observer to the Audit management and treasury are also reported regularly to the Committee and one observer to each and every other Audit Committee and Board. committee. The quorum for committee meetings is a majority of the Directors on the committee which, save as set out c) Detailed financial controls below, must include a TCI Designated Director, a US WEST These include internal controls and procedures which Designated Director and an independent non-executive are designed to ensure completeness and accuracy of Director. The requirement for the presence of a Designated the recording of all transactions and the safeguarding Director for there to be a quorum does not apply to meetings of assets. In particular there are clearly defined policies of the Audit Committee. The composition of the Audit for capital expenditure including appropriate authorisation Committee is set out on page 37. The Finance Director levels. Significant capital projects and company acquisitions and Chief Executive Officer also attend meetings of the and disposals require Board approval. Audit Committee and the Remuneration Committee where appropriate. The composition of the Remuneration Committee d) Risk management is set out on page 37. The Company Secretary attends all Quarterly budgetary reviews include the identification Board and Committee meetings. and assessment of business and financial risks. Executive management and franchise Managing Directors are required The proceedings of the Audit and Remuneration Committees to complete a formal review of the status of their control are formally recorded by the Company Secretary and reported environment every year. to the Board. The Audit Committee, on behalf of the Board, receives 4. Internal control a written assurance from the senior managers of the adequacy The Board has overall responsibility for the Group’s system of of the controls in the operations for which senior internal control. Responsibility for designing and operating the management are responsible. The Audit Committee reviews system is delegated to the executive Directors. The Audit these assurances together with the reports from the internal Committee has reviewed the effectiveness of the Group’s audit function and the external auditors. internal control environment, the scope of the work undertaken by the internal audit function, the Group’s e) Independent non-executive Directors financial statements and the scope of work undertaken by the The three independent non-executive Directors carry significant external auditors. weight in Board decisions. They bring an independent judgement to bear on issues of strategy, performance and resources Although no system of internal control can provide absolute including key appointments and standards of conduct. assurance against misstatement or loss, the Group’s system is They are independent of management and the shareholder designed to provide reasonable assurance that problems are designated Directors. Their fees reflect the time which they identified on a timely basis and dealt with appropriately. The commit to the Company. Each of them is a member of the principal features of the Group’s internal control structures are Audit Committee, Mr Stenham being Chairman and also a summarised below: member of the Remuneration Committee. The Board as a whole is responsible for the selection and appointment of a) Management structure non-executive Directors. Appointments are for an initial There is a clearly defined organisational structure with lines term of three years from November 1994. 46 • UK GAAP TELEWEST COMMUNICATIONS plc Corporate governance

f) Going concern express a separate opinion on the effectiveness of either the After reviewing the Group’s budget for 1997 and its medium- Group’s system of internal financial control or corporate term plans, the Directors consider that the current senior governance procedures, or on the ability of the Group to secured credit facility provides sufficient funding to complete continue in operational existence. the construction of the network, satisfy working capital requirements and pay interest on existing debt instruments. 5. Statement of Directors’ responsibilities The Group regularly monitors its ongoing ability to draw Company law requires the Directors to prepare financial down finance, which is dependent on satisfying financial statements for each financial year which give a true and fair covenants. In addition the Group is continually evaluating view of the state of affairs of the Company and the Group as the financial implications of the planned launch of digital at the end of the financial year and of the profit or loss for services, developing the interfranchise network and future that period. In preparing the financial statements, the Directors investment opportunities; these may require additional are required to: select suitable accounting policies and apply funding sources outside the current arrangements. them consistently; make judgements and estimates that are The Directors have considered these additional requirements reasonable and prudent; state whether applicable accounting and they still have a reasonable expectation that the Group standards have been followed subject to any material has adequate resources to continue in operational existence departures disclosed and explained in the financial statements, for the foreseeable future. Therefore they have continued and prepare the financial statements on the going concern to adopt the going concern basis in preparing the accounts. basis unless it is inappropriate to presume that the Group will continue in business. The auditors, KPMG Audit Plc, have confirmed that in their opinion, with respect to the Directors’ statements on internal The Directors are responsible for keeping proper accounting control on page 45 (other than statements going beyond records which disclose with reasonable accuracy at any time internal financial control which are outside the scope of their the financial position of the Company and which enable them report), and going concern above, the Directors have provided to ensure that the financial statements comply with the the disclosures required by the Listing Rules of the London Companies Act 1985. The Directors have general responsibility Stock Exchange and such statements are not inconsistent with for taking such steps as are reasonably open to them to the information of which they are aware from their audit work safeguard the assets of the Company and the Group and on the financial statements; and that the Director’s statement to prevent and detect fraud and other irregularities. The on page 44 appropriately reflects the Company’s compliance Directors, having prepared the financial statements, note that with the other paragraphs of the Cadbury Code of Best the auditors are required by the Act to take whatever steps Practice specified by the Listing Rules for their review. They and undertake whatever inspections they consider to be have carried out their review in accordance with the relevant appropriate for the purpose of enabling them to give their guidance issued by the Auditing Practices Board, which does auditors’ report. not require them to perform any additional work necessary to TELEWEST COMMUNICATIONS plc UK GAAP • 47 Auditors’ report to the members of Telewest Communications plc

We have audited the financial statements on pages 48 to 66. We planned and performed our audit so as to obtain all the We have also examined the amounts disclosed relating to information and explanations which we considered necessary emoluments and share options which form part of the Report in order to provide us with sufficient evidence to give of the Directors on page 38 and the Report of the Remuneration reasonable assurance that the financial statements are free Committee on pages 42 and 43. from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated Respective responsibilities of Directors and Auditors the overall adequacy of the presentation of information in the As described on page 46 the Company’s Directors are financial statements. responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on Opinion our audit, on those statements and to report our opinion to In our opinion the financial statements give a true and fair you. view of the state of affairs of the Company and of the Group as at 31 December 1996 and of the loss of the Group for the Basis of opinion year then ended and have been properly prepared in We conducted our audit in accordance with Auditing accordance with the United Kingdom Companies Act 1985. Standards issued by the Auditing Practices Board in the United Kingdom. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the KPMG Audit Plc financial statements. It also includes an assessment of the Chartered Accountants significant estimates and judgements made by the Directors in Registered Auditors the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s 11 March 1997 circumstances, consistently applied and adequately disclosed. London 48 • UK GAAP TELEWEST COMMUNICATIONS plc Consolidated profit and loss account for the year ended 31 December 1996

1996 1995 Note £’000 £’000

Turnover 2 290,266 144,784 Operating costs 3 (419,517) (228,556)

Operating loss (129,251) (83,772) Share of results of associated undertakings 13 (15,203) (12,103) Other interest receivable and similar income 8 17,222 15,645 Interest payable and similar charges 9 (122,671) (34,435)

Loss on ordinary activities before taxation 5 (249,903) (114,665)

Tax on loss on ordinary activities 10 (820) (690)

Loss on ordinary activities after taxation (250,723) (115,355) Minority interests 19 (180) (16)

Loss for the financial year 21 (250,903) (115,371)

Loss per equity share (pence) 11 (17.7) (10.5)

The Group has no recognised gains or losses other than those reflected in the profit and loss account.

