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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JUNE 11, 1996
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INTERNATIONAL CABLETEL INCORPORATED
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(Exact Name of Registrant as Specified in Charter)
Delaware 0-22616 52-1822078
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(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
110 East 59th Street, New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (212)371-3714
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_______________________________________________________________________________
(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
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On June 11, 1996 International CableTel Incorporated ("CableTel") (Nasdaq:
ICTL) announced that on June 3, 1996 it had commenced the commercial provision
of cable telephone and entertainment services in a portion of its Northern
Ireland franchise. A copy of the press release issued by the Company announcing
the above is attached hereto as an exhibit and incorporated herein by reference.
In addition, International CableTel Incorporated ("CableTel") has raised
net proceeds of approximately $267 million from an offering that it had
completed on June 12, 1996 of its 7% Convertible Subordinated Notes Due 2008
(the "Convertible Notes").
CableTel intends to use the proceeds from the offering to finance (i) the
repayment of a principal amount of approximately (pound sign) 60 million falling
due in December 1996 under bank facilities entered into to finance part of the
purchase price paid for NTL and (ii) to pay approximately (pound sign)35 million
of the purchase price for NTL which is due in May 1997. Substantially all the
remaining proceeds will be used to finance the construction and working capital
requirements of CableTel's residential cable television and residential and
business cable telephone services in the United Kingdom, to fund a portion of
NTL's existing operations and expansion of those operations and for other
general corporate purposes.
The Convertible Notes have not been registered under the Securities Act of
1933 or any state securities laws, and unless so registered, may not be offered
or sold except pursuant to an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. Accordingly, the Convertible Notes were offered and sold only
to "qualified institutional buyers", to a limited number of institutional
"accredited investors" that made certain representations and agreements and
pursuant to certain offers and sales that occurred outside the United States.
Attached hereto as an exhibit and incorporated herein by reference are the
sections entitled "Risk Factors", "Management's Discussion and Analysis of
Results of Operations and Financial Condition", "Company", "Regulation" and
"Description of Certain Indebtedness-The NTL Facilities" extracted from
CableTel's offering memorandum dated June 7, 1996 (the "Offering Memorandum')
relating to the offering of the Convertible Notes.
Item 7. Financial Statements and Exhibits
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Exhibits
99.1 Press Release issued June 11, 1996.
99.2 Extracts from the Offering Memorandum entitled "Risk Factors",
"Management's Discussion and Analysis of Results of Operations
and Financial Condition", "Company", "Regulation" and
"Description of Certain Indebtedness-The NTL Facilities."
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL CABLETEL INCORPORATED
(Registrant)
By: \s\ Richard J. Lubasch
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Name: Richard J. Lubasch
Title: Senior Vice President-General Counsel
Dated: June 18, 1996
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EXHIBIT INDEX
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Exhibit Page
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99.1 Press Release issued on June 11, 1996.
99.2 Extracts from the Offering Memorandum entitled "Risk Factors",
"Management's Discussion and Analysis of Results of Operations and
Financial Condition", "Company", "Regulation" and "Description of
Certain Indebtedness--The NTL Facilities" incorporated by reference
into the foregoing report.
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Exhibit 99.1
[LOGO AND LETTERHEAD OF CABLETEL]
For Immediate Release
INTERNATIONAL CABLETEL INCORPORATED
ANNOUNCES COMMENCEMENT OF
CABLE TELEPHONE AND ENTERTAINMENT SERVICES IN NORTHERN IRELAND
New York, New York; Guildford, Surrey (June 11, 1996). International
CableTel Incorporated ("CableTel") (Nasdaq: ICTL) announced today that on June
3, 1996 it had commenced the commercial provision of cable telephone and
entertainment services in a portion of its Northern Ireland franchise.
The Northern Ireland franchise, which covers approximately 530,000 homes
and associated businesses, was awarded to CableTel in May 1995.
CableTel, through its subsidiaries and affiliated joint ventures, holds
licenses to develop, construct and operate cable television, telephone and
telecommunications systems covering over two million households in five regional
areas in the United Kingdom comprised of Central Scotland, South Wales, Suburban
London, West Yorkshire and Northern Ireland. Recently, CableTel announced that
it had purchased NTL, which provides terrestrial television and radio
transmission, operates a national broadband communications network which it uses
to provide high bandwidth services to telecommunications companies, commissions
and maintains emergency service radio systems, provides cell sites for wireless
communications operators, and operates satellite teleport facilities.
* * * * *
For further information contact: J. Barclay Knapp, President at 212-906-8445 or
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Richard J. Lubasch, General Counsel at 212-906-8470.
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Exhibit 99.2
As used in the extracts from the Offering Memorandum set forth below, the term
(i) "Company" means International CableTel Incorporated and, except in relation
to the Convertible Notes and unless the context otherwise requires, its
consolidated subsidiaries and partnerships including NTL (as defined below);
(ii) "CableTel" means International CableTel Incorporated and its consolidated
subsidiaries and partnerships excluding NTL; (iii) "NTL" means NTL Group Limited
and, unless the context otherwise requires, its consolidated subsidiaries; (iv)
references to "pounds," "pence" or "p" are to the lawful currency of the United
Kingdom and references to "U.S. dollars," "dollars," "$" or "cents sign" are to
the lawful currency of the United States. Solely for the convenience of the
reader, the extracts set forth below contain translations of certain pound
sterling amounts into U.S. dollars. These translations should not be construed
as representations that the pound sterling amounts actually represent such U.S.
dollar amounts or could have been or could be or will be converted into U.S.
dollars at the rate indicated or at any other rate. Unless otherwise indicated,
the translations of pounds sterling into U.S. dollars have been made at $1.5254
per 1.00 pound, the noon buying rate in The City of New York for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on March 31, 1996. See
"Exchange Rates" for information regarding the Noon Buying Rate for the past
five fiscal years. On June 6, 1996, the Noon Buying Rate was $1.5405 per
1.00 pound.
RISK FACTORS
Prospective investors should consider carefully all of the information set
forth herein and, in particular, should evaluate the
following risks before deciding to purchase the Convertible Notes.
SUBORDINATION OF CONVERTIBLE NOTES
The Convertible Notes are subordinated in right of payment to all existing
and future Senior Debt (as defined in the Indenture) of the Company. As of
March 31, 1996, after giving effect to the financing of the acquisition of
NTL, the Offering and the use of proceeds therefrom, the Company would have
had approximately $942.4 million of Senior Debt. See "--Potential Adverse
Consequences of Leverage," "--Need for Additional Financing; Proposed Credit
Facilities" and "Description of Convertible Notes--Subordination of
Convertible Notes." In addition, the Convertible Notes are effectively
subordinated to all existing and future indebtedness and other liabilities and
commitments of the Company's subsidiaries. See "--Dependence Upon Cash Flow
from Subsidiaries."
POTENTIAL ADVERSE CONSEQUENCES OF LEVERAGE
The Company is, and, following the consummation of the Offering will
continue to be, highly leveraged. At March 31, 1996, after giving effect to
the acquisition of NTL and the financing thereof, the issuance of the
Convertible Notes and the use of the proceeds therefrom, the Company's total
long-term indebtedness would have been approximately $1.5 billion,
representing approximately 84.1% of total capitalization, including the
Company's: (i) $611.8 million accreted value of 11 1/2% Series B Senior
Deferred Coupon Notes Due 2006 (the "11 1/2% Notes"); (ii) $168.6 million
accreted value of 12 3/4% Series A Senior Deferred Coupon Notes Due 2005 (the
"12 3/4% Notes"); (iii) $161.9 million accreted value of 10 7/8% Senior
Deferred Coupon Notes Due 2003 (the "10 7/8% Notes" and, collectively with the
11 1/2% Notes and the 12 3/4% Notes, the "Senior Notes"); and (iv) $191.8
million principal amount of 7 1/4% Convertible Subordinated Notes Due 2005
(the "7 1/4% Convertible Notes"). As the Company's subsidiaries draw down
amounts expected to be available under the Revolving Facility (as defined),
the Proposed Credit Facilities (as defined) and other possible future
financings, the amount of debt outstanding will increase further. The
indentures governing the Convertible Notes, the Senior Notes and the 7 1/4%
Convertible Notes permit the Company and its subsidiaries to incur substantial
additional indebtedness. The ability of the Company and its subsidiaries to
make scheduled payments under present and future indebtedness will depend on,
among other things, the Company's and its subsidiaries' ability to complete
the build out of the franchises on a timely and cost effective basis, the
Company's ability to access the earnings of its subsidiaries (which may be
subject to significant contractual and legal limitations), the future
operating performance of the Company and its subsidiaries and the Company's
ability to refinance its indebtedness when necessary. Each of these factors is
to a large extent subject to economic, financial, competitive, regulatory and
other factors that are beyond the Company's and its subsidiaries' control. See
"--Uncertainty of Construction Progress and Costs" and "--Dependence Upon Cash
Flow from Subsidiaries."
The agreements and debt instruments in respect of the Company's indebtedness
(including the NTL Facilities--see "Description of Certain Indebtedness--The
NTL Facilities") contain, and the Proposed Credit Facilities and other
possible future financings are expected to contain, various covenants which,
among other things, require the Company to maintain certain financial ratios,
restrict or prohibit the payment of dividends and other distributions to the
Company by its subsidiaries, restrict asset sales and dictate the use of
proceeds from the sale of assets. These restrictions, in combination with the
leveraged nature of the Company, could limit the ability of the Company to
respond to market conditions or meet extraordinary capital needs or otherwise
could restrict corporate activities and the ability of the Company's
subsidiaries to make payments to the Company which might otherwise fund
payments due on the Convertible Notes and the Company's other indebtedness.
See "--Dependence Upon Cash Flow from Subsidiaries." There can be no assurance
that such restrictions will not adversely affect the Company's ability to
finance its future operations or capital needs or to engage in other business
activities, such as acquisitions, which may be in the interest of the Company.
The degree to which the Company is leveraged could have important
consequences to holders of the Convertible Notes, including the following:
(i) increasing the Company's vulnerability to adverse changes in
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general economic conditions or increases in prevailing interest rates; (ii)
limiting the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate purposes,
including the build out of the networks in the franchises; (iii) requiring a
substantial portion of the Company's and its subsidiaries' cash flow from
operations to be dedicated to debt service requirements, thereby reducing the
funds available for dividends, operations and future business opportunities;
and (iv) increasing the Company's and its subsidiaries' exposure to increases
in interest rates given that certain of the Company's and its subsidiaries'
borrowings may be at variable rates of interest. Further, all or a substantial
portion of the indebtedness of the Company and its subsidiaries (including all
amounts outstanding pursuant to the NTL Facilities) is expected to mature
prior to the final maturity of the Convertible Notes. In addition, the Company
may under certain circumstances be obligated to offer to repurchase its
outstanding debt securities (including, without limitation, the Convertible
Notes) prior to maturity and there can be no assurance that the Company will
have the financial resources necessary or otherwise be able to repurchase
those securities and the Convertible Notes in such circumstances.
NEED FOR ADDITIONAL FINANCING; PROPOSED CREDIT FACILITIES
The development, construction and operation of the Company's cable
television and telecommunications network will require substantial capital
investment. The Company believes that, after taking into account CableTel's
proportional ownership of its franchises, the aggregate cost of network
construction from March 31, 1996 through passing 2,090,000 of the total
2,292,000 homes in its franchises in accordance with its regulatory build
schedules (including the license payments in respect of the Northern Ireland LDL
and the Gwent and Glamorgan LDLs) will be approximately 1.05 billion pounds (the
"Anticipated Funding Requirement"). The Company intends to resume discussions
with commercial banks toward arranging credit facilities (the "Proposed Credit
Facilities") to further fund a portion of such construction costs and working
capital requirements (see "Description of Certain Indebtedness--The Proposed
Credit Facilities"). Based on information currently available to the Company,
the Company estimates that expected sources of funds including, but not limited
to, existing cash on hand, the Proposed Credit Facilities (or other financings,
if obtained) and projected cash flow from operations will be sufficient to fund
the Anticipated Funding Requirement.
The information in the preceding paragraph includes projections; in
reviewing such information it should be kept in mind that actual results may
differ materially from those in such projections. These projections were based
on various factors and were derived utilizing numerous assumptions. Important
assumptions and factors that could cause actual results to differ materially
from those in these projections include the Company's ability to continue to
design network routes, install facilities, obtain and maintain any required
government licenses or approvals and finance construction and development, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as assumptions about customer acceptance, churn rates,
overall market penetration and competition from providers of alternative
services. Other factors and assumptions not identified above were also
involved in the derivation of these projections, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to update these projections to reflect actual funding requirements,
capital expenditures and results, changes in assumptions or changes in other
factors affecting such projections. There can be no assurance that (i) the
Proposed Credit Facilities or any other financings will be obtained (or be
available on acceptable terms); (ii) the Company or its subsidiaries will be
able to access all amounts available under the terms of the Proposed Credit
Facilities or other financings; (iii) actual construction costs will not
exceed the Anticipated Funding Requirement (see "--Uncertainty of Construction
Progress and Costs" below) or that additional financing substantially in
excess of the Anticipated Funding Requirement will not be required; (iv)
conditions precedent to advances under any such credit facility will be
satisfied when funds are required; (v) the Company will not acquire additional
franchises or other new businesses that would require additional capital; (vi)
the Company will be able to generate sufficient cash from operations to meet
any unfunded portion of its capital requirements when required or to satisfy
the conditions under the terms of the Senior Notes or the Company's other debt
instruments and agreements for the incurrence of additional debt financing or
(vii) the Company's subsidiaries will not incur losses from their exposure to
exchange rate fluctuations or be adversely
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affected by interest rate fluctuations. See "--Currency Risk." To the extent
that the Company's subsidiaries determine not to, or are unable to, obtain or
borrow under the Proposed Credit Facilities, the actual amounts required to
complete the Company's planned build-out exceed the Anticipated Funding
Requirement or the Company's operating cash flow does not meet expectations,
the Company will require additional debt or equity financing. There can be no
assurance that any such financing will be available on acceptable commercial
terms or at all. The inability of the Company to secure additional financing
could result in a failure to comply with the minimum build milestones set
forth in its licenses and could ultimately lead to the revocation of such
licenses. See "--Requirement to Meet Build Milestones."
In addition to the Anticipated Funding Requirement, significant amounts of
additional funding will be required to complete the acquisition of NTL, pay
principal and interest due under the NTL Facilities and fund related
acquisition costs and the ongoing capital expenditure requirements of NTL's
business and operations. See "--The NTL Acquisition" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources--The NTL Acquisition."
The Company will continue to consider strategic acquisitions and
combinations primarily in the United Kingdom, as attractive opportunities
arise. The Company is currently involved in various stages of exploration,
development and negotiation of certain transactions, some of which, if
completed, would be significant and are likely to involve the incurrence of
substantial indebtedness by the Company and its subsidiaries to finance such
transactions. There can be no assurances that such transactions will occur. In
particular, the indentures governing the Company's Senior Notes permit
indebtedness to be incurred to finance acquisitions only if such acquisitions
are acquisitions of either tangible or intangible assets, licenses and
computer software used in connection with a Cable Business (as defined in the
indentures governing the Senior Notes) or certain entities, directly or
indirectly, engaged in a Cable Business if such entities meet certain
qualifying criteria specified in such indentures.
DEPENDENCE UPON CASH FLOW FROM SUBSIDIARIES
The Company is a holding company that conducts its operations through its
direct and indirect wholly-owned subsidiaries and affiliated joint ventures.
As a holding company, the Company holds no significant assets other than its
investments in and advances to its subsidiaries and affiliated joint ventures.
The Company is, therefore, dependent upon its receipt of sufficient funds from
its subsidiaries and affiliated joint ventures to meet its own obligations.
The ability of the Company and its creditors, including holders of the
Convertible Notes, to benefit in the distribution of any assets of any of the
Company's subsidiaries and affiliated joint ventures upon any liquidation of
any such subsidiary or joint venture will be subject to the prior claims of
the subsidiary's or joint venture's creditors, including trade creditors and,
to the extent that such subsidiary or joint venture is not directly owned by
the Company, to the prior claims of any other persons directly or indirectly
owning such subsidiary or joint venture.
The ability of the Company to pay interest on the Convertible Notes or to
repay the Convertible Notes at maturity or otherwise, will be dependent upon
the cash flows of its subsidiaries and the payment of funds by those
subsidiaries to the Company in the form of repayment of loans, dividends or
otherwise. The Company's subsidiaries and joint ventures have no obligation,
contingent or otherwise, to pay amounts due pursuant to the Convertible Notes
or to make funds available for those payments, whether in the form of loans,
dividends or otherwise. In addition, the creditors of the Company's
subsidiaries (including the lenders under the Proposed Credit Facilities) may
impose restrictions on the rights of the Company to receive from its
subsidiaries repayment of, or interest in respect of, intercompany loans and
certain of the Company's subsidiaries may be prevented from paying dividends
or making other distributions to the Company. In particular, the NTL
Facilities prohibit the Purchaser (as defined) from paying dividends to the
Company unless certain cash flow targets are met and, if such targets are met,
require that 50% of all Excess Cash Flow (as defined in the NTL Facilities) of
the Purchaser and its subsidiaries (including the NTL group) must be applied
to prepay principal amounts outstanding under certain of the NTL Facilities.
See "Description of Certain Indebtedness--The NTL Facilities." Therefore, the
Company's ability to make interest and principal payments when due to holders
of the Convertible Notes or other indebtedness of the Company and the
Company's ability to purchase the Convertible Notes, the 7 1/4% Convertible
Notes, the Senior Notes and other debt that may become repayable or
repurchasable upon a Change
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of Control or the occurrence of certain other events is dependent upon the
receipt of sufficient funds from its subsidiaries, which may be restricted by
the terms of future indebtedness of the Company's subsidiaries.
Each of the Company's subsidiaries that is a Delaware corporation may pay
dividends, under the Delaware General Corporation Law (the "DGCL"), only out
of its surplus, or, in the circumstances prescribed by the DGCL, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Each of the Company's subsidiaries that is a United
Kingdom company is, under applicable United Kingdom law, prohibited from
paying dividends unless such payments are made out of profits available for
distribution (which consist of accumulated, realized profits, so far as not
previously utilized by distribution or capitalization, less accumulated,
realized losses, so far as not previously written off in a reduction or
reorganization of capital duly made). Other statutory and general English law
obligations also affect the ability of directors of the Company's subsidiaries
to declare dividends and the ability of the Company's subsidiaries to make
payments to the Company on account of intercompany loans. In addition, the
United Kingdom may impose a withholding tax on payments of interest and
advance corporation tax on distributions (of interest, dividends or otherwise)
by United Kingdom subsidiaries of the Company.
The Convertible Notes are effectively subordinated to all existing and
future indebtedness and other liabilities and commitments of the Company's
subsidiaries, including any borrowings by the Company's subsidiaries under the
NTL Facilities and the Proposed Credit Facilities. As of March 31, 1996, after
giving pro forma effect to the Company's acquisition of NTL, the borrowing of
approximately 200 million pounds pursuant to NTL Facilities, the issuance of the
Convertible Notes and the application of the net proceeds therefrom, the
Convertible Notes would have been structurally subordinated to approximately
$594.6 million of liabilities of the Company's subsidiaries. In addition, each
of the indentures governing the Senior Notes permits subsidiaries of the Company
to incur additional Indebtedness to finance the construction and working capital
needs of a Cable Business (as defined therein) and the acquisition of cable
assets or the acquisitions of certain businesses. In light of the Company's
strategy of continued growth, in part through acquisitions, the Company and its
subsidiaries may incur substantial indebtedness in the future.
Borrowings under the NTL Facilities are, and a substantial portion of the
Company's and its subsidiaries' existing and future indebtedness (including
borrowings under the Proposed Credit Facilities) is expected to be, secured by
liens and other security interests over the assets of the Company's
subsidiaries and the equity interests in the Company's subsidiaries. In
addition, the ability of the Company and its creditors, including holders of
the Convertible Notes, the 7 1/4% Convertible Notes and the Senior Notes, to
benefit from distributions of assets of the Company's subsidiaries may be
limited to the extent that the outstanding shares of any of its subsidiaries
and such subsidiary's assets are pledged to secure other debt of the Company
or its subsidiaries. Any right of the Company to receive assets of any
subsidiary upon such subsidiary's liquidation or reorganization (and the
consequent right of the holders of the Convertible Notes to participate in
those assets) will be structurally subordinated to the claims of that
subsidiary's creditors, except to the extent that the Company is itself
recognized as an unsubordinated creditor of such subsidiary. However, to the
extent that the Company is so recognized, the claims of the Company would
still be subject to any security interests in the assets of such subsidiary
and any liabilities of such subsidiary senior to those held by the Company and
may otherwise be challenged by third parties in a liquidation or
reorganization proceeding. In addition, loan agreements may require, as in the
case of the NTL Facilities, the Company to subordinate its right to repayment
of indebtedness outstanding between it and the borrower under such agreement
or any subsidiary of the Company to the rights of the lenders under the
agreement. In particular the rights of the Company and other subsidiaries to
repayment of principal and interest lent by them to the borrower under the NTL
Facilities have been and will be subordinated to the rights of the lenders
under the NTL Facilities pursuant to subordination agreements with such
lenders.
The principal fixed assets of the Company's subsidiaries are cable headends,
cable television and telecommunications distribution equipment,
telecommunications switches and customer equipment. The value of a substantial
portion of these fixed assets is derived from their employment in the
Company's and its subsidiaries' cable television and telecommunications
businesses. In the case of NTL, its principal fixed assets are transmission
towers, masts and antennas and the sites on which they are located. These
assets are highly
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specialized and, taken individually, can be expected to have limited
marketability. Consequently, in the event that secured creditors seek to
realize on the collateral securing debt of the Company's subsidiaries, these
creditors would be likely to seek to sell the business as a going concern
(possibly through a sale of pledged shares of subsidiaries), either in its
entirety, or by franchise or other business unit, in order to maximize the
proceeds realized. The amounts (and the timing of the receipt of any amounts)
available to satisfy the Company's obligations under the Convertible Notes
after any such sale may be adversely affected by provisions of laws favoring
secured creditors.
Therefore, for the reasons referred to in the preceding paragraphs, there
can be no assurance that the Company will be able to receive any cash flow
from its subsidiaries in a timely manner or at all.
THE NTL ACQUISITION
Additional Funding May Be Required. The Company anticipates that substantial
amounts of capital investment will be required in the future in order to
develop and expand NTL's business--see "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources--The NTL Acquisition." The Company estimates, based on the
information currently available to it, that through December 31, 1997 NTL will
require up to approximately 50 million pounds in capital beyond that which
NTL is capable of generating from its current operations for interest expense,
capital expenditure and working capital needs. The NTL Facilities contain a
revolving credit facility (the "Revolving Facility") of (Pounds)25 million
which may be used for capital expenditure and working capital purposes of NTL,
subject to satisfaction of certain drawdown conditions including, in
particular, in the case of cash advances (other than cash advances made by the
Purchaser to repay any sums paid pursuant to any standby letters of credit
issued by it in accordance with the terms of the Revolving Facility) the
repayment of a bridge facility (the "Bridge Facility") of (Pounds)60 million
comprised in the NTL Facilities. The Company believes that, based on current
estimates, NTL's other capital needs for the foreseeable future will be funded
with existing cash on hand of the Company. However, there can be no assurance
that the actual amounts required to develop NTL's business will not exceed the
Company's current estimates, that conditions precedent to advances under the
Revolving Facility will be satisfied or cash on hand will be available when
funds are required.
The cash required for payment of interest and principal related to the
financing will be substantial and may restrict cash availability for other
purposes. See "Description of Certain Indebtedness--The NTL Facilities." While
anticipated cash flow from the combined operations and other sources should be
adequate to make those payments, such demands may limit the funds available
for development and capital expenditures. In addition, the NTL Facilities
prohibit the Purchaser from paying dividends to the Company unless certain
cash flow targets are met and, if such targets are met, require that 50% of
all Excess Cash Flow of the Purchaser and its subsidiaries (including the NTL
group) must be applied to prepay amounts outstanding under the Long Term
Facility.
Unknown Acquisition Liabilities. The acquisition of NTL is structured as a
share purchase, which may result in the Purchaser having acquired NTL
companies with unknown liabilities. The Company has negotiated and obtained
from NTL's former shareholders certain representations and warranties
concerning contingent liabilities and other obligations of NTL to reduce the
risk that the Company will be held liable for unknown liabilities of NTL. The
Further Payment is subject to reduction in accordance with the Deed of
Adjustment (as defined) if such representations and warranties are proved to
be untrue or inaccurate. Nevertheless, there may be circumstances in which the
adjustment of the Further Payment does not provide the Company with protection
from contingent or other obligations of the NTL companies or breaches of the
representations and warranties, to the extent that they exceed 35 million
pounds. The Deed of Adjustment also provides for the Further Payment to be
reduced in accordance with a formula relating to the outcome of OFTEL's review
of the price cap applicable to NTL's regulated businesses (the "Price Cap
Review"). If the final outcome of the Price Cap Review is within the range
indicated in OFTEL's Interim Statement issued May 1996 (the "Interim
Statement"), then the Further Payment will not be reduced.
See "Regulation--NTL--Price Cap Review."
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Dependence Upon Site Sharing Arrangement. As a result of, among other
factors, a natural shortage of potential transmission sites and the
difficulties in obtaining planning permission for erection of further masts,
the British Broadcasting Corporation (the "BBC") and NTL have made
arrangements to share a large number of sites. Under the present arrangements,
one of the parties (the "Station Owner") is the owner, lessee or licensee of
each site and the other party (the "Sharer") is entitled to request a license
to use certain facilities at that site. Each site license granted pursuant to
the site sharing agreement is for an initial period expiring on December 31,
2005 (subject to title and to the continuation in force of the site sharing
agreement) and provides that, if requested by the Sharer, it will be extended
for further periods. The site sharing agreement and each site license provide
for the Station Owner to be paid a commercial license fee and for the Sharer
to be responsible, in normal circumstances, for the costs of accommodation and
equipment used exclusively by it. These arrangements continue between the BBC
and NTL notwithstanding the acquisition. Either party may terminate the
agreement by 5 years notice in writing to the other expiring on December 31,
2005 or at any date which is a date 10 years or a multiple of 10 years after
December 31, 2005. Although the Company does not anticipate that the site
sharing agreement or the site licenses will be terminated, there can be no
assurance that such a termination will not occur. Termination of the site
sharing arrangements would have a material adverse effect on NTL's business
and would also result in an event of default under the NTL Facilities and the
acceleration of the indebtedness outstanding thereunder. Each such event could
have a material adverse effect on the Company. In particular, an acceleration
of the indebtedness under the NTL Facilities could lead to defaults under the
indentures governing the Convertible Notes, the Senior Notes, the 7 1/4%
Convertible Notes and under the terms of other existing indebtedness of the
Company and its subsidiaries. There can be no assurance that the Company would
have sufficient resources to repay such indebtedness should it be accelerated.
Dependence Upon ITV and Other Contracts. NTL's business is substantially
dependent upon contracts with the ITV contractors, Channel 4 and S4C for the
provision of transmission services. See "The Company--NTL--Revenues Receivable
Under Contract." The prices that NTL may charge these companies for television
transmission services is subject to regulation by OFTEL. See "--Possible
Changes in Government Regulation" and "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources--The NTL Acquisition." The contracts with the ITV contractors,
Channel 4 and S4C terminate on December 31, 2002. Although, historically, the
ITV contractors, Channel 4 and S4C have renewed their contracts with NTL,
there can be no assurance that they will do so upon expiration of the current
contracts, that they will not negotiate terms for NTL's provision of
transmission services on a basis less favorable to NTL or that they would not
seek to obtain from third parties a portion of the transmission services
currently provided by NTL.
BBC Privatization. The United Kingdom Government has announced its intention
to privatize the BBC's transmission business upon expiration of the BBC's
Royal Charter in December 1996. Details regarding the privatization are not
yet published. If one or more businesses other than NTL successfully bid for
the BBC's transmission business, there can be no assurance that NTL will not
encounter significant competition for its transmission business from
expiration of NTL's current contracts with the ITV contractors, Channel 4 and
S4C. See "--Dependence Upon ITV and Other Contracts."
General. The benefits of the NTL Acquisition could be less than anticipated
and potential risks could be greater than expected. While the Company believes
the acquisition of NTL will be beneficial to the Company and its stockholders,
there can be no assurance that (1) the expected benefits will be realized; (2)
the potential risks will not occur; or (3) the risks can be managed without
adversely affecting the Company.
OPERATING LOSSES; LIMITED FINANCIAL HISTORY; DEFICIENCY OF EARNINGS TO FIXED
CHARGES
Although the long distance business of OCOM Corporation ("OCOM") to which
the Company succeeded has realized net income from operations in the past, on
a consolidated basis, the Company has experienced operating losses and net
losses since 1989 (with the exception of 1992). The Company had net income
(loss) for the three months ended March 31, 1996 and 1995 and years ended
December 31, 1995, 1994, 1993 and 1992 of $(42.7 million) and $(13.5 million),
$(90.8 million), $(29.6 million), $(11.1 million) and $1.2 million,
respectively. As of March 31, 1996, the Company's accumulated deficit was
$172.3 million. The development of the Company's business to date has resulted
in significant expenditures and the continued construction and expansion of
its network will require considerable additional expenditures before
significant operating revenues
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may be generated. Construction and operating expenditures have resulted in
negative cash flow, which is expected to continue at least until an adequate
customer base is established. The Company also expects to incur substantial
additional operating losses, and there can be no assurance that the Company
will achieve or sustain profitability in the future. Failure to become
profitable could adversely affect the Company's ability to sustain operations,
and obtain additional required funds. See "--Need for Additional Financing;
Proposed Credit Facilities." Moreover, such a failure would adversely affect
the Company's ability to pay the required interest payments on the Company's
indebtedness (including, without limitation, the Convertible Notes).
For the three months ended March 31, 1996 and 1995 and for the years ended
1991, 1993, 1994 and 1995, the Company's earnings were insufficient to cover
fixed charges by approximately $42.7 million and $13.5 million, $0.4 million,
$10.4 million, $31.8 million, and $105.4 million, respectively. The ratio of
earnings to fixed charges for the year 1992 was 81:1. The Company's pro forma
as adjusted earnings for the year ended December 31, 1995 and for the three
months ended March 31, 1996 were inadequate to cover pro forma as adjusted
fixed charges by $125.8 million and $46.5 million, respectively. Fixed charges
consist of interest expense, including capitalized interest, amortization of
fees related to debt financing and rent expense deemed to be interest.
REQUIREMENT TO MEET BUILD MILESTONES
The telecommunications license for each franchise contains specific
construction milestones. Under the terms of its current telecommunications
licenses, from March 31, 1996 until the end of 2003, CableTel is required to
construct cable television systems passing an aggregate of approximately
1,480,000 additional premises (residential and business), including
approximately 178,500 premises in 1996. OFTEL and the Department of Trade and
Industry ("DTI") are the only bodies with the authority to modify the
construction milestones in the licenses other than the Northern Ireland and
Gwent and Glamorgan LDLs (in respect of which the ITC is the relevant
authority for modifying construction milestones). Based on current network
construction scheduling, the Company believes it will be able to satisfy
CableTel's milestones in the future, but there can be no assurance that such
milestones will be met. In the event that the Company is unable to meet the
construction milestones required by any of its licenses, and is unable to
obtain modifications to the milestones, the relevant license or licenses could
be revoked, which would have a material adverse effect on the Company and
which could affect the continued availability of funding to the Company and
its operating subsidiaries.
UNCERTAINTY OF CONSTRUCTION PROGRESS AND COSTS
At March 31, 1996, construction of CableTel's network had passed
approximately 29% of its final regulatory milestone requirements for all its
franchises (including the Northern Ireland and Gwent and Glamorgan
franchises). Successful construction and development of CableTel's network
will depend on, among other things, CableTel's ability to continue to design
network routes, install facilities, obtain and maintain any required
government licenses or approvals and finance construction and development, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. The exact amounts and timing of all of these expenditures are
subject to a variety of factors which may vary greatly by market and be beyond
the control of the Company. Accordingly, there can be no assurance that the
actual amounts of capital expenditures described above will not exceed the
Anticipated Funding Requirement or that additional funding substantially in
excess of the Anticipated Funding Requirement will not be required.
In building its network, CableTel is generally required by its licenses to
use underground construction, which is more expensive and time consuming than
aerial construction. Mechanized construction methods often cannot be used to
install network infrastructure in CableTel's franchise areas due to existing
underground utility infrastructure. In addition, CableTel is responsible for
restoring the surface area after its underground construction is completed.
