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FORM 10-K
________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 0-24792
COMCAST UK CABLE PARTNERS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Clarendon House Comcast Corporation
2 Church Street West 1500 Market Street, 35th Floor
Hamilton, HM 11, Bermuda Philadelphia, PA 19102-2148
(809) 295-5950 (215) 665-1700
(Address, including zip code, (Name, address, including
and telephone number, zip code, and telephone
including area code, number, including area code,
of Registrant's principal of agent for service)
executive offices)
________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Shares, (UK Pound)0.01 par value
________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
________________________________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
________________________________
As of March 1, 1997, the aggregate market value of the Class A Common Shares
held by non-affiliates of the Registrant was $317.1 million.
________________________________
As of March 1, 1997, there were 37,231,997 Class A Common Shares and 12,872,605
Class B Common Shares outstanding.
________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders presently scheduled to be held in June 1997.
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<PAGE>
COMCAST UK CABLE PARTNERS LIMITED
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business...........................................................1
Item 2 Properties........................................................15
Item 3 Legal Proceedings.................................................15
Item 4 Submission of Matters to a Vote of Security Holders...............15
Item 4A Executive Officers of the Registrant..............................15
PART II
Item 5 Market for the Registrant's Common Equity and
Related Shareholder Matters ...................................17
Item 6 Selected Financial and Other Data.................................18
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................22
Item 8 Financial Statements and Supplementary Data.......................29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................70
PART III
Item 10 Directors and Executive Officers of the Registrant................70
Item 11 Executive Compensation............................................70
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................................70
Item 13 Certain Relationships and Related Transactions....................70
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...71
SIGNATURES..................................................................74
This Annual Report on Form 10-K for the year ended December 31, 1996, at the
time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
This Annual Report on Form 10-K contains forward looking statements made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward looking statements
involve risks and uncertainties which could significantly affect expected
results in the future from those expressed in any such forward looking
statements made by, or on behalf of the Company. Certain factors that could
cause actual results to differ materially include, without limitation, the
effects of legislative and regulatory changes; the potential for increased
competition; technological changes; the need to generate substantial growth in
the subscriber base by successfully launching, marketing and providing services
in identified markets; pricing pressures which could affect demand for the
Company's services; the Company's ability to expand its distribution; changes in
labor, programming, equipment and capital costs; the Company's continued ability
to create or acquire programming and products that customers will find
attractive; future acquisitions, strategic partnerships and divestitures;
general business and economic conditions; and other risks detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission.
<PAGE>
PART I
ITEM 1 BUSINESS
Comcast UK Cable Partners Limited and its subsidiaries (the "Company"), an
indirect controlled subsidiary of Comcast Corporation ("Comcast") (see Item 5 -
"Market for the Registrant's Common Equity and Related Shareholder Matters"),
was incorporated in 1992 to develop, construct, manage and operate the interests
of Comcast in the United Kingdom ("UK") cable and telecommunications industry.
As of December 31, 1996, the Company has interests in four operations (the
"Operating Companies"): Birmingham Cable Corporation Limited ("Birmingham
Cable"), in which the Company owns a 27.5% interest, Cable London PLC ("Cable
London"), in which the Company owns a 50.0% interest, Cambridge Holding Company
Limited ("Cambridge Cable"), in which the Company owns a 100% interest and two
companies holding the franchises for Darlington and Teesside, England
("Teesside"), in which the Company owns a 100% interest.
When build-out of the Operating Companies' systems is complete, these systems
will have the potential to serve approximately 1.6 million homes and the
businesses within their franchise areas. As of December 31, 1996, the Operating
Companies' systems passed more than 975,000 homes or approximately 61% of the
homes in their franchise areas and served more than 254,000 cable subscribers,
268,000 residential telephony subscribers and 8,300 business telephony
subscribers.
The Company accounts for its interests in Birmingham Cable and Cable London
under the equity method. Through March 31, 1996, the Company also accounted for
its interest in Cambridge Cable under the equity method (see below).
Collectively, Birmingham Cable, Cable London and Cambridge Cable are referred to
herein as the "Equity Investees" (which term excludes Cambridge Cable as of
March 31, 1996).