The above results are in respect of continuing operations of the Group. TELEWEST COMMUNICATIONS plc UK GAAP • 49 Consolidated balance sheet as at 31 December 1996

1996 1995 Note £’000 £’000

Fixed assets Tangible assets 12 1,447,194 1,063,808 Investments 13 117,410 191,028

1,564,604 1,254,836

Current assets Stocks 14 53 40 Debtors 15 66,929 54,980 Cash at bank and in hand 79,116 464,818

146,098 519,838

Creditors: amounts falling due within one year 16 (212,434) (137,744)

Net current (liabilities)/assets (66,336) 382,094

Total assets less current liabilities 1,498,268 1,636,930

Creditors: amounts falling due after more than one year 17 (918,008) (795,066)

Minority interests 19 (347) (167)

Net assets 579,913 841,697

Capital and reserves Called up share capital 20 142,363 141,603 Share premium 21 9,187 – Merger reserve 21 535,267 556,095 Other reserves 21 270,237 270,237 Profit and loss account 21 (377,141) (126,238)

Equity shareholders’ funds 579,913 841,697

The financial statements were approved by the Board of Directors on 11 March 1997 and signed on its behalf by:

S J Davidson Director

C J Burdick Director 50 • UK GAAP TELEWEST COMMUNICATIONS plc

Company balance sheet as at 31 December 1996

1996 1995 Note £’000 £’000

Fixed assets Investments 13 233,289 242, 916

Current assets Debtors: due within one year 15 71 225,807 Debtors: due after more than one year 15 1,053,279 – Cash at bank and in hand 48,481 428,067

1,101,831 653,874

Creditors: amounts falling due within one year 16 (8,273) (14,358)

Net current assets 1,093,558 639,516

Total assets less current liabilities 1,326,847 882,432 Creditors: amounts falling due after more than one year 17 (1,230,153) (757,482)

Net assets 96,694 124,950

Capital and reserves Called up share capital 20 142,363 141,603 Share premium 21 9,187 – Profit and loss account 21 (54,856) (16,653)

Equity shareholders’ funds 96,694 124,950

The financial statements were approved by the Board of Directors on 11 March 1997 and signed on its behalf by:

S J Davidson Director

C J Burdick Director TELEWEST COMMUNICATIONS plc UK GAAP • 51

Consolidated cash flow statement for the year ended 31 December 1996

1996 1995 Note £’000 £’000

Net cash inflow/(outflow) from operating activities 23 28,479 (10,205)

Returns on investments and servicing of finance Interest received 18,206 11,568 Interest paid (25,795) (6,041) Interest element of finance lease payments (2,754) (1,930)

Net cash (outflow)/inflow from returns on investments and servicing of finance (10,343) 3,597

Investing activities Purchase of tangible fixed assets (464,367) (254,453) Sale of tangible fixed assets 3,059 688 Purchase of subsidiary undertakings 26 (14,167) (3,232) Investment in associated undertakings and other participating interests (7,728) (9,143) Other investing activities – 335

Net cash outflow from investing activities (483,203) (265,805)

Net cash outflow before financing (465,067) (272,413)

Financing Cash paid for credit facility arrangement costs (18,400) – Proceeds from debenture issue – 754,812 Cash paid for foreign currency option – (88,070) Cash paid for debenture issue costs (829) (20,574) Payment of share issue costs – (6,141) Proceeds from borrowings 100,400 – Repayment of borrowings (937) (157,930) Capital element of finance lease payments (1,231) (1,291)

Net cash inflow from financing 79,003 480,806

(Decrease)/increase in cash and cash equivalents 27 (386,064) 208,393 52 • UK GAAP TELEWEST COMMUNICATIONS plc

Reconciliation of movements in equity shareholders’ funds for the year ended 31 December 1996

Group Company Group Company 1996 1996 1995 1995 Note £’000 £’000 £’000 £000

Opening equity shareholders’ funds 841,697 124,950 743,716 – Loss for the financial year (250,903) (38,203) (115,371) (16,653) Issue of shares 10,676 9,947 678,174 141,603 Goodwill written off 4 (21,557) – (464,872) – Movement arising from Group reconstruction ––50 –

Closing equity shareholders’ funds 579,913 96,694 841,697 124,950 TELEWEST COMMUNICATIONS plc UK GAAP • 53

Notes forming part of the financial statements

1 Accounting policies Depreciation The principal accounting policies which have been applied Depreciation is provided to write off the cost, less estimated consistently throughout the year in the preparation of the residual value, of tangible fixed assets by equal instalments financial statements are as follows: over their estimated useful economic lives as follows: Freehold and long leasehold buildings 50 years Basis of preparation The financial statements have been prepared in accordance Cable and ducting 20 years with applicable accounting standards and under the historical Electronic equipment cost accounting rules. – System electronics 8 years The Group financial statements consolidate the financial – Switching equipment 8 years statements of the Company and its subsidiary undertakings – Subscriber electronics 5 years together with associated undertakings to the extent of – Headend, studio and playback facilities 5 years the Group’s interest in those undertakings. The results of Other equipment subsidiary undertakings acquired during the year are included – Office furniture and fittings 5 years in the consolidated profit and loss account from the date – Motor vehicles 4 years of acquisition. Depreciation of cable and ducting and systems electronics is The Company has taken advantage of Section 230 of the charged monthly on their estimated cost at the end of the Companies Act 1985 and has not presented a profit and loss prematurity period, scaled down by a ratio of average account. The loss of the Company for the financial year is customers in the current period to the estimated customer disclosed in Note 21 to these financial statements. base at the end of the prematurity period. The Directors have included unaudited pro forma Group Preconstruction costs are amortised over the life of the turnover and operating cost information for the year ended franchise from the date of the first customer. 31 December 1995 in Notes 2 and 3 to these financial statements which consolidate the turnover and operating The estimated useful lives of cable and ducting and system costs of Telewest Communications (Midlands & North West) electronics assets were reassessed with effect from 1 January Limited (“TCMN”), formerly SBCC, a subsidiary undertaking 1996 and changed from 25-30 years and 10 years to 20 years acquired on 3 October 1995, as if this subsidiary undertaking and 8 years, respectively. The net book value of these assets is had been owned for the entire year. This pro forma being written-off over their revised estimated remaining lives. information has been included to facilitate the analysis of results given the significance of this acquisition to Foreign currencies the Group. Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary Investments assets and liabilities denominated in foreign currencies, to the Investments in subsidiary undertakings are stated in the extent that they are not hedged by financial instruments, are Company balance sheet at cost. The consolidated profit and translated using the rate of exchange ruling at the balance loss account includes the Group’s share of the losses of sheet date and the gains or losses on translation are included associated undertakings and the consolidated balance sheet in the profit and loss account. includes the investment in these companies at the Group’s share of their net assets. Leases Where the Group enters into a lease which entails taking Goodwill substantially all the risks and rewards of ownership of an Purchased goodwill on acquisition of subsidiary undertakings, asset, the lease is treated as a finance lease. The asset is representing the excess of the fair value of the consideration recorded in the balance sheet as a tangible fixed asset and is given over the fair value of the separable net assets acquired, depreciated over its estimated useful life or the term of the is set off directly against reserves. lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Capitalisation of overheads Rentals payable are apportioned between the finance Subsidiary undertakings capitalise that proportion of overheads element, which is charged to the profit and loss account, and which relates to the construction of the cable network. the capital element which reduces the outstanding obligation for future instalments. 54 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