Although CableTel has recently been able to negotiate construction contracts
at rates which it believes are competitive relative to the cable industry as a
whole, construction costs could increase significantly over the next few years
as existing contracts expire and as demand for cable construction services
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grows due to anticipated increases in the cable industry's overall
construction activity. Accordingly, there can be no assurance that the Company
will be able to construct its network in a timely manner, or at a reasonable
cost.
For a discussion of the risks associated with the Company's Anticipated
Funding Requirement for construction of CableTel's network in its existing
franchises, see "--Need for Additional Financing; Proposed Credit Facilities."
UNCERTAINTY OF CUSTOMER ACCEPTANCE
The cable/telephony and telecommunications industry has a limited operating
history in the United Kingdom. Although initial acceptance of cable/telephony
services provided by the Company has been encouraging, the Company is unable
to predict with certainty how consumer demand for CableTel's services may
develop over time. The Company's future revenue growth depends in large
measure on (i) the development of significant consumer preference for cable
television over other types of in-home entertainment and (ii) customer
acceptance of CableTel as an attractive alternative to its competitors as a
provider of telephone and other telecommunications services. Since December
31, 1994, the Company has, through the acquisition of the Northern Ireland and
Gwent and Glamorgan franchises increased the total number of homes in its
franchises by almost 50%. The Company's future success will depend on customer
acceptance of its services and its ability to extend CableTel's brand name in
these new franchise areas. See "--Significant Competition." The inability of
the Company to generate demand for its services could have a material adverse
effect on the Company.
To date, unlike other United Kingdom operators, CableTel has not experienced
significant churn in its franchise areas although the Company expects churn
rates to increase. There can be no assurance as to CableTel's future churn
rates. Higher levels of churn could have a material adverse effect on the
financial condition and results of operations of the Company.
SIGNIFICANT COMPETITION
The Company faces significant competition from established and new
competitors in the areas of cable television, residential telephone and
business telecommunications services. The Company believes that competition
will intensify in each of these business areas, particularly business
telecommunications.
Cable Television. CableTel's cable television systems compete with direct
reception over-the-air broadcast television, direct-to-home ("DTH") satellite
services and satellite master antenna systems ("SMATV"). Pay television and
pay-per-view ("PPV") services anticipated to be offered by CableTel will
compete to varying degrees with other communications and entertainment media,
including DTH services, home video, cinema exhibition of feature films, live
theater and newly emerging multimedia services. The Company expects that, in
the future, CableTel may face competition from programming provided by video-
on-demand services, including those that may be provided by public telephone
operators ("PTOs") with national licenses (i.e. national PTOs). The extent of
such competition depends upon, among other factors, the quantity and quality
of the programming offered, the price (including the amount of up-front and
service costs) and, with respect to broadcast services, the quality of the
broadcast signal.
National PTOs such as BT and Mercury were restricted from holding licenses
to provide cable/telephony systems until March 31, 1994. Since then, national
PTOs have been allowed to bid for the award of cable licenses in respect of
areas of the United Kingdom that have not already been licensed. This position
results from regulations promulgated under the Broadcasting Act 1990 and it
may be changed by further regulations which reflect changes in policy of
relevant governmental authorities. Any such change in policy could have a
material adverse effect on the Company. To the Company's knowledge, no
national PTO has applied for a cable license in its own right but certain
companies associated with BT and Mercury hold licenses to provide
cable/telephony systems outside the Company's franchises.
On September 29, 1993, the ITC issued a statement pursuant to which it took
the position (shared by OFTEL and DTI) that BT and the other national PTOs may
provide "video-on-demand" service under their
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existing licenses. No assurance can be given that video-on-demand will not
provide substantial competition to the Company within its markets in the
future.
In December 1995, the government of the United Kingdom published its
Broadcasting Bill 1995 (the "Broadcasting Bill") which is expected to be
enacted by the end of August 1996. If enacted in its present form, the
Broadcasting Bill will provide for the future regulation of digital
terrestrial television ("DTT") that is expected to provide an additional 18 or
more new terrestrial channels serving between 60% and 90% of the United
Kingdom's population. Some of the channels will be reserved for digital
simultaneous broadcasting by the existing terrestrial broadcasters. The
introduction of DTT, as well as digital satellite television will provide both
additional programming opportunities as well as increased competition for the
Company and its subsidiaries. For example, British Sky Broadcasting Limited
("BSkyB") is proposing to launch a digital satellite service in 1997 either by
itself or in conjunction with other partners including, possibly, BT (see "--
Residential Telephony"). Although customers of cable operators may be able to
receive digital satellite television signals for more than 120 channels from
their cable operator using their existing equipment (subject to capacity
restraints), there can be no assurance that satisfactory (or any) terms of
carriage will be obtained by CableTel for digital satellite programs or
channels.
The full extent to which existing or future competitors using existing or
developing media will compete with cable television systems may not be known
for several years. There can be no assurance, however, that existing, proposed
or as yet undeveloped technologies will not become dominant in the future and
render cable television systems less profitable or even obsolete.
Residential Telephony. The Company competes primarily with BT in providing
telephone services to residential customers. BT, formerly the only major PTO
in the United Kingdom, has an established market presence, fully built
networks and resources substantially greater than those of the Company.
According to OFTEL, at December 1995, nearly 95% of United Kingdom residential
telephone exchange line customers are customers of BT. The Company's growth in
telecommunications services, therefore, depends upon its ability to convince
BT's customers to switch to the Company's telecommunications services. The
Company believes that price is currently one of the most important factors
influencing the decision of United Kingdom customers to switch to a cable
telecommunications service. BT has, however, introduced significant price
reductions in certain categories of calls and, due to regulatory price
controls, BT is expected to make further reductions in its telecommunications
prices. Accordingly, although the Company intends to remain competitive, in
the future it may be unable to offer residential telephone services at rates
lower than those offered by BT. In such case, the Company may experience a
decline in its average per line residential telecommunications revenues, may
not achieve desired penetration rates and may experience a decline in total
revenues. There can be no assurance that any such decline in revenues or
penetration rates will not adversely affect the financial condition and
results of operations of the Company and its subsidiaries.
In addition to BT, other telecommunications competitors which may have
substantially greater resources than those of the Company could prevent the
Company from increasing its share of the residential telecommunications
market. AT&T Communications (U.K.) Ltd. ("AT&T U.K.") was awarded a national
PTO license in December 1994 and has announced an intention to enter both the
business and residential markets. In addition, IONICA L3 Limited ("IONICA"),
will begin to offer telecommunications services via a fixed radio network in
1996. IONICA announced in November 1995 an arrangement with Scottish Power
Telecommunications Limited ("Scottish Telecom"), a subsidiary of Scottish
Power PLC, whereby Scottish Telecom will provide IONICA's service in Scotland.
Liberty Communications Limited, the U.K.'s other licensed wireless local loop
operator, is expected to launch its residential telephone service in late
1996. In addition, on February 8, 1996, the DTI announced the award of two
licenses to operate radio fixed access services in the 2 GHz band. These new
licenses enable the two licensees, BT and RadioTEL Systems, to provide
telecommunications services to customers living in defined remote rural areas
mainly in Scotland, Wales and Northern Ireland and create potential additional
competition for the Company's residential telephony services in certain remote
rural areas of the Company's Northern Ireland franchise. The Company also
competes with mobile networks such as those provided by Telecom Securicor
Cellular Radio Limited (marketed under the name
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"Cellnet") (in which BT has a 60% interest) and Vodafone Group Plc, and with
personal communications networks such as those provided by Mercury (marketed
under the name "Mercury One-2-One") and Microtel Logic Limited (marketed under
the name "Orange"). There can be no assurance that the Company will be able to
compete successfully with BT or such other telecommunications operators.
The Company believes that it has a competitive advantage in the residential
market because of its ability to offer integrated telephone, CATV,
telecommunications services (including interactive and on line services) and
dual product packages designed to encourage customers to subscribe to both
services. However, there can be no assurance that this competitive advantage
will continue. BSkyB is currently marketing telecommunications services on
behalf of BT, which enables BSkyB's customers to earn additional discounts on
BT's residential telecommunications volume discount plans. In addition, it is
reported from time to time that BT and BSkyB are discussing the formation of
cooperative arrangements. For example, recent press reports have indicated
that the two companies are in advanced discussions regarding the formation of
a joint venture to promote digital satellite television and interactive
services in the United Kingdom. Given the respective market positions of BT
and BSkyB, the Company believes that, if the two companies successfully
combine their respective marketing strengths, the resulting combination may
provide significant competition to cable operators including CableTel. At
present, however, it remains to be seen whether cooperative arrangements, such
as the proposed joint venture, can be established successfully. Based on
recent press reports, the Company believes that significant issues remain to
be resolved between the parties. The Company cannot currently predict the
effect that competition from joint BT/BSkyB ventures would have on CableTel's
business until further details are available as to how it is proposed that
these and other issues are to be resolved.
Business Telephony. BT also is the Company's principal competitor in
providing business telecommunications services. In addition, the Company
competes with Mercury (a majority owned subsidiary of Cable and Wireless PLC),
Energis Communications Limited ("Energis") (a subsidiary of the National Grid
Company plc), Scottish Telecom in Scotland and with other companies that have
recently been granted telecommunications licenses, such as MFS Communications
Limited. In the future, the Company may compete with additional entrants to
the business telecommunications market, such as AT&T U.K. Competition is based
on price and quality of services and the Company expects price competition to
intensify if Energis and other new market entrants compete aggressively. Most
of these competitors have substantial resources and there can be no assurance
that these or other competitors will not expand their businesses in the
Company's existing markets or that the Company will be able to continue to
compete successfully with such competitors in the business telecommunications
market.
LIMITED ACCESS TO PROGRAMMING
The Company's ability to make a competitive offering of cable television
services is dependent on CableTel's ability to contract for and obtain access
to programming at a reasonable cost. While various sources of programming are
available to cable system operators in the United Kingdom, BSkyB is currently
the most important supplier of cable programming and the exclusive supplier of
certain programming. BSkyB provides the industry with a range of programming,
including the most popular mainstream premium movie channels available in the
United Kingdom and, until May 1997, exclusive English premier league soccer
games. BSkyB also competes with CableTel by operating a DTH satellite service
that provides programming, including programming that is also offered by
CableTel, to approximately 3.6 million subscribers in the United Kingdom.
BSkyB's programming is important in attracting and retaining cable television
subscribers and, in the absence of more alternative programming sources, BSkyB
may be able to set and raise prices for its programming without significant
competitive pricing pressure. On August 18, 1995, the Office of Fair Trading
("OFT") announced that the Director General of Fair Trading ("DGFT") had
reviewed and approved a revision by BSkyB of its wholesale price list
(industry rate card) for the supply of programming to cable operators. The
revised rate card sets wholesale primary discounts based upon the cable
operator's pay-to-basic ratio and market penetration. Under the revised rate
card, CableTel will pay an additional 13% on its March 1995 prices, with
effect from January 1, 1996. This review was supplemented by a further review
announced in December 1995 by the DGFT of BSkyB's position in the pay TV
market, including issues relating to the supply of programming and related
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services at the wholesale level. The DGFT is expected to respond in June or
July of 1996. No assurance can be given that BSkyB will not exploit its
dominant market position in a manner which may have a material adverse effect
on the Company's operating results.
In addition, BSkyB announced in 1995 the conclusion of programming supply
agreements with the two largest cable operators in the United Kingdom. Under
these agreements, these two cable operators accepted significantly restrictive
provisions in return for more favorable rates than those contained in the new
BSkyB ratecard. BSkyB has, however, undertaken to suspend operation of certain
anti-competitive restrictions contained in these agreements, while the DGFT
considers further whether the agreements warrant investigation by the
Restrictive Practices Court. The Company anticipates that, as these two cable
operators together control approximately 40% of homes under franchise in the
United Kingdom, the consequences of these agreements will make it
substantially less viable for other cable operators (including CableTel) to
reduce their dependence on BSkyB as the principal source of programming supply
by developing, through cooperative ventures among cable operators, their own
PPV services, sports or movie channels and cable-exclusive programming.
CableTel, like many other cable operators, obtains most of its programming
through arrangements with BSkyB and other programming suppliers which are not
reflected in signed written agreements. To date, CableTel has not had a formal
contract with BSkyB, although it has been in discussions with BSkyB for some
time. There can be no assurance that CableTel will be able to enter into a
definitive agreement with BSkyB, that the terms of such definitive agreement
will not be less favorable to CableTel than the current arrangement, or that
BSkyB will continue to supply programming to CableTel on reasonable commercial
terms or at all. Moreover, CableTel has not, to date, entered into written
contracts with many of its other program suppliers. The loss of BSkyB or other
programming, a deterioration of the perceived quality of BSkyB or other
programming, or a material increase in the price that CableTel is required to
pay for BSkyB or other programming could have a material adverse effect on the
Company and its subsidiaries.
Because of this and other factors described in the preceding paragraphs,
there can be no assurance that its current programming will continue to be
available to the Company on acceptable commercial terms, or at all.
POSSIBLE CHANGES IN GOVERNMENT REGULATION
The principal business activities of the Company in the United Kingdom are
regulated and supervised by various governmental bodies, the ITC, OFTEL under
the directions of the Director General and the DTI on behalf of the Secretary
of State for Trade and Industry. Changes in laws, regulations or governmental
policy (or the interpretations of such laws or regulations) affecting the
Company's activities and those of its competitors, such as licensing
requirements, increased price regulation, deregulation of interconnection
arrangements, acceleration of the date (which is scheduled for 2001 but is
subject to review in 1998) BT and Mercury can provide broadcast entertainment
services over their existing national networks or a change in policy allowing
more than one cable licensee in the franchise area could have a material
adverse effect on the Company's financial condition and results of operations.
In particular, if there were a change of government or government policy in
the United Kingdom, existing restrictions on the eligibility of BT, Mercury or
certain other national PTOs to compete with CableTel's CATV business might be
removed or significantly weakened. The United Kingdom's opposition party, the
Labour Party, has stated its intention to review these restrictions if it is
elected as the governing party. A General Election is required to be held by
May 22, 1997 but may be called earlier. A substantial portion of NTL's
business is also subject to regulation. See "Regulation--NTL." In particular,
the prices that NTL may charge the ITV companies, Channel 4 and S4C for
television transmissions services are subject to price controls imposed by
OFTEL, which are being reviewed by the Director General. Based on the Director
General's initial conclusions published in the Interim Statement, the Company
expects that the future revenues NTL receives from providing these services
will be reduced. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources--The NTL
Acquisition." There is no assurance that
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the new price controls resulting from the final conclusions of the Director
General's review will not be reviewed further prior to 2002 or that price
controls for the years following December 31, 2002 will not have a material
adverse effect on such revenues.
As the United Kingdom is a member of the European Union ("EU"), the Company
may be subject to regulatory initiatives of the European Commission ("EC").
Changes promulgated in EC directives, particularly to the extent that they
require a European Union television "production" and "programming" quota which
may reduce the range of programs which can be offered and increase the costs
of purchasing television programming. See "Regulation--CableTel European Union
Legislation--Television Regulation." In addition, EC Directives may introduce
provisions requiring the Company and its subsidiaries to provide access to its
cable network infrastructure to other service providers, could have a material
adverse effect on its business. Furthermore, as part of the implementation of
the EU Television Standards Directive, the United Kingdom government has set
out in a paper ("The Regulation of Conditional Access for Digital Television")
its approach to the regulation of conditional access for digital television.
The United Kingdom government intends to, among other things, exclude from all
licenses issued under the Telecommunications Act (including cable operators)
the authority to provide encryption and subscriber management services ("SMS")
for digital programming services and issue two new class licenses, one
covering encryption and the other covering SMS. Cable operators operating
those systems will have to register with OFTEL. It is proposed that the new
licenses for encryption and certain types of SMS will include detailed
conditions including an obligation to provide these services and a prohibition
on discrimination. A draft statutory instrument, together with draft class
licenses, are expected to be published for consultation in June 1996.
MANAGEMENT OF GROWTH AND EXPANSION
The Company has experienced rapid growth and development in a relatively
short period of time and will continue to do so to meet its strategic
objectives and regulatory milestones. The management of such growth will
require, among other things, stringent control of construction and other
costs, continued development of the Company's financial and management
controls, increased marketing activities and the training of new personnel.
Failure to manage its rapid growth and development successfully could have a
material adverse effect on the Company's financial condition and operating
results.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of certain of whom, such as Mr. George S. Blumenthal and
Mr. J. Barclay Knapp, could have a material adverse effect on the Company. The
Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. The Company has not entered into written employment contracts or
non-compete agreements with, nor has it obtained life insurance policies
covering, such key executive officers. Certain senior managers of the Company
also serve as members of senior management of other companies in the
telecommunications business. See "Management" and "Certain Transactions."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future
these changes will neither materially affect the continued use of fiber optic,
coaxial or copper cabling technologies nor materially hinder the Company's
ability to acquire necessary technologies, the effect of technological changes
on the businesses of the Company cannot be predicted.
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The Company believes that its advanced network design is sufficiently
flexible to permit it to deliver a wide variety of existing entertainment,
telecommunications and information services and will enable it to offer
anticipated new services in the future without incurring significant
additional construction costs to adapt its existing underground network.
However, the cost of implementation of emerging and future technologies could
be significant and the Company's ability to fund such implementation will
depend on its ability to obtain additional financing. See "--Need for
Additional Financing; Proposed Credit Facilities."
In the future, digital compression techniques may allow terrestrial
broadcasters to offer approximately eight digital channels on a frequency
which currently carries one analog channel. The Company believes that if
digital terrestrial broadcast or digital satellite television services are
introduced successfully in the United Kingdom, at competitive prices, the
Company, as well as its competitors, will be able to increase significantly
the number of channels they are able to offer to their customers. However, the
effect of any emerging and future technological changes on the viability or
competitiveness of the Company's network and services cannot be accurately
predicted.
CURRENCY RISK
To the extent that the Company obtains financing in United States dollars
and incurs expenses in the construction and operation of the Company's
regional systems in the United Kingdom in British pounds sterling, it will
encounter currency exchange rate risks. In addition, the Company's revenues
will be generated primarily in British pounds sterling while its interest and
principal obligations with respect to most of the Company's existing
indebtedness (including, without limitation, the indebtedness represented by
the Senior Notes and the 7 1/4% Convertible Notes) is, and the Convertible
Notes will be, payable in United States dollars. While the Company may
consider entering into transactions to hedge the risk of exchange rate
fluctuations, there can be no assurance that the Company will engage in such
transactions, or, if the Company decides to engage in such transactions, that
they will be successful and that shifts in the currency exchange rates will
not have a material adverse effect on the Company.
FRAUDULENT CONVEYANCE
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time it
incurred indebtedness under the Convertible Notes, (a) incurred such
indebtedness with the intent of hindering, delaying, or defrauding current or
future creditors, or (b)(i) received less than reasonably equivalent value or
fair consideration therefor and (ii)(A) was insolvent or rendered insolvent by
reason of such incurrence, (B) was engaged or about to engage in a business or
transaction for which its remaining assets constituted unreasonably small
capital to carry on such business or (C) intended to incur, or believed that
it would incur, debts beyond its ability to pay such debts as they mature,
then such indebtedness under the Convertible Notes could be voided or
invalidated, or could be subordinated to all other debts of the Company. The
voiding or invalidating of any of such indebtedness of the Company could
result in an event of default with respect to other indebtedness of the
Company, which could result in acceleration of such other indebtedness.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally,
however, a company will be considered insolvent if the sum of its respective
debts is greater than all such company's property at a fair valuation or if
the present fair saleable value of its assets is less than the amount that
would be required to pay its probable liability on its existing debts
(including contingent liabilities), as they become absolute and mature. The
Company believes that it was not, after giving effect to the issuance of the
Convertible Notes, considered insolvent under any of the foregoing standards.
This belief is based on the Company's analysis of its subsidiaries' cash flow
projections and other financial information, including pro forma financial
statements. There can be no assurance, however, that a court passing on such
questions would agree with the Company.
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INSURANCE COVERAGE
The Company obtains insurance of the type and in the amounts that it
believes are customary in the United Kingdom for similar companies. Consistent
with this practice, the Company does not insure the underground portion of its
cable network. Any catastrophe affecting a significant portion of the
Company's underground cable network could result in substantial uninsured
losses.
ANTI-TAKEOVER MATTERS
Certain provisions of the Indenture and the indentures governing the Senior
Notes and the 7 1/4% Convertible Notes may have the effect of delaying or
preventing transactions involving a Change of Control of the Company,
including transactions in which stockholders might otherwise receive a
possible substantial premium for their shares over then current market prices,
and may limit the ability of stockholders to approve transactions that they
may deem to be in their best interest.
A Change of Control would require the Company to make an offer to purchase
all the Convertible Notes, the Senior Notes and the 7 1/4% Convertible Notes,
may require the Company to refinance substantial amounts of its indebtedness
and would impose other significant obligations on the Company. The inability
of the Company to purchase all or some of the Convertible Notes, the Senior
Notes and the 7 1/4% Convertible Notes tendered for purchase, would also
constitute an event of default under the Indenture and the indentures
governing the Senior Notes and the 7 1/4% Convertible Notes, which would have
certain adverse consequences to the Company and holders of the Convertible
Notes.
The Certificate of Incorporation of the Company as currently in effect
contains certain provisions which may have the effect, alone or in combination
with each other or with the existence of authorized but unissued Common Stock
and any series of preferred stock, of precluding or rendering more difficult a
hostile takeover, making it more difficult to remove or change the composition
of the Company's incumbent board of directors and its officers, being adverse
to stockholders who desire to participate in a tender offer and depriving
stockholders of possible opportunities to sell their shares at temporarily
higher prices. See "Description of Capital Stock--Certain Special Provisions."
In particular, the rights issuable pursuant to the stockholder rights plan of
the Company have certain anti-takeover effects as they will cause substantial
dilution to a person or group that acquires a substantial interest in the
Company without the prior approval of the Board of Directors. The effect of
such rights may be to inhibit a change in control of the Company (including
through a third party tender offer at a price which reflects a premium to then
prevailing trading prices) that may be beneficial to the Company's
stockholders. See "Description of Capital Stock--Certain Special Provisions--
Stockholder Rights Plan." Under the Company's Certificate of Incorporation,
holders of Common Stock and holders of the Series A Junior Participating
Preferred Stock (the "Junior Preferred Stock") issued upon exercise of such
rights generally vote as a class, with each share of Common Stock being
entitled to one vote per share and each share of Junior Preferred Stock being
entitled to 100 votes per share. As a result of the provisions of the
Certificate of Incorporation and the ownership of the Company, no change of
control requiring stockholder approval is possible without the consent of the
owners of the Junior Preferred Stock.
RESTRICTIONS ON DIVIDENDS
The indentures governing the Senior Notes impose certain limitations on the
payment of dividends. The Company's ability to pay cash dividends on the
Company's equity securities including the Common Stock and to make other
"Restricted Payments" is limited under the indentures governing the Senior
Notes to the sum of (i) the difference between Cumulative EBITDA (as defined
in the indentures governing the Senior Notes) and 1.5 times Cumulative
Interest Expense (also as defined in the indentures governing the Senior
Notes) plus (ii) net proceeds from the sale of capital stock (excluding the
proceeds of the Company's offering of 10 million Common Stock in October
1993). Further, the terms of the NTL Facilities restrict, and the terms of the
Proposed
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Credit Facilities or other future indebtedness of the Company's subsidiaries
may (subject to the terms of the indentures governing the Senior Notes)
restrict, the ability of certain of the Company's subsidiaries to distribute
earnings to the Company or make other payments to the Company. See "--
Dependence Upon Cash Flow of Subsidiaries" above. Neither the Company nor its
predecessor, OCOM Corporation, has ever paid cash dividends on its Common
Stock. In addition, the payment of any dividends by the Company in the future
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements,
the general financial condition of the Company and its subsidiaries and
general business conditions. See "Dividend Policy" and "Risk Factors--
Operating Losses; Limited Financial History."
LACK OF PUBLIC MARKET
There has been no public market for the Convertible Notes prior to this
Offering. The Convertible Notes and the Common Stock issuable upon conversion
or redemption thereof have not been registered under the Securities Act and
may be subject to restrictions on resale, unless registered pursuant to an
effective shelf registration statement as described herein. See "Description
of the Convertible Notes--Registration Rights" and "Notice to Investors." The
Registration Rights Agreement will not obligate the Company to keep the Shelf
Registration Statement effective beyond the third anniversary of the date of
issuance of the Convertible Notes. Although the Initial Purchasers have
advised the Company that they currently intend to make a market in the
Convertible Notes, they are not obligated to do so and any such market making
may be discontinued at any time without notice, at the sole discretion of any
of the Initial Purchasers. Accordingly, there can be no assurance as to the
development or liquidity of any market that may develop for the Convertible
Notes. The Convertible Notes are expected to be eligible for trading in the
PORTAL Market.
There can be no assurance that the market prices for Company's securities
including the Convertible Notes and the Common Stock issuable on conversion
thereof will not be subject to substantial fluctuations. Factors such as
fluctuations in the operating results of the Company, announcements of
technological innovations or events affecting others in the industries in
which the Company operates, changes in governmental legislation or regulation,
currency and exchange rate fluctuations and general economic conditions may
have significant effect on the market prices of its securities, including the
Convertible Notes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
At December 31, 1995, the Company and its subsidiaries and affiliated joint
ventures held licenses to develop, construct and operate cable television,
telephone and telecommunications systems covering approximately 2,090,000
households in five Regional Areas in the United Kingdom, comprised of Central
Scotland, South Wales, Suburban London, West Yorkshire and Northern Ireland.
The Company's proportional ownership in these systems represents 1,769,400
households. On May 9, 1995, the Company acquired NTL. See "Liquidity and
Capital Resources--The NTL Acquisition." In addition, the Company owns OCOM,
which operates a long distance telephone and microwave transmission business
in certain portions of the United States. See "United States--Long
Distance/Microwave Services (OCOM)" below.
United Kingdom--Cable/Telephony and Telecommunications (CableTel)
During 1995 the Company accelerated the pace of construction of its systems
and built an operations infrastructure, which includes a dual cable/telephony
billing system. By March 31, 1996, the Company had passed more than 601,000
homes, including 85,000 inherited homes previously constructed as cable-only
systems, or approximately 29% of its total of 2,090,000 franchise homes. The
Company also expects that it will have a total of 57% of all homes in its
franchise areas passed by the end of 1997. The Company intends to have 94% of
its network construction in its franchises completed by the end of 2000.
Through March 31, 1996, approximately $693.8 million had been invested in the
construction of the Company's existing network and associated property, plant
and equipment.
In October 1995, the ITC granted the Northern Ireland LDL covering up to
530,000 homes and the associated businesses in Northern Ireland to CableTel
Northern Ireland Limited, a wholly owned subsidiary of the Company. The
Company believes that the Northern Ireland LDL represents a significant and
attractive opportunity for the Company to expand its current business and
overall presence in the United Kingdom. In addition, in December 1995, the ITC
granted an LDL covering up to 330,000 homes in Glamorgan and Gwent to CableTel
South Wales Limited, the Company's joint venture company with South Wales
Electricity plc ("SWALEC"). See "--Liquidity and Capital Resources" below.
Separately, in October 1995, CableTel South Wales Limited acquired the cable
television business of Metro Cable TV Limited ("Metro Cable") in South Wales
and Hertfordshire, for an aggregate consideration of 7.8 million pounds. The
Metro Cable networks provide only CATV service to 171,500 homes and are not
counted towards any OFTEL build milestones.
In May 1995, the Company formed Cable Online Limited to establish a United
Kingdom-wide Internet access service. Following a successful six-week trial of
400 users throughout the United Kingdom, Cable Online was launched in November
1995. Beginning with the Regional Areas, the Company plans to establish up to
70 Internet "Points of Presence," strategically located throughout the United
Kingdom, by the summer of 1996. Cable Online will be both a retailer and
wholesaler of Internet services and the Cable Online service will be made
available to customers within and outside the Company's Regional Areas. The
Company is in discussions with a number of cable operators and other
organizations who are interested in reselling the Cable Online service under
their own name.
On January 26, 1996, through its wholly owned subsidiary, Secure Backup
Systems Limited ("Secure Backup Systems"), the Company acquired the business and
assets of the Secure Backup Systems division of Byss Co. Limited. Initial
consideration of 250,000 pounds was paid on completion with deferred
consideration of up to 350,000 pounds payable if certain revenue targets are
achieved by the new company.
United States--Long Distance/Microwave Services (OCOM)
OCOM provides the CCI/AirTouch Joint Venture (as defined) with certain
microwave services pursuant to a contract (the "JV Contract") between it and
the CCI/AirTouch Joint Venture. It is not yet known whether the
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CCI/AirTouch Joint Venture will continue to renew the JV Contract, exercise
its termination right or exercise its right to buy the equipment and
facilities at a price equal to the replacement cost of all such equipment and
facilities based upon a bona-fide third party bid. Since the CCI/AirTouch
Joint Venture is OCOM's only significant private line microwave transmission
service customer, and is expected to remain its biggest customer, termination
or expiration of the JV Contract would result in the loss of substantially all
of the microwave transmission revenues. Microwave transmission revenues were
$4,988,000, $5,592,000 and $5,293,000 in the years ended December 31, 1995,
1994 and 1993, respectively, which represented 56%, 60% and 55% of OCOM's
total revenues, respectively. If the termination or expiration of the JV
Contract is coupled with the CCI/AirTouch Joint Venture's exercise of its
right to buy OCOM's microwave transmission equipment and facilities, the
above-mentioned loss of revenues may be partially offset by the proceeds from
the sale of these assets. In either case, the termination or expiration of the
JV Contract would have a material adverse impact on OCOM's financial position,
results of operations and net cash flows. Management believes, however, that
such an impact on OCOM is unlikely to have a material adverse effect on the
financial position, results of operations and net cash flows of the Company
and its subsidiaries as a whole, since the Company's United Kingdom businesses
are not expected to require cash flows from OCOM.
OCOM no longer generates wholesale toll revenues from the CCI/AirTouch Joint
Venture since the CCI/AirTouch Joint Venture converted to its new long
distance service provider in June and July 1995. Notwithstanding the above-
mentioned conversion, however, OCOM continues to generate revenues from the
private line microwave transmission services provided by it pursuant to the JV
Contract.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Revenues consist of cable television revenues, telephone and
telecommunications revenues, and OCOM's toll and microwave revenues. Cable
television revenues increased to $8,051,000 from $1,830,000 as a result of
customer growth that increased the Company's current revenue stream. Telephone
and telecommunications revenues increased to $7,762,000 from $542,000 as a
result of customer growth that increased the Company's current revenue stream.
Toll revenues increased to $1,309,000 from $951,000 due to the expansion of
the long distance business into new markets in the second quarter of 1995,
which represents 65% of the 1996 toll revenue. Toll revenues in 1995 include
$331,000 from the CCI/Airtouch Joint Venture's resale of OCOM's long distance
service, which revenue is no longer generated due to the conversion of the
CCI/Airtouch Joint Venture's business to a new service provider in June and
July 1995. Microwave transmission revenues increased to $1,312,000 from
$1,310,000 as a result of additional revenue from additional circuits
installed in the microwave network, offset by the reductions in amounts billed
to the CCI/Airtouch Joint Venture for circuits in the microwave network.
Operating expenses increased to $12,629,000 from $3,296,000 due to increased
operating expenses of the cable television, telephone and telecommunications
business to $11,683,000 from $2,306,000 as a result of the increases in
programming costs, interconnection costs and costs of operating the network.
OCOM's operating expenses decreased due to a decrease in property taxes,
offset by costs incurred in new markets where OCOM has provided long distance
service since the second quarter of 1995.
Selling, general and administrative expenses increased to $21,798,000 from
$10,514,000 principally because of the increase in costs of the cable
television, telephone and telecommunications business to $21,100,000 from
$9,646,000. The cable television, telephone and telecommunications business
costs increased as a result of increase in sale and marketing costs and
additional personnel and overhead to service the increasing customer base.
OCOM's costs decreased as a result of a reduction in marketing costs related
to OCOM's entrance into new markets in 1995 offset by increases in billing
costs from the additional long distance business in 1996. The 1996 and 1995
cable television, telephone and telecommunications costs include $814,000 of
non-cash expense
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from the amortization of non-competition agreements in connection with the
acquisitions of certain United Kingdom subsidiaries.
Depreciation and amortization expense increased to $12,190,000 from
$5,532,000 primarily due to an increase in depreciation of cable television,
telephone and telecommunications equipment.