GENERAL DEVELOPMENTS OF BUSINESS
Industry Consolidation
Based on closed and announced transactions, it is apparent that the UK cable and
telecommunications industry is undergoing a significant consolidation, which
trend the Company expects to continue in the foreseeable future. The Company has
engaged an investment advisor to assist it in evaluating the current state of
the UK marketplace, the position of other participants and its alternatives.
There can be no assurance that the Company will take any action, or in what time
frame any such action, if undertaken, might be accomplished.
SingTel Transaction
In March 1996, the Company completed the acquisition (the "Singtel Transaction")
of Singapore Telecom International Pte. Limited's ("Singapore Telecom") 50%
interest in Cambridge Cable, pursuant to the terms of a Share Exchange Agreement
executed by the parties in December 1995. In exchange for Singapore Telecom's
50% interest in Cambridge Cable and certain loans made to Cambridge Cable, with
accrued interest thereon, the Company issued approximately 8.9 million of its
Class A Common Shares and paid approximately (UK Pound)11.8 million to Singapore
Telecom. The Company has accounted for the Singtel Transaction under the
purchase method. As a result of the Singtel Transaction, the Company now owns
100% of Cambridge Cable and Cambridge Cable was consolidated with the Company
effective March 31, 1996.
DESCRIPTION OF THE COMPANY'S BUSINESS
General
Cable communications, residential telephony and business telecommunications
services are similar in that they involve the transmission of information
between two or more geographically separated sites. The cable/telephony operator
generally offers subscribers these services for a monthly fee for access to the
distribution network, plus additional charges for certain usage of the network,
premium services and other value-added services.
<PAGE>
Cable Communications
A cable communications system delivers multiple channels of television
programming, primarily entertainment and information, to the homes of
subscribers who pay a monthly fee for the service. The Operating Companies
currently offer their subscribers a choice of basic services and various premium
services, including news services, sports channels, movies, and ethnic and
foreign language programs. Each Operating Company sets its own rates, including
a monthly fee for cable communications services. From time to time, the
Operating Companies offer premium services on a trial basis without charge or at
a discount.
The demand for cable communications services is, in part, a function of both
over-the-air reception quality and alternative programming availability. While
signal reception in the UK has been considered adequate, the increasing
availability of cable and satellite programming is providing an attractive
alternative to limited over-the-air and other sources of programming, including
video tape rentals.
Various sources of programming are available to cable system operators in the
UK. British Sky Broadcasting Group, plc ("BSkyB") is currently the industry's
and the Operating Companies' primary programming supplier. BSkyB is also the
principal provider of multi-channel direct-to-home ("DTH") satellite television
services in the UK. Certain of the Operating Companies have programming
agreements with BSkyB that expired in February 1997. Effective March 1, 1997,
BSkyB's programming services are provided to all of the Operating Companies in
accordance with the BSkyB rate card (see "Competition - Cable Communications").
The Company does not believe that this will have a material effect on the
Operating Companies' financial position, results of operations or liquidity.
Alternative programming sources are developing. For example, Flextech p.l.c.
("Flextech") owns interests in or manages companies that provide additional
sources of programming to the Operating Companies. Flextech is a publicly listed
UK company and is a majority owned subsidiary of Tele-Communications, Inc.
("TCI"), a co-owner of one of the Company's strategic and financial partners.
The Company cannot predict to what extent alternative programming services will
become available or what affect future increases in the cost of programming will
have on its or the Operating Companies' future financial position, results of
operations or liquidity.
The full extent to which cable communications systems will be able to compete
with existing and future television delivery systems is currently not known. The
Company believes that the architecture of the networks the Operating Companies
are constructing will enable them more easily to implement new technologies and
provide enhanced or new services. There can be no assurance, however, that
existing, proposed or as yet undeveloped technologies will not become dominant
in the future and render cable communications systems less profitable or even
obsolete. However, the Company endeavors to monitor closely all relevant
technological developments and to cause or encourage the Operating Companies to
position themselves to remain competitive.
Residential Telephony
Residential telephony service permits subscribers to place and receive telephone
calls to and from other telephone users in the local area, the rest of the UK or
the rest of the world. The Operating Companies route most calls made by or to
its subscribers through its network interconnections with other telephony
operators which include British Telecommunications plc ("BT") and Mercury
Communications Ltd. ("Mercury"), the two principal providers of nationwide
telephony services in the UK.