Turnover Financial instruments Turnover represents the invoiced value (excluding value added tax) The Group uses foreign currency options which permit, but of services supplied by the Group. do not require, the Group to exchange foreign currencies at a future date with another party at a contracted exchange rate Stocks (the “Forward Rate”). Such contracts are used to hedge Stocks are stated at the lower of cost and net realisable value. against adverse changes in foreign currency exchange rates associated with certain obligations denominated in foreign Franchise costs currency. The premium paid to enter into these options is Expenditure incurred on successful applications for franchise included on the balance sheet as a fixed asset investment and licences is included in tangible fixed assets and is amortised is amortised to the profit and loss account over the life of the over the life of the original franchise term. Costs relating to option at a constant rate of the carrying value of the unsuccessful applications are written off to the profit and loss obligation it hedges. The difference between the contracted account. amount to be exchanged under the option translated at the Forward Rate and the contracted amount translated at the Taxation spot rate at the inception of the contract is also amortised to The charge for taxation is based on the loss for the year and the profit and loss account over the life of the option at a takes into account taxation deferred because of timing constant rate of the carrying value of the obligation. The differences between the treatment of certain items for carrying value of the obligation is increased for the amortised taxation and accounting purposes. Provision is made for portion of the difference. deferred tax only to the extent that it is probable that an To the extent that the Sterling values of the Group’s foreign actual asset or liability will crystallise. currency obligations, translated at the year-end exchange rate, are less than their carrying values as determined above, Pension costs the carrying values of the obligation are reduced. The carrying The Group operates a defined contribution pension scheme or value of the foreign currency option used to hedge the contributes to a third-party scheme of the employee’s choice. obligations is reduced by an equivalent amount. The amount charged against the profit and loss account represents the contributions payable to the selected schemes The Group also enters into combined foreign currency and in respect of the accounting period. interest rate swap contracts (“Foreign Currency Swaps”) to hedge against adverse changes in foreign currency exchange Restricted Share Scheme rates associated with obligations denominated in foreign The value of awards over ordinary shares granted to eligible currency. The principal element of Foreign Currency Swaps is employees under the Telewest Restricted Share Scheme is translated at the spot rate at the reporting date with any gain charged to the profit and loss account to the extent that the or loss on translation recognised in the profit and loss awards have been earned by employees in the current period. account. Such gains and losses are offset against gains and losses arising on the translation of the obligations which have Interconnection with other operators been hedged. The interest element of Foreign Currency When telephony traffic is carried by other operators the Swaps is accounted for on an accruals basis with the net Group incurs interconnect costs. Interconnect costs are interest income or expense recognised in the profit and loss subject to regulation in the form of a determination by the account as it is earned and payable. Office of Telecommunications. A determination may give rise Interest rate swap agreements which are used to manage to amendments, most often in the form of reductions, to interest rate risk on the Group’s borrowings are accounted for interconnect costs relating to prior periods. using the accruals method. Net income or expense resulting from the differential between exchanging floating and fixed The Group reviews its interconnect costs on a regular basis rate interest payments is recorded on an accruals basis. To the and adjusts the rate at which these costs are charged in the extent that the interest rate swap agreements are delayed profit and loss account in accordance with the estimated starting, net income or expense is not recognised until the interconnect costs for the current period. Amendments to effective date of the agreement. costs relating to prior periods are made in the current period, but only when recovery or payment of these amounts is Finance costs reasonably certain. Costs incurred in raising funds are deducted from the amount raised and amortised over the life of the debt facility on a constant-yield basis. Where the period and utilisation of the debt facility is uncertain, the amortisation rate is determined by reference to the Group’s estimated future financing requirements. TELEWEST COMMUNICATIONS plc UK GAAP • 55

2 Segmental information 5 Loss on ordinary activities before taxation Turnover is attributable principally to the provision of cable Loss on ordinary activities before taxation is stated after television and telephony services in the United Kingdom charging: which the Directors consider to be the same class of business 1996 1995 £’000 £’000 and, accordingly, no segmental analysis of operating loss or net assets is shown. Turnover comprised the following: Auditors’ remuneration: Audit 290 250 Pro forma Other services 168 219 1996 1995 1995 £’000 £’000 £’000 Depreciation and other amounts (Note 1) written off tangible fixed assets: Owned 122,610 56,825 Cable television 121,224 64,740 83,735 Leased 7,106 3,194 Telephony – residential 125,013 57,597 81,222 Exchange losses 25,852 4,732 Telephony – business 34,562 17,449 20,571 Hire of plant and machinery – rentals Other 9,467 4,998 5,667 payable under operating leases 129 116 290,266 144,784 191,195 Hire of other assets – operating leases 2,936 2,160

The auditors’ remuneration for audit services to the Company was £20,000 (1995: £20,000). 3 Operating costs Pro forma In addition to the amounts stated above for auditors’ 1996 1995 1995 £’000 £’000 £’000 remuneration, the Group paid £820,000 in 1995 to the (Note 1) auditors for services provided in connection with the acquisition of TCMN. This amount has been included in the Programming expenses 69,906 32,194 42,859 costs of acquisition in the consolidated financial statements. Telephony expenses 52,572 29,526 38,741 Selling, general and administrative expenses 167,323 105,311 137,680 6 Remuneration of Directors Depreciation and 1996 1995 amortisation 129,716 61,525 82,344 £’000 £’000

419,517 228,556 301,624 Fees to non-executive Directors 114 122 Remuneration as executives: Having regard to the special nature of the Group’s business, Basic salary, allowances and the analysis of operating costs as prescribed by the Companies taxable benefits 416 1,071 Act 1985 is not meaningful. In the circumstances, therefore, as Performance-related bonuses 25 79 required by paragraph 3(3) of Schedule 4 of the Companies Other bonuses – 140 Act 1985, the Directors have adapted the prescribed format to Pension contributions 18 24 the requirements of the Group’s business. Compensation for loss of office (payable by the Company) 539 487