Interest and other income increased to $7,763,000 from $3,714,000 due to an
increase in funds available for short-term investment and an increase in the
interest rate on the Company's short-term investments.
Interest expense increased to $24,711,000 from $4,242,000 due to the
issuance of the 12 3/4% Notes, the 11 1/2% Notes and the 7 1/4% Convertible
Notes subsequent to March 1995.
Foreign currency transaction losses of $123,000 in 1996 and gains of
$196,000 in 1995 are the result of changes in the exchange rate.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Although all entities are encouraged to adopt this
method of accounting for all stock-based employee compensation plans
(including stock option plans), SFAB No. 123 allows an entity to continue to
measure compensation costs for its plans as prescribed by AFB Opinion No. 25,
"Accounting for Stock Issued to Employees." At this time, management expects
to continue its accounting in accordance with AFB Opinion No. 25.
Years Ended December 31, 1995 and 1994
Revenues consist of cable television revenues, telephone and
telecommunications revenues, and OCOM's toll and microwave revenues. Cable
television revenues increased to $13,813,000 from $4,478,000 as a result of
customer growth that increased the Company's current revenue stream. Telephone
and telecommunications revenues increased to $10,991,000 from none as a result
of the activation of the telephone systems in August 1994. Toll revenues
increased to $3,949,000 from $3,675,000 due to the expansion of the long
distance business into new markets in 1995, which represents 31% of the 1995
toll revenue. Toll revenues in 1995 include $658,000 from the CCI/AirTouch
Joint Venture's resale of OCOM's long distance service, which revenue will no
longer be generated due to the conversion of the CCI/AirTouch Joint Venture's
business to a new service provider in June and July 1995. Microwave
transmission revenues decreased to $4,988,000 from $5,592,000 due to a
reduction in amounts billed to the CCI/AirTouch Joint Venture for circuits in
the microwave network.
Operating expenses increased to $24,415,000 from $7,827,000 due to the
increase in the operating expenses of the cable television, telephone and
telecommunications business to $21,030,000 from $4,119,000. The cable
television, telephone and telecommunications business operating expenses
increased as a result of the increases in programming costs, interconnection
costs and costs of operating the network. OCOM's operating expenses decreased
due to a decrease in property taxes, offset by costs incurred in new markets
where OCOM has started to offer long distance service.
Selling, general and administrative expenses increased to $72,629,000 from
$27,890,000 principally because of the increase in costs of the cable
television, telephone and telecommunications business to $65,275,000 from
$26,499,000. The cable television, telephone and telecommunications business
costs increased as a result of increases in sales and marketing costs and
additional personnel and overhead to service the increasing customer base. In
addition, OCOM's costs increased as a result of one-time fees of $2,468,000
incurred in connection with its participation in the equal access balloting
process conducted by AT&T Wireless, as well as costs incurred primarily to
obtain customers in new markets where OCOM has started to offer long distance
service. The 1995 and 1994 cable television, telephone and telecommunications
costs include $3,257,000 and $3,144,000,
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respectively, of non-cash expense from the amortization of non-competition
agreements in connection with the acquisitions of certain United Kingdom
subsidiaries.
Depreciation and amortization expense increased to $29,823,000 from
$17,916,000 primarily due to an increase in depreciation of cable television,
telephone and telecommunications equipment.
Interest, dividend and other income increased to $21,185,000 from
$18,403,000 due to an increase in the interest rate on the Company's short
term investments and an increase in funds available for short term investment
from the issuance of the 12 3/4% Notes and the 7 1/4% Convertible Notes.
Interest expense increased to $28,379,000 from $11,410,000 due to the
issuance of the 12 3/4% Notes and the 7 1/4% Convertible Notes.
Foreign currency transaction gains of $84,000 in 1995 and $2,062,000 in 1994
are the result of changes in the exchange rate. The foreign currency
transaction gains were not cash gains since the Company did not exchange its
pounds sterling cash and cash equivalents for U.S. dollars.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company
adopted SFAS No. 121 in 1995, which had no material effect on the Company's
financial statements.
Years Ended December 31, 1994 and 1993
Revenues consist of cable television revenues and OCOM's toll and microwave
revenues. Cable television revenues increased to $4,478,000 from $502,000 as a
result of the Company's acquisitions of its United Kingdom subsidiaries in the
fourth quarter of 1993 and the first quarter of 1994. Toll revenues decreased
to $3,675,000 from $4,283,000 because the CCI/AirTouch Joint Venture entered
into the long distance market in competition with OCOM as a reseller of OCOM's
long distance service. In addition, voice mail revenues included in toll
revenues decreased to $285,000 from $627,000 as a result of the sale of the
voice mail equipment to the CCI/AirTouch Joint Venture in May 1994. Microwave
transmission revenues increased to $5,592,000 from $5,293,000 from additional
circuits installed in the microwave network and billed to the CCI/AirTouch
Joint Venture.
Operating expenses increased to $7,827,000 from $4,441,000 due to the
increase in the operating expenses of the cable television, telephone and
telecommunications business from $681,000 to $4,119,000.
Selling, general and administrative expenses increased to $27,890,000 from
$5,042,000 principally because of the increase in costs of the cable
television, telephone and telecommunications business to $26,499,000 from
$3,108,000, offset by decreases in OCOM's payroll costs. The 1994 and 1993
cable television, telephone and telecommunications costs include $3,144,000
and $645,000, respectively, of non-cash expense from the amortization of non-
competition agreements in connection with the acquisitions of certain United
Kingdom subsidiaries.
Depreciation and amortization expense increased to $17,916,000 from
$6,206,000 because of amortization of license acquisition costs and deferred
financing costs incurred and depreciation of cable television, telephone and
telecommunications equipment acquired subsequent to the third quarter of 1993,
offset by a decrease in depreciation of microwave equipment that became fully
depreciated during 1993.
Interest, dividend and other income increased to $18,403,000 from $5,182,000
due to the increase in short term investments as a result of funds available
from the Company's debt and equity public offerings in October 1993.
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Interest expense increased to $11,410,000 from $2,950,000 as a result of the
issuance of the 10 7/8% Notes in October 1993 and the assumption of United
Kingdom subsidiary debt.
Foreign currency transaction gains of $2,062,000 in 1994 and losses of
$7,052,000 in 1993 are the result of changes in the exchange rate. The foreign
currency transaction gains and losses were not cash gains and losses since the
Company did not exchange its pounds sterling cash and cash equivalents for
U.S. dollars.
The provision for income taxes increased to $1,630,000 from $645,000 as a
result of an increase in United Kingdom income taxes.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company adopted the provisions
of the new standard for investments held as of or acquired after January 1,
1994. In accordance with the Statement, prior period financial statements have
not been restated to reflect the change in accounting principle. Application
of the new rules had no financial effect as of January 1, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company will require significant amounts of capital to finance
construction of CableTel's system network, connection of cable television,
telephone and telecommunications customers to the network, working capital and
debt service. The Company also requires substantial capital to complete the
acquisition of NTL, repay certain of the NTL Facilities and fund the capital
expenditure requirements of NTL's existing operations and to finance the
expansion of those operations (see "--The NTL Acquisition" below).
The Company expects that the capital required to build CableTel's networks
and connect residential and business subscribers will be approximately $950
per home in its franchise areas, of which approximately $600 represents the
cost of the network itself and the remainder represents the capital cost of
connecting customers to its network. Certain locations may require more or
less capital depending upon household density, business density, and
penetration rates. In addition, certain costs such as the establishment of
telephone switches, cable headends, and facilities are incurred during the
initial phases of network construction, leading to average capital
expenditures per home which are higher in the initial years. The construction
and development of the systems will depend on, among other things, the
Company's ability to design network routes, install facilities, obtain and
maintain any required governmental licenses or approvals and finance
construction and development, all in a timely manner, at reasonable costs and
on satisfactory terms and conditions.
Pursuant to the terms of the Northern Ireland LDL, CableTel Northern Ireland
Limited is required to make annual cash payments to the ITC for fifteen years,
commencing on the earlier of the end of the first full calendar year after the
start of operations or May 18, 1997, in the amount of approximately
14.4 million pounds (subject to adjustments for inflation). Such payments are
in addition to the percentages of qualifying revenue already set by the ITC of
0% for the first ten years and 2% for the last five years of the fifteen-year
license. CableTel Northern Ireland Limited is committed to covering at least
428,000 out of the total 530,000 homes in the LDL area. Pursuant to the terms
of the Glamorgan and Gwent LDL, CableTel South Wales Limited is required to
make annual cash payments to the ITC for fifteen years, commencing in the
first full calendar year after the start of operations, in the amount of
approximately 104,188 pounds (subject to adjustments for inflation). Such
payments are in addition to the percentages of qualifying revenue already set
by the ITC of 0% for the first five years, 2% for the second five years and 4%
for the last five years of the fifteen-year license.
The Company believes that, after taking into account its proportional
ownership of its franchises, the aggregate cost of network construction from
March 31, 1996 through passing 2,090,000 of the total 2,292,000 homes in
CableTel's franchises in accordance with its regulatory build schedules
(including the license payments in respect of the Northern Ireland LDL and the
Gwent and Glamorgan LDL) will be approximately 1.05 billion pounds ($1.6
billion), which includes the commitments for equipment and services at March
31, 1996 of approximately
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$26,900,000. The exact amounts and timing of these expenditures could vary
significantly with the actual number of subscribers and are subject to a
variety of factors which may vary greatly by market and may be beyond the
control of the Company (see "Risk Factors--Uncertainty of Construction
Progress and Costs"). In addition, this amount includes various estimated
inflation factors on certain components. The substantial costs will result in
a negative cash flow until an adequate customer base is established.
In January 1996, the Company issued $1,050,000,000 aggregate principal
amount at maturity of its 11 1/2% Series A Senior Deferred Coupon Notes Due
2006 (the "Old 11 1/2% Notes"), which were exchanged for a like aggregate
principal amount at maturity of its 11 1/2% Series B Senior Deferred Coupon
Notes Due 2006 (the "11 1/2% Notes") pursuant to an exchange offer consummated
on May 23, 1996. See "Description of Certain Indebtedness--The 11 1/2% Notes."
The Old 11 1/2% Notes were issued at a price to investors of 57.155% of the
aggregate principal amount at maturity, or $600,127,500. The Company received
net proceeds of approximately $582,000,000 from the issuance of the Old 11
1/2% Notes. The original issue discount of the 11 1/2% Notes accretes at a
rate of 11 1/2%, compounded semiannually, to an aggregate principal amount of
$1,050,000,000 by February 1, 2001. Interest will thereafter accrue at 11 1/2%
per annum, payable semiannually beginning on August 1, 2001. The 11 1/2% Notes
may be redeemed at the Company's option, in whole or in part, at any time on
or after February 1, 2001 at 105.75% the first year, 102.875% the second year
and 100% thereafter, plus accrued and unpaid interest to the date of
redemption.
In April 1995, the Company issued $175,000,000 aggregate principal amount of
its 7 1/4% Convertible Notes due 2005 (the "7 1/4% Convertible Notes") and
$277,803,500 aggregate principal amount at maturity of its 12 3/4% Senior
Deferred Coupon Notes Due 2005 (the "Old 12 3/4% Notes"). On August 18, 1995
the Company issued $277,803,500 aggregate principal amount at maturity of the
12 3/4% Series A Senior Deferred Coupon Notes Due 2005 (the "12 3/4% Notes")
in exchange for the Old 12 3/4% Notes and the Old 12 3/4% Notes were canceled.
See "Description of Certain Indebtedness--The 12 3/4% Notes." The 12 3/4%
Notes were issued at a price to investors of 53.995% of the aggregate
principal amount at maturity, or $150,000,000. The Company received proceeds
of $145,125,000 from the issuance of the 12 3/4% Notes and $169,750,000 from
the issuance of the 7 1/4% Convertible Notes. In addition, in May 1995, the
initial purchasers of the 7 1/4% Convertible Notes exercised their over-
allotment option for an additional $16,750,000 principal amount of 7 1/4%
Convertible Notes, for which the Company received proceeds of $16,315,000.
The original issue discount of the 12 3/4% Notes accretes at a rate of 12
3/4%, compounded semiannually, to an aggregate principal amount of
$277,803,500 by April 15, 2000. Interest will thereafter accrue at 12 3/4% per
annum, payable semiannually beginning on October 15, 2000. The 12 3/4% Notes
may be redeemed at the Company's option, in whole or in part, at any time on
or after April 15, 2000 at 103.64% the first year, 101.82% the second year and
100% thereafter, plus accrued and unpaid interest on the date of redemption.
Interest on the 7 1/4% Convertible Notes is payable semiannually beginning
on October 15, 1995. The 7 1/4% Convertible Notes are convertible into shares
of Common Stock prior to maturity at a conversion price of $27.56 per share
(as adjusted for the four-for-three stock split by way of a stock dividend
paid in August 1995), subject to further adjustment in certain events. The 7
1/4% Convertible Notes are redeemable, in whole or in part, at the option of
the Company at any time on or after April 15, 1998, at a redemption price of
105.08% that declines annually to 100.73% in 2004, in each case together with
accrued and unpaid interest to the redemption date.
In October 1993, the Company issued $212,000,000 aggregate principal amount
of its 10 7/8% Notes. The 10 7/8% Notes were issued at a price to investors of
58.873% of the aggregate principal amount at maturity, or $124,811,000. The
Company received proceeds of $119,797,000 from the issuance of the 10 7/8%
Notes. The original issue discount of the 10 7/8% Notes accretes at a rate of
10 7/8%, compounded semiannually, to an aggregate principal amount of
$212,000,000 by October 15, 1998. Interest will thereafter accrue at 10 7/8%
per
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annum, payable semiannually beginning on April 15, 1999. The 10 7/8% Notes may
be redeemed at the Company's option, in whole or in part, at any time on or
after October 15, 1998 at 103.107% the first year, 101.554% the second year
and 100% thereafter, plus accrued and unpaid interest to the date of
redemption. See "Description of Certain Indebtedness--The 7 1/4% Convertible
Notes."
Cash and cash equivalents as of March 31, 1996 (excluding the net proceeds
of the Offering) are expected to be sufficient to meet CableTel's capital
requirements to the second quarter of 1997 in accordance with the build
schedules contained in the existing licenses. The Company intends to resume
discussions with commercial banks regarding the arrangement of the Proposed
Credit Facilities to further fund construction costs and working capital
requirements. Based on the information currently available to the Company and
taking into account the Company's proportional ownership of its franchises, it
is currently anticipated that expected sources of funds (including, but not
limited to, the Proposed Credit Facilities or other financings, if obtained),
cash on hand and cash flow from operations (which is expected by early 1997)
will be sufficient to fund the estimated costs required to complete planned
construction in its existing franchises past 2,090,000 homes in accordance
with the construction milestones set forth in its licenses. To the extent that
either the Company is unable to obtain the Proposed Credit Facilities or such
other financing or does not meet its projections, the Company will require
additional debt and/or equity financing. There can be no assurance that (i)
the Proposed Credit Facilities will be obtained (or be available on acceptable
terms), (ii) any other financing will be consummated or available on
acceptable terms, (iii) actual construction costs will not exceed the
Company's expectations or that additional funding substantially in excess of
the amounts estimated above will not be required, (iv) conditions precedent to
advances under any such credit facility will be satisfied when funds are
required, (v) the Company will not acquire additional franchises or businesses
that would require additional capital or (vi) the Company will be able to
generate sufficient cash from operations to meet any unfunded portion of its
capital requirements when required. The Company does not have any firm
additional financing plans to address any of the foregoing situations at this
time.
The inability of the Company to obtain the Proposed Credit Facilities or
alternative financing could result in a failure to comply with the minimum
build milestones set forth in its licenses for certain of its franchises and
could ultimately lead to the revocation of such licenses, which would have a
material adverse effect on the Company.
The Company also incurs capital expenditures for the establishment of its
business facilities and fixtures, office and computer equipment, its billing
and subscriber management systems and vehicles. These costs also vary by
location and size of franchise, but are substantially less than the capital
costs of the network itself.
The exact amounts and timing of all of these expenditures are subject to a
variety of factors which may vary greatly by market and be beyond the control
of the Company. Accordingly, there can be no assurance that the amount of the
funding actually required will not exceed the estimated amounts described
above or that additional funding substantially in excess of the amounts
estimated above will not be required. Furthermore, if the Company were to make
additional investments or acquire additional franchises, funding would be
needed in addition to the anticipated funding requirements described above.
In addition to its capital expenditures, the Company incurs direct operating
costs for such items as salaries and office rent. As network installation
progresses, the Company will incur increased sales and marketing expenses
(including sales commissions). Since the Company does not intend initially to
produce its own programming, it purchases programming from suppliers whose
charges may reach 65% of cable television revenues in the early years. The
Company also incurs charges from other telecommunications systems in order to
interconnect with the worldwide telephone network. The Company's ability to
generate positive operating cash flow depends upon its ability to increase
penetration and revenues at a faster rate than the growth of these costs.
The Company's operations are conducted through its direct and indirect
wholly-owned subsidiaries and joint ventures. See "Risk Factors--Dependence
Upon Cash Flow Subsidiaries." As a holding company, the Company holds no
significant assets other than its investments in and advances to its
subsidiaries and joint ventures. The
22
<PAGE>
Company is therefore dependent upon the receipt of sufficient funds from its
subsidiaries and joint ventures to meet its own obligations. Accordingly, the
Company's ability to make scheduled interest and principal payments (or any
other payments that may become payable) when due to holders of indebtedness of
the Company and the Company's ability to pay cash dividends to its
stockholders is dependent upon the receipt of sufficient funds from its
subsidiaries, which may be restricted in the manner described in the next
paragraph.
Each of the Company's subsidiaries which are Delaware incorporated
corporations may pay dividends, under the DGCL only out of its surplus or, in
the circumstances prescribed by the DGCL, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal
year. Each of the Company's subsidiaries which are United Kingdom companies
are, under applicable United Kingdom law, prohibited from paying dividends
unless such payments are made out of profits available for distribution (which
consist of accumulated, realized profits, so far as not previously utilized by
distribution or capitalization, less accumulated, realized losses, so far as
not previously written off in a reduction or reorganization of capital duly
made). The Company's United Kingdom subsidiaries (excluding NTL and its
subsidiaries) do not currently have such profits and are not expected to have
any such profits for the foreseeable future. In addition, the United Kingdom
may impose a withholding tax on payments of interest and advance corporation
tax on distributions (dividends or otherwise) by United Kingdom subsidiaries
to the Company. In light of the Company's strategy of continued growth, in
part through acquisitions, the Company and its subsidiaries may incur
substantial indebtedness in the future. A substantial portion of such future
indebtedness and, in particular, indebtedness incurred by the Company's
subsidiaries under the Proposed Credit Facilities, is expected to be secured
and, consequently, will have priority to the extent of such security over
unsecured indebtedness. In addition, the NTL Facilities effectively restrict,
and the lenders under the Proposed Credit Facilities may impose restrictions
on the rights of the Company to receive from its subsidiaries repayment of or
interest in respect of intercompany loans or restrictions on the ability of
the Company's subsidiaries to pay dividends or make other distributions.
Therefore, for the reasons referred to in this paragraph and under "--The NTL
Acquisition" below, there can be no assurance that the Company will be able to
receive any cash flow from its subsidiaries in a timely manner or at all.
In addition, the Company will encounter currency/exchange rate risks which
could be material relative to funding United Kingdom operations and to
revenues. To the extent that the Company obtains financing in United States
dollars and incurs costs in the construction and operation of the Company's
regional systems in the United Kingdom in British pounds sterling, it will
encounter currency exchange rate risks. Furthermore, the Company's revenues
will be generated primarily in British pounds sterling while its interest and
principal obligations with respect to most of the Company's existing
indebtedness is, and will be, payable in dollars. At March 31, 1996, the
Company had invested approximately $607,000,000 in pounds sterling money
market instruments and cash accounts to reduce this risk. While the Company
may consider entering into transactions to hedge the risk of exchange rate
fluctuations, there can be no assurances that the provisions governing the
indebtedness of the Company and its subsidiaries would permit such
transactions, and, if such provisions do permit such transactions, that they
will successfully prevent shifts in the currency exchange rates from having a
material adverse effect on the Company.
OCOM requires capital in order to expand its private line microwave
transmission business. Historically, OCOM has used cash from operations to
expand this business. In addition, through its participation in the equal
access balloting process conducted by AT&T Wireless, OCOM provides long
distance service to AT&T wireless customers who chose OCOM as their long
distance provider. OCOM will need capital for a continuing marketing effort
and for interconnection costs in each market in which it provides service.
OCOM's cash on hand and cash from operations are expected to be sufficient to
meet all of its requirements.
The NTL Acquisition
In May 1996, an indirect wholly owned subsidiary of the Company (the
"Purchaser") acquired NTL, an English limited liability company, for payments
of approximately 204 million pounds (the "Initial Payment")
23
<PAGE>
at closing, 17.1 million pounds (which corresponds to the benefit of a tax
credit expected by NTL by October 1, 1996) in October 1996 and 35 million pounds
(subject to adjustments, the "Further Payment") on the first anniversary of
closing. NTL provides television and radio transmission services and a range of
other services in the broadcasting and telecommunications industries. To finance
a substantial portion of the purchase price for NTL, a syndicate of lenders
arranged by Chase Investment Bank Limited as arranger and The Chase Manhattan
Bank, N.A. as agent has made available senior secured loan facilities (the "A
Facilities") of a maximum principal amount of 165 million pounds comprised of
(i) the Short Term Facility (of 50 million pounds), (ii) the Long Term Facility
of 90 million pounds (together with the Short Term Facility, the "Term Loan
Facilities") and (iii) the Revolving Facility (of 25 million pounds). The Term
Loan Facilities were fully drawn to finance a portion of the Initial Payment or
refinance monies used to pay a portion of the Initial Payment including related
acquisition expenses. The Short Term Facility is repayable in full on December
31, 1996 unless certain conditions are fulfilled on or prior to that date, in
which case the amounts outstanding under the Short Term Facility will
automatically be converted into, and shall be deemed amounts outstanding under
the Long Term Facility. The Company anticipates that such conditions will be met
and that the amounts outstanding under the Short Term Facility will be so
converted. See "Description of Certain Indebtedness--The NTL Facilities--The A
Facilities."
The Revolving Facility is available until December 31, 1997 for capital
expenditure and working capital purposes of NTL's group. Up to 2 million pounds
of the Revolving Facility is available by way of standby letters of credit to
guarantee overdraft and other working capital facilities made available by any
clearing banks to the Purchaser. At the end of the availability period, any
amount outstanding under the Revolving Facility will be converted to term debt
and be aggregated with the Long Term Facility.
All amounts outstanding under the Long Term Facility are scheduled to be
repaid in quarterly installments from 1998 to 2002 inclusive. The amount of the
installments will be based upon an agreed percentage of the loans and will
increase year to year. Final repayment of the Long Term Facility is due on
December 31, 2002. See "Description of Certain Indebtedness--The NTL
Facilities--The A Facilities."
Loans under the A Facilities bear interest at an annual rate equal to LIBOR
plus a margin that varies from 0.75% per annum to 1.75% per annum, based on
certain financial ratios of the Purchaser and certain of its subsidiaries.
The A Facilities are secured by guarantees from NTL and certain of its
subsidiaries and by first ranking fixed and floating charges over the present
and future assets (subject to certain exceptions) of the Purchaser, NTL and
certain of its subsidiaries. See "Description of Certain Indebtedness--The NTL
Facilities--The A Facilities."
The Chase Manhattan Bank, N.A. also made available to the Purchaser a secured
loan facility of 60 million pounds (the "Bridge Facility") to finance most of
the remainder of the Initial Payment and acquisition costs and expenses due at
closing. The Bridge Facility is secured by guarantees from the Company, OCOM
Corporation, OCOM Sub I, Inc., OCOM Sub III, Inc., CableTel UK Group, Inc.,
CableTel (UK) Limited, NTL and certain of its subsidiaries and by second ranking
fixed and floating charges over (subject to certain exceptions) all the present
and future assets of the Purchaser, NTL and certain of its subsidiaries, subject
to certain subordination arrangements. The Bridge Facility must be repaid in
full by December 31, 1996. See "Description of Certain Indebtedness--The NTL
Facilities--The Bridge Facility."
Loans under the Bridge Facility bear interest at an annual rate equal to LIBOR
plus a margin of 3%, which margin shall be increased by an additional 1.25% on
each of the "Applicable Margin Step-Up Dates" falling three, four, five, six and
seven months after the advance of any loans under the Bridge Facility. The
Purchaser may repay all, but not less than all, of the amount outstanding under
the Bridge Facility at any time without penalty. The Bridge Facility contains
covenants similar to those of the A Facilities.
The NTL Facilities contain various covenants and conditions including, among
other things, a covenant prohibiting dividends and distributions by the
Purchaser to the Company unless certain cash flow targets are met
24
<PAGE>
and, if such targets are met, requiring 50% of all Excess Cash Flow to be
applied to repay amounts outstanding under the A Facilities.
The Company requires approximately 95 million pounds ($145 million) to (i)
repay the borrowings under the Bridge Facility on or before December 31, 1996
and (ii) pay the Further Payment in May 1997. The Company anticipates that
such additional funding should be available from the net proceeds of this
Offering. In addition, the Company may be required to finance the repayment of
the 50 million pounds Short Term Facility if certain conditions are not met
although, based on the Interim Statement, the Company expects that such
conditions will be met. See "Description of Certain Indebtedness--The NTL
Facilities--The A Facilities."
On May 23, 1996 the Director General of OFTEL published his initial
conclusions of his review of the price control for the television transmission
services provided by NTL to the ITV companies, Channel 4 and S4C. The total
revenues receivable by NTL for such services (the "new Po revenues") in 1996
are expected to be either 56.4 million pounds if the Channel 3 companies
accept certain contractual conditions or 57.4 million pounds if they do not.
These revenues are approximately 40% to 45% of NTL's total anticipated
revenues for 1996. If the final outcome of the Director General's review
results in price controls within the range indicated in the Interim Statement
then the total amount of such new Po revenues will be 53.4 million pounds in
1997 and, thereafter through 2002, will be reduced annually by, at worst, the
Retail Prices Index (RPI) minus 4.3%. There is no assurance that these price
controls will not be reviewed again by OFTEL prior to 2002 or that price
controls for the years following December 31, 2002 will not have a material
adverse effect on the revenues NTL receives from the ITV companies, Channel 4
and S4C.
The Company anticipates that substantial amounts of capital will be required
in the future in order to, among other things (i) expand NTL's existing
telecommunications network in England to other regions of the United Kingdom,
(ii) meet the rapid build schedule of the Channel 5 contract, and (iii)
install NTL's third teleport for its satellite uplinking business. The Company
estimates that, based on the information currently available to it, through
December 31, 1997, NTL may require approximately 50 million pounds in capital
beyond that which NTL is capable of generating from its current operations for
interest expense under the NTL Facilities, capital expenditures (including
substantial amounts of discretionary expenditure to develop and expand NTL's
business) and working capital. Up to 25 million pounds is expected to be
available under the Revolving Facility for capital expenditure and working
capital purposes of NTL, subject to satisfaction of a number of significant
conditions, in particular, the receipt of subordinated debt or equity from the
Company and the repayment of the Bridge Facility. The Company believes that
the remainder of such capital needs will be funded by cash on hand of the
Company. To the extent that such cash on hand is insufficient to meet NTL's
actual working capital and capital expenditure requirements, either the
planned development and expansion of NTL's network could be curtailed or
additional funding will be necessary. There is no assurance that such
additional funding will be available to the Company on acceptable terms or at
all. See "Risk Factors--The NTL Acquisition."
The information in the preceding paragraphs under "Liquidity and Capital
Resources" include projections; in reviewing such information it should be
kept in mind that actual funding requirements, capital expenditures and
results may differ materially from those in such projections. These
projections were based on various factors and were derived utilizing numerous
assumptions. Important assumptions and factors that could cause actual results
to differ materially from those in these projections include the Company's
ability to continue to design networks, install facilities, obtain and
maintain any required government licenses or approvals and finance
construction and development, all in a timely manner, at reasonable costs and
on satisfactory terms and conditions, as well as assumptions about customer
acceptance, churn rates, overall market penetration and competition from
providers of alternative services. Other factors and assumptions not
identified above were also involved in the derivation of these projections,
and the failure of such other assumptions to be realized as well as other
factors may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these projections to
reflect actual results, changes in assumptions or changes in other factors
affecting such projections.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994
Cash used in operating activities was $3,047,000 in 1995 and cash provided
by operating activities was $5,249,000 in 1994. The change is primarily due to
the significant increase in the net loss, which was partially offset by non-
cash charges.
Purchases of fixed assets, net of proceeds from sales, were $452,650,000 in
1995 and $130,439,000 in 1994 as a result of increased cable television,
telephone and telecommunications fixed asset purchases in 1995. License
acquisition costs in 1995 of $12,412,000 were primarily for the acquisition of
the cable television business of Metro Cable TV Limited in South Wales and in
the northern suburbs of London. The increase in other assets in 1995 of
$3,361,000 is primarily due to an additional contribution to an unconsolidated
joint venture in the cable television programming business.
Cash provided by financing activities was $350,806,000 in 1995 primarily due
to the proceeds from the 12 3/4% Notes and the 7 1/4% Convertible Notes
aggregating $341,750,000, net of financing costs incurred of $13,019,000.
Additional financing costs of $2,565,000 were incurred in connection with the
Proposed Credit Facilities. Principal payments of $9,963,000 represent the
payment in full of the subsidiary bank loan included in notes payable at
December 31, 1994 and the semi-annual principal payment of the subsidiary bank
loan included in long-term debt. Pursuant to the terms of the subsidiary bank
loan, $2,810,000 was released from escrow. In 1995, one of the Company's joint
ventures received 12,000,000 pounds from the Company and 8,000,000 pounds
from the minority interest holder in the joint venture pursuant to capital
calls and borrowed 18,120,000 pounds from the Company and 12,080,000 pounds
from the minority interest holder in the joint venture. The capital
contribution and proceeds from borrowings from minority partner of $12,626,000
and $19,065,000, respectively, are the result of the cash received from the
minority interest holder for the capital call and loan.
26
<PAGE>
THE COMPANY
The Company entered the cable/telephony and telecommunications market in the
United Kingdom in 1993 and is the third largest operator of cable/telephony
systems in the United Kingdom in terms of the number of homes in the franchise
areas managed by the Company, its subsidiaries and affiliated joint ventures.
The Company offers customers cable television, residential telephone and
business telecommunications services, thereby generating three sources of
revenue from an integrated, high capacity, high speed, full-service network.
The Company's network provides a two way communications pathway which is
capable of delivering new services which may emerge from the convergence of
telecommunications, information services and entertainment.
In May 1996, the Company, through an indirect wholly-owned subsidiary,
acquired NTL. NTL, formerly the engineering division of the Independent
Broadcasting Authority of the United Kingdom (the "IBA"), was formed in 1990
and privatized by the United Kingdom Government in 1991. NTL's core business
is the transmission of television programming for the ITV (Channel 3)
companies, Channel 4 and S4C. NTL has also successfully bid for the
transmission of the Channel 5 signal for Channel 5 Broadcasting Limited. Under
contracts with those companies, NTL is responsible for operating, monitoring
and maintaining a transmission service. Transmission is carried out by means
of a network of transmitters located at over 1,200 transmission sites
throughout England. In addition to its core business, NTL broadcasts signals
for Teletext and independent local radio broadcasters. Since its
privatization, NTL has also diversified into non-regulated telecommunications
transmission via microwave links between its towers, entered the satellite
earthstation business, acquired DTELS, a company which installs and services
radio systems for emergency services and businesses, and developed
capabilities to install turnkey television facilities in the international
market.
CABLETEL
CableTel was incorporated in April 1993 to develop, construct and operate
broadband communications systems outside the United States that provide
integrated "last mile" telecommunications services to both business and
residential customers. The provision of voice, data and video services from a
distribution network to a customer's premises and the distribution of such
services over the network is referred to as "last mile" telecommunications
service. CableTel now manages cable/telephony licenses covering over two
million homes and, the Company estimates, over 150,000 business premises.
CableTel offers customers cable television, residential telephone and business
telecommunications, thereby generating three sources of revenue from an
integrated, high capacity, high speed, full service network. CableTel's
networks provide a two way communications pathway that is capable of
delivering new services which may emerge from the convergence of
telecommunications, information and entertainment services. Such new services
include Cable Online, an Internet access service that was launched by the
Company in November 1995 to provide dial-up and back office infrastructure to,
among others, Virgin Net, a joint venture announced in May 1996 that plans to
offer its own brand of interactive services including Internet access.