Each public telephony operator is required to negotiate an interconnection
agreement with any public telephony operator that seeks one and may request
Office of Telecommunications ("OFTEL") intervention if the parties cannot agree
on certain terms. The interconnection agreements are essentially wholesale
arrangements that set forth the fees charged for completing a call originating
on, carried over or terminating on a local or national public telephony
operator's network. BT provides interconnection to all Public Telecommunications
Operators ("PTOs") under the terms of a standard interconnection agreement.
OFTEL determines the charges for all standard interconnection services.
The Operating Companies have installed high capacity, digital telephony switches
in their systems. By owning and operating their own switches, the Operating
Companies are better able to monitor calling patterns and, without relying on BT
or Mercury, can provide detailed and customized billing and offer premium
services to their subscribers.
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<PAGE>
Each of the Operating Companies (with the exception of Cambridge Cable)
participates with certain other cable companies in a central network service
center in Woking, England (the "Network Service Center") established by TeleWest
Communications plc ("TeleWest"), the Company's strategic and financial partner
in Birmingham Cable and Cable London. Such services are provided to cable
companies at a fee. The Network Service Center, which provides 24-hour a day
centralized switch engineering, interconnect access administration and related
support services, represents a centralized cost-effective approach to managing
cable telephony networks with multiple switches.
Business Telecommunications
The business telecommunications market consists of the same services provided to
the residential telephony market, as well as the provision of a variety of
advanced telecommunications services. Business users frequently require higher
transmission capacity for additional services, including central exchange
("Centrex"), high-speed data services, leased access, voice mail, video
conferencing and other services.
Operating Companies' Systems
The following table sets forth, for each Operating Company, Homes Passed, Homes
Marketed, Cable Subscriber, Residential Telephony Subscriber and Business
Telephony Subscriber information for the five years ended December 31, 1996. The
information presented below does not give effect to the Company's proportionate
ownership interests in the Equity Investees.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Homes Passed (1)
Birmingham Cable 374,451 292,503 227,110 156,720 104,076
Cable London 312,050 246,198 171,864 121,755 78,883
Cambridge Cable 188,513 151,577 115,518 75,072 36,574
Teesside 100,542 40,608
Homes Marketed (2)
Birmingham Cable 369,512 291,875 220,632 150,248 98,038
Cable London 296,416 230,325 163,564 121,755 78,845
Cambridge Cable 174,868 142,237 107,987 64,846 32,584
Teesside 92,839 34,585
Cable Subscribers (3)
Birmingham Cable 111,432 88,719 73,540 55,356 35,588
Cable London 67,877 52,871 42,977 30,111 20,452
Cambridge Cable 45,378 36,799 30,763 16,007 6,827
Teesside 30,280 14,391
Residential Telephony Subscribers (4)
Birmingham Cable 105,128 81,268 57,944 35,430 22,362
Cable London 57,495 39,608 31,121 17,577 11,967
Cambridge Cable 56,448 43,002 33,302 12,012 221
Teesside 49,612 20,094
Business Telephony Subscribers (4)
Birmingham Cable 2,994 2,154 1,504 1,158 688
Cable London 2,560 1,864 1,429 889 589
Cambridge Cable 2,227 1,779 1,253 474 22
Teesside 554 75
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<FN>
(1) A home is deemed "passed" if it can be connected to the system without
further extension of the transmission lines.
(2) A home is deemed "marketed" if it has been released to the Operating
Companies' marketing departments for sales.
- 3 -
<PAGE>
(3) A dwelling with one or more television sets connected to a system is
counted as one cable subscriber.
(4) A dwelling with one or more telephone lines connected to a system is
counted as one telephony subscriber.
</FN>
</TABLE>
Birmingham Cable Franchise Area. Birmingham Cable holds a franchise, awarded in
1988, for the cities of Birmingham and Solihull with approximately 443,000 homes
and the local delivery operator license for the Wythall franchise, a 4,000 home
franchise awarded in 1995.
Cable London Franchise Area. Cable London holds, through wholly owned
subsidiaries, the Camden, Haringey, Enfield and Hackney/Islington franchises,
which were awarded in 1989 and 1990. Cable London's franchise area covers a
contiguous area of approximately 65 square miles or roughly 20% of Greater
London and contains approximately 437,000 homes.