4 Acquisitions in the year Total emoluments in respect of the year 1,112 1,923 On 10 January 1996, the Company acquired the entire issued Of the above remuneration, £93,000 and £426,000, was share capital of Telewest Communications (Worcester) Limited, reimbursed to TCI and US WEST for the years ended then known as Bell Cablemedia (Worcester) Limited and the 31 December 1996, and 1995, respectively, for making owner of the Worcester cable franchise, for cash consideration available to the Company the services of certain Directors. of £9,849,000. Telewest Communications (Worcester) Limited was otherwise a dormant company with net assets of £2 The Chairman did not receive any remuneration during the representing its called up share capital. This acquisition has year (1995: £nil). The remuneration of the highest paid been accounted for under the acquisition method of Director was as follows: 1996 1995 accounting. The goodwill arising on acquisition, in the amount £’000 £’000 of £9,848,998, has been set off against the merger reserve. Basic salary, allowances and During the year, the Company made various other minor taxable benefits 248 427 acquisitions, largely for share consideration. Details of these Performance-related bonuses 25 51 acquisitions are set out in Note 20 to the financial statements. Other bonuses – 70 The goodwill arising on these acquisitions, in the amount of Pension contributions 13 5 £11,708,000, has also been set-off against the merger reserve. Total emoluments in respect The cumulative goodwill written off against reserves at of the year 286 553 31 December 1996 was £486,429,000 (1995: £464,872,000). 56 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

6 Remuneration of Directors (continued) 8 Other interest receivable and similar income The emoluments, excluding pension contributions, of 1996 1995 Directors who perform their duties wholly or mainly within £’000 £’000 the United Kingdom fell within the following ranges: On bank deposits and 1996 1995 short-term investments 14,928 14,014 Directors Directors On loans made to associated £0 – £5,000 1 2 undertakings 1,723 1,631 £25,001 – £30,000 1 – Other 571 – £30,001 – £35,000 1 1 17,222 15,645 £35,001 – £40,000 – 1 £45,001 – £50,000 1 – £50,001 – £55,000 – 1 Interest payable and similar charges £165,001 – £170,000 1 – 9 1996 1995 £250,001 – £255,000 – 1 £’000 £’000 £270,001 – £275,000 1 – £485,001 – £490,000 – 1 On bank loans and overdrafts and £545,001 – £550,000 – 1 other loans: Wholly repayable within five years 3,816 2,583 A detailed analysis of Directors’ remuneration, including Wholly or partly repayable in more salaries and benefits, performance-related bonuses and than five years 1,924 – Finance costs of Senior other bonuses is set out in the Report of the Remuneration Discount Debentures 60,696 13,663 Committee on pages 42 and 43. Details of Directors’ interests Finance costs of Senior Debentures 22,471 5,643 in the share capital of the Company are set out in the Report Finance charges payable in of the Directors on page 38. respect of finance leases and hire purchase contracts 3,442 1,928 Exchange losses on foreign currency translation, net 25,852 4,732 7 Staff numbers and costs Loss on sale of interest rate swap – 5,467 The average number of persons employed by the Group Other 4,470 419 (including Directors and those seconded from shareholders) 122,671 34,435 during the year, analysed by category, was as follows: 1996 1995 The exchange gain for the year on the translation of the Number Number US Dollar denominated Senior Discount Debentures Sales and customer services 2,114 1,309 amounted to £53,025,000. This amount has been offset by Construction and operations 1,827 889 an adjustment of an equal amount to the unamortised value Administration 715 578 of the premium paid for the foreign currency option which hedges the Senior Discount Debentures. 4,656 2,776

The aggregate payroll costs of these persons, including amounts which have been capitalised in tangible fixed assets, 10 Tax on loss on ordinary activities 1996 1995 were as follows: £’000 £’000 1996 1995 £’000 £’000 Corporation tax on taxable profit at 33% 50 16 Share of associated undertaking’s tax 770 674 Wages and salaries 90,559 57,035 820 690 Social security costs 8,977 5,491 Other pension costs 2,580 1,538 The corporation tax charge for the year arises on the taxable profits of a subsidiary undertaking which cannot be fully 102,116 64,064 relieved by the tax losses within the Group.

11 Loss per share The calculation of loss per equity share is based on the loss on ordinary activities after taxation and minority interests for the year, divided by the weighted average number of equity shares of the Company in issue during the year of 1,421,492,181 (1995: 1,102,384,337). TELEWEST COMMUNICATIONS plc UK GAAP • 57

12 Tangible fixed assets

Group Freehold and Freehold long leasehold Cable and Electronic Other land buildings ducting equipment equipment Total £’000 £’000 £’000 £’000 £’000 £’000

Cost At 1 January 1996 4,223 36,005 766,866 359,617 79,239 1,245,950 Additions – 9,951 335,844 130,783 39,012 515,590 Disposals – – (749) (565) (4,792) (6,106)

At 31 December 1996 4,223 45,956 1,101,961 489,835 113,459 1,755,434 Accumulated depreciation At 1 January 1996 – 4,920 74,532 70,810 31,880 182,142 Charge for the year – 2,458 47,374 60,220 19,664 129,716 On disposals – – (725) (547) (2,346) (3,618)

At 31 December 1996 – 7,378 121,181 130,483 49,198 308,240 Net book value At 31 December 1996 4,223 38,578 980,780 359,352 64,261 1,447,194

At 31 December 1995 4,223 31,085 692,334 288,807 47,359 1,063,808

Included in the net book value of electronic equipment and other equipment is £38,258,000 and £6,880,000, respectively, (1995: £23,796,000 and £1,080,000, respectively) in respect of assets held under finance leases and similar hire purchase contracts. Depreciation charged on these assets was £7,106,000.