Based on operating results and experience gained by management in the United
States telecommunications market, CableTel has developed marketing strategies
that it believes will maximize customer subscription rates, customer retention
and operating profitability. These strategies include focusing on geographic
regions with distinct cultural characteristics, which allows CableTel to
tailor its marketing and product offerings to meet regional needs and
preferences.
27
<PAGE>
CableTel is developing its existing franchises in the United Kingdom, where
it has clustered 16 separate franchises into five distinct geographic regions
(the "Regional Areas"). Summary information for the franchises in each of the
Regional Areas at March 31, 1996 is set forth below:
<TABLE>
<CAPTION>
HOMES IN
FRANCHISE(1)
-------------------
OWNERSHIP EQUITY
REGIONAL AREA FRANCHISES PERCENTAGE TOTAL ADJUSTED
<S> <C> <C> <C> <C>
Central Scotland..... N.W. Glasgow/Clydebank 100.0% 128,000 128,000
Greater Glasgow 100.0 254,000 254,000
Bearsden/Milngavie 100.0 14,000 14,000
Paisley/Renfrew 100.0 73,000 73,000
Inverclyde/Eastwood 100.0 30,000 30,000
--------- ---------
499,000 499,000
--------- ---------
South Wales.......... Cardiff/Penarth 60.0%(2) 103,000 61,800
Newport 60.0 (2) 85,000 51,000
Swansea/Neath 60.0 (2) 122,000 73,200
Glamorgan/Gwent(3) 60.0 (2) 230,000 138,000
--------- ---------
540,000 324,000
--------- ---------
Suburban London...... Surrey/Hampshire 100.0% 136,000 136,000
Central Hertfordshire 70.0 (4) 102,000 71,400
East Hertfordshire 70.0 (4) 56,600 39,600
South Bedfordshire 70.0 (4) 95,000 66,500
North Bedfordshire 70.0 (4) 95,000 66,500
--------- ---------
484,600 380,000
--------- ---------
West Yorkshire....... Huddersfield/Dewsbury 100.0% 138,400 138,400
--------- ---------
Northern Ireland(3).. 100.0% 428,000 428,000
--------- ---------
FRANCHISE TOTALS.... 2,090,000 1,769,400
========= =========
</TABLE>
- ---------------------
(1) Based on the Company's regulatory milestones which were derived from the
1981 census (being the census statistics at the date each license was
granted).
(2) SWALEC owns the remaining 40%.
(3) The Telecommunications Act 1984 licenses for the Gwent and Glamorgan LDL
and the Northern Ireland LDL (and all other LDLs) are not expected to be
issued until the second quarter of 1996.
(4) An Indiana partnership known as B/G Co. indirectly owns the remaining 30%.
In 1995, CableTel increased its franchise base in the United Kingdom by
being awarded LDLs covering approximately 658,000 homes. In October 1995, the
ITC granted CableTel Northern Ireland Limited, a wholly owned subsidiary of
CableTel, the Northern Ireland LDL, covering an approximate total of 530,000
homes and associated businesses, of which CableTel Northern Ireland is
committed to cover 428,000 homes and associated businesses. Covering the
entire socio-economic region, the Northern Ireland LDL represents an
approximate 30% expansion of CableTel's total homes in its franchise areas and
a significant fifth regional system. In addition, in December 1995, the ITC
granted CableTel South Wales Limited, the Company's joint venture with SWALEC,
the Glamorgan and Gwent LDL. CableTel South Wales Limited is committed to
covering at least 230,000 out of a total 330,000 homes in the LDL area. The
Glamorgan and Gwent LDL area is adjacent to the joint venture's existing
franchises in South Wales. The joint venture is owned 60% by the Company and
40% by SWALEC.
Management believes that CableTel's regionalization strategy will enhance
consumer acceptance of its services through the provision of regionally-
oriented cable television programming and advertising and pricing
28
<PAGE>
plans providing for discounts for in-region calling. Regional operations also
allow the formation of strategic partnerships with prominent regional entities
such as the Company's joint venture with SWALEC, the region's primary
electricity provider. Strategic regional partnerships bring cost efficiencies
through infrastructure and resource sharing, extensive local market knowledge
and immediate local customer awareness.
The Company believes that it can successfully apply its strategies for
developing, operating and marketing "last mile" cable/telephony systems in the
Regional Areas to provide high quality voice, data and communications services
throughout the United Kingdom. The acquisition of NTL is regarded by the
Company as its most important step to date in providing the Company with
national broadband telecommunications network capabilities in the United
Kingdom. By connecting CableTel's local loop fibre-optic network to NTL's
high-capacity network, the combined businesses will have end-to-end broadband
capabilities covering voice, video and data services. See "--NTL." However,
the Company continues to evaluate other opportunities as they arise.
In May 1995, the Company established Cable Online to establish a United
Kingdom-wide Internet access service. Following a successful six-week trial of
400 users throughout the United Kingdom, Cable Online was launched in November
1995. Beginning with the Regional Areas, the Company has established Internet
"Points of Presence" strategically located throughout the United Kingdom. The
Company plans to overcome the slow performance and repeated engaged signals
currently experienced by Internet users by providing increased levels of
accessibility and customer service and support. See "--Internet Access and
Other Interactive Services." Cable Online is both a retailer and wholesaler of
Internet services and will make its services available to customers within and
outside the Company's Regional Areas. The Company is in discussions with a
number of cable operators and other organizations who are interested in
reselling the Cable Online service under their own name.
On May 13, 1996, CableTel announced the establishment of the Virgin Net
joint venture with Virgin. The new company is owned 49% by a CableTel
subsidiary and 51% by the Virgin Group and is intended to offer Internet
access and interactive services to United Kingdom consumers and small
office/home office users. Cable Online has entered into a commercial contract
to provide a dial-up national network and back office infrastructure necessary
for users to access Virgin Net and the wider Internet. As both a service and a
content provider, Virgin Net plans to offer an easy-to-use interface to the
World Wide Web and act as a focal point for a range of Internet and broadband
services. A prototype consumer service is expected to be tested by the end of
1996.
On January 26, 1996, through its wholly owned subsidiary, Secure Backup
Systems Limited ("Secure Backup Systems"), the Company acquired the business
and assets of the Secure Backup Systems division of Byss Co. Limited, a
provider of automatic off-site back up services and electronic archiving
services and that of a distributor of computer programs.
OPERATING RESULTS
CableTel continues to outperform the United Kingdom cable/telephony
industry's overall customer penetration averages for telephone and CATV
business. As of March 31, 1996, customer revenue generating unit penetration
in the Company's newly constructed dual network was 58% of homes marketed. An
RGU is one cable television account or one telephone account; a dual customer
counts as two RGUs. The Company believes that tracking the RGU index as a
measure of performance provides a better vehicle for comparing the United
Kingdom cable/telephony business with separate cable television and telephone
operations in other parts of the world where such services are still sold
through separate companies. At March 31, 1996, CableTel's penetration was 29%
for telephony and 29% for CATV. By comparison, according to the latest
available statistics of the ITC dated January 1, 1996, United Kingdom cable
customer penetration averages 22% for telephone and 22% for television. At
March 31, 1996, CableTel's churn (subscriber termination) rate was
approximately 12.8% per year. Although this rate is better than average United
Kingdom churn rates, the Company expects its churn rate to increase as its
customer base increases. There can be no assurance as to CableTel's future
churn rates. Higher levels of churn could have a material adverse effect on
the financial condition and results of operations of the Company.
29
<PAGE>
The Company attributes its above average marketing and sales results to its
marketing strategy. During the first half of 1994, the Company undertook an
evaluation of its prospective markets and the sales and marketing techniques
of other cable telephone/television operators. The Company used the results of
that evaluation to implement a residential sales and marketing test-bed during
the second half of 1994. As a result of this evaluation and the test-bed, the
Company developed a marketing strategy focusing on dual product offerings
targeted at the CableTel's Regional Areas and their distinct cultural
characteristics, which it believes contributed to its operating success to
date and will maximize the Company's future results.
The Company believes that its marketing strategy has increased the number of
customers subscribing to cable telephone and CATV. In addition, a variety of
factors have resulted in a relatively low churn rate (as of March 31, 1996) of
approximately 12.8% per year, including applicant credit checks, direct debit
payments, one-year service contracts and charging for installation services.
Although the lack of emphasis on promoting pay-programming services resulted
in lower-than-average pay-to-basic ratios, the Company continues to believe
that "overselling" pay-programming services is a major factor in cable churn,
and that pay-to-basic ratios will increase naturally due to the extensive
cross promotion of these services on basic channels and the introduction of
new pay-programming and pay-per-view services in the future.
The following table illustrates the number of homes passed, the number of
homes released to marketing and the total number of customers as of March 31,
1996 and December 31, 1995 and 1994 for the full-service dual network
constructed by the Company since 1993:
NEWLY CONSTRUCTED DUAL NETWORK
<TABLE>
<CAPTION>
DECEMBER 31
---------------- MARCH 31
1994 1995 1996
<S> <C> <C> <C>
Homes Passed (1).................................... 144,000 463,000 516,000
Homes Marketed(2)................................... 7,200 176,200 249,500
Total Customers..................................... 2,280 57,700 81,860
Dual.............................................. 1,680 44,630 62,440
Cable-Only........................................ 370 6,620 9,750
Telephone-Only.................................... 230 6,450 9,670
Total RGUs(3)....................................... 3,960 102,330 144,300
RGU Penetration..................................... 55% 58% 58%
Cable Penetration................................... 28% 29% 29%
Telephone Penetration............................... 27% 29% 29%
</TABLE>
- ---------------------
(1) "Homes passed" is the expression in common usage in the cable industry as
the measurement of the size of a cabled area, meaning the total number of
residential premises which have the potential to be connected to the cable
system.
(2) Initial sales process completed.
(3) An "RGU" is one telephone account or one CATV account; a dual customer
counts as two RGUs.
In addition, as of March 31, 1996 CableTel had approximately 47,500 RGUs on
those portions of its network that have been constructed as CATV-only and
inherited by CableTel through acquisition.
BUSINESS STRATEGIES
The Company's overall goal is to maximize operating profits by increasing
service offerings and by seeking opportunities to grow its customer base
throughout its Regional Areas and the United Kingdom as a whole. CableTel is
currently employing several strategies to achieve this:
Installing Flexible Integrated Full-service Networks. This strategy allows
the Company to pursue three revenue streams--residential cable television,
residential telephony, and business telecommunications services--without
significant incremental cost in fixed investment. The integrated full-service
networks provide a high
30
<PAGE>
speed, high-capacity, two-way communications pathway to the consumer that,
potentially, is capable of delivering new services which may emerge from the
convergence of telecommunications, information and entertainment. One such
service is Cable Online which was launched in November 1995. See "Marketing
Strategy--Residential Marketing--Internet Access and Other Interactive
Services."
Focusing on Distinct Geographic Regional Areas. This strategy allows the
Company to offer services which appeal to natural geographic, political, and
social factors in each Regional Area. The Company believes that tailoring its
services to the Regional Areas will increase the penetration of those
services. Examples of tailored services include the development of local
television programming and advertising, the development of regional telephone
calling plans, and the construction of private telecommunications networks
specifically tailored to "captive" local organizations such as governmental
and educational institutions.
Maximizing Revenue Contribution on a Total Franchise Basis. The Company
gains significant operating and financial leverage from incremental revenue
contribution since much of the Company's network investment and general
expenses are fixed. The Company's strategy is to maximize total franchise
revenue contribution rather than revenue contribution derived from each
customer. An example of this strategy is the development of multiple
television pricing plans that appeal to differing and distinct market segments
and price points. A second example is the development of more "a la carte" and
transaction-oriented services which increase network utilization.
Gaining Cost Efficiencies. The Company gains cost efficiencies by
centralizing certain services provided to the Regional Areas in CableTel's
head office in Guildford. Examples include network planning, marketing,
information systems, finance, collections, and overnight network monitoring
and customer service. Alternatively, those cost centers which are critical to
penetration, customer service, and retention are located as close to the
customer as possible. Examples include construction management, sales,
customer service, and network maintenance, which are all located in the
Regional Areas.
Controlling Strategic Resources, Billing and Subscriber Management. During
1994, CableTel installed a flexible and integrated management information
system ("MIS"), which includes a dual cable/telephony billing system that
enables the Company to provide detailed billing to its subscribers. Based on
management's experience in developing and operating telephone billing
information systems, the Company believes that the clarity and accuracy of the
bill are perceived by customers to evidence the quality of the service
provided. A flexible and integrated MIS can result in a significant
competitive advantage. In addition, management's experience has shown that,
although initially more costly, an internally managed MIS is cost effective
over time. By maintaining a comprehensive data base of customer demographics,
calling and viewing patterns and other activities, the Company will be able to
evaluate CableTel's performance and adjust its business activities. CableTel
has entered into an agreement with Bytel Limited ("Bytel") pursuant to which
CableTel licenses the use of Bytel's billing and subscriber management
software running on CableTel's computer equipment. In addition, the agreement
provides CableTel with an option to purchase the source code of the billing
and subscriber management systems under terms contained in the agreement.
Participating in Strategic Alliances. The Company has existing strategic
alliances and expects to develop new alliances to further the attainment of
its goals. An example is the Company's strategic alliance with SWALEC, the
electricity distribution company for South Wales. By allying itself with
SWALEC, the Company has obtained immediate local customer awareness, extensive
local market knowledge and cost efficiencies. The Company also expects to
enter into interconnection alliances with cable/telephony operators in
contiguous franchise areas. Interconnection alliances are expected effectively
to extend the benefits the Company achieves through its regional strategy by
providing: (i) cost savings for telephone calls that can be routed between
interconnect partners instead of through BT, (ii) additional revenues from
telephone calls and private circuits terminating on CableTel's networks and
originating in the interconnect partners' networks, (iii) increasing
advertising sales reach, and (iv) potential cost sharing in any joint
development of regional programming. In addition, the Company intends to enter
into strategic alliances to wholesale its recently launched Cable Online
Internet access services to other cable operators. The Company anticipates
that these cable operators will house
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Internet "Points of Presence" in their own franchise areas and market, sell
and bill their own customers within their franchise areas. Cable Online is
currently negotiating such ventures with a number of cable operators and other
organizations. One such venture, the proposed Virgin Net joint venture
announced in May 1996, has been established with Virgin and will involve Cable
Online providing the dial-up national network and back office structure
necessary for access to Virgin Net and the Internet.
The Company may employ the following strategies to expand its customer base:
National Telecommunications Services. The Company plans to become a leading
provider of high-quality telecommunications services not only within its
Regional Areas but also throughout the United Kingdom. This process has begun
with the launch of Cable Online in November 1995. To wholesale Cable Online's
service the Company expects to enter into strategic alliances and other
business combinations with other cable operators and other organizations so
that such other operators and organizations will house the "Points of
Presence" in their own franchise areas and market and sell to their own
customers within those franchise areas. In addition, the Company believes that
NTL's network may be expanded to provide a cost-effective extension of the
reach of CableTel's inbound services, such as its Internet access service
Cable Online, by increasing the estimated percentage of the United Kingdom's
population within a local telephone call charging area of CableTel's
franchises from approximately 43% to approximately 90%. See "--NTL."
Franchise Expansion. The Company expects opportunities to expand its
franchise base in the United Kingdom will arise from three principal areas:
government public tenders, acquisitions and joint ventures. The Company may
participate in public tenders for LDLs adjacent to its existing systems, as in
the case of the Glamorgan and Gwent LDL. The Company also believes the United
Kingdom cable/telephone industry will continue to consolidate and, therefore,
believes there may be opportunities to expand through acquisition. Finally,
the Company may participate in joint ventures and other business combinations
with other operators or strategic partners in acquiring existing franchise
areas or developing new franchise areas and new ancillary businesses.
MARKETING STRATEGY
CableTel increases its customer base and improves market penetration for its
services by implementing separate marketing strategies tailored to its
residential and business customers. The Company believes that separately
marketing to residential and business customers based on the specific benefits
they receive from CableTel's services is the most effective means of
maximizing CableTel's customer base.
Residential Marketing
The Company promotes CableTel's brand image as an integral part of the
emerging information super-highway and is constructing its integrated full-
service fiber optic networks in order to bring a wide variety of services to
the consumer. This branding strategy includes the following concepts in
CableTel's advertising, literature and other materials:
. building interest, awareness, and credibility for CableTel's services;
. stressing the benefits of its networks to consumers in each particular
Regional Area;
. introducing multichannel television, alternative telephone service and,
recently, Internet access as the first of an expanding array of services
which will be carried on the network in the future;
. emphasizing that CableTel is bringing "more choice" in television
viewing, "better value" in telephone service and "state of the art"
communications technology in providing access to the Internet; and
. demonstrating CableTel's commitment to quality, value and service in its
offerings as evidenced by its Code of Practice approved by OFTEL.
In addition to its branding strategy, CableTel employs an extensive direct
marketing and selling approach to gain customers. CableTel begins to build a
relationship with customers before construction commences in a given area by
closely coordinating its upcoming activities with local government authorities
and community groups
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and eliciting feedback on ways to minimize disruptions and inconvenience.
Information packages and construction notices are delivered to each household
prior to construction.
Complete demographic data including name, address, telephone number, and
other pertinent information is obtained on all households in each construction
area and pre-loaded into a lead-tracking database. CableTel's consumer affairs
advisors personally visit affected neighborhoods and households in order to
meet the special needs of the residents. All written and telephonic inquiries
from residents are input by name into the lead-tracking database, so that when
areas are released to marketing, CableTel's sales personnel have complete
customer profiles of the residents in their selling area. The sales release
process is preceded by the hand delivery of a videotape to every household
describing CableTel and its services and is followed by a personal appointment
with a CableTel sales advisor.
All information regarding both current and future sales opportunities is
input into the data base, with current sales information updating CableTel's
provisioning, billing and subscriber management system. Unsold household data
is maintained for future telemarketing, direct mail, and remarketing by the
salesforce.
CableTel's product and pricing strategies emphasize choice, value, and
quality, and are designed to encourage subscription to multiple services and
maximize long-term customer retention.
Telephone. CableTel emphasizes the "value" of its residential telephone
service in three ways. First, CableTel's line rental charges are, at present,
less than BT's, so the customer saves money immediately. Second, CableTel's
usage pricing, coupled with its per-second billing, is designed to provide a
savings versus BT's calling rates. Third, on nights and weekends, CableTel's
customers can call its other customers in the same local area for a flat per
call rate. CableTel demonstrates its commitment to quality through more
extensive and more stringent service and customer support. CableTel's
experience, together with potential changes stemming from OFTEL's current
review of interconnect policy, may lead to the introduction of more volume-
oriented and/or geographically based calling plans designed to give the
customer even greater choice and value. The Company believes that NTL's
existing network in England can be expanded to other regions in the United
Kingdom at a relatively low unit cost to provide the Company with substantial
savings on its customers' long distance telephone interconnect costs. By
integrating NTL's telephone network with CableTel's networks, the Company will
be able to bypass the wholesale long distance fees charged by BT and other
carriers for carrying calls to and from CableTel's telephone networks. The
combined businesses should also be well positioned to offer similar savings to
other United Kingdom cable/telephony providers as a more efficient lower-cost
national communications alternative to other existing national PTOs.
Multichannel Television. CableTel currently offers a "basic" package with 28
channels, as well as six foreign language channels and up to seven "pay"
services on an "a la carte" basis. This offering provides more "choice" for
the consumer than terrestrial broadcast television in that more and/or
different channels are available. It provides "value" in that subscribing to
CableTel's service entails a lower up-front cost than subscribing to satellite
services. "Quality" is emphasized by stressing the reliability of its
underground, fiber-optic network versus broadcast aerials and satellite dishes
which are subject to degradation in poor weather conditions. The possible
future introduction of new "starter" or "mini" basic packages and more "a la
carte" opportunities for pay and pay-per-view programming may provide a lower
overall cost to the consumer but at a higher price per channel, therefore
maintaining or enhancing the Company's profitability.
Multiple Services. CableTel encourages subscription to both multiple
services by offering a "two for one" discount on installation charges. In
addition, CableTel offers to buy a customer's DTH satellite dish if the
customer subscribes for CableTel's telephone services. In this manner,
CableTel is not perceived to be discounting cable television to gain telephone
business or vice versa; rather, it is passing some of the savings of a dual
account back to the customer.
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Customer Retention. In order to maximize retention, CableTel usually charges
an installation fee, adopts a one-year service agreement and encourages direct
debit payment as the "standard." The installation fee and one-year contract
provide qualifying mechanisms to insure that the customer understands and
recognizes the value of the services, while the encouragement of direct debit
payment may avoid non-payment cancellation. Each of these qualifying
mechanisms may be waived for no additional charge.
Internet Access and Other Interactive Services. As part of CableTel's
multiple services product strategy, Cable Online offers Internet access--
supporting dial-up access at speeds of up to 28.8 Kbits/sec. Particular
emphasis is being placed on jargon-free customer service and support. The
Cable Online service is currently being offered for an initial fee of
(Pounds)20.00 and a monthly charge of either (Pounds)12.95 or (Pounds)14.95,
depending on the method of payment. Cable Online is testing the provision of
Internet access at substantially higher speed through either ethernet access
(10 Mbits/sec.), cable modems (4 Mbits/sec.) or ISDN access (128 Kbits/sec.).
Ethernet access and cable modems for networks like the Company's are still in
the early stages of testing, and there is no assurance that they will be
commercially practicable.
Business Marketing
CableTel began business telecommunications marketing in April 1995. The
Company is extending CableTel brand image it is developing for the residential
marketplace into the business community. Again the emphasis is on CableTel as
a new provider of state-of-the-art communications services, with broadband
capabilities for the local market that open a new era of potential
applications for businesses, institutions and government.
The Company researched the business telecommunications market within its
franchises and adopted a segmentation strategy which targets specific and
appropriate resources on small, medium, large, and major accounts. Emphasis is
placed on businesses, institutions and organizations that share natural
geographic boundaries with CableTel's operations. The Company believes that
the success of this segmentation strategy has already been demonstrated by,
among other things, the five-year contract that CableTel South Wales Limited
concluded in July 1995 with a consortium of seven higher education
establishments in South Wales. The communications network which is being
installed by CableTel South Wales Limited is believed to be among the first in
the United Kingdom to use high speed fiber optic technology to link colleges
over a wide geographical area--two of the colleges being more than 50 miles
apart. Other examples of target organizations include professionals, financial
institutions, local government, schools, hospitals, universities, emergency
services and community organizations.
The Company's sales strategy for the business market will employ a
consultative direct marketing and sales technique. It begins with detailed
market surveys designed to quantify the current and future needs of each
business in the franchise by name. CableTel's sales advisors call on potential
customers armed with all pertinent information regarding the customer and with
all products in CableTel's portfolio at their disposal.
Regional customer service centers have been set up to ensure that the needs
of business customer post-sale can be met effectively. Service quality is
demonstrated by CableTel's commitment to service guarantees and standards
which meet or exceed the best competitive practices, and is ensured through
the reliability of CableTel's new, state-of-the-art network.
The Company based its initial entry into the market on its core business
telephony products. It has since introduced the first Managed Data Service--
FibreLink2--and is currently implementing the first phase of Central Exchange
("CENTREX") services. The Company expects its ISDN Basic Rate Access service
to be available later in 1996.
The Company's short-term focus is to broaden its portfolio of products by
developing services with high customer demand which will improve overall
returns to the business. In conjunction with this activity, the Company is
developing customized products for large customers which the Company believes
may lead to further product developments in the future.
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The Company is also exploring market opportunities for Closed Circuit
Television/Surveillance Systems ("CCTV"). This is currently a high growth area
in the United Kingdom for local and public authorities, private developments
and multi-occupancy situations--which is a good match with the strategic
advantages resulting from the Company's network infrastructure.
Business Telephony Services. The Company offers a choice of telephony
services to its business customers: Business Exchange Lines ("BELs"),
typically single or multiple lines delivered via twisted copper pair, or
Enhanced Telephony Services. The latter is delivered via a high quality
digital connection to a customer's PBX and based on a minimum connection of 15
lines. Enhanced features and facilities are available on both services;
additional features, such as Direct Dialing Inward ("DDI"), are available only
on the Enhanced Telephony Service. Two usage rates are currently available,
offering customers a choice based on their calling patterns. Both usage and
rental charges are competitively priced, and automatic volume discounts give
further savings to customers.
Future developments may include the implementation services such as Caller
Return and Caller Line Identification and are intended to address specific
tariffing needs of identified customer groupings. Additionally, CableTel
intends to offer number portability late in 1996, which is expected to aid the
acquisition of business customers.
CENTREX services give customers the equivalent of their own telephone system
(PBX or key system) without the expense of having to purchase, operate and
maintain one. The Company believes that the CENTREX market in the United
Kingdom is currently underserved, especially among small and medium
businesses, where the concept is new to most customers. The pricing of CENTREX
services is based on value provided to the customer rather than pricing lower
than competitors. CableTel is currently implementing the first phases of
CENTREX Service in one business unit. The Company anticipates that the service
will be fully deployed in all business units by the third quarter 1996. The
services include CENTREX Select, a single site service, and CENTREX Network, a
multi-site service giving transparency of voice (and limited data)
communications between multiple locations.
Managed Data Services. Pricing for narrowband and broadband private line
services is higher in the United Kingdom than in the United States market.
High bandwidth (broadband) services, although available, are subject to long
lead times for installation in many areas of the United Kingdom, are
expensive, and are subject to variances in service quality. CableTel's
offerings in this area will thus emphasize the immediate availability of
large, flexible bandwidth circuits to meet the growing needs of the market,
while meeting the demands of existing and emerging standards. CableTel's first
managed data service, FibreLink2 was introduced in January 1996. This service
is aimed at large businesses which need data or voice communications between
different locations and provides a bandwidth of 2 Mbits/sec. Higher bandwidth
services (34-155 Mbits/sec.) are available on request, as are lower bandwidth
(64 Kbits/sec.) services. Broadband services will be offered to address
emerging multi-media and data-intensive applications, with rates designed to
reflect the value provided to the customer.
Other Data Services. The market for ISDN basic rate access ("BRA") services
has not developed in the United Kingdom as fast as in other European Union
Member States, primarily because of prohibitive pricing policies employed by
the major telephone companies to protect private line revenues. CableTel
recognizes the importance of this potentially high-growth market, both within
its own franchise areas and the synergies presented with NTL, Cable Online and
Secure Backup Systems.
The Company intends to make ISDN BRA services accessible to small and
medium-sized businesses, to the growing work-from-home market and to larger
businesses. The service will enable, among other things, effective Local Area
Network ("LAN") to LAN connections, fast data transfer to fixed or multiple
locations, higher speed Internet access, and videoconferencing.
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Business CATV. The Company intends to develop a base range of CATV packaging
aimed at the smaller business user. The initial offerings will be based
broadly on existing residential services, and it is expected that over time it
will develop business-specific delivery mechanisms and packages.
OPERATING STRENGTHS
The Company believes that the experience and expertise of CableTel's
management, the scope and quality of its services and the technological
capabilities of its network position it to grow in the integrated United
Kingdom cable television and telecommunications market.
The Company's senior managers have extensive experience in the United States
cellular telephone industry, a competitive telecommunications environment
which has several similarities to CableTel's current operations in the United
Kingdom. Both cellular telephone service and CableTel's current operations are
competitive "last mile" telecommunications services requiring creative
marketing, packaging, pricing and customer support techniques to enhance
penetration, reduce churn and attain operating profitability. The Company's
CEO and COO each have over 10 years senior management experience with cellular
telephone companies operating in Ohio, Michigan and the Commonwealth of Puerto
Rico. These companies combined currently have over one million cellular
customers.
The Company has supplemented its managerial experience by appointing a
management team with extensive experience in both the United States cellular
and cable television and the United Kingdom telephone industries and, more
recently, by retaining the senior management of NTL. Furthermore, the combined
entities of CableTel and NTL employ approximately 2,900 persons. The Company
believes the wide range and diversity of professional and technical staff of
the Company will have the depth and breadth of skills needed to address the
demands of the changing market for telecommunications and information
services.
In addition to the experience and expertise of its management and the depth
of its personnel, the Company believes that its principal operating strengths
include the following:
Independence/Single Purpose. CableTel was specifically organized to pursue
attractive "last mile" telecommunications service opportunities and is
currently focusing its efforts on the United Kingdom. As an independent,
entrepreneurial enterprise, the Company believes that it is able to pursue
strategies and adopt tactics without regard to historical practice and respond
rapidly to an evolving business environment in the United Kingdom cable
television/telephony and telecommunications business.
Timely Market Entry. CableTel's relatively recent entry into the United
Kingdom telecommunication market enables it to install a state-of-the-art,
fiber optic based television, telephone and telecommunications networks. This
has allowed the Company to market CableTel from the beginning of its United
Kingdom operations as an integrated "full-service" network operator with an
expanding array of services, rather than as a cable television operator which
is now offering telephone services or a telephone company which is now
offering multi-channel television programming.
Focus on Market Segmentation and Network Utilization. Since most of the
Company's capital and operating costs are fixed, the Company gains significant
operating and financial leverage from adding incremental customers to its
service or incremental usage on its network. The Company will, therefore,
focus on providing a high degree of customer service, and innovative pricing
plans that maximize choice to the consumer. To support these efforts, the
Company has installed a flexible and integrated billing and subscriber
management system and acquired in-house resources to enable it to develop
multiple pricing packages for its cable television services and innovative
calling plans for its communications services in the near future. The Company
expects to further
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expand these systems and resources over time to facilitate the introduction of
additional subscription based services such as Internet access (which was
launched on a national basis in November 1995) and additional transaction-
based services such as home shopping and banking.
Established Technology/Future Flexibility. CableTel is installing its full-
service network using established state-of-the-art technology, deploying fiber
optics directly to business concentrations and residential nodes averaging 600
telephone lines or 500 homes respectively, and employing spare duct and
transmission capacity in excess of anticipated needs. In this manner, the
Company achieves the cost efficiencies and rapid deployment that using
standardized equipment entails, while retaining the flexibility to expand and
adapt its network over time with little or no additional underground or
construction investment.
Size. The Company believes that, as one of the largest cable operators in
the United Kingdom, CableTel is generally able to obtain favorable terms, as
compared to smaller operators, in purchasing services, equipment and
programming.
In addition, the Company believes that CableTel benefits from the following
operating strengths, which are common characteristics of cable
television/telephony and telecommunications providers in the United Kingdom:
. CableTel provides telephone, CATV telecommunications services and other
data communications (such as Internet access) over an integrated network
and believes that this gives it a competitive advantage and cost savings
over single service providers;
. CableTel has installed and owns its telephone switches which enables it
to increase profitability and operating flexibility by (a) eliminating
the need to pay third parties for switching calls between its
subscribers within its systems and reducing the cost of switching calls
to other operators outside of CableTel's systems and (b) receiving
revenues from other telephony operators who use CableTel's switches to
complete calls to CableTel's subscribers. The installation of its own
switches gives CableTel more flexibility in the future to offer a wider
range of services (e.g., customized call pricing plans) than previously
was possible; and
. CableTel believes that its advanced network design is sufficiently
flexible to permit delivery of a wide variety of existing entertainment,
telecommunications and information services and will enable it to offer
anticipated new services in the future without incurring significant
additional construction costs with respect to its existing underground
network.
THE REGIONAL AREAS
CableTel operates its 16 separate franchises as five Regional Areas. Each
Regional Area is managed and operated by a local management team led by a
local managing director. The headends, telephone switches and technical and
customer services facilities in the Regional Areas are connected by a wide-
area fiber optic network to CableTel's Network Operations Center in Guildford.
Central Scotland
The Central Scotland Regional Area covers nearly 500,000 homes and includes
Glasgow, the fourth largest metropolitan area in the United Kingdom and the
largest city in Scotland. It is generally considered the commercial and
industrial center of Scotland and has a higher density of households per
kilometer of cable communications network than the United Kingdom as a whole.
The Company offers locally orientated and originated programming and
advertising.
South Wales
South Wales is the commercial and industrial center of Wales and one of the
United Kingdom's major contiguous urban areas. Cardiff, the capital of Wales,
Swansea (in West Glamorgan) and Newport (in Gwent) are the region's major
cities. The Company's licenses in South Wales cover approximately 540,000
homes and a substantial portion of the Welsh business community. Between 1980
and 1990, employment in the Welsh information technology and electronics
industries grew substantially compared to the rest of the United Kingdom, as
there has been a concerted effort to attract high technology and service
oriented businesses to replace heavy
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industries such as steel, mining and shipping which were, historically, the
mainstay of South Wales' economy. The Company believes that its regional focus
and its partnership with SWALEC, the region's primary electricity utility,
will enable it to maximize the potential of South Wales' regenerated economy
and cultural characteristics.