Cambridge Cable Franchise Area. Cambridge Cable holds, through wholly owned
subsidiaries, the Cambridge, Harlow and Ipswich/Colchester franchises, which
were awarded in 1990, and the local delivery operator license for the South East
Anglia area (the "SEA Franchise"), which was awarded in January 1995. The
franchise areas contain approximately 490,000 homes, although the build
milestones in the SEA Franchise only require Cambridge Cable to pass 104,000 of
the 205,000 homes in the SEA Franchise.
Teesside Franchise Area. Wholly owned subsidiaries of the Company hold the
Darlington and Teesside franchises which contain approximately 254,000 homes.
Network Construction Costs
Construction of integrated cable/telephony systems is capital intensive,
requiring substantial investment for "network costs" including civils (trenching
and constructing underground ducts), cable and telephony plant and network
electronics, "subscriber costs", including converters, subscriber electronics
and installation of cable from the network to the subscriber's home, and other
costs such as head-end equipment, switching offices, land and buildings,
computers and furniture and fixtures. The Company and the Operating Companies
estimate that from inception the total cost of developing and constructing the
Operating Companies' integrated cable/telephony systems will range from (UK
Pound)1.2 billion to (UK Pound)1.3 billion, although no assurance can be given
that the actual costs will not be higher. Through December 31, 1996, the
Operating Companies had incurred approximately (UK Pound)770 million to
construct their systems.
Expenses relating to the construction of the Operating Companies' integrated
cable/telephony systems have been higher than costs to construct cable
communications systems in the United States ("US"). This is due, in part, to the
nature of system construction in the UK which requires incremental costs to
provide residential telephony and business telecommunications services in
addition to cable communications services. The UK does not have an
infrastructure of existing telephone poles, overhead lines or electrical
conduits in which to run new fiber optic and coaxial cable. Therefore, all cable
installation requires newly constructed, hand-trenched, underground ducts. The
provision of residential telephony and business telecommunications services
requires the installation of additional lines, as well as the installation of
high capacity, digital telephony switches.
Revenue Sources
Cable Communications
The Operating Companies offer varying levels of cable communications service,
depending primarily on their respective channel capacities. Monthly service
rates and related charges vary in accordance with the type of service selected
by the subscriber. The Company may receive an additional monthly fee for premium
services, the charge for which varies with the type and level of service
selected by the subscriber. Additional charges are often imposed for
installation services, commercial subscribers, program guides and other
services. The Company also generates revenue from pay-per-view services and
advertising sales. Subscribers typically pay on a monthly basis and generally
may discontinue services at any time.
- 4 -
<PAGE>
Residential Telephony
The Operating Companies currently charge residential telephony subscribers a
monthly exchange line rental fee, usage fees, which are charges for each local,
long distance or international call, and fees for additional services and
initial connections.
Business Telecommunications
The Operating Companies charge business telecommunications subscribers a
connection fee based upon the number of lines being installed and for the
initial connection or reconnection to the company's network, a monthly exchange
line rental fee, usage fees, which are charges for each local, long distance or
international call, and fees for additional services.
Competition
Cable Communications
The Operating Companies' cable communications systems compete with direct
reception over-the-air broadcast television, DTH satellite-delivered television
services and private satellite master antenna television ("SMATV") systems. They
also compete, to varying degrees, with other communications and entertainment
media, including home video products, including videotape cassette recorders,
movie theaters, live theater, live sporting events, newspapers and interactive
online computer services. The extent of such competition depends upon, among
other things, price, variety and quality of the programming offered and, with
respect to broadcast television, the quality of reception. In the future, cable
communications companies may face competition from television services offered
by national public telephony operators and by other competitors using existing
or new delivery systems.
There were an aggregate of approximately 3.4 million DTH subscribers compared to
approximately 1.9 million broadband cable subscribers throughout the UK as of
December 31, 1996. BSkyB offers DTH television service and currently is the
predominant competitor in the UK multi-channel television market. Since DTH is a
satellite-based system, the DTH provider does not need an underground cable
network to provide service to its subscribers. A DTH subscriber, however, must
purchase or rent a satellite receiver and then pay monthly subscriber fees to
the DTH provider for the use of a decoder, which makes the satellite signal
usable. Although DTH service currently presents substantial competition to cable
communications service, the Company believes that cable communications may have
certain advantages over DTH. First, installation of satellite dishes may require
compliance with restrictive zoning ordinances and, for renters, landlord's
consent. Second, the satellite dishes must be installed outside of the building
with a "line-of-sight" orientation toward the transmitting satellite, which can
be problematic in urban areas. Third, DTH subscribers who purchase, as opposed
to rent, their satellite dishes must arrange and pay for any servicing required
for the dish. Fourth, without substantial improvements in existing technology,
DTH providers will not be able to offer telephony services and local-oriented
advertising and programming currently offered by cable communications operators,
or the interactive video services that the Operating Companies expect to be able
to offer in the future. The Company, however, expects DTH providers, including
BSkyB, to provide substantial competition for the foreseeable future and no
assurances can be given that they will not become an even stronger competitor.