13 Fixed asset investments

Group Associated undertakings Foreign Share Other Own currency of net participating shares option assets Loans interests held premium Total £’000 £’000 £’000 £’000 £’000 £’000

Cost At 1 January 1996 69,997 24,593 20,666 7,280 88,070 210,606 Additions 194 4,496 5,000 – – 9,690 Released during the year – – – (115) – (115) At 31 December 1996 70,191 29,089 25,666 7,165 88,070 220,181

Share of post-acquisition losses At 1 January 1996 (13,887) ––––(13,887) Share of loss on ordinary activities before taxation (15,203) ––––(15,203) Share of tax on loss on ordinary activities (770) ––––(770)

Provision At 1 January 1996 – – – (2,806) – (2,806) Charge for the year – – – (1,380) – (1,380) Amortisation of foreign currency option premium At 1 January 1996 ––––(2,885) (2,885) Charge for the year ––––(12,815) (12,815) Valuation adjustment to option premium ––––(53,025) (53,025) At 31 December 1996 (29,860) – – (4,186) (68,725) (102,771)

Net investments At 31 December 1996 40,331 29,089 25,666 2,979 19,345 117,410 At 31 December 1995 56,110 24,593 20,666 4,474 85,185 191,028 58 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

13 Fixed asset investments (continued)

Company Foreign Loans Own currency Subsidiary Participating to group shares option undertakings interests undertakings held premium Total £’000 £’000 £’000 £’000 £’000 £’000

Cost At 1 January 1996 153,257 – – 7,280 88,070 248,607 Additions 18,993 2,033 5,000 – – 26,026 Transfer from group undertaking – 31,682 – – – 31,682 Released during the year – – – (115) – (115)

At 31 December 1996 172,250 33,715 5,000 7,165 88,070 306,200

Provision At 1 January 1996 – – – (2,806) – (2,806) Charge for the year – – – (1,380) – (1,380)

Amortisation of foreign currency option premium At 1 January 1996 ––––(2,885) (2,885) Charge for the year ––––(12,815) (12,815) Valuation adjustment to option premium ––––(53,025) (53,025)

At 31 December 1996 – – – (4,186) (68,725) (72,911)

Net investments At 31 December 1996 172,250 33,715 5,000 2,979 19,345 233,289

At 31 December 1995 153,257 – – 4,474 85,185 242,916

Details of principal subsidiary undertakings, associated undertakings, and other participating interests of the Group are set out on pages 65 and 66.

Own shares held At 31 December 1996, own shares held comprised 3,937,000 ordinary shares of 10 pence held by the Telewest Employee Share Ownership Plan Trust (the “Telewest ESOP”) for awards under the Telewest Restricted Share Scheme, a scheme designed to provide incentives to executives of the Company. Further details on the Telewest Restricted Share Scheme are set out on page 41 of the Report of the Remuneration Committee.

The market value at 31 December 1996 of the shares held was 124 pence per share; the carrying value of the shares held is 182 pence per share, being the cost of the shares at the date they were acquired by the Telewest ESOP.

At 31 December 1996, 2,648,000 ordinary shares had been awarded to executives of the Group, leaving the remaining 1,289,000 shares available for future awards to eligible executives. The provision made against own shares held represents awards earned by executives in respect of services to the Group.

The Telewest ESOP received an interest-free loan of £7,280,000 from the Group to subscribe for the ordinary shares to establish the Telewest ESOP. The loan is to be repaid by way of cash contributions made to the ESOP Trustees by subsidiary undertakings of the Group. At 31 December 1996, the Telewest ESOP owed £4,474,000 to the Group. TELEWEST COMMUNICATIONS plc UK GAAP • 59

14 Stocks 17 Creditors: amounts falling due after more than All stock is in the form of raw materials and consumables. one year Group Company Group Company 1996 1996 1995 1995 £’000 £’000 £’000 £’000 15 Debtors Senior Group Company Group Company 1996 1996 1995 1995 Debentures £’000 £’000 £’000 £’000 due 2006 171,499 171,499 188,540 188,540 Senior Discount Due within Debentures one year due 2007 586,993 586,993 565,976 565,976 Trade debtors 29,305 – 23,123 – Senior Secured Amounts owed Facility 81,814 – –– by subsidiary Other bank undertakings ––– 222,195 loans and Other debtors 27,925 8 22,243 3,612 overdrafts 400 – 2,949 – Prepayments and Obligations accrued income 9,524 63 9,444 – under finance 66,754 71 54,810 225,807 leases and hire purchase Due after more contracts than one year (Note 22) 51,674 19,965 29,385 – Amounts owed Foreign Currency by subsidiary Swap 20,875 20,875 2,966 2,966 undertakings – 1,053,279 –– Amounts owed Other debtors 175 – 170 – to group 175 1,053,279 170 – undertakings – 430,821 –– Other creditors 4,753 – 5,250 – 66,929 1,053,350 54,980 225,807 918,008 1,230,153 795,066 757,482

16 Creditors: amounts falling due within one year The bank loan is a property loan secured on freehold land and Group Company Group Company buildings held by the Group. 1996 1996 1995 1995 £’000 £’000 £’000 £’000 Bank loans and overdrafts are secured on Group property, carry interest at between 1.00% and 1.75% over LIBOR, and Bank loans and are repayable as follows: overdrafts 2,949 – 937 – Group Group Obligations under 1996 1995 finance leases £’000 £’000 and hire Between one and two years – 2,949 purchase Between two and five years 400 – contracts (Note 22) 2,716 145 929 – 400 2,949 Trade creditors 46,855 – 40,402 1,390 Amounts owed Senior Debentures due 2006 to group The Group has issued US$300,000,000 principal amount of undertakings –91 – 3,372 Senior Debentures (the “Senior Debentures”) with a yield Taxation and to maturity of 9.625%. The Senior Debentures mature on social security 4,068 – 2,548 – 1 October 2006. Interest on the Senior Debentures accrues Other creditors 24,417 1,784 12,998 4,647 semi-annually and is payable in arrears. The Senior Debentures Accruals and are redeemable, in whole or in part, at the option of the deferred Group at any time on or after 1 October 2000. income 131,429 6,253 79,930 4,949 The Group has entered into a Foreign Currency Swap which 212,434 8,273 137,744 14,358 expires on 1 October 2000 to hedge its exposure to adverse The bank loans are property loans secured on freehold land fluctuations in exchange rates on the principal amount of the and buildings held by the Group. Senior Debentures. The terms of the Foreign Currency Swap 60 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