Suburban London
The Suburban London Regional Area comprises the Surrey and East Hampshire
license area to the southwest of London and the Central and East Hertfordshire
and North and South Bedfordshire license areas to the north of London
totalling approximately 485,000 homes. The Company believes that the licenses
in these commuting residential communities offer an attractive blend of
household density and demographic characteristics and above average levels of
disposable income. Located between Heathrow and Gatwick international
airports, the borough of Guildford and surroundings in Surrey have become the
headquarters for many multinational high technology companies (including the
cable/telephone operators TeleWest and Comcast, as well as British Airways,
General Motors and the General Electric Company). To the north of London,
Luton is a commercial and industrial center hosting such manufacturers as
British Aerospace and Vauxhall (General Motor's United Kingdom division) and
is the home of the fourth largest international airport in the South of
England.
West Yorkshire
Covering over 138,000 homes, Kirklees is one of the five districts that
constitute the West Yorkshire region in north central England and is comprised
of the towns of Huddersfield, Batley, Cleckheaton and Dewsbury. A
manufacturing area known for textiles and engineering products, Kirklees has
recently begun to develop an active service sector which has helped to create
a stronger economy. Kirklees is geographically located between three major
cities in the United Kingdom, Leeds, Sheffield and Manchester. Each of these
cities already has an established cable network.
Northern Ireland
The Northern Ireland franchise, covering approximately 428,000 homes and
approximately 41,000 associated businesses, was the largest remaining cable
television, telephone and telecommunications franchise to be awarded by the
ITC. The franchise covers the entire socio-economic area of Northern Ireland,
with approximately 40% of the population located in the Greater Belfast area
in the east and another major population area centered on Londonderry in the
west. Although the economy of Northern Ireland has traditionally been oriented
more towards primary industries such as agriculture, forestry and fishing than
the United Kingdom as a whole, service industries now employ over 70% of the
population and service industry employment grew by nearly 11% from 1988 to
1993. The Company believes that the overall economic growth profile of the
region is strong and that the prospect of inward investment will lead to a
more dynamic business sector and, therefore, increased demand for
telecommunications services in the future. The Company believes that because
the birth rate in the area is higher than the United Kingdom as a whole, the
population is younger and household sizes are larger than the United Kingdom
average. The Company's experience and market research has shown that the
presence of children in a household significantly increases the propensity to
subscribe to CATV.
The Company believes that the Northern Ireland franchise represents a
significant and attractive opportunity for the Company to expand its current
business and overall presence in the United Kingdom while at the same time
continuing the Company's strategy of focusing its efforts on distinct
geographic regions.
THE NETWORK
The Company believes that its advanced network design is sufficiently
flexible to permit it to deliver a wide variety of existing entertainment,
telecommunications and information services and will enable it to offer
anticipated new services in the future without incurring significant
additional construction costs to adapt its existing underground network.
However, the cost of implementation of emerging and future technologies could
be significant and the Company's ability to fund such implementation will
depend on its ability to obtain additional financing. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Risk Factors--Uncertainty of Construction Progress and Costs."
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Network Design and Functionality
The Company is installing its cable/telephone and telecommunications network
using established state-of-the-art technology, deploying fiber optics directly
to business concentrations and residential nodes averaging 600 telephone lines
or 500 homes respectively, and employing spare duct and transmission capacity
in excess of anticipated needs. In this manner, the Company achieves the cost
efficiencies and rapid deployment that using standardized equipment entails,
while retaining the flexibility to expand and adapt its network over time with
little or no additional underground or construction investment.
The construction of a new network varies depending upon factors including
the number of route miles to be installed, density of homes and businesses,
type of surface, and the architecture of the network backbone. Each system has
been designed with at least one headend and at least one telephone switching
office. Each system's headend and telephone switching office is directly
connected to each node by fiber optic cable. Each node is then connected to a
subscriber's premises. Construction of each system has been planned on a
neighborhood by neighborhood basis to allow revenue generating operations to
commence in a neighborhood as construction of the portion of the system
serving such neighborhood is completed.
The Company activated its first telephone switch and cable television system
in the United Kingdom in the Guildford franchise area in July 1994.
Activations in Glasgow, Luton, Cardiff, Swansea and Huddersfield during the
remainder of 1994 completed CableTel's activation of its telephone switches
and cable television systems.
Fiber Optics
The evolution of fiber optic technology over the past decade, including
increases in the capacity of laser transmitters and decreases in the price of
optical receivers, has enabled the economic deployment of fiber optic cable
much closer to the customer than in traditional (coaxial cable) CATV and
(copper pair) telephone networks and thereby improving the quality and
capacity of the CATV and telephone service. The main advantages of deploying
fiber in place of both coaxial cable or copper wire are its smaller size,
greater capacity, freedom from electrical interference, and significant
reduction of the requirement for periodic maintenance. The Company is
deploying fiber to "nodes" serving 500 homes which are no more than several
hundred meters from the furthest home.
Network Architecture
The Company's cable network is being built with an initial capacity of 750
MHz, which is sufficient to carry over 60 analog channels of television. With
digital compression of the television signal, many more channels can be
transmitted. The system is upgradeable to 1 GHz. Generally, a maximum of one
amplifier is required between the headend optical receivers and a home.
Traditional cable systems often employ "cascades" of more than 5 amplifiers
which degrade signal quality and increase the chances of system failure.
The telecommunications network uses a redundant-ring based architecture
known as synchronous digital hierarchy ("SDH"), which improves the Company's
ability to flexibly deploy capacity and further enhances system resilience.
Telephone signals are carried from the node to the home over traditional
copper "twisted pair," albeit over a shorter distance than in traditional
telephone networks, improving signal quality and allowing higher bandwidth
services such as ISDN to be more easily deployed. To connect its residential
customers, the Company uses a "dual drop" consisting of coaxial cable capable
of transmitting 1 GHz of bandwidth and two copper twisted pairs capable of
providing two telephone connections. Large business customers are expected to
be connected to the telephone network directly through fiber optic cable.
Switches and Headends
The Company's GPT System X telephone switches are centrally located in each
of its systems and are currently interconnected with BT and, in the near
future, will be interconnected with Mercury (a majority owned subsidiary of
Cable and Wireless plc), other PTOs, and/or other cable/telephone operators in
order to complete
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telephone calls placed to subscribers of competing or distant networks and to
receive such calls. Under United Kingdom law, BT, Mercury and all other PTOs
are required to enter into interconnection agreements with cable/telephony
system operators. See "Regulation--CableTel." The Company currently routes
calls made by or to its customers through its interconnections with BT. The
Company pays an interconnection fee to complete such calls and collects a
similar fee for receiving such calls.
Network Construction Costs
In building its network, the Company is generally required by its licenses
to use underground construction, which is more expensive and time consuming
than aerial construction. Mechanized construction methods often cannot be used
to install network infrastructure in the Company's franchise areas due to
existing underground utility infrastructure. In addition, the Company is
responsible for restoring the surface area after its underground construction
is completed. Although the Company has recently been able to negotiate
construction contracts at rates which it believes are competitive relative to
the cable industry as a whole, construction costs could increase significantly
over the next few years as existing contracts expire and as demand for cable
construction services grows due to anticipated increases in the cable
industry's overall construction activity. The Company is considering how it
may reduce the costs of underground construction by utilizing the microwave
radio links installed by NTL between its mast sites and supplementing those
links with fiber-optic cable particularly in Regional Areas, such as South
Wales and West Yorkshire, where hill and vale topography involves significant
underground construction costs.
The Company expects that the capital required to build CableTel's networks
and connect residential and business subscribers will be approximately $950
per home in its franchise areas, of which approximately $600 represents the
cost of the network itself and the remainder represents the capital cost of
connecting customers to its network. Certain locations may require more or
less capital depending upon household density, business density, and
penetration rates. In addition, certain costs such as the establishment of
telephone switches, cable headends, and facilities are incurred during the
initial phases of network construction, leading to average capital
expenditures per home which are higher in the initial years. The construction
and development of the systems will depend on, among other things, the
Company's ability to design network routes, install facilities, obtain and
maintain any required governmental licenses or approvals and finance
construction and development, all in a timely manner, at reasonable costs and
on satisfactory terms and conditions.
Capital expenditures related to the installation of new residential
telephone and cable subscribers range from $180-$270 of capital expenditure
per subscriber or line, though actual costs vary from this range based on the
specific type of circuit installed, the location of the customer and whether
or not the customer subscribes for multiple services. The potential number of
subscribers or lines will exceed the number of homes passed because the homes
and businesses passed have the potential for multiple cable subscribers or
telephone lines. Capital expenditures associated with passing other businesses
and connecting business telephone subscribers vary significantly depending on
the type and size of business and the amount of capacity required and other
factors which vary greatly by market and are beyond the control of the
Company. The Company has passed, and expects to continue to pass a significant
number of small businesses in the course of its residential build.
The Company also incurs capital expenditures for the establishment of its
business facilities and fixtures, office and computer equipment, its billing
and subscriber management systems, and vehicles. These costs also vary by
location and size of franchise, but are substantially less than the capital
costs of the network itself.
Network Construction Milestones
Each license specifies a network build schedule which the Company is
required to implement. The build schedule is based upon aggregate "total
premises (or homes) passed" at specified intervals of time. Failure of the
Company to comply with the build schedules contained in a license could result
in the revocation of such license, which could have a material adverse effect
on the Company. In addition, the design, construction and technical
characteristics of the Company's network must adhere to various United Kingdom
governmental regulations.
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From January 1, 1995 through December 31, 1995, the Company constructed its
network past more than 319,000 homes in its existing franchise areas. Together
with its second half of 1993 build (approximately 10,000 homes passed), its
1994 build (approximately 134,000 homes passed), and previously constructed
cable-only systems which the Company intends to retrofit for telephony
(approximately 85,000 premises), as of December 31, 1995, the Company had
passed more than 548,000 homes and, therefore, exceeded its 1995 cumulative
OFTEL milestone of 465,500 homes passed. In addition, in 1995 the Company
acquired the business and assets of Metro Cable TV Limited in South Wales and
Hertfordshire, which includes 171,500 homes passed. Due to technological
limitations, these networks provide only CATV service to these 171,500 homes
and are not counted towards any OFTEL build milestones.
As a result of its current build progress and the retrofitting described
above, the Company expects to have over approximately 57% of its full-service
networks installed in its franchises (including the recently awarded Northern
Ireland and Gwent and Glamorgan franchises) by December 31, 1997, and 73% by
December 31, 1998. The following table summarizes the Company's construction
activities as of March 31, 1996, and the future network construction progress
anticipated by the Company:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------
1994 1995 1996(1) 1997(1) 1998(1) 1999(1) 2000(1) 2001(1) 2002(1) 2003(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total homes........ 1,432,000 1,432,000 2,090,000 2,090,000 2,090,000 2,090,000 2,090,000 2,090,000 2,090,000 2,090,000
Full-service
network passings.. 144,000 463,000 771,100 1,191,300 1,525,700 1,797,400 1,964,000 2,027,300 2,090,000 2,090,000
Acquired (cable-
only) network
passings(2)....... 85,000 85,000 44,000 -- -- -- -- -- -- --
Total homes passed. 229,000 548,000 815,100 1,191,300 1,525,700 1,797,400 1,964,600 2,027,300 2,090,000 2,090,000
Percent of homes... 16% 38% 39% 57% 73% 86% 94% 97% 100% 100%
OFTEL milestone.... 210,500 465,500 779,500 1,124,000 1,445,000 1,714,500 1,909,000 2,024,000 2,082,200 2,090,000
</TABLE>
- ---------------------
(1) The figures presented are based on the Company's projections of its
construction activities; in reviewing such information it should be kept
in mind that actual results may differ materially from those in such
projections. 1996 figures are based upon construction through March 31,
1996. No assurance can be given that such projections will be met. These
projections were based on various factors and were derived utilizing
numerous assumptions. Important assumptions and factors that could cause
actual results to differ materially from those in these projections
include the Company's ability to continue to design network routes,
install facilities, obtain and maintain any required government licenses
or approvals and finance construction and development, in a timely manner,
at reasonable costs and on satisfactory terms and conditions and the
absence of weather or labor difficulties. These assumptions are subject to
a variety of factors which may vary greatly by market and be beyond the
control of the Company. See "Risk Factors--Uncertainty of Construction
Progress and Costs." Other factors and assumptions not identified above
were also involved in the derivation of these projections, and the failure
of such other assumptions to be realized as well as other factors may also
cause actual results to differ materially from those projected.
(2) The Company intends to retrofit these networks to full-service status in
1996 and 1997. The figures presented do not include 171,500 homes of Metro
Cable TV Limited acquired in 1995 for the reasons stated above which are
not subject to OFTEL build milestones for the reasons stated on the
previous page.
Based on current network construction scheduling, the Company believes it
will be able to satisfy its milestones in the future, but there can be no
assurance that such milestones will be met. See "Risk Factors--Requirement to
Meet Build Milestones " and "--Uncertainty of Construction Progress and
Costs."
INDUSTRY
Overview
The Company believes that the United Kingdom represents an attractive
environment to conduct CableTel's business due to the following factors:
. the United Kingdom is one of the few countries in which private sector
companies are permitted to provide cable television, telephone and
telecommunications services over a single integrated network, thus
enabling cable television/telephony operators to lower certain capital
costs and spread operating and marketing costs over both services;
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. the availability of a wide range of programming providing customers with
a varied choice of CATV services;
. the large average size of cable/telephony systems in the United Kingdom,
including CableTel systems, will enable the Company to focus on regional
programming and advertising for its cable services and improve telephone
operating margins through reduced access charges resulting from carrying
more calls which are originated and completed within each system area;
. the decreasing cost of fiber optic and digital compression technologies
is enabling cable television/telephony operators to install an
integrated, high capacity, high speed, full service network directly to
residential and business customers that can deliver state-of-the-art
cable television, telephone and telecommunications services and will
eliminate the "last mile" bottlenecks associated with traditional
telephone systems in the United Kingdom and telephone and CATV systems
in the United States; and
. current United Kingdom regulatory policy encourages the development and
construction of integrated cable/telephony networks by, among other
things:
-- prohibiting BT and certain other national PTOs from using their
national telephone networks to carry broadcast entertainment
services to residential customers until at least 1998;
-- licensing only one cable operator to provide both cable television
and telecommunications services in any one franchise area; and
-- not subjecting cable television/telephony providers to government
price control while subjecting BT to certain pricing restrictions.
The favorable characteristics, as listed above, of the United Kingdom cable
television and telecommunications industry have spurred a rapid buildout of
infrastructure and a growing consumer acceptance for cable/telephony
providers' services, as evidenced by the increase in the number of homes
passed by cable networks and by the increase in customers subscribing to their
services.
However, the cable/telephony and telecommunications industry has a limited
operating history in the United Kingdom. Although initial acceptance of
cable/telephony services provided by the Company has been encouraging (see "--
Operating Results" above), the Company is unable to predict with certainty how
consumer demand for its services may develop over time. The Company's future
revenue growth depends in large measure on (i) the development of significant
consumer preference for cable television over other types of in-home
entertainment and (ii) customer acceptance of the Company as an attractive
alternative to its competitors as a provider of telephone and other
telecommunications services. See "--Competition." In addition, since December
31, 1994, the Company has, through the acquisition of the Northern Ireland and
Gwent and Glamorgan franchises, increased the total number of homes in its
franchises by almost 50%. The Company's future success will depend on customer
acceptance of its services and its ability to extend its brand name in these
new franchise areas. The inability of the Company to generate demand for its
services would have a material adverse effect on the Company.
Choice of Programming
The demand for cable entertainment services is a function of both over-the-
air signal reception quality and alternative programming availability. While
signal reception in the United Kingdom has been considered adequate for the
majority of television households, the increasing availability of cable and
satellite programming provides an attractive alternative to limited over-the-
air programming and VCRs. The Company believes that the number of alternative
programming channels potentially available to cable and satellite subscribers
has increased from approximately 10 in 1985 to more than 50 currently. The
ability of cable operators to offer a wide range of films, sports, news and
special interest channels not previously available is expected to increase
demand for cable television services. The Company continues to review
CableTel's channel offerings and is currently evaluating and assessing the
repackaging of the channels it offers in certain of its Regional Areas. Future
legislation and, in particular, the legislation that may be enacted to
implement certain EU Directives may, however, reduce the range of available
cable and satellite programming--see "Regulation--CableTel--European Union
Legislation--Television Services."
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BSkyB is the leading supplier of programming to direct-to-home DTH and cable
television operators in the United Kingdom. The Company believes that BSkyB
has acquired this market position primarily because it is the exclusive
supplier of certain premium programming, including, in particular, certain
premium movie channels and live English Premier League soccer matches. The
Premier League television rights are now the subject of bids by BSkyB and at
least two other rival consortia because BSkyB's five-year agreement with the
Premier League expires following the 1996/97 season. The rivals are (i) a
consortium comprising Carlton Communications and the Mirror Group; and (ii)
United News and Media (possibly, with another large United Kingdom media
operator). Negotiations are to commence in June 1996. BSkyB has responded and
has proposed a joint venture with the Premier League under which the Premier
League would be offered a percentage of subscription revenues of Sky Sports
channels.
BSkyB currently provides CableTel with eight channels on a non-exclusive
basis. BSkyB also offers this programming (together with additional
programming) to its DTH satellite customers in competition with CableTel and
other cable operators. Other services are available to both the DTH market and
cable system operators because such services utilize the same Astra satellite
system as the BSkyB channels. Certain programming, such as that provided by
the BBC and other terrestrial broadcasters, is available to CableTel and other
cable operators without charge.
CableTel, like many other cable operators, obtains most of its programming
through arrangements with BSkyB and other programming suppliers which are not
reflected in signed written agreements. To date, CableTel has not had a formal
contract with BSkyB, although it has been in discussions with BSkyB for some
time. There can be no assurance that CableTel will be able to enter into a
definitive agreement with BSkyB, that the terms of such definitive agreement
will not be less favorable to the Company than the current arrangement, or
that BSkyB will continue to supply programming to CableTel on reasonable
commercial terms or at all. See "Risk Factors--Limited Access to Programming."
In May 1995, BSkyB announced that it had entered into separate program
supply arrangements with the two largest cable operators in the United Kingdom
which, taken together, control approximately 40% of homes under franchise in
the United Kingdom. One of the immediate consequences of these agreements has
been to make it substantially less viable for other cable operators (including
the Company) to reduce their dependence on BSkyB as the principal source of
programming supply by developing, through cooperative ventures among cable
operators, their own PPV services, sports or movie channels and cable-
exclusive programming. See "Risk Factors--Limited Access to Programming."
Consolidation, System Size
As of January 1, 1996, 140 continuing licenses had been awarded by ITC and
DTI covering approximately 17.8 million out of the 22.6 million television
households in the United Kingdom. Of these licenses, five groups (including
the Company) own over 73% of the licensed households in the United Kingdom on
a net equity basis. The largest operators in the industry include 10 North
American cable television and telecommunications companies such as Tele-
Communications, Inc., Comcast, Jones Intercable, US WEST, NYNEX, Southwestern
Bell and Bell Canada. Events such as the TeleWest--SBC Cablecomms merger,
TeleWest's purchases of the Post-Newsweek properties in Scotland and its
purchase of Flextech, the formation of Bell Cablemedia, and General Cable's
purchases in Birmingham and Yorkshire, and Le Group Videotron's announcement
of its decision to market its 56% controlling interest in Videotron Holdings
Plc each point to continued consolidation in the United Kingdom
cable/telephony industry.
The Company believes the average cable television system in the United
Kingdom, including the Company's systems, is significantly larger than the
typical United States system. Licenses granted to cable television operators
in the United Kingdom average over 100,000 homes per license versus a United
States average of below 10,000 homes. These licenses may be further aggregated
for operating purposes to create regional systems, which permit significant
economies of scale in construction, operation and marketing. The large number
of households covered by its licenses will enable the Company to centralize
facilities for cable and
43
<PAGE>
telephony services, focus on regional programming and advertising for its
cable services and improve telephone operating margins through reduced access
charges resulting from carrying more calls which are originated and completed
within each license area.
Technology
The decreasing costs of fiber optic and digital compression technologies
have made the deployment of a single integrated distribution network for
voice, video and data services technically and commercially feasible. Such a
network becomes economically feasible when, as in the United Kingdom, the
operator has a "new build" opportunity and the ability to generate the
multiple television, telephone and telecommunications revenue streams such a
network is capable of providing.
The main benefits of fiber in place of coaxial cable in the network result
from its smaller size, greater capacity, increased functionality, and its
lower power and amplification requirements. The above factors combine to lower
installation and maintenance costs, increase service offerings and increase
the quality of those service offerings. Network capacity will be increased by
digital compression which, when introduced into the Company's systems, will
allow the combination of several video signals into the capacity previously
utilized by a single video channel.
The above factors combine to allow the provision of a new, truly broadband,
two-way network in the United Kingdom without the capacity bottlenecks
currently experienced in traditional copper-pair telephone networks, or
coaxial-only cable television networks. These "last mile" bottlenecks can
occur in several ways. In a traditional coaxial cable television network,
relatively high signal loss necessitates the use of amplifiers which increase
distortion and reduce picture quality and channel capacity. In a traditional
telecommunications network, the twisted-pair copper wire that connects a
subscriber's premises to the nearest switch is not capable of carrying
sufficient data to provide video and other advanced services. In addition, in
the United Kingdom, lack of adequate duct capacity for additional wiring by
existing telephone providers places further limits on providing service.
COMPETITION
Historical Overview
Historically, the use of telephony or cable networks to provide a full range
of telecommunications services was restricted by the telecommunications policy
of the United Kingdom Government. From 1912 through the early 1980's, the
United Kingdom General Post Office ("GPO") was the monopoly supplier of
telephone services throughout the United Kingdom, with the exception of a few
municipalities. In 1981, BT assumed the responsibilities of monopoly telephone
supplier from the GPO. The process of privatizing BT commenced in 1984 and was
completed in July 1993.
In 1984, Mercury was granted a license to compete with BT. At that time, the
United Kingdom Government established a policy (the "Duopoly Policy") that it
would not license operators other than BT and Mercury to provide fixed-link
national and international public telecommunications services before November
1990, when it would commence a review of the Duopoly Policy (the "Duopoly
Review") and competition in the United Kingdom telecommunications market
generally.
The Duopoly Review was completed in 1991, and, with its enabling
regulations, represented a fundamental turning point in the telecommunications
industry in the United Kingdom. In effect, cable licensees and others were
granted the authority to provide all forms of wired telecommunications
services other than international telephony. Since the Duopoly Review, the
terms on which cable operators may require BT, Mercury or another PTO to
interconnect with them have been significantly improved.
Since the Duopoly Review, BT has remained the dominant provider of fixed
link telephony services for businesses and residences in the United Kingdom,
and Mercury has continued to offer long distance and international services
and has attempted to gain market share in the business telecommunications
market. During this period, cable/telephony services providers found
increasing levels of subscriber interest in their telephone services.
44
<PAGE>
Historically, regulation had been an impediment to the development of cable
television in the United Kingdom. Importantly, non-EU entities were reluctant
to invest in cable operations in the United Kingdom since they were barred by
regulation from acquiring majority interests in CATV licenses. Regulations
also gave longer licenses to cable operations choosing a "switched star"
architecture (primarily utilized in the United Kingdom) over the more
traditional "tree and bush" architecture utilized in other markets. In
addition, the United Kingdom investment community was reluctant to invest in
CATV operations as a result of the high capital expenditure required to fund
the early stages of cable system construction combined with a high corporation
tax rate and the abolition in 1986 of a tax credit for certain capital
investments.
The broadband cable television industry began in the United Kingdom in 1983
when the government began awarding pilot cable television licenses. However,
industry expectations that an adequate supply of programming would become
available to cable operators in the mid-1980's were overly optimistic. In
addition, many of the pilot systems were built with unproven technology and
had serious difficulties in providing high quality and reliable signals. The
management of these early systems had little cable experience and had minimal
resources to tap. The result was a very poor experience by the British
investment community. Non-British investors have taken the lead in developing
the cable/telephony industry in the United Kingdom over the past five years.
These investors had significant experience in developing, constructing and
operating cable television, telephone and telecommunications systems.
Cable Television Services
In each cable license area within the United Kingdom, it is currently the
ITC's policy that only one license to provide cable television services be
granted.
The Company's television systems currently compete with the four United
Kingdom terrestrial channels, being BBC 1, BBC 2, Channel 3 and Channel 4. BBC
1 and BBC 2 are "public" channels regulated by government charter, and are
funded by a license fee levied on all United Kingdom homes with a television
and receiver and do not sell advertising. The commercial television services
of ITV (Channel 3) and Channel 4/S4C operate under licenses granted in
accordance with the Broadcasting Act 1990. Except in the case of Channel 4/S4C
which is provided by a statutory corporation, the ITV licenses are awarded by
the ITC by competitive tender. ITV and Channel 4 are regulated by the ITC.
Channel 4 and the breakfast time service on ITV is provided on a national
basis. Otherwise, ITV licensees are appointed specifically to serve regions,
namely the 15 licensees which provide services to 14 regions in the United
Kingdom, the Isle of Man and the Channel Islands, with two of these licensees
serving London for different periods of the week. Both ITV and Channel 4
derive their revenues principally from advertising sales and the sale of
programming to other broadcasters.
In addition to these four existing terrestrial channels, in October 1995 the
ITC announced the award to Channel 5 Broadcasting Limited of the only national
Channel 5 license under the Broadcasting Act 1990, which will open the way for
a fifth television channel broadcasting on UHF and serving approximately 70%
of United Kingdom households. The Channel 5 licensee will be permitted to
choose to make the service available using cable and satellite distribution.
It is unlikely that the service will start before 1997. The detailed
programming content for Channel 5 is, as yet, unknown.
Although the current terrestrial channels are perceived by the public as
providing high quality programming, due to the limited amount of air time
available to them and the commitment required from them to provide a wide
diversity of programs, they are unable to dedicate a significant amount of air
time to films, sports or other thematic programming. As of January 1996,
approximately one-third of all viewing in homes with cable television or
satellite services was of cable or satellite channels which the Company
believes shows a willingness of many consumers in the United Kingdom to pay
for such additional programming.
The Broadcasting Bill (which is likely to receive royal assent in July 1996)
will establish the structures for the provision of DTT broadcasting. It is
anticipated that licenses will be issued for 6 multiplex providers (although
one company may hold more than one multiplex license), each providing 3
digital channels, and that licenses will be issued for program service
providers to provide, by contract with the multiplex provider, services
45
<PAGE>
for transmission of those channels, and that the existing terrestrial
television operators will be offered guaranteed digital channels. It is
unlikely that the services will be available before 1997. The Broadcasting
Bill will also relax many of the current restrictions relating to ownership of
United Kingdom television broadcasters.
CableTel's cable television systems also compete with other methods of
delivering television signals to the home for a fee, such as DTH or satellite
master antenna systems ("SMATV"), which is generally limited to 1,000 homes
served by a single headend on a single (or two adjoining) building(s). The
extent of such competition depends upon the number and quality of the signals
available by direct antenna reception as compared to the number and quality of
signals distributed by the cable television system. Pay-television and PPV
services will compete to varying degrees with other communications and
entertainment media, including DTH services, home video, movies and live
theater. In particular, the availability of recently released theatrical
movies on videocassettes may affect the degree to which the Company is able to
sell pay television and PPV services to subscribers.
As an alternative to CATV, DTH satellite receivers, together with
appropriate descrambling equipment, are used by individuals and commercial
establishments to receive various programming services from DTH systems. There
are an aggregate of approximately 3.6 million DTH subscribers compared to
approximately 1.7 million broadband cable subscribers throughout the United
Kingdom. BSkyB offers DTH television to its subscribers who must purchase or
rent a satellite receiver and satellite dish. The dishes receive signals from
the SES-Astra satellites, which carry the BSkyB channels and other popular
programming services. BSkyB is proposing to launch a digital satellite service
in its next financial year (July 1997 to June 1998) either by itself or in
conjunction with partners including, possibility, BT (see "--Residential
Telephone Service"). In order to receive digital Satellite Services customers
will be required to purchase a digital "set-top" converter to receive the
signals. Customers of cable operators will be able to receive digital
satellite programming from their cable operator using their existing equipment
(subject to capacity restrictions).
The BBC has recently outlined its programming plans for its proposed DTT
service. The service will be offered in wide screen format with CD-quality
sound. Programming will comprise a 24 hour news channel and additional
regional news services. Further channels would be available on a subscription
basis and will carry popular general entertainment utilizing the BBC's
considerable archive resources in addition to thematic channels devoted to
art, drama, science, wildlife and education. The BBC has stated that
programming would always be offered on the BBC's two terrestrial channels (or
the digital free-to-air equivalent) before being shown on subscription
channels.
CableTel's ability to make a competitive offering of cable television
services is dependent on CableTel's ability to contract for and obtain access
to programming at a reasonable cost. While various sources of programming are
available to cable system operators in the United Kingdom, BSkyB is currently
the most important supplier of cable programming and the exclusive supplier of
certain programming. BSkyB also competes with the Company by operating a DTH
satellite service that provides programming, including programming that is
also offered by the Company, to approximately 3.6 million subscribers in the
United Kingdom. BSkyB's programming is important in attracting and retaining
CATV subscribers and, in the absence of more alternative programming sources,
BSkyB may be able to set and raise prices for its programming without
significant competitive pricing pressure. No assurance can be given that BSkyB
will not exploit its dominant market position in a manner which may have a
material adverse effect on the Company's operating results. See "Risk
Factors--Limited Access to Programming."
PTOs such as BT and Mercury were restricted from holding licenses to provide
cable services until March 31, 1994, other than through affiliates of PTOs.
Since March 31, 1994, PTOs may apply in a public competitive bid process for
cable licenses in respect of areas of the United Kingdom that have not already
been licensed. This position may be changed by further regulations according
to changes in policy of relevant United Kingdom Government authorities. Any
change in policy could have a material adverse effect on the Company. To the
Company's knowledge, no PTO has applied for an LDL in its own right but
certain companies associated with BT and Mercury hold licenses to provide
cable systems outside CableTel's system areas.
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Following the Duopoly Review, the United Kingdom Government stated that its
policy was not to allow national PTOs to convey national broadcast
entertainment services in their own right over existing telephone networks
until March 2001 for delivery to residential subscribers. However, the
Government indicated that this restriction may be reviewed by the Director
General of Telecommunications as early as March 1998 with a view to lifting
this restriction. In February 1994, in a letter to the Cable Communications
Association, and again in a Command Paper issued in November 1994, the
Government reaffirmed its policy on this matter. The United Kingdom government
opposition party, the Labour Party, however, has stated its intention to
review these restrictions if it is elected to Government at the next general
election (which be held no later than May 22, 1997) by permitting a gradual
program of entry of national PTOs into cable franchise areas from 1998 with
full and open competition in all franchise areas in 2002. This would
effectively give all cable operators at least six years to complete the
construction of their networks and coincides with the United Kingdom
Parliamentary Select Committee's recommendations.
On September 29, 1993, the ITC issued a statement pursuant to which it
(supported by OFTEL and the DTI) took the position that BT and other PTOs were
not prevented from providing video on demand services under their existing
telecommunications licenses. While BT and other PTOs are prohibited from
providing residential CATV service, they are not precluded from providing
video on demand service to businesses and educational institutions. Video on
demand services involve the transmission of an individual entertainment
program to a single household in response to such a request. BT is testing a
pilot video on demand service--BT Interactive TV--that offers movies, TV,
music, education and home shopping and banking to 2,500 residents in
Colchester. BT is also testing video on demand on a smaller scale in its
Westminster franchise. The Company believes that in order for BT to offer
video on demand services on a national or large regional basis, BT may be
required to make substantial investment to upgrade its existing
telecommunications switches and to install video distribution facilities and
subscriber decoder boxes and that it is unlikely that BT will offer video-on-
demand on a national basis until towards the end of this decade. In addition,
BT has still to establish what services it will offer commercially and the
prices for the services. However, since the Company cannot assess the
commercial feasibility of BT offering video on demand services, no assurance
can be given that video on demand will not provide substantial competition to
the Company within its markets in the United Kingdom in the future.
The Company believes that CableTel will compete effectively in the provision
of CATV services for the following reasons:
. Channel Capacity. Its network will be capable of delivering a greater
number of channels than terrestrial services;
. Customer Service. It will emphasize customer service through local
management of billing information, management, operational and control
systems;
. Aesthetics. In order to receive BSkyB services directly from BSkyB, a
satellite dish must be purchased and installed by each subscriber.