A significant factor in favor of BSkyB is its role as the sole source supplier
of many popular cable television programs, including most sports and movies. If,
in the future, BSkyB chooses to restrict the programming it makes available to
cable communications operators or offers it at relatively higher prices, the
Operating Companies could be at a significant competitive disadvantage. Pursuant
to informal undertakings given by BSkyB to the Office of Fair Trading ("OFT")
announced in March 1995, BSkyB agreed to offer cable operators a new incentive
discount plan which would not be dependent on a cable operator taking all of
BSkyB's channels. In addition, BSkyB agreed to charge for the supply of
programming to its DTH business on a basis which is no more favorable than that
applied to cable operators and to maintain separate accounting records for such
business. Subsequently, a number of UK cable operators expressed concerns to the
OFT about BSkyB's programming charges and, in August 1995, the OFT announced
that it had approved a revision by BSkyB of its wholesale price list for the
supply of programming to cable operators. Following further complaints from UK
cable operators, the OFT conducted a review of BSkyB's position in the premium
services market, particularly with respect to sports rights (including the
informal undertakings referred to above), and a further review of BSkyB's
pricing structure and its impact on cable. In July
- 5 -
<PAGE>
1996, the OFT reported that, although BSkyB's acquisition of premium programming
may have created a barrier to entry, BSkyB had not acted anti-competitively.
BSkyB has since revised its program supply rate card to allow cable operators to
buy its programs more selectively.
In the UK Government's 1991 review of the telecommunications industry (the
"Duopoly Review"), the UK Government stated that its policy was not to allow
national public telephony operators to convey or provide entertainment services
over their existing telephony network until March 2001. This policy may be
reviewed as it relates to the conveyance of such services as early as March 1998
if OFTEL determines that removal of the restrictions would be likely to provide
more effective competition. Because of the transmission capacity limitations of
twisted pair copper wires historically used in BT's telecommunications network,
particularly between its local switching sites and its customers' homes, and the
age and condition of older portions of BT's network, the Company believes that
BT may not be able to provide cable communications service comparable to that
offered by the Operating Companies without substantial capital investment or
unless substantial improvements are made in digital compression or other
technologies.
The Independent Television Commission ("ITC") has recently confirmed that, in
its view, a video-on-demand service does not need to be licensed as a local
delivery service. In addition, the Department of Trade and Industry ("DTI") and
OFTEL have taken the view that the existing telecommunications licenses of BT
and other national public telephony operators would not prohibit them from
providing video-on-demand services over their systems. The Operating Companies
similarly are not prevented from providing video-on-demand services.
Video-on-demand services involve transmission of individual programs to a single
household in response to a particular request. In order to offer video-on-demand
services on a broad scale, the Company believes that BT would be required to
upgrade its existing telecommunications switches and to install video
distribution facilities and subscriber decoder devices. After initial trials of
video-on-demand in Colchester and Ipswich using standard telephone lines, BT has
announced that in 1997 it will offer video-on-demand on a trial basis to up to
1,000 customers connected to its Westminster cable franchise in London. No
assurance can be given that video-on-demand will not provide substantial
competition in the future.
A House of Commons select committee produced a report in July 1994 on the future
development of broadband services in the UK through national fiber optic
networks. The report contained recommendations for the lifting of current
restrictions on the provision of entertainment services over broadband networks
by persons other than licensed cable operators. One recommendation (which has
been supported by the UK Labour Party) was that the UK Government should reduce
uncertainty concerning such restrictions by directing OFTEL and the ITC to
provide, on a franchise by franchise basis, specific dates for the lifting of
such restrictions (which could be set earlier than March 2001), and that the UK
Government make clear that all restrictions on public telephony operators
conveying or providing entertainment services will be lifted by the end of 2002.