17 Creditors: amounts falling due after more (Tranche B) is available on a revolving basis concurrently with than one year (continued) Tranche A for an amount up to 6.5 times the trailing, rolling six month annualised consolidated net operating cash flow, provided for the Group to make an initial exchange of gradually reducing throughout the period of the facility principal of US$300,000,000 in exchange for £196,078,000. to 4 times by 1 January 2000. Thereafter, the amount During the term of the Foreign Currency Swap, the Group is to outstanding under the Tranche B facility converts to a term make Sterling fixed-rate interest payments and is to receive loan amortising over 5 years. The aggregate drawing at any US Dollar fixed-rate interest payments on the initial exchange time under both tranches cannot exceed £1.2 billion. amounts. On expiration, the initial principal amounts will be Borrowings under the facility are secured by the assets of re-exchanged. the Group, including the partnership interests and shares The Senior Debentures are unsecured liabilities of the Group. of subsidiaries, and bear interest at 2.25% above LIBOR for Tranche A and between 0.5% and 1.875% above LIBOR Senior Discount Debentures due 2007 (depending on the ratio of borrowings to the trailing, rolling The Group has issued US$1,536,413,000 principal amount six month annualised consolidated net operating cash flow) at maturity of Senior Discount Debentures (the “Senior for Tranche B. Discount Debentures”) with a yield to maturity of 11%. At 31 December 1996, the unamortised portion of the The Group’s ability to borrow under the facility is subject to, discount on issue is £328,946,000 (1995: £387,197,000). among other things, its compliance with the financial and The Senior Discount Debentures mature on 1 October 2007. other covenants and borrowing conditions contained therein. Interest on the Senior Discount Debentures accrues semi- In September 1996, the Group entered into certain delayed- annually. Cash interest will not accrue on the Senior Discount starting interest rate swap agreements in order to manage Debentures prior to 1 October 2000 and is thereafter payable interest rate risk on the Senior Secured Facility. The effective in arrears on 1 April and 1 October of each year at a rate of dates of the interest rate swap agreements are 2 January 1997 11% per annum. The Senior Discount Debentures are and 31 March 1997, and the agreements mature on redeemable, in whole or in part, at the option of the Group 31 December 2001 and 28 March 2002 respectively. at any time on or after 1 October 2000. The aggregate notional principal amount of the swaps The Group has purchased a five-year Sterling put option to adjusts upwards on a semi-annual basis to a maximum of purchase US$1,537,000,000 to hedge its exposure to adverse £750 million. In accordance with the swap agreements, the fluctuations in exchange rates on the principal amount at the Group receives interest at the six-month LIBOR rate and pays early redemption date of the Senior Discount Debentures. The a fixed interest rate in the range of 7.835 – 7.975%. put option has a strike price at expiration on 28 September 2000 of £1 = US$1.4520 (“the Forward Rate”). 18 Deferred taxation The option premium paid of £88,070,000 has been included The amount provided, and the full potential liability, in respect on the balance sheet within fixed asset investments and is of deferred taxation is as follows: being amortised to the profit and loss account over the Group Group 1996 1995 five-year term of the option at a constant rate of the carrying £’000 £’000 amount of the Senior Discount Debentures. The difference between the contracted amount translated at the Forward Tax effect of timing differences due to: Excess capital allowances over Rate and at the spot rate at the inception of the contract in depreciation 110,600 – the amount of £91,717,000 is also being amortised on the Other 27,900 12,100 same basis to the profit and loss account. Trading losses (138,500) (12,100) At 31 December 1996, the unamortised value of the option – – premium has been reduced by £53,025,000, representing the hedging of an equivalent foreign exchange gain on the Senior As at 31 December 1996, the Group estimates that it has, Discount Debentures during the year. subject to Inland Revenue agreement, £940,000,000 (1995: £294,000,000) of tax losses, including losses arising The Senior Discount Debentures are unsecured liabilities of prior to 1995 from the Group’s predecessor businesses, the Group. available to relieve future profits. Accumulated tax losses Senior Secured Facility at 31 December 1995 exclude capital allowances on assets On 22 May 1996, the Group entered into a senior secured which were available to the Group, but had not been claimed. credit facility (the “Senior Secured Facility”) with a syndicate At 31 December 1996, accumulated tax losses include a claim of banks. The facility is divided into two tranches: the first for all available capital allowances. No deferred tax asset has portion (Tranche A) is available on a revolving basis for up to been recognised in respect of any unutilised tax losses. £300 million, reducing to £100 million by 30 June 1998 with full repayment by 31 December 1998; the second portion TELEWEST COMMUNICATIONS plc UK GAAP • 61

19 Minority interests At 31 December 1996, the minority interests comprised Telewest Communications (London South) Limited, together 30,000 ordinary shares of £1 each and 20,000 cumulative with the relevant minority share of the profits or losses of each convertible preference shares of £1 each in Cable Guide entity. All minority interests are equity interests. Limited, and 5,000 ordinary shares of 10 pence each in

20 Called up share capital Number £000s

Convertible Convertible Ordinary preference Ordinary preference shares of shares of shares of shares of 10p each 10p each 10p each 10p each Total

Authorised At 1 January and 31 December 1996 2,010,000,000 661,000,000 201,000 66,100 267,100

Allotted, called up and fully paid At 1 January 1996 919,963,400 496,066,708 91,996 49,607 141,603 Issued during the year 7,604,200 – 760 – 760

At 31 December 1996 927,567,600 496,066,708 92,756 49,607 142,363

The consideration received in respect of the issue of shares during the year was as follows :

Consideration received Number of shares issued

Surrender by Trans-Global (UK) Limited of its option to acquire 9.9% of equity in the South East Regional Franchise Area 6,486,433

Additional 20% of share capital of Telewest Communications (Cotswolds) Limited 561,050

Additional 0.25% of share capital of Cable London plc 556,717

7,604,200

Convertible preference shares preference shares (the “Elected Shares”). If the election has The convertible preference shares are convertible into fully paid been exercised, the holders of the ordinary shares and the ordinary shares at any time on the basis of one ordinary share Elected Shares will receive any surplus in accordance with the for every convertible preference share provided that, amount paid-up or credited as paid-up on the shares held. immediately following the conversion, the percentage of the The holders of the convertible shares are not entitled to vote issued ordinary share capital of the Company held by members at any general meeting of the Company unless the meeting of the public, as defined by the listing rules of the London includes the consideration of a resolution for winding up the Stock Exchange, does not fall below 25%. The ordinary shares Company or a resolution modifying the rights or privileges arising on conversion will rank pari passu in all respects with attaching to the convertible preference shares. the ordinary shares then in issue. Employee share schemes The holders of the convertible preference shares are entitled Details of the employee share schemes operated by the to receive a dividend of such amount as is declared and paid Company are set out on pages 40 and 41 of the Report of the in relation to each ordinary share, subject to the dividend to Remuneration Committee. be paid not exceeding 20 pence per share net of any associated tax credit. During the year, options and awards were granted over ordinary shares of the Company in accordance with the rules of In the event of a winding-up of the Company or other return the various employee share schemes. At 31 December 1996, of capital, the assets of the Company available for distribution taking into account options and awards exercised, cancelled, will be paid first to the holders of the convertible preference and lapsed, during the year, the following options to subscribe shares up to the sum of capital paid-up or credited as paid-up for the ordinary shares and awards over ordinary shares were unless the right of election upon a winding-up of the outstanding. Company has been exercised in respect of the convertible 62 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

20 Called up share capital (continued)

Telewest Executive Share Option Schemes

Exercise price Number of shares Date of grant per share Exercise period under option

9 November 1995 154.5p 13/5/98-11/5/2002 5,029,062 9 November 1995 155.5p 13/5/98-11/5/2002 246,474 9 November 1995 171.5p 17/6/98-15/6/2002 1,136,059 9 November 1995 173.5p 17/6/98-8/11/2005 881,445 11 March 1996 141.0p 12/3/99-10/3/2006 3,803,186 11 March 1996 138.0p 12/3/99-10/3/2006 142,626

Total options outstanding at 31 December 1996 11,238,852

Telewest Sharesave Option Schemes

Exercise price Number of shares Date of grant per share Exercise period under option

12 December 1994 150.0p 1/2/2000-31/7/2000 653,522 12 December 1995 134.0p 1/2/2001-31/7/2001 1,258,104 12 December 1996 102.5p 1/2/2000-31/7/2000 2,165,009

Total options outstanding at 31 December 1996 4,076,635

The savings contracts associated with the options granted on 12 December 1996 became effective from 1 February 1997.