Satellite dish reception requires a "line of sight" to the satellite
and, as such, may be difficult in multiple dwelling units or within
cities. Some local governments, such as Glasgow, discourage the
installation of satellite dishes on government housing. Satellite dishes
are generally considered to be aesthetically displeasing; and
. Network Architecture. Its network architecture provides several benefits
as compared to DTH satellite television reception, including:
interactive two-way capability, de minimus delay when changing channels
(versus a noticeable delay in DTH) and easy, inexpensive hookup of a
second television.
The full extent to which other developing media will compete with CATV
systems may not be known for several years. There can be no assurance,
however, that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render cable television systems less
profitable or even obsolete. The Company endeavors, however, to monitor
closely all relevant technological developments and to position itself to
remain competitive.
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Residential Telephone Services
BT is the Company's principal competitor in providing local residential
telephone service. Since it is the only end-to-end provider of
telecommunications service in the United Kingdom, BT is a formidable
competitor to the Company in providing both business and residential telephone
service. According to OFTEL, at December 1995, nearly 95% of all United
Kingdom residential telephone exchange line customers were customers of BT.
The Company's growth in telecommunications services depends, therefore, upon
its ability to convince BT's customers to switch to the Company's
telecommunications services. The Company believes that price is an important
factor influencing the decision of United Kingdom customers to switch to a
cable telecommunications service. BT has introduced price reductions in
certain categories of calls and due to regulatory price controls BT is
expected to make further reductions in its telecommunications prices.
Accordingly, although the Company intends to remain competitive, in the future
it may be unable to offer residential telecommunications services at rates
lower than those offered by BT. In such case, the Company may experience a
decline in its average per line residential telecommunications revenues and
may not achieve desired penetration rates. There can be no assurance that any
such decline in revenues or penetration rates will not adversely affect the
financial condition and results of operations of the Company.
In addition to BT, other telecommunications competitors which may have
substantially greater resources than those of the Company could prevent the
Company from increasing its share of the residential telecommunications
market. AT&T U.K. was awarded a PTO license in December 1994 and has announced
an intention to enter both the business and residential markets. In addition,
IONICA is expected to begin offering telecommunications services throughout
the United Kingdom in the residential network via a fixed radio network in May
or June 1996. IONICA announced in November 1995 an arrangement with Scottish
Telecom, a subsidiary of Scottish Power PLC, whereby Scottish Telecom will
provide IONICA's service in Scotland. Liberty Communications Limited, the
U.K.'s other licensed wireless local loop operator, is expected to launch its
residential telephone service in late 1996. In addition, on February 8, 1996,
the DTI awarded two national licenses to operate radio fixed access services
in the 2 GHz band. These new licenses will enable the two licensees, BT and
RadioTEL Systems, to provide telecommunications services to customers living
in defined remote rural areas mainly in Scotland, Wales and Northern Ireland
and create potential additional competition for the Company's residential
telephony services in certain remote rural areas of the Company's Northern
Ireland franchise.
CableTel also competes with mobile networks such as those provided by
Telecom Securicor Cellular Radio Limited (marketed under the name "Cellnet")
(in which BT has a 60% interest) and Vodafone Group Plc ("Vodafone"), and with
personal communications networks such as those provided by Mercury (marketed
under the name "Mercury One-2-One") and Microtel Logic Limited (marketed under
the name "Orange"). This technology could grow to become a competitive threat
to the Company's networks, particularly if call charges are reduced further on
the mobile networks. However, the NTL's Radio Communications Division should
enable the Company to benefit from these technologies. For example, NTL
recently signed a five year coverage contract with Orange which is expected to
generate revenues of (Pounds)1 million per year and has been commissioned by
NTL to assist in the design and planning of mobile radio sites for the Mercury
One-2-One network. See "--NTL's Business--RadioComms." There can be no
assurance, however, that the Company will be able to completely mitigate
competition from BT or such other telecommunications operators.
The Company believes that it has a competitive advantage in the residential
market because of its ability to offer integrated cable telephone, television
and telecommunications services and dual product packages designed to
encourage customers to subscribe to both services. Giving low income
households the ability to better manage their telephony expenditure has given
such customers the confidence to use a telephony service. The Company achieves
this by offering value added services such as call barring to international
services, premium rate or national calls, itemized billing, a low monthly
rental and significantly cheaper average calls. The Company's research
indicates that the ability to manage telephony expenditure more effectively,
combined with low call charges, will also increase confidence among those who
already use a telephone, and will encourage them to
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make more and better use of the Company's telephone services. However, there
can be no assurance that this competitive advantage will continue. BSkyB is
currently marketing telecommunications services on behalf of BT, which enables
BSkyB's customers to earn additional discounts on BT's residential
telecommunications volume discount plans. In addition, it is reported from
time to time that BT and BSkyB are discussing the formation of cooperative
arrangements. For example, recent press reports have indicated that the two
companies are in advanced discussions regarding the formation of a joint
venture to promote digital satellite television and interactive services in
the United Kingdom. Given the respective market positions of BT and BSkyB, the
Company believes that, if the two companies successfully combine their
respective marketing strengths, the resulting combination may provide
significant competition to cable operators including CableTel. At present,
however, it remains to be seen whether cooperative arrangements, such as the
proposed joint venture, can be established successfully. Based on recent press
reports, the Company believes that significant issues remain to be resolved
between the parties. The Company cannot currently predict the effect that
competition from joint BT/BSkyB ventures would have on CableTel's business
until further details are available as to how it is proposed that these and
other issues are to be resolved.
Business Telecommunications Services
BT is also the Company's principal competitor in providing business
telecommunications services. In addition to BT, the Company competes with
Mercury, which is a subsidiary of Cable & Wireless plc, Energis, which is a
subsidiary of the National Grid Company plc. The Company competes with
Scottish Telecom in Scotland and with other companies that have recently been
granted telecommunications licenses such as MFS Communications Limited. In the
future, the Company may compete with additional entrants to the business
telecommunications market, such as AT&T U.K. Most of these competitors have
resources substantially greater than that of the Company, and there can be no
assurances that the Company will be able to continue to compete successfully
with such competitors in the business telecommunications market. On February
9, 1996, the DTI announced the award of three licenses to NTL, Mercury and
IONICA and Scottish Telecom to operate radio fixed access services in the 10
GHz band throughout the United Kingdom (each, an "RFA license"). The RFA
licenses permit the licensees to provide advanced digital business
telecommunications services, such as ISDN, to small and medium sized
businesses more quickly and at a lower cost than those services provided by
other cable operators which must rely on networks constructed underground.
The Company believes that it will be able to compete effectively against BT
and Mercury and the other PTOs by emphasizing local customer service, local
account management, higher quality technical service, additional calling
features and lower prices. Examples of the Company's planned competitive
strategies include:
. exploiting the Company's information, management, operational and
control systems to gather detailed knowledge of local market trends and
preferences and to provide improved localized customer service;
. developing product portfolios and prices tailored to meet local market
needs and developments as they arise;
. utilizing modern network infrastructure, employing modern digital
switches and substantial fiber optic plant which provides customers
added value services, for example, in the form of a remotely managed
network which can identify and isolate switching problems;
. providing business customers with special services and facilities
including high capacity, private circuit digital lines (2 megabits and
above), Internet access, CENTREX services, Virtual Private Networks and
freephone services (0800 service);
. taking full advantage of number portability which is expected to aid the
migration of telephone subscribers, particularly business customers, to
cable operators and away from BT; and
. fully exploring the commercial feasibility of deploying advanced digital
telecommunications services to small and medium sized businesses
throughout the United Kingdom by means of radio fixed access pursuant to
NTL's RFA License.
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Data Communications Market
The data communications market is showing much higher rates of growth than
the United Kingdom telephony market, and is, in turn, driving the demand for
increased high quality, high capacity ISDN services. According to a recent
report by a United Kingdom consultancy firm, the overall value added data
market in the United Kingdom will grow at a rate of 21% per annum until the
end of the century. Particular elements of the market are expected to grow at
much higher rates. According to the same report, the total value added data
communications market is predicted to reach (Pounds)2.05 billion by 2000,
equivalent to 15.5% of the voice telephony market. By comparison, the
equivalent ratio in 1995 is approximately 8%. Established data services, such
as electronic data interchange ("EDI") and e-mail are, according to the above-
mentioned report, expected to experience continued growth, with EDI revenues
increasing by 19% per annum and e-mail experiencing 33% growth. Data network
services are expected to continue to grow at 11% per annum, although they will
account for a diminishing portion of service providers' revenues.
NTL
NTL provides broadcast and broadband transmission and communications
services in the United Kingdom. NTL's origins date back to the mid 1950's when
as part of the Independent Television Authority ("ITA"), the predecessor of
IBA, NTL designed and built the transmitter network for the United Kingdom's
first commercial television service, ITV. Until its privatization in 1991, NTL
concentrated on building and operating major broadcast networks.
Since its privatization, NTL has diversified beyond its core business and
entered into the telecommunications and radio sectors, by using a national
infrastructure of transmitters. NTL now provides terrestrial television
transmission and independent radio signal transmission, operates a national
broadband microwave communications network which it uses to provide trunk
services to telecommunications companies, commissions and maintains emergency
service radio systems, leases and manages cell sites for wireless telephony
operators, operates satellite earth stations that uplink video, audio, voice
and data signals to satellites and designs and builds studio and broadcast
facilities.
NTL is composed of four business divisions: Network Services, Telecom
Services, RadioComms, and Nexus International.
NETWORK SERVICES
NTL's Network Services provides television and radio broadcasters with
broadcast services. This division designs, installs, operates and maintains
new transmitter networks and has a spectrum planning service which uses NTL
software to plan the coverage of television and radio networks. It operates a
national infrastructure in the United Kingdom of over 2,000 transmitters which
deliver broadcast signals for ITV, Channel 4, S4C, Teletext and many of the
United Kingdom's independent radio broadcasters. In addition, NTL has recently
been awarded a ten-year contract to build the transmission system and
broadcast the signal for Channel 5, the United Kingdom's third independent
television channel.
Currently, four channels are transmitted to United Kingdom homes via
terrestrial transmission: BBC 1, BBC 2, Channel 3 and Channel 4/S4C. Channel 5
is expected to be launched as the United Kingdom's fifth over-the-air
television channel in 1997. NTL has contracted to transmit a reliable, high
quality signal to homes throughout the United Kingdom for the independent
television companies (including, if and when launched, Channel 5). BBC
Transmission, a division of the BBC, has a similar relationship regarding the
transmission of BBC 1 and BBC 2. However, OFTEL regulates the price which NTL
can charge for transmission of Channel 3 and Channel 4/S4C. Channel 5 is not
currently subject to this regulation. See "Regulation--NTL--Price Cap Review."
In addition to transmission services, NTL continuously markets added value
services to its existing television customers including additional monitoring
services, reserve system services and contribution/distribution services.
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NTL offers a range of services to radio broadcasting licensees in the United
Kingdom including target service area planning; site location, integration and
construction; and equipment selection, procurement, operation, monitoring and
maintenance. NTL offers total broadcast contract services ("TBCs"), where it
designs, builds, owns and maintains the operator's transmission facilities,
and facility management contract services ("FMCs"), where it maintains
customer-owned equipment and administers the operation of the transmission
service. It maintains over 50 TBCs and 40 FMCs. Classic FM is one of two
national independent radio networks served by NTL. In 1994, NTL was successful
in winning eight-year transmission contracts with all of the five new
independent regional radio licensees who commenced service in 1994. NTL also
renewed, for periods of up to ten years, all but one of the 24 expiring
contracts of NTL's existing customers.
In 1995, NTL's Network Services division had total revenues of approximately
72.1 million pounds or approximately 66% of NTL's total revenues.
TELECOM SERVICES
The Telecom Services division includes NTL's telecommunications and
satellite services groups.
NTL first entered the trunk communications business in 1993 by building
digital networks for Westcountry TV, Yorkshire Tyne Tees Television, Anglia
Television and S4C to link their independent studio facilities with NTL's
transmission facilities. In 1994, NTL broadened the scope of this business by
expanding into competitive trunk communications when it commissioned a network
to link Vodafone's main cellular telephone exchanges. This network employed
Synchronous Digital Hierarchy ("SDH") technology and was the first of its kind
in the United Kingdom. NTL has since expanded its network's geographic scope
and capacity, increased its share of Vodafone's traffic and added a number of
new customers including Orange, the Civil Aviation Authority and Birmingham
Cable. The Telecom Services division builds and operates digital networks
covering capacities of 2 Mbit/sec. to 155 Mbit/sec. for customers, and
provides managed bandwidth for video, audio, voice and data signals to various
regions of the United Kingdom. The infrastructures of the networks are
separate from BT and Mercury and are capable of delivering national long
distance services in the United Kingdom.
NTL also offers a range of satellite uplinking services including uplinks
for a variety of entertainment channels to a number of satellites including
ASTRA 1C, Intelset, Eutelsat and Orion, and an international gateway service
which is capable of providing long distance and corporate communications. NTL
provides connections to a number of satellites for clients requiring video,
voice digital audio and data services. Customers include CBS, United Artists,
Turner-Broadcasting Systems and Virgin. NTL operates two teleports, in
Winchester and Croydon, and is currently building a third teleport in central
London, providing uplink services to a number of United Kingdom cable
television programming suppliers. In addition, under the terms of its contract
with Channel 5 Broadcasting, NTL expects to distribute the Channel 5 program
signal to the terrestrial transmission network via satellite links. This
service is traditionally provided via terrestrial links secured from BT, NTL
or another telecommunications services provider.
In 1995, the Telecom Services division had total revenues of approximately
6.6 million pounds or approximately 6% of NTL's total revenues.
RADIOCOMMS
RadioComms offers the provision of infrastructure and support services to
customers with "mission critical" communication needs. RadioComms is involved
in two main activities--mobile communications maintenance support and
facilities leasing. RadioComms includes the business operations of DTELS, the
emergency services communications business that NTL acquired from the Home
Office of the United Kingdom Government in 1994. DTELS handles a significant
portion of the radio installation and maintenance market for the police and
fire services in England, as well as other customers such as HM Prison
Service, HM Coast Guard, British Rail, county councils and a number of
utilities. This business has grown in the two years following DTELS'
acquisition.
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In addition to network maintenance, RadioComms provides a range of
installation and commissioning services for new network design and build
projects. NTL has recently been engaged by Ericsson to assist in the design,
planning and procuring of mobile radio sites for the Mercury One-2-One mobile
telephone network in the United Kingdom. The contract also takes advantage of
the facility leasing capabilities which constitute the second part of NTL's
RadioComms business. Facility leasing involves the leasing or licensing of
space on the NTL television masts to other telecommunications providers such
as Orange, Vodafone, Mercury and several cable telephony operators.
In 1995, RadioComms had total revenues of approximately 28.7 million pounds
or approximately 26% of NTL's total revenues.
NEXUS
Nexus is NTL's broadcasting systems design division, specializing in
services associated with the design and construction of radio and television
studio centers and technical facilities. These services include installation,
commissioning, equipment procurement, training and consultancy for projects
ranging from production and post production studio facilities to full turnkey
systems involving transmitter network planning and installation. Nexus was
responsible for designing and constructing the international broadcast
facility for NBC at the Barcelona Olympic Games. Nexus also designed and built
a 60 channel digital audio play-out center for Music-Choice-Europe, a digital
music supplier which is uplinked by NTL's Telecoms division and distributed
throughout Europe by satellite.
In 1995, Nexus had total revenues of approximately 2.0 million pounds or
approximately 2% of NTL's total revenues.
REVENUES RECEIVABLE UNDER CONTRACTS
NTL generates a relatively reliable stream of revenues as, at present, it is
the sole provider of television transmission services to ITV, Channel 4 and
S4C. The Company believes NTL is well-positioned to increase these revenues in
the future as the transmission provider for the new Channel 5 signal and,
possibly, DTT signals. The table below summarizes the projected total value of
NTL's currently contracted revenues from January 1, 1996 through December 31,
2002, based on 1995 prices. In some cases, the actual revenues may increase or
decrease in line with changes in the RPI and adjustments made to reflect the
final outcome of the Price Cap Review.
<TABLE>
<CAPTION>
FORWARD ORDER
TYPICAL LENGTH BOOK 1996-2002
BUSINESS OF CONTRACTS(1) (IN MILLIONS
OF POUNDS)
<S> <C> <C>
Network Services(2)............................ 6 to 10 years 461
Telecom Services(3)............................ 5 to 8 years 58
RadioComms..................................... 3 to 15 years 139
Nexus.......................................... 5 years 1
---
Total.......................................... 659
</TABLE>
- --------
(1) Typical length of contracts is the typical term of a contract for the
service indicated from the date on which it is signed.
(2) Network Services is comprised of television service contracts with a
typical length of 6 years, each of which expire in 2002 and radio service
contracts with a typical length of 6 to 10 years.
(3) Telecom Services includes satellite service contracts, the typical length
of which is 5 years.
The foregoing table includes projections of the expected approximate
revenues receivable by NTL pursuant to its existing contracts; in reviewing
the information presented in the table it should be kept in mind that actual
revenues received by NTL may differ materially from those projected in the
table. These projections were based on various factors and were derived
utilizing several assumptions. Important assumptions and other important
factors that could cause actual revenues to differ from those indicated in the
table include, among other things, general economic conditions, the regulatory
regime prevailing from time to time, NTL's adherence to the construction,
service and other obligations of such contracts, absence of labor or weather
difficulties, absence of
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defaults, particularly payment defaults, by the counter-parties to such
contracts or the termination or non-renewal of such contracts. The Company
assumes no obligation to update this table to reflect actual revenues received
by NTL, changes in assumptions or changes in other factors affecting the
information presented. See "Risk Factors--The NTL Acquisition--Dependence Upon
ITV and Other Contracts."
INDUSTRY AND COMPETITION
Television Transmission
Television transmission involves the conversion of audio and video signals
created in television studios into UHF signals which are transmitted over-the-
air to the receiving public. The United Kingdom terrestrial broadcast market
is composed of two networks operated by the BBC and NTL. NTL currently
transmits Channel 3, Channel 4/S4C and is expected to transmit the Channel 5
signal when Channel 5 begins broadcasting. The BBC transmits BBC 1 and BBC 2.
Because NTL and the BBC control the tower sites and the transmission equipment
for each of the television transmission networks respectively, the
introduction of competition to these two transmission networks would depend on
limitations such as availability of radio frequency spectrum, appropriate
sites, environmental approach, financing and other similar factors. Subject to
any relevant application of competition law, the Company does not anticipate
that other operators would undertake the application of an analog terrestrial
network in the existing terrestrial television market in the United Kingdom.
NTL and the BBC are interdependent upon one another, as they share sites and
facilities throughout the United Kingdom. This interdependence requires
elaborate commercial arrangements that provide for site sharing. See "Risk
Factors--The NTL Acquisition."
Analog television transmission is effected through a network of transmitters
located at 51 main sites and over 1,100 secondary sites throughout the United
Kingdom. Of these sites, NTL is the owner, lessee or licensee of 23 main
transmitting sites and approximately 600 other sites. The BBC is the owner,
lessee or licensee of the remainder. On a substantial majority of sites, NTL
maintains separate transmitters for ITV and Channel 4/S4C and the BBC
maintains its own transmitters for BBC 1 and BBC 2. At most sites, the output
from NTL and BBC transmitters is combined before being fed to a common aerial
system. Where this occurs, the provision of the combining equipment, feeders
and aerial system is the responsibility of the owner, lessee or licensee of
the site.
In general, the transmitters located at the main transmitting sites are
those that are most important in terms of population coverage and output
power. Where those transmitters are unable to transmit to areas of population
directly, perhaps as a result of natural obstacles such as hills, they may be
supplemented by transmitters at other sites. Those sites are generally
referred to as relay stations. Relay stations receive the signal transmitted
from other transmitter stations and re-transmit the signal for reception
within local areas of coverage or by a further relay station.
Radio Services
Radio signals are transmitted throughout the United Kingdom by over-the-air
analog signals. The radio transmission market is similarly divided between the
license fee funded BBC and the national, regional and Independent Local Radio
("ILR") companies. ILR in the United Kingdom is characterized by the wide
variety of companies responsible for its provision to local service areas.
This has resulted in a more competitive market for radio transmission services
than there is for television transmission services, as some local companies
have chosen to develop their own local networks.
The market for the transmission of independent radio is estimated at
approximately 12 million pounds per annum of which NTL retains approximately
65%. NTL faces a continuous program of contract renewals with its ILR
customers. Ownership of the ILR transmitters provides a clear benefit during
negotiations, but the Company believes that NTL's focus on providing quality
service is the key to its retention rate of over 90%. NTL has also bid
successfully for the majority of new licenses awarded, including Classic FM,
the United Kingdom's only national independent radio service that was
tendered.
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Telecommunications Services
NTL competes with British Telecom, Mercury and Energis for a portion of the
United Kingdom's telecommunications market. NTL's networks can deliver
capacity to customers with requirements from 2 Mbit/sec. to 155 Mbit/sec.
providing managed bandwidth for data and voice signals. NTL's infrastructure
is totally separate from other network providers which, when coupled with its
expertise gained in delivering quality broadcast services nationwide, allows
NTL to offer some of the highest levels of link performance in the
United Kingdom.
Satellite Services
The satellite transmission market involves the provision of services whereby
video or audio, voice and/or data signals are "beamed" from an "earth station"
or dish to one or more satellite transponders and returned to a customer's
receiving dish. The market for satellite services is competitive and expanding
in scope and potential value. The Company estimates that video traffic
currently comprises approximately 75% of the total market. Intra-European
traffic in video uplinks is estimated by the Company to be approximately
39 million pounds with 10 million pounds originating in the United Kingdom.
Of the latter figure, BT and NTL are estimated to have a market share of
approximately 60% and 35% respectively (as of December 31,1995). NTL offers
satellite services primarily in the broadcast and video distribution sector
with customers including CBS, United Artists and Turner Broadcasting Systems.
NTL has endeavored to secure the capital it deploys by contracting with
customers for typically five year service agreements. NTL does not typically
build or expand its satellite facilities until its customers are secured by
such long-term contracts. Currently, NTL covers seven major satellites. The
Company believes that NTL's existing earth station infrastructure and
facilities, coupled with planned expansions may give NTL significant
competitive advantages to new competition in this market segment.
Radio Communications
The Company estimates that the total United Kingdom market for radio
communications maintenance services is currently approximately 75
million pounds annually of which NTL serves approximately 16%. In addition, this
division provides services in the facilities leasing sector, and installs and
commissions radio-based systems for third parties.
Nexus
There are only a few other companies in the United Kingdom providing
services similar to Nexus and most of these are equipment
manufacturers/suppliers and system specialists. Nexus' current share of the
available market is estimated to be approximately 10%. Nexus operates on a
relatively low cost base, employing only nine full time staff and expects
capital expenditures to increase being directly linked to contracted revenue.
EMERGING OPPORTUNITIES
The Company believes that NTL is well placed to take advantage of emerging
opportunities in communications throughout the United Kingdom. NTL's workforce
of over 450 engineers and 350 technicians combined with its existing national
communications infrastructure should allow it to move quickly and take
advantage of the following potential business opportunities.
Network Services
NTL has been involved in broadcast television since the 1950's when, as the
engineering division of the ITA, NTL designed and built the television
transmission system for the nation's first independent commercial
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television network. Since its beginnings, NTL has stayed at the forefront of
technology. Its record of innovations include:
. pioneering UHF color television transmission in 1969;
. Europe's first mobile satellite uplink in 1978;
. transmission of the United Kingdom's second national independent
television signal, Channel 4, in 1982; and
. direct broadcasting via satellite in 1990.
In addition, NTL was recently awarded contracts by Channel 5 Broadcasting to
provide transmission and satellite distribution services. The Company
estimates that the potential value of these contracts is approximately
(Pounds)9 million per annum. NTL plans to launch broadcast services for
Channel 5 in January 1997. The award of the transmission contract for Channel
5 will involve the construction of at least 33 transmission sites in 1996.
NTL has also agreed to distribute Channel 5's programming signal from the
London studio to the various transmitters. This is intended to be facilitated
through a satellite distribution network, uplinked from one of NTL's earth
stations.
The Company believes that NTL has currently positioned itself as one of the
leading suppliers of Digital Audio Broadcasting ("DAB") services. In November
1995, NTL demonstrated the United Kingdom's first commercial radio DAB
multiplex. Currently, NTL is engaged in an extended DAB marketing trial in
London with the support of key radio customers, with pilot service due to run
until February 1997. The Broadcasting Bill, which is expected to receive royal
assent in July 1996, creates a licensing regime for digital terrestrial sound
broadcasting and raises the prospect of full-time commercial DAB service,
which will offer CD-quality radio for the first time. It is not yet known when
this aspect of the Bill will come into force.
Two potential developments are likely to alter the structure and scope of
the United Kingdom's terrestrial transmission market during the next few
years: the introduction of digital terrestrial broadcasting and the
privatization of the BBC.
The Company believes that, as NTL is currently the United Kingdom's only
private sector provider of terrestrial broadcast television services to the
independent television companies, NTL is likely to be well placed to take
advantage of DTT. Although the development and implementation of DTT is
subject to significant uncertainties, the Company anticipates that DTT will be
an over-the-air broadcast service. NTL's tower facilities, national
maintenance force and management team favorably position NTL as a provider of
DTT broadcast services. As part of NTL's sale of its Advanced Products
Division to DigiMedia Vision Limited ("DMV"), a subsidiary of News
International, NTL entered into an agreement with DMV to develop the new
digital decoder which would be required if NTL commenced DTT transmission.
Furthermore, expected synergy with NTL's analog transmission business also
makes NTL a likely low cost provider of DTT broadcast services.
The United Kingdom Government has announced its intention to privatize the
BBC's transmission business upon the expiration of the Royal Charter in
December 1996. NTL has announced its intention to participate in the
privatization. Such participation will depend upon, amongst other factors,
NTL's assessment of the business case and whether such participation will be
permitted by United Kingdom competition regulation. As NTL is currently the
only other provider of national broadcast transmission services in the United
Kingdom, the Company believes that NTL is well placed to bid for all or a
portion of the BBC's transmission business. There is no assurance, however,
that this will be the case, that NTL will bid or that any bid made by NTL will
be successful or be allowed to proceed under United Kingdom competition
regulation. Moreover, if one or more businesses other than NTL successfully
bid for the BBC's transmission business, NTL may face significant competition.
Although the details regarding the proposed privatization are not yet
published, the Company anticipates that there will be some period before such
buyers would be allowed to compete with NTL. There is no assurance, however,
that this will be the case.
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Telecom Services
The planned expansion of NTL's national digital network should allow NTL to
offer state-of-the-art network alternatives for large carriers of data,
including cable/telephony companies, as well as managed network facilities
ensuring high levels of availability and service. To date, NTL has established
contractual arrangements with Vodafone and Orange by extending its network and
expanding capacity with the installation of fibre, the Company anticipates
that NTL should be well positioned to participate in the competition for the
provision of bandwidth as United Kingdom telecommunications usage continues to
expand as carriers take advantage of new voice and data opportunities.
The Company plans to integrate NTL's telecommunications network with
CableTel's local networks by expanding NTL's network to Scotland, Northern
Ireland and Wales. This will serve both the anticipated needs of CableTel's
existing customer base as well as NTL's desire to enter its third phase of
operation, as a nationwide wholesale telecommunications carrier. The Company
believes the integrated network will offer other cable telephony operators a
viable alternative to BT, Mercury and Energis in the provision of long
distance services throughout the United Kingdom. In addition, NTL has recently
had confirmation that it will be awarded a license to operate radio fixed
access services at 10 GHz. The Company believes that this will greatly
facilitate the development of its local access strategy for transmission.
NTL also currently plans to continue to expand its presence in the market
for satellite services, putting its third teleport on line in June 1996.
RadioComms
The major growth in the radio communications market over the next five years
is expected to arise from the outsourcing of maintenance services by public
and private network operators. NTL intends to target those with a national or
wide area infrastructure. The facilities leasing market is expected to
continue to grow with the expanding market for the provision of mobile and
fixed wireless telephony services. The Company currently intends to continue
to maximize the use of NTL's sites through effective marketing, provision of
end-to-end services and its continued responsiveness to customer needs.
NTL also plans to participate in the competitive tender for the provision of
the new Public Safety Radio Communications Project ("PSRCP") which plans to
provide a new state of the art network for essential services through the
United Kingdom. It is likely that PSRCP will be financed under the United
Kingdom Government Private Finance Initiative.
NETWORK AND SYSTEMS
Network Services
NTL's television transmission network consists of over 600 transmission
sites, with towers ranging from five meters to nearly 400 meters. NTL's
transmission tower at Emley Moor in Yorkshire is the United Kingdom's tallest
free-standing structure at over 1,000 feet. These towers are complimented by
other transmission sites and relay stations situated throughout the United
Kingdom. In addition to the transmission sites held by NTL, NTL also shares
sites held by the BBC, allowing it to complete its nationwide coverage. In
all, NTL maintains over 2,000 transmitters, monitored from four regional
centers and maintained by 22 strategically positioned service centers.
NTL's transmitters range in size from a 2 watt repeater which serves a small
village to 500 kilowatt main stations that cover large metropolitan areas. All
of the transmitters are analog and can be divided into two categories, solid
state circuitry and klystron tube. The klystron tube transmitters have been
manufactured by Pye and Marconi, while the solid state units were manufactured
by Harris, all reputable manufacturers of transmission equipment. Klystron
tube-type television transmitters have useful life of 20 to 25 years, while
the solid state
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transmitters can last well beyond this time frame. Solid state transmitters
require less maintenance than klystron transmitters, but are not available in
the high power capacity that is needed to cover the major metropolitan areas.
The ITV UHF transmitters were first brought on line in 1969 as the earlier
VHF transmitter system was being phased out. Nearly all of these transmitters
have been subsequently replaced with newer models. NTL is completing the final
stage of modernization of the ITV network and is currently preparing to
upgrade certain of the Channel 4 transmitters which are approaching 20 years
in service.
Historically, NTL's capital expenditures have been dominated by the
replacement of ageing transmitters, bringing new low power solid state re-
transmission stations on line, and general maintenance activities. Some
additional capital has been expended on upgrading systems to stereo sound,
modernizing security with video cameras and installing new remote monitoring
equipment, which allows NTL to monitor the principal transmitters from one
control center.
In addition, NTL has built and currently operates and maintains radio
transmission facilities for a number of ILR operators. These facilities share
components of NTL's national television network infrastructure.
Telecom Services
NTL's network was designed specifically for the high-volume
telecommunications market in the United Kingdom and, as such, it incorporates
many customer sites directly onto its main network. Expertise in designing and
installing this network was gained through nearly 40 years of managing its
television transmission network. The network is a SDH digital microwave
network controlled from a national network control center. The network is
configured in fault tolerant rings which allow one segment to fail and still
keep the network in service. NTL uses Nera SDH Radio Link Digital Microwave
radio systems on the network. Nera radios are installed on a combination of
existing NTL structures and customer sites. NTL believes that its extensive
experience in frequency planning and co-ordination ensures that all systems
placed into service will be of the highest reliability. NTL is currently
expanding the capacity of its network through the introduction of fiber on its
core routes.
SUMMARY OF THE ACQUISITION
The following summary of the terms of the acquisition of NTL and the
financing of that acquisition does not purport to be complete and is qualified
in its entirety by reference to the Acquisition Agreements (as defined below)
and the NTL Facilities Agreements (as defined below), copies of which have
been filed with the Commission as exhibits to the Company's Registration
Statement on Form S-4 (File No. 333-1010) filed with the Commission on April
16, 1996.
On May 9, 1996, an indirect wholly owned English subsidiary of the Company
(the "Purchaser") purchased all the issued shares of NTL pursuant to an offer
(the "NTL Offer") to all the NTL shareholders and optionholders made on May 8,
1996 in accordance with a deed of irrevocable undertaking (the "Undertaking")
dated March 28, 1996, between the Company, the Purchaser and the directors and
institutional shareholders of NTL.
Pursuant to the Undertaking, the NTL Offer and a deed of adjustment (the
"Deed of Adjustment"), the Purchaser paid the Initial Payment (approximately
204 million pounds) in cash at closing, and agreed to pay the Further Payment
(approximately 35 million pounds, subject to reduction in accordance with the
Deed of Adjustment), on or before the first anniversary of the closing of the
acquisition. The Initial Payment was comprised of a payment of approximately
157 million pounds to NTL's shareholders and optionholders and payments of
approximately 46.7 million pounds to repay NTL's bank indebtedness such that
NTL was acquired free from existing bank indebtedness.