Telewest Restricted Share Scheme At 31 December 1996, awards over 2,648,000 Ordinary shares were outstanding. The exercise period of these awards is from 13 January 1998 to 24 July 2006.

Of the total shares under award at 31 December 1996, executives had earned 2,300,000 Ordinary shares in respect of services provided to the Group, leaving 348,000 Ordinary shares to be earned through future services.

21 Reserves Group Company

Share Merger Other Profit Share Profit premium reserve reserves and loss premium and loss £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 1996 – 556,095 270,237 (126,238) – (16,653) Issue of shares 9,187 729 – – 9,187 – Goodwill written off – (21,557) – – – – Loss for the financial year – – – (250,903) – (38,203)

At 31 December 1996 9,187 535,267 270,237 (377,141) 9,187 (54,856) TELEWEST COMMUNICATIONS plc UK GAAP • 63

22 Commitments and contingencies 24 Analysis of changes in financing during the year Debentures, Foreign (i) Capital commitments Share capital loans and currency The amount of capital expenditure authorised by the Group for (including finance lease option which no provision has been made in the financial statements is premium) obligations premium £’000 £’000 £’000 as follows: 1996 1995 Balance at £’000 £’000 1 January 1996 141,603 788,716 (85,185) Contracted 13,539 5,616 Cash inflows from Authorised but not contracted 526,051 507,380 financing – 79,003 – Shares issued for The Company has no capital commitments. non-cash consideration 9,947 – – (ii) Leasing commitments Amortisation of finance Obligations of the Group in respect of finance leases, net of costs – 61,779 12,815 interest, are payable over the following periods. Valuation adjustment to foreign currency Group Company Group 1996 1996 1995 option premium – – 53,025 £’000 £’000 £’000 Foreign exchange gain on debentures – (57,589) – Within one year 2,716 145 929 Debenture issue costs In the second to fifth relating to prior year years inclusive 22,812 3,933 15,498 paid during the year – 829 – Over five years 28,862 16,032 13,887 Inception of finance lease 54,390 20,110 30,314 contracts – 25,307 –

The Company had no obligations in respect of finance leases Balance at in 1995. 31 December 1996 151,550 898,045 (19,345) Annual commitments of the Group under operating leases are set out below: Purchase of subsidiary undertakings 1996 1996 1995 1995 25 Land and Land and 1996 1995 buildings Other assets buildings Other assets £’000 £’000 £’000 £’000 £’000 £’000 Tangible fixed assets – 400,978 Within Fixed asset investments – 314 one year 162 709 78 166 Debtors – 22,629 In the second Cash at bank and in hand – 4,159 to fifth years Creditors – (45,012) inclusive 675 1,167 386 1,177 Loans and finance leases – (158,062) Over five years 3,092 – 1,690 28 – 225,006 Goodwill 19,723 464,872 3,929 1,876 2,154 1,371 19,723 689,878 The Company has no operating leasing commitments. Satisfied by: Issue of shares 9,869 678,174 23 Reconciliation of operating loss to net cash Cash 9,854 7,391 inflow/(outflow) from operating activities Accruals for costs incurred – 4,313 1996 1995 19,723 689,878 £’000 £’000

Operating loss (129,251) (83,772) Depreciation and amortisation 129,716 61,525 Increase in stocks (13) (15) Increase in debtors (16,493) (6,080) Increase in creditors 44,520 18,137

Net cash inflow/(outflow) from operating activities 28,479 (10,205) 64 • UK GAAP TELEWEST COMMUNICATIONS plc

Notes

26 Analysis of the net outflow of cash equivalents 28 Related party transactions in respect of the purchase of subsidiary undertakings Identity of relevant related parties 1996 1995 2 £’000 £’000 Tele-Communications International, Inc. (“TCI ”) and U S WEST Inc. (“US WEST”) are related parties of the Group, in that they Cash consideration (9,854) (7,391) own more than 20% of the voting rights of the Group. Cox Payment of prior year accrual for Communications, Inc. (“COX”) and SBC Communications, Inc. acquisition costs (4,313) _ (“SBC”) are also considered to be related parties of the Group, Cash at bank and in hand in that they control substantial portions of the voting rights of acquired – 4,159 the Group and hence are able to exercise influence over its Net outflow of cash and financial and operating policies. cash equivalents (14,167) (3,232) Birmingham Cable Corporation Limited and Cable London plc (together “the Associates”) are related parties of the Group by virtue of their status as associated companies. 27 Analysis of changes in cash and cash equivalents 1996 1995 Nature of transactions £’000 £’000 Transactions with related parties, other than those described Balance at 1 January 464,818 248,002 in other notes to the financial statements, were as follows: Net cash (outflow)/inflow before The Group, in the normal course of providing cable television foreign exchange (386,064) 208,393 services, purchases certain of its programming from Foreign exchange movement on cash 362 8,423 subsidiaries of TCI2. Such programming is purchased on Balance at 31 December 79,116 464,818 commercially-available terms. Total purchases in the year amounted to £6,951,000. The amount due to the subsidiaries of TCI2 at 31 December 1996 is £1,470,000.

The Group has management agreements with TCI2, US WEST, COX, and SBC under which amounts are paid for employees who have been seconded to the Group. The amounts charged under these agreements during the year and total amounts due to TCI2, US WEST, COX, and SBC at 31 December 1996 are set out below.

Related party Amounts charged under Total amounts due at management agreements 31 December 1996 £’000 £’000

TCI2 375 810

US WEST 1,810 365

COX 281 600

SBC 93 –

The Group has entered into consulting agreements with the Associates to provide consulting services relating to telephony operations. Under the agreements, the Group receives an annual fee based upon the revenue of the Associates. The Group also receives a fee for providing switching services to the Associates comprising a fixed element based on a number of switches and a variable element based on a number of lines. Fees received during the year in respect of these services amount to £1,383,000. The amounts due at 31 December 1996 from the Associates in respect of these services were £2,524,000. TELEWEST COMMUNICATIONS plc UK GAAP • 65

Principal subsidiary undertakings

Except where otherwise stated, the Company owns indirectly 100% of the ordinary share capital of the following principal subsidiary companies and holds indirectly a 100% interest in the following partnerships and joint ventures. The Company also indirectly owns preference shares in the subsidiary companies which are separately disclosed. The subsidiary companies are incorporated in Great Britain and registered in England and Wales except for the Scottish companies, being those companies indicated by *, which are registered in Scotland. The proportion of the ordinary shares held by the Group also represent the proportion of voting rights held by the Group with the exception of Cable Guide Limited in which the Group holds 66.67% of the voting rights.