In addition to the Initial Payment and Further Payment, the Purchaser is
required to pay 17.1 million pounds (the "ACT Payment"), representing the
estimated recoverable advance corporation tax previously paid by NTL, to
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the former NTL shareholders in October 1996. The ACT Payment corresponds to
the amount of that advance corporation tax that is expected to be available
for set off against NTL's liability for mainstream corporation tax for the
period ended December 31, 1995 or reclaimed in respect of prior periods. The
Purchaser's obligation to pay the ACT Payment is not, however, conditioned
upon NTL's receipt of a tax credit of 17.1 million pounds or on the ability
of NTL to set off 17.1 million pounds of advance corporation tax. The
Purchaser has also assigned (to a trustee for the former NTL shareholders)
NTL's rights to receive up to approximately 12.5 million pounds retained in
an escrow account as security for claims against warranties given by NTL in
respect of its sale of its Advanced Products Division in October 1995. The
Company has guaranteed the Purchaser's obligations under the Undertaking, the
NTL Offer and the Deed of Adjustment (collectively the "Acquisition
Agreements").
The Initial Payment was financed principally by bank loans under the terms
of two secured loan facilities agreements (the "NTL Facilities Agreements")
dated March 28, 1996 between the Purchaser, the Arranger and The Chase
Manhattan Bank, N.A., as agent. Up to 165 million pounds is available
pursuant to senior secured loan facilities (the "A Facilities") and comprised
of (i) the Short Term Facility (of 50 million pounds), (ii) the Long Term
Facility (of 90 million pounds), and (iii) the Revolving Facility (of up to
25 million pounds). The Term Loan Facilities were used to finance a portion
of the Initial Payment and to refinance monies used to pay a portion of the
Initial Payment including related acquisition expenses. The Revolving Facility
is available until December 31, 1997 for capital expenditure and working
capital purposes of NTL's group. Up to 2 million pounds of the Revolving
Facility is available by way of standby letter of credits to guarantee
overdraft and other working capital facilities made available by any clearing
bank of the Purchaser. See "Description of Certain Indebtedness--the NTL
Facilities--the A Facilities."
The Chase Manhattan Bank, N.A. also made available to the Purchaser
60 million pounds under the Bridge Facility which was used to finance most of
the remainder of the Initial Payment and acquisition costs and expenses. The
Bridge Facility is secured by guarantees from the Company, OCOM Corporation,
OCOM Sub I, Inc., OCOM Sub III, Inc., CableTel UK Group, Inc., CableTel (UK)
Limited (the "ICTL Guarantees"), NTL and certain of its subsidiaries, and by
second ranking fixed and floating charges over the present and future assets
of the Purchaser (subject to certain exceptions), NTL and certain of its
subsidiaries, subject to certain subordination arrangements. The Bridge
Facility must be repaid in full by December 31, 1996. The ICTL Guarantees
require that 62.5 million pounds be retained in an interest-bearing deposit
account with the lender until the Bridge Facility is repaid. See "Description
of Certain Indebtedness--The NTL Facilities--The Bridge Facility."
OCOM
OCOM sells retail long distance services to cellular customers of AT&T
Wireless, previously known as McCaw Cellular Communications, who chose the
Company as their long distance service provider. The Company provides these
services primarily through arrangements with other long distance carriers
under tariff or contract. OCOM pays long distance companies a wholesale rate
for these calls and bills its customers at a retail rate, thus earning a
margin.
In addition, pursuant to a contract between OCOM and the CCI/AirTouch Joint
Venture, the Company through OCOM provides the CCI/AirTouch Joint Venture with
cell site to switch and switch to switch private line transmission service
over the Company's microwave facilities at competitive tariffed rates. The
Company also offers tariffed private line transmission services to other
customers. The equipment, facilities and services used to accomplish
interconnections in and between cellular systems provided pursuant to a
contract with the CCI/AirTouch Joint Venture are owned and maintained by OCOM
but are located on towers owned by the CCI/AirTouch Joint Venture. At any time
the CCI/AirTouch Joint Venture may (i) give OCOM a termination notice that
such contract will terminate one year from the date of such notice or (ii)
exercise a right to buy all of OCOM's equipment and facilities at a price
equal to the replacement cost of all such equipment and facilities based upon
a bona-fide third party price (subject to AirTouch receiving certain
regulatory approvals including approval of the Federal Communications
Commission (the "FCC") for such purchase).
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COMPETITION
In the provision of long distance services, OCOM competes with such long
distance companies as AT&T, MCI and Sprint, all of which have resources and
experience far in excess of that of OCOM. In addition, OCOM competes with
landline telephone companies and others for the continuation of the microwave
transmission business it currently provides to the CCI/AirTouch Joint Venture.
OCOM competes in both businesses primarily on the basis of service, quality
and pricing. The Telecommunications Act of 1996 (the "1996 Act") will increase
competition in the long distance and microwave transmission markets because it
significantly liberalized restrictions on market entry. In particular, Bell
Operating Companies are permitted to provide local and long distance services,
subject to certain restrictions and conditions precedent in states where they
also provide local telephone services. Moreover, public utilities and cable
television companies are permitted to provide telecommunications services,
including long distance, in some cases, through separate subsidiaries, and
long distance companies will be able to enter into the local telephone
markets.
GENERAL
RESEARCH AND DEVELOPMENT
The Company's research and development activities involve the analysis of
technological developments affecting its cable television, telephone and
telecommunications business, the evaluation of existing services and sales and
marketing techniques and the development of new services and techniques.
PATENTS, COPYRIGHTS AND LICENSES
The Company does not have any material patents or copyrights nor does it
believe that patents play a material role in its business. CableTel, NTL and
OCOM are substantially dependent on the licenses and franchises granted by the
legislative agencies which regulate their respective businesses, the loss of
any one or more which could have a material adverse effect on the Company's
business and financial condition. There are no material intellectual property
licenses used by the Company the loss of which would have such an effect.
CUSTOMERS
Except for the CCI/AirTouch Joint Venture, no customer accounted for more
than 5% of consolidated operating revenue in the twelve months ended December
31, 1995 and no material part of CableTel's business is dependent upon a
single customer or a few customers, the loss of any one or more of which would
have a materially adverse effect on the Company. NTL's business is, however,
substantially dependent or the revenues it receives pursuant to its contracts
with the ITV companies, Channel 4 and S4C the loss of one or more of which may
have a material adverse effect on the Company. See "Risk Factors--The NTL
Acquisition."
EMPLOYEES
At May 15, 1996 the Company and its subsidiaries had approximately 1,650
employees in CableTel, approximately 1,200 employees in NTL and approximately
50 employees in OCOM. All NTL employees (except senior management) are
represented by the Broadcasting, Entertainment, Cinematographic and Theatre
Union which has entered into a collective bargaining agreement with NTL. All
other employees of the Company are not represented by any labor organization.
The Company believes that its relationship with its employees is good.
PROPERTIES
CableTel's subsidiaries own or lease regional head-offices in Glasgow,
Cardiff, Huddersfield, Fleet, Belfast and Luton and the corporate head-office
in Guildford. In addition, the CableTel's subsidiaries own or lease switching
centers/head-ends and sub-sites together with various cable television,
telephone and telecommunications equipment used in each of its regional
systems.
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NTL owns, leases or occupies under license approximately 770 properties, of
which approximately 700 are used as transmitter sites. NTL staff are present
at 72 of such properties, which are used either as operational bases or as
offices. Approximately 200 of the sites are freehold, approximately 440
leasehold and approximately 130 occupied under license. In addition, NTL is
the lessee or licensee of approximately 600 transmitter sites which are owned
by the BBC and shared between the two organizations pursuant a site sharing
agreement. See "Risk Factors--The NTL Acquisition." Substantially all NTL's
assets and properties are subject to fixed and floating charges securing the
amounts outstanding under the NTL Facilities. See "Description of Certain
Indebtedness--The NTL Facilities."
OCOM leases commercial office space in Ohio. In addition, OCOM owns the
microwave equipment employed in its system, maintenance equipment and has a
non-exclusive right to space on certain of the CCI/AirTouch Joint Venture's
cellular radio towers.
The Company maintains offices under lease for its corporate staff in New
York City and in Princeton, New Jersey.
The Company believes that its facilities are presently adequate for their
current use. The Company intends to continue to expand its systems in
accordance with the requirements of CableTel's network build schedules and
acquire new sites as part of the ongoing expansion of NTL's transmission
networks.
LEGAL PROCEEDINGS
The Company is involved in, or has been involved in, certain disputes and
litigation arising in the ordinary course of its business, including claims
involving contractual disputes and claims for damages to property and personal
injury resulting from the construction of CableTel's networks and the
maintenance and servicing of NTL's transmission masts, none of which are
expected to have a material adverse effect on the Company's financial
position.
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REGULATION
The following section summarizes certain regulatory matters relating to the
businesses of the Company.
CABLETEL
CATV and cable telephony/telecommunications operators in the United Kingdom
are governed by legislation under both the Broadcasting Act 1990, which
replaced the Cable and Broadcasting Act 1984 (the "CBA"), and the
Telecommunications Act 1984 (the "Telecommunications Act"). An operator of a
cable television and cable telephony franchise in the United Kingdom covering
more than 1,000 homes requires the following two licenses for each cable
franchise area:
(a) a CATV license, which authorizes the provision of cable television
services within a defined geographical area and which may be either:
(i) a prescribed diffusion service license ("PDSL") (issued pursuant
to the CBA prior to January 1, 1991 and continued in effect under the
Broadcasting Act) which allows an operator to provide cable television
services by means of a cable network; or
(ii) an LDL issued since January 1, 1991 pursuant to the Broadcasting
Act which allows an operator to deliver television and other licensed
programming services by means of a licensed telecommunications network,
including a cable network or microwave distribution system, and
(b) a telecommunications license, issued under the Telecommunications Act
by the Secretary of State for Trade and Industry (the "Secretary of
State"), which authorizes the installation and operation of the
telecommunications network used to provide CATV and telecommunications
services.
The CATV licenses and telecommunications licenses contain various conditions
and, in the event that such conditions are breached, the Director General or
the ITC, as appropriate, may take action to enforce compliance with such
licenses. The ITC or the Secretary of State has the power ultimately to revoke
such licenses.
The Company's United Kingdom businesses are further subject to regulation by
the EU. See "--European Union Legislation."
THE BROADCASTING ACT
Licensing
The television services provided by the Company are regulated principally by
the ITC, which was established under the Broadcasting Act 1990 to license
commercial television services (except for BBC services and Channel 4 in
Wales), whether delivered terrestrially, by cable or satellite. The ITC
regulates these services by monitoring compliance with license conditions and
has a range of enforcement powers if licensees fail to comply with them.
It is ITC policy to grant licensees the exclusive right to provide cable
television services in the area covered by their licenses ("ITC Licenses").
The Company holds such licenses for each of its 16 franchise areas.
Before the Broadcasting Act 1990, the ITC Licenses awarded by the Cable
Authority (under the CBA) were PDSLs. PDSLs are no longer granted, but they
continue in effect unchanged under the Broadcasting Act. Now ITC Licenses are
granted as LDLs. The main distinction between a PDSL and an LDL is a
competitive tendering process and the role the ITC plays in monitoring the
development of services by licensees.
A local delivery service is a service using a cable or microwave system (at
40 GHz) for the purpose of delivering television or radio services to two or
more homes, and is licensable only if more than 1,000 homes can be served. In
advertising a new LDL franchise the ITC specifies the percentages of
qualifying revenue
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("PQRs") payable by any successful applicant for each year for the period of
the license. An LDL is then awarded on the basis of competitive tendering
usually to the applicant submitting the highest cash bid (payable annually
over the 15-year period of the license and indexed for inflation) and, in
general, agreeing to provide the service to the largest number of homes in the
area. The ITC makes no judgement about the quality of the services to be
provided, and accordingly, the ITC's continuing interest is to monitor the
timetable by which the applicant agreed to make the services available. The
fees payable to the ITC, in addition to the original cash bid and PQR
payments, consist of an initial fee payable on grant of the license and annual
fees thereafter based on a proportion of the ITC's costs of licensing and
regulating commercial television services.
A prescribed diffusion service, the forerunner to the local delivery
service, is a service involving a cable system capable of serving at least
10,000 homes. The ITC has inherited the responsibility for monitoring the way
in which the licensee develops the services which were originally proposed by
the applicant for distribution throughout its franchise areas (such as a local
channel). The fee currently payable to the ITC for a PDSL is an annual fee
based on a proportion of the ITC's costs and expenses.
Duration of ITC Licenses
The duration and terms for renewal of the Company's PDSLs and LDLs are as
follows:
PDSLs. PDSLs are issued for an initial period of 15 years, although the
Company is entitled to seek an extension for a further 8-year period. If
the Company elects to extend a PDSL, upon expiration of an extended
license, the Company must apply for a new LDL under the competitive
tendering process described above. If the Company does not elect to extend
a PDSL the Company is entitled to apply for the grant of an LDL for the
same area for a further 15 year period, and the ITC will set the amount of
notional cash bid and PQR payments payable over the period of the license.
The ITC can only refuse to grant the LDL in such circumstances if (i) they
propose to grant a new LDL in respect of a different area, (ii) the
licensee is not operating throughout the whole of the franchise area, (iii)
the licensee's proposed service under the LDL would not cover the entire
franchise area or (iv) its proposed telecommunications service is not
acceptable.
LDLs. LDLs are issued for a period of 15 years and can be renewed on one
or more occasions for 15 years. The grounds on which the ITC may refuse to
renew a license are substantially similar to those referred to above. On
renewal of the LDL the ITC will set the amount of notional cash bid and PQR
payments payable over the period of the renewed LDL. The ITC can only
refuse to renew the LDL if: (i) the ITC proposes to grant a new LDL for a
different area; (ii) in the case of a licensee that fails to achieve the
required coverage specified in its technical plan, the ITC is not satisfied
that the licensee would be able to achieve the required coverage on renewal
of the license.
The majority of the Company's ITC Licenses will expire in December 2005 and
are not currently due for renewal or extension. Applications for renewal of
the LDL may be made within five years of the expiry of the LDL and not later
than the date the ITC would need to invite applicants for a new LDL for the
relevant franchise to replace the LDL upon its expiry.
The Company has a number of "transitional" LDLs ("LDTs") for areas in South
Wales acquired from Metro in 1995. LDTs were issued under the Broadcasting Act
to replace old diffusion service licenses which were not PDSLs and which were
outside a cable franchise area. These are issued for an initial period of 5
years, and may be renewed for further 5-year periods. On renewal, the ITC may
specify the amount of a notional cash bid and PQR payments over the period of
the LDT. All the Company's LDTs have been renewed without any cash bid or PQR
payment requirements and will expire in 1999. The Company will be entitled to
seek a renewal of its LDTs for further 5-year periods.
Enforcement and Revocation
The ITC is empowered to revoke a license where it considers it necessary to
do so for the purpose of complying with the restrictions on ownership
contained in the Broadcasting Act 1990. Where the licensee is a
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corporate entity the ITC may also revoke the license if any change in the
nature or characteristics of that corporate entity or any change in the
persons having control over or interests in it are such that, had they
occurred before the granting of the license, they would have induced the ITC
to refrain from granting the license. A license can also be revoked if the
operator fails to comply with any license condition (including, in the case of
an LDL, the establishment of the service in accordance with the technical plan
submitted by the licensee) or direction from the ITC and the ITC considers
revocation to be in the public interest or if the ITC is satisfied that the
licensee ceases to be a fit and proper person. With respect to LDLs and other
licenses issued under the Broadcasting Act, the ITC can also impose fines and
shorten license periods.
Ownership Restrictions
Prior to the Broadcasting Act 1990 non-EU persons or companies controlled by
non-EU persons were prohibited from owning or controlling cable operators of
broadband licenses. These restrictions were repealed by the Broadcasting Act
1990.
The ITC is under a duty to ensure that certain entities, including local
authorities, political bodies and religious bodies, do not hold ITC Licenses.
The Secretary of State for National Heritage has a wide discretion to amend
the rules restricting participation in ITC Licenses. Restrictions will also be
imposed on cross ownership of different licensed services (including local
delivery services and program services) and different media (including
newspapers and licensed services, such as local delivery services) operating
in substantially the same areas.
In December 1995, the United Kingdom Government published its Broadcasting
Bill, which will regulate media ownership. The Broadcasting Bill, among other
things:
. introduces a relaxation of TV ownership restrictions, whereby any person
may hold two or more licenses (whether Channel 3, Channel 5 and/or cable
operator licenses) provided the audience time attributable to those
services is 15% or less of total audience time;
. allows greater cross-ownership between newspaper groups, television
companies and radio stations, at both the national and regional levels;
. introduces "public interest" criteria by which the regulatory
authorities can assess and approve mergers or acquisitions between
newspapers and television and radio companies;
. provides that the holder of a LDL, in which a national newspaper
proprietor has an interest in excess of 20%, may not have more than 20%
of certain other licenses such as regional Channel 3, National Channel 3
or Channel 5 licenses; and
. introduces a much wider definition of "control" of license holders
(extending beyond shareholdings and voting rights to include control
over editorial or programming policy).
If the Broadcasting Bill is passed, it is expected that the new regulations
will come into force by the third quarter of 1996.
Local Services Requirement
The Company's PDSLs (i.e. all its ITC Licenses except the Northern Ireland
and Gwent and Glamorgan LDLs) require the provision of local services
(including text information, community access and programming dedicated to the
Company's local communities). In recent meetings with the ITC, the Company has
begun the formulation of a plan to develop and provide some of these services
in 1996. The Company intends to provide local programming services in each of
its Regional Areas, in conjunction with local partners (such as local
universities, technical colleges, radio stations and newspapers) in 1997.
Restrictions on Transfer
The Broadcasting Act 1990 permits the transfer of an ITC License to a third
party with the prior written consent of the ITC. The ITC has absolute
discretion to refuse any proposed transfer of such a license.
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Program Origination
Under the Broadcasting Act 1990, cable operators may carry only licensed
program services on their systems and present only advertising and programs
(including foreign satellite programs) which conform to the restrictions set
forth in codes produced by the ITC in relation to advertising, program
sponsorship and programming content. Cable operators are required under the
terms of their PDSLs to carry the public analog terrestrial channels of the
BBC, Channel 3, Channel 4 and S4C. In Commission v. UK, a case before the
European Court of Justice (the "ECJ") concerning the UK's implementation of
the Television Without Frontiers Directive (Council Directive 89/552/EEC of
October 3, 1989), Advocate General Lenz has opined that the UK's requirement
under the Broadcasting Act 1990 to license foreign television program services
when conveyed by a cable service in the United Kingdom is contrary to that
Directive. See "--European Union Legislation-- Television Regulation."
THE TELECOMMUNICATIONS ACT
Licensing
The installation and operation of the Company's United Kingdom cable
systems, over which it provides its television and other telecommunications
services, requires a license issued under the Telecommunications Act by the
Secretary of State for Trade and Industry (a "DTI License"). The Company has a
number of DTI Licenses covering areas which coincide with the areas covered by
its ITC Licenses.
A DTI License authorizes a cable operator to install and operate the
physical network used to provide entertainment and telecommunications services
in its franchise. It also authorizes the operator to connect its system to
other television and telecommunications systems, including those operated by
the terrestrial broadcasting authorities, satellite broadcasters and PTOs.
Although the DTI License granted to a cable operator is for a particular
franchise area, it is not exclusive.
A cable operator's DTI License contains conditions regulating the manner in
which the licensee operates its telecommunications system, provides
telecommunications services, connects its systems to others and generally
operates its business. A cable operator's DTI License also contains a number
of detailed provisions relating to the technical aspects of the licensed
system (e.g., numbering, metering and the use of technical interfaces) and the
manner in which the licensee conducts its business (e.g., publicity of certain
prices, terms and conditions). In addition, a cable operator's DTI License
contains prohibitions on undue preference and discrimination in providing
service and unfair cross-subsidy of other services. The cable operator's DTI
License also requires the licensee to comply with certain codes of practice
and to provide information which the Director General may require to carry out
his statutory functions.
The fees payable for the DTI License consist of an initial fee payable on
the grant of the license and annual fees thereafter. The fees are based on a
proportion of the costs of the Director General in exercising his functions
under the Telecommunications Act.
A DTI License is not transferable. However, a change of control of a
licensee may be permitted subject to compliance with a notification
requirement provided that, among other things, the proposed change is not, in
the opinion of the Secretary of State, against the interests of national
security or relations with the government of a country or territory outside
the United Kingdom.
The Telecommunications Act provides a licensing and regulatory framework for
telecommunications activities in the United Kingdom and established the office
of the Director General (supported by OFTEL), as an independent regulatory
authority. Telecommunications policy is overseen by the DTI. The Secretary of
State also has primary licensing authority under the Telecommunications Act,
although he may delegate that authority to the Director General. The principal
functions of the Director General are, among other things, to monitor and
enforce compliance with DTI License conditions, establish and administer
standards for telecommunications equipment and contractors, investigate
complaints and exercise certain functions concurrently with other
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regulators to promote or ensure competition in telecommunications markets. The
Director General may modify DTI Licenses either with the agreement of the
licensee following a statutory period of public consultation or following a
report of the Monopolies and Mergers Commission. The Director General is also
empowered to issue enforcement orders requiring compliance with DTI License
conditions which have been breached.
Term, Renewal and Revocation
DTI Licenses originally were granted for an initial period of either 15 or
23 years (depending on the technology used by the licensee), commencing on the
date service was first provided to customers. In July 1992, following the
Duopoly Review, technology-related discrimination in DTI License length was
abandoned. The United Kingdom government invited all holders of 15-year DTI
Licenses to apply for new 23-year licenses. However, a licensee also had the
right to extend a 15-year DTI License to 23 years if it provided certain
technical undertakings within five years of the date of the original grant of
license. To date, the Company has given such undertakings with respect to all
of its DTI Licenses and, consequently, the Company's DTI Licenses will expire
at various times between 2008 and 2017.
Upon expiration, a DTI License cannot be renewed and application must be
made for a new license. If the ITC License is renewed for a franchise, a new
DTI License for the same area covered by the ITC License is also likely to be
issued.
A DTI License may be revoked if the licensee fails to pay the license fee
when due, if the licensee fails to comply with an enforcement order, upon the
occurrence of certain insolvency-related events or if any ITC License relating
to a licensee's system is revoked. A DTI License may also be revoked if, among
other things, the licensee fails to give the required notification to the DTI
of changes in shareholders and agreements affecting control of the licensee or
if the DTI concludes that any such change would be against the interests of
national security or the United Kingdom government's international relations.
Network Construction
DTI Licenses for PDSL areas specify the build schedule of the system which
the cable operator is required to implement (by reference to the numbers of
premises passed) and the particular technical characteristics to which the
system must adhere. It is OFTEL's responsibility to enforce compliance with
the build schedules. The DTI Licenses for LDL areas, such as Northern Ireland
and Glamorgan and Gwent, will not specify a build schedule. This schedule is
contained in the LDL issued by the ITC, and it is the ITC's responsibility to
enforce compliance with those build schedules. Failure to comply with the
build schedules could result in license revocation. See "--The Network--
Network Construction Milestones."
Under a DTI License, the cable operator is subject to and has the benefit of
the Telecommunications Code promulgated under the Telecommunications Act. The
Telecommunications Code provides certain rights and obligations with respect
to installing and maintaining equipment such as ducts, cables and cabinets on
public or private land (including the installation of equipment on public
highways). Cable operators also have the benefit of the New Roads and Street
Works Act 1991 which provides them with the same rights and responsibilities
with respect to construction on public highways as other public utilities.
Cable operators generally are required to post bonds with local authorities in
respect of their obligation to ensure reinstatement of roads and streets in
the event the operator becomes insolvent, ceases to carry on business or has
its DTI License terminated. In order to install equipment on private property,
cable operators should first seek the agreement of occupiers, property owners
and others, but where such agreement is not forthcoming, they may apply for a
court order dispensing with the requirement for such an agreement.
The DTI has not yet issued the DTI Licenses for the Northern Ireland and
Gwent and Glamorgan LDLs, as is the case with all other LDLs awarded by the
ITC. The Company will not be entitled, therefore, to the benefits of the
Telecommunications Code until the DTI Licenses for those franchises are
issued. Until that time construction activities in the licensed areas for
those LDLs are subject to the Street Works Act whereby the
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Company can request the consent of the street owner (i.e. the local highway
authority or the Department of the Environment) to install its
telecommunications apparatus. The Company has not yet experienced any
significant difficulties in adopting this interim approach.
A planning order issued in April 1994 imposes planning consent requirements
on certain works carried out under the Telecommunications Code. Under this
planning order, installation, alteration or replacement of any
telecommunications apparatus on, or within the land surrounding, a dwelling
house is deemed to be work for which planning consent is required. There is
some uncertainty as to the extent this restriction will affect the development
and maintenance of television and telecommunications systems. The Department
of the Environment, however, takes the view that cabling a house is a "minor
operation" and is not, therefore, "development" unless it alters the external
appearance of a building.
Telephone Operations
The ability of cable television operators to provide telephone services is
subject to the restrictions contained in their DTI Licenses. All the Company's
DTI Licenses permit the Company to provide voice telephony services as
principal and to switch their own traffic. Additionally, under the United
Kingdom regulatory regime, the Company has the right to require BT, Mercury
and other PTOs (including cable operators) to provide interconnection and,
failing agreement on the interconnection terms, the right to request OFTEL to
determine the interconnection conditions. The Company has an interconnection
agreement with BT and is currently negotiating an interconnection agreement
with Mercury.
Telephone Number Portability. At the request of a cable operator, and if so
directed by the Director General, BT is obligated to offer customers number
portability (i.e. the ability of telephone customers to retain their telephone
numbers when changing to another telephony operator).
Pursuant to a recent hearing by the Monopolies and Mergers Communication
(the "MMC"), following a reference by the Director of General of
Telecommunications (the "DGT") on April 27, 1995, the DGT will now amend BT's
license in accordance with the MMC's findings. The license modifications will
require that BT split total number portability costs 70:30 with the cable
operator requesting number portability. This means that BT will bear the
systems' set up costs; the other operator will pay the per line set up costs;
and BT and the other operator will share extra costs associated with routing a
call to a ported number until October 1997 when BT will introduce a new method
of routing ported number calls, called the "call dropback" method. BT will
bear any costs associated with call dropback. These costs will be minimal.
OFTEL has indicated that the DGT expects to implement the amendments by the
end of June 1996. The Company intends to offer number portability for new
customers in late 1996.
Price Regulation. Although OFTEL must be notified of rate changes for
licensed services, the rates charged by the Company are not subject to pricing
restrictions (other than under general competition law provisions) and need
not be approved by any United Kingdom government entity. BT is currently
subject to controls on the prices it may charge customers. Under provisions in
BT's license, BT may not, until July 31, 1997, increase its aggregate prices
for general public switched telecommunications services on an annual basis by
more than the amount of the increase in the United Kingdom domestic RPI minus
7.5%. The RPI increased 2.7% from March 31, 1995 to March 31, 1996. Based on
this formula, BT may be required, and has been required to, decrease its
prices. Within this limitation, BT may not increase its charges for certain
individual services by more than certain other price limitations, generally
RPI. In addition, BT's license contains separate restrictions on prices for
private circuits. See "The Company--CableTel--Competition."
BT has been permitted to offer discounts nationally to high volume users,
albeit subject to several conditions. Importantly, BT is restricted in the
manner in which it can offer discounted services by virtue of the obligation
not to show undue preference to or exercise undue discrimination against
particular persons or persons of any class or description (cable operators are
also subject to a similar prohibition on undue preference or discrimination
except in relation to voice telephony services). Except as mentioned above, BT
is not, therefore,
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allowed to offer discounted services in local markets without offering them
nationally. For so long as this policy remains in effect, BT will be
restricted in its ability to respond through differential pricing to local
competition from cable operators.
OFTEL is currently reviewing the controls on BT's retail pricing which will
expire in July 1997, and is presently consulting the telecommunications
industry and other interested parties on its future approach. OFTEL wishes to
adopt a more deregulated approach where market forces would be permitted to
determine pricing where competition exists in particular markets. However
OFTEL has linked its ability to take a deregulated approach, both in terms of
BT's price control review and with respect to the rest of the industry, to the
introduction of the fair trading condition into the licensing regime. OFTEL's
proposal is to introduce an effects based condition prohibiting anti-
competitive practices. Although this proposal is currently made in relation to
BT's license, OFTEL has indicated that it will be proposed for incorporation
into all significant telecommunications operators licenses. OFTEL published
its proposals for BT's price control review on June 3, 1996. The principal
proposals include: (i) to control retail prices through 2001 only where
consumer protection is required (namely, low to medium spending residential
customers (approximately the first 80% by bill spend) and additional
guarantees for small businesses--this control is expected to cover only
approximately 25% of BT's revenues; (ii) an X, for the purposes of the price
cap formula (RPI minus X), of 4.5% for those residential customers and
protection for the top 20% of customers by bill spend and small businesses;
(iii) that this will be the last retail price control; (iv) the introduction
of price controls on network charges (the input costs of operators competing
with BT) the detail to be determined in 1997; and (v) the introduction of the
so-called "fair trading" condition in BT's license which would enable the
Director General more effectively to deal with anti-competitive behavior by
BT. OFTEL's price cap proposals represent a first step towards deregulation of
pricing in the United Kingdom telecommunications market. The introduction of
price controls on network charges, with a price floor based on long run
incremental costs, is likely to provide cable operators with a predictable
cost base to allow them effectively to compete with BT. OFTEL is now formally
consulting industry participants on these proposals with a view to making a
formal proposal to BT in August 1996. If BT rejects either OFTEL's proposed
new price control or the fair trading condition, both issues will be referred
to the MMC. Depending on the outcome, the price control review and any MMC
reference may have an adverse effect on the margins of cable operators as they
will need to compete with BT's lower prices.
Interconnection and Accounting Separation. The commercial viability of voice
and other telecommunications services provided by cable operators depends on
their ability to connect with other telecommunications systems in a cost
effective manner. Cable operators' systems must connect with systems operated
by other PTOs for calls that do not originate or terminate on their system.
Each holder of a public telecommunications license (including NTL, BT and
Mercury as well as cable operators) is required to negotiate an
interconnection agreement with any other license holder that seeks one and
either party may request intervention from the Director General if there is a
failure to agree on terms. The Director General also has the power to make
determinations and directions in respect of certain obligations of any party
to an interconnection agreement. However, determinations by the Director
General may be liable to challenge in the courts. In addition, BT is required
by its license to make all interconnection agreements that it has entered into
publicly available.
In a statement in March 1994, the Director General indicated that he would
refer PTOs to the BT/Mercury interconnection agreement, the terms of which he
determined in December 1993, in order to establish a set of "standard rates"
for certain interconnection services which other PTOs might require from BT.
This policy does not preclude other PTOs from seeking determination in respect
of charges or other services not considered by the BT/Mercury determination.
In addition, work has been undertaken to implement "accounting separation" in
BT's business (in accordance with the license modifications implemented as
discussed below), from which it is intended to derive a list of standard rates
with respect to most interconnect services, the charges for which are expected
to be determined by the Director General from April 1, 1995. The charges for
such services will be determined in accordance with certain provisions of BT's
DTI License which require that the operator pay BT's fully allocated costs
attributable to the services to be provided (taking into account relevant
overhead and a
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reasonable rate of return on its attributable assets, with the allocation of
such costs and the attribution of assets to be subject to a further
requirement that BT prepare separate accounts with respect to BT's "retail,"
"access" and "network" businesses). The standard charges determined in this
manner generally will be payable by all operators, including BT's own "retail"
business which competes with the Company and other PTOs. On March 31, 1995,
OFTEL modified BT's license to implement these arrangements and address
certain other pricing matters.