The principal activities of these entities, unless otherwise indicated, are the building and operation of cable television and telephony networks in the United Kingdom.

All subsidiary undertakings have been included in the consolidated financial statements.

Companies: Cable Adnet Limited Telewest Communications (Midlands) Limited Cable Guide Limited (Publisher) Telewest Communications (Midlands & North West) Limited (The Company owns indirectly 70% of the ordinary shares Telewest Communications (Motherwell) Limited* and 60% of the cumulative convertible preference shares) Telewest Communications Networks Limited (Management Cable Internet Limited Company) Telewest Communications (Central Lancashire) Limited (The Company owns directly 100% of the ordinary shares) Telewest Communications (Cotswolds) Limited Telewest Communications (North East) Limited Telewest Communications (Cumbernauld) Limited* Telewest Communications (North West) Limited Telewest Communications (Dumbarton) Limited* Telewest Communications Scotland Holdings Limited* Telewest Communications (Dundee & Perth) Limited* (Holding Company) Telewest Communications (East Lothian) Limited* Telewest Communications (Scotland) Limited* Telewest Communications (Falkirk) Limited* Telewest Communications (South East) Limited Telewest Communications (Fylde & Wyre) Limited Telewest Communications (South Thames Estuary) Limited Telewest Communications (Glenrothes) Limited* Telewest Communications (South West) Limited Telewest Communications Group Limited (Management Telewest Communications (Southport) Limited Company) Telewest Communications (St. Helens & Knowsley) Limited Telewest Communications (Liverpool) Limited Telewest Communications (Telford) Limited Telewest Communications (London South) Limited Telewest Communications (Wigan) Limited (The Company owns indirectly 99.75% of the Telewest Communications (Worcester) Limited ordinary shares)

Principal place Partnerships: of business Avon Cable Limited Partnership Bristol Cotswolds Cable Limited Partnership Cheltenham Edinburgh Cable Limited Partnership Edinburgh Estuaries Cable Limited Partnership Basildon London South Cable Partnership Croydon Telewest Communications (North East) Partnership Newcastle Telewest Communications (South East) Partnership Basildon Tyneside Cable Limited Partnership Newcastle United Cable (London South) Limited Partnership Croydon

Joint Ventures: Avon Cable Limited Partnership and Telewest Communications (South West) Limited Joint Venture Bristol London South Cable Partnership and Telewest Communications (London South) Limited Joint Venture Croydon Telewest Communications (Cotswolds) Venture Cheltenham Telewest Communications (Scotland) Venture Edinburgh 66 • UK GAAP TELEWEST COMMUNICATIONS plc

Principal associated undertakings and other participating interests

Associated undertakings Issued and fully paid up Percentage share capital shareholding

Birmingham Cable Corporation Limited 51,073,486 ordinary shares of £1 each 27.47

Cable London plc 55,125,690 ordinary shares of 10p each 50.00**

London Interconnect Limited 120 ordinary shares of £1 each (equally divided between ordinary A, B, C, D, E and F shares) 16.67

Central Cable Sales Limited 2 ordinary shares of £1 each 50.00

Cable London plc has also issued £45,000,000 of convertible loan stock which is convertible into ordinary shares. The Group held £22,500,000 of the issued loan stock at 31 December 1996.

The Group’s interest in London Interconnect Limited is included in the consolidated financial statements as an associated undertaking because the Group is in a position to exercise a significant influence over the company.

All associated shareholdings operate in the United Kingdom and are incorporated in Great Britain and are registered in England and Wales.

The principal activities of Birmingham Cable Corporation Limited and Cable London plc are the building and operation of cable television and telephony networks. The principal activity of London Interconnect Limited is the provision of telephony services. The principal activity of Central Cable Sales Limited is the sale of advertising space on cable television networks.

Participating interests Issued and fully paid up Percentage share capital shareholding

The Cable Corporation Limited 18,225,389 ordinary shares of 25p each 17.45%

1,000,000 ordinary “B” shares of £6.50 each –

2 special shares of 25p each –

Percentage shareholding of total ordinary shares 16.50%

The principal activities of The Cable Corporation Limited are the building and operation of cable television and telephony networks in the United Kingdom. The Cable Corporation is incorporated in Great Britain and is registered in England and Wales.

** The investment is held directly by Telewest Communications plc. ADVISERS GLOSSARY

Financial advisers Affiliate groups means Birmingham Kleinwort Benson Limited Cable Limited, Cable London Limited 20 Fenchurch Street and The Cable Corporation in which London EC3P 3DB the Group owns equity interests of 27.5%, 50% and 16.5% Morgan Stanley & Co. International Limited respectively. 25 Cabot Square Canary Wharf Churn refers to the percentage of London E14 4QA customers who voluntarily or involuntarily cease subscription to a Broker Telewest service. Kleinwort Benson Securities Limited 20 Fenchurch Street Company means Telewest London EC3P 3DB Communications plc, registration number 2983307. Auditors and reporting accountants KPMG Audit Plc Convertible preference shares 8 Salisbury Square refers to the issued convertible London EC4Y 8BB preference shares of 10p each in the capital of the Company. Legal advisers (As to English law) Group means the Company and its Clifford Chance subsidiaries. 200 Aldersgate Street London EC1A 4JJ Homes passed refers to homes in respect of which network (As to US law) construction is complete and Weil, Gotshal & Manges LLP meaning customers can subscribe to 767 Fifth Avenue Telewest’s telephone, television and New York NY 10153 on-line services.

Registrars Penetration refers to the Lloyds Bank Registrars percentage of ‘passed’ customers The Causeway who subscribe to one or more of Worthing Telewest’s services. West Sussex BN99 6DA SBCC refers to SBC Cablecomms (UK) which was acquired by the Company on 3 October 1995.

Telewest shares refers to the issued ordinary shares of 10p each in the capital of the Company.

Until the first quarter of 1996, Telewest calculated ‘churn’ by including those who move home and reconnect elsewhere. This resulted in overstatement of churn, so in common with other cable companies, Telewest now excludes those customers who move their television/residential telephony service from one premises to another within a Telewest franchise. Telewest Communications plc Genesis Business Park Albert Drive, Woking Surrey GU21 5RW United Kingdom

Telephone 01483 750900 Facsimile 01483 750901 E-mail: [email protected] Homepage: http://www.telewest.co.uk

Registered in England 2983307 London Stock Exchange symbol: ‘TWT’ NASDAQ symbol: ‘TWSTY’