In December 1994, the Director General issued a consultative document "A
Framework for Effective Competition" (the "Consultative Document") which
proposed a fundamental review of, among other matters, interconnection
arrangements, access deficits, certain retail pricing regulations and
competition. The Consultative Document suggested, among other things, that the
interconnection regime be revised to allow standard interconnect charges based
on incremental costs to be adopted. In addition, various changes were
suggested in respect of the payment of access deficit contributions ("ADCs"),
including the removal of the retail price cap upon BT's line rental charges
and the resulting elimination of the current ADC system. The Consultative
Document suggested that after the price cap review in 1997, it may be more
appropriate to move towards a regulatory framework which involves less
detailed intervention by the Director General in setting interconnection
charges and relies more on the Director General specifying a framework and
allowing BT certain pricing freedoms within such framework, subject to a
number of pricing restrictions on anti-competitive behavior. The Director
General formally published his conclusions and outline proposals for changes
to the regulatory structure at the end of July 1995 in an OFTEL Statement
entitled "Effective Competition: Framework for Action." These proposals
include the removal of the exchange line rental restriction on BT (with
protection for light users in the form of a guarantee by OFTEL that the bills
of these customers will not increase faster than the rate of inflation)
together with the abolition of the ADC regime. Modifications to BT's license
implementing these changes have now taken effect. In addition, OFTEL has
proposed that a new interconnection regime be introduced in 1997 together with
a price control review of network price controls. This new regime will be
based upon the introduction of incremental cost charging in respect of
interconnect fees (rather than the current method which is based upon fully
allocated cost charging) and the introduction of a network price cap with
respect to wholesale charges. Other proposals of OFTEL including the funding
of a universal service by the telecommunications industry on a transparent and
proportional basis and the introduction of ways to deal more effectively with
instances of anti-competitive behavior by operators (both in terms of
developing OFTEL's role as a competition authority and by modifying BT's and
all PTO's licenses to introduce a general condition dealing with anti-
competitive behavior).
OFTEL has also stated that operators may be required to provide network
information to BT for interconnection purposes in much the same way as BT must
publish information about its own network and, once BT is subject to quality-
of-service targets and publication requirements in relation thereto, similar
requirements may apply to other operators. Such "symmetry" will be applied to
other operators in respect of wider interconnection obligations (such as
accounting separation and transparency of charge calculation for
interconnection) if OFTEL concludes that any such operator has market power
and is in a position to distort competition to the detriment of consumers,
although OFTEL does not currently propose to require other operators to
publish their interconnection agreements.
Equal Access. The licenses of BT, Mercury and the cable operators enable
OFTEL to require them to make available to customers the ability to have their
long-distance or international calls carried by another operator without extra
procedures, either by pre-selection or on a call-by-call basis. A
determination in respect of equal access cannot be given in relation to a
cable operator until the operator provides 25% of local exchange lines in any
local charge area or the licensed area.
There can be no assurance that the implementation of equal access by the
Director General will not adversely affect the ability of cable
television/telecommunications operators to market their telecommunications
services.
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Technical and Reporting Requirements
The principal technical requirements for the cable systems are contained in
the telecommunications licenses and address technical requirements for
transmissions, performance requirements specified as British Standards
relating to wideband cable distribution systems and, in all cases, radio
interference restrictions.
The Company's DTI Licenses impose obligations to provide any information
which OFTEL may require for the purpose of exercising their statutory
functions. This includes financial reporting, market data, and information on
customer complaint and fault handling procedures.
EUROPEAN UNION LEGISLATION
Telecommunications Regulation
The European Commission has adopted various Directives focusing on a number
of key issues which are closely linked to the overall political timetable for
liberalization of voice telephony and infrastructure throughout the European
Union by January 1, 1998 (subject to the transitional periods for certain
Member States). These Directives include, among others, the following:
. A Directive requiring Member States to abolish all restrictions on the
supply of transmission capacity by CATV network operators to service
operators and allow the use of cable networks for the carriage of
telecommunications services, other than voice telephony, within Member
States from January 1, 1996. The Directive does not affect the provision
of CATV services.
. A Directive which provides for full competition in telecommunication
services and network infrastructure by January 1, 1998. This Directive
also provides for the liberalization of self-provided infrastructure
(such as utilities' networks) for the provision of services other than
voice telephony from July 1, 1996. This liberalization would be extended
to the provision of voice telephony by January 1, 1998. The Directive's
provisions are generally comparable to the existing United Kingdom
regime which is already liberalized with respect to the provision of
telecommunication services and infrastructure, with the exception of the
duopoly of BT and Mercury over international facilities infrastructure.
The DTI has recently consulted the industry on whether full
liberalization should be made available in July 1996. An announcement of
the DTI's decision is expected in June 1996.
. A Directive on the application of open network provision ("ONP") to
voice telephony. This Directive sets rules and targets for basic
telephone service in areas such as telephone directories, tariffs,
billing procedures and quality of service. It also requires telephone
companies to grant access to service providers on open, objective and
non-discriminatory terms, (which is now generally the case for cable
operators in the United Kingdom).
In addition, the European Commission has proposed a Directive on
interconnection in telecommunications with regard to ensuring universal
service and interoperability through application of the ONP principles. The
proposed Directive sets out a harmonized framework to be implemented by Member
State regulatory authorities regarding the interconnection of public
telecommunications networks and services utilizing the ONP principles of
transparency, objectivity and non-discrimination. This proposal aims to ensure
open access to networks and services and to guarantee the rights and
obligations of operators and service providers for interconnection with the
networks and services of others. On March 20, 1996 a revised proposal was
adopted which seeks to limit the scope of the interconnection obligations to
interconnection between networks. Accordingly, this revised proposal would not
extend the benefits of cost-based interconnection to service providers. The
DTI has confirmed that the principles of the proposal are broadly in line with
the approach which OFTEL is implementing through its interconnection and
accounting separation program in the United Kingdom.
The European Commission has also proposed a Directive aiming to establish a
common framework for Member States' general authorizations and individual
licenses for telecommunications services and infrastructure by establishing
principles for the procedures under which general authorizations or individual
licenses might be
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granted and the conditions that might be attached to such authorizations or
licenses. The European Commission intends to reach a common position on the
proposed Directive in June 1996 and to adopt the Directive by the end of 1996
to enable new operators to apply for licenses under the new regime so that
they can start operating as of January 1, 1998.
Television Regulation
The European Commission has commenced proceedings against the UK Government
regarding its implementation of the Television Without Frontiers Directive.
This Directive allows for the free transmission of television signals
throughout the European Union provided that the channels meet certain minimum
criteria in terms of, among other things, program content and advertising.
Advocate General Lenz has delivered his opinion on the merits of the two cases
put to the ECJ. In summary, he has opined as follows: (i) that the UK has
erred in adopting an uplink test for the licensing of non-domestic satellite
services, which the test should be based on establishment of the broadcaster
in the UK; (ii) that the UK has erred in applying more liberal licensing rules
to non-domestic satellite services than those applying to domestic satellite
services; and (iii) that the UK has erred in requiring non-UK licensed
services to be re-licensed in the UK before they can be re-transmitted on
cable (the UK has accepted this but has said that, in practice, the ITC does
not require broadcasters licensed in other member states to be relicensed). If
the ECJ agrees with the opinion referred to in (ii), such satellite services
(which include most of the satellite television channels currently conveyed by
CableTel's systems) would become subject to a 50% European Union production
quota and a 25% independent production requirement.
At present, it is likely that none of the current satellite services in the
United Kingdom would comply with both of these production requirements and it
is possible that many of them would not be able to do so in the future. The
Department of National Heritage is considering how to alleviate the principal
effects of such a requirement if the ECJ rules in favor of the European
Commission. One proposal is to apply the terms of the Directive to all
satellite television channels. Unless such a proposal is implemented, cable
operators may be required to substantially change the television programming
they offer. Given that there are a limited number of program suppliers which
may be able to satisfy the "production" requirements which may apply to United
Kingdom satellite channels, the cost of programming to cable operators could
also increase. There is no assurance that the loss of certain satellite
channels and/or the increased costs of such channels would not have a material
adverse effect on CableTel's cable television business. The ECJ's decision is
expected within 3 to 6 months. The Company believes that it is likely that the
ECJ will rule in favour of the Commission. If the ECJ does so rule, the
Broadcasting Act 1990 will be amended to bring it into line with the
provisions of the relevant Directive.
NTL
A significant proportion of NTL's total revenues is attributable to the
provisions of television and radio transmission and distribution services and
the provision of telecommunications services. In the United Kingdom, the
provision of such services is governed by the Telecommunications Act and The
Wireless Telegraphy Act 1949 (the "Wireless Telegraphy Act"). Set forth below
is a brief summary of the principal licenses of NTL granted pursuant to these
Acts.
NTL'S TELECOMMUNICATIONS ACT LICENSES
NTL holds four licenses under the Telecommunications Act and the DTI has
recently confirmed that a fifth license will be granted later in 1996.
License to run telecommunications systems for the provision of television
and radio transmission services (the "Transmission License"). The Transmission
License is probably the most important of NTL's licenses. It permits NTL to
carry out its core business of providing transmission services to television
and radio broadcasters. The Transmission License was granted on December 20,
1990 for a period of 25 years from January 1, 1991. It is subject to
revocation thereafter on 10 years' notice in writing. No notice may be given
before the end of the fifteenth year.
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NTL's Transmission License contains conditions and other provisions which,
among other things: (i) require NTL to provide specified telecommunications
services to specified persons on request; (ii) specify certain criteria to be
met by NTL in providing those services; (iii) require the connection of NTL's
telecommunications systems with those of certain other transmission operators
and the transmission over those systems by such operators of messages for
general reception; (iv) require NTL to publish its charges and terms and
conditions of business and not to show undue preference to or exercise undue
discrimination against particular persons in the provision of certain
telecommunications services; (v) requires NTL to hold Wireless Telegraphy Act
licenses in respect of each item of wireless telegraphy comprised in its
system; (vi) impose on NTL an obligation to share its transmission sites with
other transmission operators; (vii) restrict the prices which NTL is allowed
to charge for the provision of certain services. (see "--Price Cap Review"
below); (viii) prohibit NTL from cross-subsidizing the unregulated side of its
business, and (ix) impose a requirement for separate accounts to be produced
in relation to both the regulated and unregulated parts of NTL's business.
The Secretary of State may revoke the Transmission License in the
circumstances described under "--CableTel--The Telecommunications Act--Term,
Renewal and Revocation" above and if a change in shareholding in NTL increases
the proportion of shares or voting power held by a PTO. The DTI confirmed on
April 3, 1996 that the Secretary of State was not minded to revoke NTL's
Transmission License as a result of the Company's acquisition of NTL.
License to run telecommunications systems for the provision of outside
broadcasting services by means of satellite systems (the "OBS License"). The
OBS License enables NTL to operate satellite up-links from outside broadcast
sites (sites which are not permanently equipped or adapted for television or
radio broadcasting). The OBS License was granted on February 6, 1991 for a
period of 25 years from February 7, 1991, thereafter revocable on 10 years'
notice in writing. No notice may be given before the end of the fifteenth
year. The OBS License contains conditions similar to those in the Transmission
License. The OBS License specifies the circumstances in which it may be
revoked by the Secretary of State which include on revocation of the
Transmission License.
License to run telecommunications systems ("Telecoms License"). The Telecoms
License enables NTL to convey messages (including voice and data) between
points on NTL's telecommunications networks. The Telecoms License also
contains conditions and revocation provisions similar to those in the
Transmission License. In compliance with the notification provisions in the
license, NTL notified the Secretary of State in March 1996 of its acquisition
by the Company. The DTI has informed the Company (see below) that this license
will need to be revoked as it has, for all intents and purposes, been replaced
by the PTO license. The Telecoms License was granted on December 30, 1992 for
a period of 10 years from 30 December 1992. Thereafter it is revocable on 5
years' written notice. No notice may be given before the end of the fifth
year.
License to run telecommunications systems ("PTO License"). The PTO License
permits NTL to run telecommunications systems of every description within the
United Kingdom and to provide telecommunications services, both authorizations
are subject to certain exceptions. NTL's PTO License was granted on February
14, 1996 for a period of 25 years from that date. Thereafter, it is revocable
on 10 years' written notice. No notice may be given before the end of the
fifteenth year. NTL's PTO License also includes a condition obliging it,
subject to certain exceptions, to enter into an agreement to connect its
system to the system of any operator which requires it to do so, provided that
operator has been granted a license authorizing it to connect its system to
NTL's system. The PTO License differs from other Telecommunications Act
Licenses in that it details the exceptions and conditions subject to which the
Telecommunications Code will apply to NTL. The Telecommunications Code confers
certain important rights on PTO's in relation to network construction,
buildings and land.
Radio Fixed Access License. The DTI has recently confirmed that NTL has been
successful in its application for a Radio Fixed Access License at 10 GHz. It
is expected that NTL will be granted a license under the Telecommunications
Act (and the Wireless Telegraphy Act) later in the year. This license will
allow NTL to provide short-range, radio-links between business customers and
its network.
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Comfort Letter from the DTI. Prior to the acquisition of NTL, the Company
received a letter of comfort from the DTI which, among other things, confirmed
that the Secretary of State would not be minded to revoke the Transmission
License, the OBS License, the PTO License or the Wireless Telegraphy Act
License for the transmission of broadcasting services dated 1 January 1991
(see below) as a result of the acquisition of NTL. However, the letter
indicated that the Telecoms License will need to be revoked as it has
effectively been replaced by the PTO License. In addition, it indicated that
revocation of the PTO License is likely at some stage in order to amend the
service to permit the conveyance of entertainment services nationally. Such an
amendment would enable the Company to use the same telecommunications system
to provide transmission of messages comprising broadcast services to the
public and for provision of other telecommunications services.
NTL'S WIRELESS TELEGRAPHY ACT LICENSES
NTL has been granted a number of Wireless Telegraphy Act licenses of which
the most important are the following:
License for the Transmission of Broadcasting Services. This license was
granted on January 1, 1991 and permits NTL to operate wireless telegraphy
stations at those sites set out in a schedule to the License. In respect of
each station, site and mast heights, power, polarisation and frequency to be
used are specified.
Microwave Fixed Link License. This license permits the licensee to establish
and use fixed stations for sending and receiving wireless telegraphy at those
sites as detailed in the schedule to the license.
Private Mobile Radio License. This license permits NTL to establish sending
and receiving stations for wireless telegraphy (both base stations and mobile
stations) and to use these stations for the purpose of sending and receiving
spoken messages concerning the business of the licensee.
Earth Station Licenses. NTL holds 12 earth station licenses. These licenses
permit NTL to establish earth stations at specified locations in the UK for
the purpose of providing wireless telegraphy up-links between the earth
station and specified geo-stationary satellites.
Each of the four types of license referred to above continue in force from
year to year unless revoked by the Secretary of State or unless any of the
license fees are unpaid by the licencee in which case the relevant license
expires.
On-site Radio Paging License. This license is valid until the end of
September 1996. The license permits NTL to establish a base station at a
specified location and to establish receiving stations as necessary.
Licenses for the Transmission of Broadcasting Services (special status). NTL
provides transmission services for a large number of radio stations pursuant
to its License for the Transmission of Broadcasting Services dated January 1,
1991 (see above). In respect of two radio stations, Classic FM and Virgin
Radio, NTL has been issued licenses which are specific for those radio
stations. This has been done for the sake of administrative convenience
because, in both cases, the license fees are paid direct to the Radio
Communications Agency by the radio station concerned.
Miscellaneous Licenses. NTL holds a number of miscellaneous Wireless
Telegraphy Act licenses including testing and development licenses and
commissioned programme makers licenses.
Conditions in NTL's Wireless Telegraphy Act Licenses. NTL's Wireless
Telegraphy Act licenses contain conditions relating to revocation of the
Licenses and notifications to the Secretary of State. In general, the
Secretary of State may revoke a Wireless Telegraphy Act license at any time.
There are no notification requirements in respect of a change of control. The
license for the transmission of broadcasting services contain provisions which
enable the Secretary of State to revoke the license if, among other things,
(1) the licensee is, in
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the opinion of the Secretary of State, not a fit and proper body to hold such
a license; (ii) it appears to him requisite or expedient to do so for purposes
connected with the EC or any other international organization or obligation or
co-operation; (iii) the licensee ceases to hold any contracts for the
broadcasting of television or sound broadcasting services or (iv) the
licensee's license granted under the Telecommunications Act is for any reason
revoked.
DAB Testing. NTL is currently testing DAB under a series of temporary
licenses in anticipation of applying for a local or national radio multiplex
license in accordance with proposals contained in the Broadcasting Bill. These
temporary licenses are issued by the Radio Authority under the Broadcasting
Act 1990. Under this Act, a body which is, or which is controlled by a body
which is, not formed under the law of an EC member state is currently
disqualified from holding a license to test DAB. The current license is,
therefore, held by an independent industry association on behalf of NTL.
However, under the present Broadcasting Bill, a non-EC company will not be
prohibited from holding a license to provide local or national radio multiplex
services, and this interim position will be regularized at that time.
PRICE CAP REVIEW
NTL's regulated business may be divided into two categories: Price Regulated
Business and Applicable Rate Business. Price Regulated Business comprises
those telecommunication services which NTL is obliged to provide pursuant to
its Transmission License and in respect of which price controls are imposed.
NTL's Applicable Rate Business comprises those telecommunications services
which NTL is obliged to provide but which do not fall within the definition of
Price Regulated Business. Charges for Applicable Rate Business are agreed
between NTL and the relevant customer. If despite all reasonable efforts
agreement cannot be reached between NTL and a significant proportion of its
customers in respect of any particular telecommunications service, the charge
will be determined by the Director General.
In respect of any services provided by NTL which are not Price Regulated
Business or Applicable Rate Business, the prices charged by NTL are wholly
unregulated, except for the overriding duty not to engage in any pricing
policy which constitutes undue preference or undue discrimination against any
person or class of person in respect of telecommunications services. NTL's
unregulated income would include, for example, charges for site rentals to PCN
operators.
NTL's Price Regulated Business is, essentially, the television transmission
service provided to the ITV (Channel 3) companies, Channel 4/S4C including the
operation and maintenance of transmission equipment and the provision to third
party transmission operators of the accommodation, masts and antennae
necessary for the operation of broadcast transmission services.
The current controls on NTL's prices expire on December 31, 1996. The
Director General is, therefore, reviewing (the "Price Cap Review") the price
controls which are to apply to NTL for the period from January 1, 1997 to
December 31, 2002. The Price Cap Review has two purposes: (1) to establish a
new "Po" (NTL's allowable revenues for the first year of the next control
period, 1997, in respect of NTL's Maximum Price Regulated Business) and (2) to
establish a new "X" (the percentage by which such revenues must, after
allowing for consumer price inflation, be reduced each year thereafter). The
Director General's initial conclusions of his review indicate that, on present
assumptions, the new Po is expected to be 53.4 million pounds and the new X
is expected to be between 4.0% and 4.3%. This compares with a current Po
figure of 56.4 million pounds in 1996 if the Channel 3 companies accept
certain contractual conditions or 57.4 million pounds if they do not. The
present price control formula is RPI-1.0%. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources--The NTL Acquisition."
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In addition to price control, the Price Cap Review raises a number of other
issues which will impact upon NTL's Price Regulated Business in the future. In
particular, the Director General has indicated that the acquisition by NTL of
the BBC transmission network would lead to price control being reopened. The
Director General has also suggested that it would be desirable for NTL to
"unbundle" the prices for operational services and required site rentals which
it charges to each broadcaster (currently Channel 3, Channel 4 and S4C) in the
form of a transmission fee in order to expose those elements of the service
which are potentially competitive and allow broadcasters to choose an
alternative supplier if they wish. OFTEL's initial proposal is that NTL should
publish a ratecard with a menu of prices for each broadcaster before the end
of 1996 in order that unbundling should take effect on January 1, 1997. At
present, the system for calculating the proportion of Channel 3's total
transmission fee which is charged to each individual franchisee is based on
net advertizing revenues ("NAR") accruing to each franchisee, rather than the
costs of actually providing the transmission service to each of the
franchisees.
OFTEL proposes that NTL should continue to charge Channel 3 as a group a
single price for each component of its transmission service, albeit that each
component would be separately distinguished. This arrangement would continue
unless and until NAR arrangements no longer applied. This decision could only
be taken after agreement with the Department of National Heritage and
consultation with other interested bodies.
The time-table for resolution of the Price Cap Review contemplates that,
following OFTEL's publication of the Interim Statement there will be a short
period for review. The Director General is then expected to publish his final
proposals at the end of June 1996. Thereafter, there will be a 28 day
consultation period on the proposed license modifications and modifications to
the Transmission License will either be agreed by NTL and the Director General
or, failing such an agreement, the Director General will order a reference to
the MMC. NTL is currently consulting with the television companies on certain
proposed changes to the service arrangements arising out of the consolidation
of NTL's four regional customer service centers into one center.
EUROPEAN UNION LEGISLATION
NTL's business is further regulated by the EU including the various European
Commission Directives referred to under "CableTel--European Union
Legislation." In addition, EU law, in particular Directive 94/46, regulates
the provision of satellite services within the EU.
OCOM
The following does not purport to be a complete summary of all the
provisions of the Communications Act of 1934, as amended, (the "Communications
Act") or the regulations and policies of the FCC thereunder that relate to the
microwave services in which the Company or its subsidiaries holds licenses.
Reference is made to the Communications Act, such regulations and the
decisions, orders, rulings and public notices promulgated thereunder by the
FCC for further information relating thereto.
Generally, the construction, operation, management and acquisition of
microwave systems in the United States are subject to regulation by the FCC
under the Communications Act. The FCC has allocated frequencies for microwave
service and issues licenses to the extent frequencies are available and the
operation of such frequencies will not cause harmful interference to other
licensed facilities. In general, the licensee is authorized to operate the
microwave facilities for a license term not to exceed ten years, subject to
compliance with FCC rules. Microwave licenses are renewed every ten years,
with the next expiration term for OCOM's microwave licenses being February 1,
2001. Prior to that time, OCOM may file renewal applications with the FCC for
an additional ten-year term upon a showing of compliance with FCC rules. All
FCC licenses may be revoked for cause. Although the Company knows of no
reasons why OCOM's microwave licenses would not be renewed in the ordinary
course, renewal of any such licenses cannot be predicted with certainty.
Pending FCC Rules. The FCC has proposed rules to reallocate for the use of
emerging new technologies such as Mobile Satellite Services ("MSS"), some of
the frequencies in the 2 GHz frequency band currently licensed to common
carrier point-to-point microwave licensees, such as OCOM. This allocation
could have a significant impact on microwave users in this frequency band.
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Alien Ownership. If the FCC finds the public interest will be served, the
Communications Act permits the FCC to refuse common carrier (including
microwave and paging) and certain other licenses to an entity indirectly
controlled by a corporation of which more than 25 percent of the capital stock
is owned by aliens, or to revoke a license granted to such entity. The
Communications Act also prohibits any entity more than 20 percent of whose
capital stock is owned by aliens from receiving or holding a license in the
common carrier (including microwave and paging) and certain other services.
Through examination of a list of the record owners of the Company's Common
Stock, the Company is not aware of alien ownership of its stock that would
cause it or OCOM to be in violation of the Communications Act. However, if the
percentage of its stock that is owned by non-U.S. individuals or entities
exceeds the 25 percent limit, the Company must reduce this percentage through
redemptions or other means or OCOM must seek a public interest determination
from the FCC or risk the loss of its U.S. microwave licenses. The FCC will
then evaluate (1) the extent to which a U.S. company is permitted to control
facilities similar to those of the licensee in the home country of such alien
investors; (2) whether reasonable and nondiscriminatory interconnection exists
for such U.S. controlled facilities in the home country; (3) whether there are
effective safeguards to prevent anticompetitive practices in the home country;
and (4) whether an effective regulatory framework exists in the home country.
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DESCRIPTION OF CERTAIN INDEBTEDNESS--THE NTL FACILITIES
The following summaries do not purport to be complete and are qualified in
their entirety by reference to the agreements described herein, copies of
which have been filed with the Commission as exhibits to the Amendment No. 2
to the Company's Registration Statement on Form S-4 (File No. 333-1010) filed
with the Commission on April 16, 1996.
THE A FACILITIES
General. On March 28, 1996, the Purchaser entered into an agreement (the "A
Facilities") with Chase Investment Bank Limited as arranger of a syndicate of
lenders (the "Lenders") and The Chase Manhattan Bank, N.A. (the "Facility
Agent"), pursuant to which the Lenders agreed, subject to the terms thereof, to
lend the Purchaser up to 165 million pounds aggregate principal amount. The A
Facilities are comprised of the Short Term Facility (of 50 million pounds), the
Long Term Facility (of 90 million pounds) (collectively, the "Term Loan
Facilities" and any loans thereunder, the "Term Loans") and the Revolving Credit
Facility (of up to 25 million pounds). The Term Loan Facilities are available to
finance the acquisition of NTL and to refinance monies used to pay a portion of
the Initial Payment including acquisition costs and expenses; the Revolving
Credit Facility may be used to finance capital expenditure and working capital
requirements of NTL. Up to 2 million pounds is available under the Revolving
Credit Facility by way of stand by letters of credit to guarantee overdraft and
other working capital facilities made available by any clearing bank to the
Purchaser. The Revolving Credit Facility is subject to certain drawdown
conditions including, in particular, the receipt of matching subordinated debt
or equity from the Company or any of its subsidiaries or any other person (other
than a member of the Purchaser group) and, in the case of cash advances (other
than cash advances made by the Purchaser to repay any sums paid by The Chase
Manhattan Bank, N.A. pursuant to any standby letters of credit issued by it in
accordance with terms of the A Facilities), the repayment of the Bridge
Facility.
Repayment and Interest. Any amounts outstanding under the Revolving Credit
Facility on December 31, 1997 (the end of the availability period) will be
converted to Term Loans. The Short Term Facility is repayable in full on
December 31, 1996 unless certain conditions (described below) are fulfilled on
or prior to that date, in which case the amounts outstanding under the Short
Term Facility will be automatically converted into, and shall be deemed to be,
amounts outstanding under the Long Term Facility. If the OFTEL price review is
determined on or before December 31, 1996, an amount of the Short Term
Facility may become repayable in accordance with a formula designed to
estimate the net present value of any resulting reduction in regulated
revenues over the period 1997 to 2002 (provided such value is no less than
1,000,000 pounds (the "Reduction Amount")). The balance of the Short Term
Facility would then be converted into, and be deemed to be, a Term Loan
repayable in accordance with the Long Term Facility. If the determination is
after December 31, 1996, the whole of the Short Term Loan would be so
converted into a Term Loan under the Long Term Facility. However, in that
case, the Purchaser would be obliged to prepay an amount of the Term Loan
equal to the Reduction Amount (provided such amount is not less than
1,000,000 pounds) following determination of the OFTEL price review. Based on
the Interim Statement, the Company expects that the whole of the Short Term
Facility will be so converted and that the Purchaser will not thereafter be
required to prepay any amount of the Term Loan linked to the Reduction Amount.
The Company has given certain undertakings in relation to the funding of the
Reduction Amount and the Further Payment. Under these undertakings, the
Company would be obligated to fund by way of equity or subordinated debt the
Reduction Amount if the OFTEL price review is determined on or before December
31, 1996. The Company is also obligated to provide further funds by way of
equity or subordinated debt up to 35 million pounds by no later than the
first anniversary of the date of completion of the acquisition. The
undertaking in relation to the Further Payment is subject to certain
reductions.
All amounts outstanding under the Long Term Facility must be repaid at the
rate of a quarter of: (i) 5% of the amounts outstanding on each quarterly
payment date during 1998; (ii) 20% of the amounts outstanding on
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each quarterly payment date during 1999; (iii) 22% of the amounts outstanding
on each quarterly payment date during 2000; (iv) 25% of the amounts
outstanding on each quarterly payment date during 2001; and (v) 28% of the
amounts outstanding on each quarterly payment date during 2002.
Loans under the A Facilities bear interest at an annual rate equal to LIBOR
plus a margin that varies from 0.75% per annum to 1.75% per annum, based on
certain financial ratios of the Purchaser and certain of its subsidiaries.
The A Facilities require that amounts outstanding thereunder be prepaid and
the commitment of its Lenders thereunder be reduced in certain circumstances.
In particular, the A Facilities require that 50% of any Excess Cash Flow (as
defined in the A Facilities) of the Purchaser and its subsidiaries shall be
applied to prepay amounts outstanding under the Term Loan Facility. The
Purchaser may prepay the Term Loan Facilities any time subject to certain
notice requirements and reimbursing the Lenders for any funding losses and
certain breakage costs.
Security. All principal, interest and other obligations of the Purchaser in
respect of loans under the A Facilities will be secured by, among other
things, guarantees given by NTL and certain of its subsidiaries and first
ranking fixed and floating charges over present and future assets (subject to
certain exceptions) of the Purchaser, NTL and certain of its subsidiaries. The
A Facilities do not, therefore, provide for the Lenders to have recourse to
the assets of the Company other than the assets of the Purchaser and its
subsidiaries including without limitation, an unsecured right of the Purchaser
against the Company under the undertaking relating to the Further Payment
referred to above under "--Repayment and Interest" and the rights of the
Lenders under the Short Term Facility pursuant to the undertaking of the
Company relating to the Reduction Amount payable pursuant to the Short Term
Facility. Based on the Interim Statement, however, the Company believes that
no Reduction Amount will become payable pursuant to the Short Term Facility.
See "--Repayment and Interest."
Covenants. The A Facilities contain various financial and other covenants,
including covenants with respect to the Purchaser and certain of its
subsidiaries relating to minimum total debt to Operating Cash Flow (as defined
in the "A Facilities"), fixed charge coverage, net worth and pro-forma debt
service ratios. The A Facilities also include covenants which restrict the
ability of the Purchaser to pay dividends or make other distributions to its
shareholders to 50% of Excess Cash Flow, provided no event of default or
potential event of default has occurred or remains unremedied. The covenants
further include other customary restrictions for facilities of this nature
including a requirement for all amounts invested by the Company or any of its
subsidiaries in the Purchaser's group to be subordinated on the terms of
subordination agreements to the claims of the A Facilities' and B Facilities'
Lenders. The Purchaser's ability to borrow under the A Facilities is subject
to, among other things, its compliance with such covenants and the failure to
comply with such covenants could result in all amounts under the A Facilities
becoming immediately due and payable.
Conditions Precedent. The Purchaser's ability to draw under the Revolving
Credit Facility is subject to the satisfaction of certain conditions precedent
including, among other things, no breach of representation, no event of
default or potential event of default by certain members of the Purchaser's
group. In addition, subject to certain exceptions, cash advances under the
Revolving Credit Facility may not be drawn-down until the Bridge Facility has
been repaid in full and matching funding has been obtained by the Purchaser in
the form of equity or subordinated debt.
Events of Default. The A Facilities contain various events of default for,
among other things, non-payment of amounts due under the facilities, breach of
covenants or representations, cross default to certain other indebtedness,
breach of the covenants regarding the financial condition of the Purchaser and
certain of its subsidiaries, termination of the BBC site sharing license
agreements and certain material commercial contracts, or failure by the
Company to comply with its undertakings to the Lenders and the Purchaser. The
occurrence of any event of default could result in all amounts outstanding
under the A Facilities becoming immediately due and payable.
THE BRIDGE FACILITY
General. Contemporaneously with its execution of the A Facilities, the
Purchaser entered into the Bridge Facility with The Chase Manhattan Bank, N.A.
(the "Bank"), pursuant to which the Bank agreed to lend to the
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Purchaser up to 60 million pounds aggregate principal amount under a secured
term loan facility. The proceeds of the Bridge Facility were primarily to be
used to finance a portion of the NTL acquisition and associated expenses.
Availability, Repayment and Interest. All amounts outstanding under the
Bridge Facility must be repaid on or before December 31, 1996. Loans under
Facility B bear interest at an annual rate equal to LIBOR plus a margin of 3%,
which margin shall be increased by an additional 1.25% on each of the
"Applicable Margin Step-Up Dates" falling three, four, five, six and seven
months after the advance of any loans under the Bridge Facility. The Purchaser
may repay all, but not less than all, of the amount outstanding under the
Bridge Facility at any time without penalty.
Security. All principal, interest and other obligations of the Purchaser in
respect of loans under the B Facility are secured by, among other things,
second ranking fixed and floating charges over the present and future assets
of the Purchaser subject to certain exceptions and NTL and certain of its
subsidiaries.
All principal, interest and other obligations of the Purchaser in respect of
the Bridge Facility are guaranteed jointly and severally by the Company, OCOM
Corporation, OCOM Sub I, Inc., OCOM Sub III, Inc., CableTel UK Group, Inc. and
CableTel (UK) Limited (the "ICTL Guarantees") NTL and certain of its
subsidiaries. The ICTL Guarantees require that the guarantors of the Bridge
Facility ensure that CableTel (UK) Limited opens and maintains with the Bank
an account with a deposit balance equal to 62.5 million pounds (the
"Deposits").
Covenants. The Bridge Facility contains covenants similar to those of the A
Facilities.
Events of Default. The Bridge Facility contains, in addition to events of
default similar to those of the A Facilities, an event of default for
withdrawal of the Deposits other than upon repayment of the Bridge Facility
in full.
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