However, none of these recommendations bind the UK Government which responded to
the report in November 1994 by stating that it remained committed to its Duopoly
Review policies restricting the conveyance or provision of entertainment
services by national public telephony operators as discussed above.
The Conservative Party has held power in the UK since 1979. The next general
election in the UK will be held on May 1, 1997. At its annual party conference
in October 1995, the leader of the UK Labour Party (the primary UK opposition
party) announced that it had held discussions with BT about the removal of the
restrictions on BT providing entertainment services and had agreed that if it
were to be elected to office at the next general election, it would implement
the recommendations of the House of Commons Select Committee Report of July
1994. This would be in return for BT's agreement to connect to its optical fiber
network, at its own cost, every school, college, hospital and library in the UK.
The Labour Party has since attempted to reassure the cable communications
companies that there will be an open market for all in the information
superhighway. There can be no assurance that the UK Labour Party, if elected,
would not adopt legislation which may have a material effect on the Company's
financial position, results of operations or liquidity.
The 1996 Broadcasting Act (the "1996 Act"), which became law in July 1996,
amended the 1990 Broadcasting Act (the "Broadcasting Act," which replaced the
Cable and Broadcasting Act 1984 (the "Cable Act")) and makes provision for the
broadcasting in digital form of television and sound program services. The 1996
Act also addresses rights to televise sporting or other events of national
interest. The 1996 Act provided, that by January 31, 1997, terrestrial
television broadcasters must declare their intention to take up their guaranteed
places on terrestrial digital
- 6 -
<PAGE>
multiplexes and offered three commercial multiplexes to other interested
parties. Two consortia have submitted bids for these commercial multiplexes, and
it is expected that these multiplexes will be awarded to one of the consortia
during April 1997. The consortia are British Digital Broadcasting, comprising
BSkyB, Carlton Communications and Granada, and Digital Television Network,
comprising International Cabletel. The introduction of digital terrestrial and
digital satellite television will provide both additional programming,
terrestrial channels and hence additional competition for the Operating
Companies.
Residential Telephony
BT, which serves approximately 93% of the UK residential telephony market as of
March 31, 1996, is the Operating Companies' principal competitor in providing
local residential telephony service. As the principal end-to-end provider of
telecommunications services in the UK, BT is, and can be expected to remain, a
formidable competitor. BT has a fully-built national network and resources
substantially greater than those of the Company and the Operating Companies. BT
also offers promotional programs and additional services in order to compete
more effectively with cable/telephony operators such as the Operating Companies.
There can be no assurance that the Operating Companies will be able to compete
successfully with BT. In addition, the Operating Companies compete with cellular
telephony operators (i.e. Cellnet (60% owned by BT) and Vodafone); personal
communications network operators, such as "Mercury one 2 one" (50% owned by
Mercury and 50% owned by US West) and "Orange"; and wireless local loop
providers. They also compete with Mercury, which, through an interconnect
agreement with BT, is able to provide alternative access fixed-link residential
telephony service even though it generally has not built residential local loop
networks. Although the Operating Companies' licenses do not permit them to offer
cellular telephony services, they are not prohibited from seeking additional
licenses to do so or from entering into distribution agreements with existing
cellular telephony operators.
Business Telecommunications
Competition in the business telecommunications area has been substantial and,
because of the number of competitors in this area, is expected to intensify. BT
is the principal competitor in providing business telecommunications services.
In addition to BT, the Operating Companies compete with Mercury, as well as
other telecommunications companies, including ENERGIS Communications Limited,
MFS Communications Limited and City of London Telecommunications Limited. BT and
Mercury, which is a majority owned subsidiary of Cable and Wireless PLC, have
resources substantially greater than those of the Company and the Operating
Companies, and there can be no assurances that the Operating Companies will be
able to compete successfully with BT, Mercury or other telecommunications
companies.
In July 1996, BT's license was modified to ensure the introduction of number
portability which allows BT's existing customers to retain their existing
telephone number when they switch from BT to another carrier such as the
Operating Companies. At the end of 1995, the UK Monopolies and Mergers
Commission ("MMC") ruled that BT should pay approximately 70% of the costs
involved in number portability while other operators would pay the rest. The
July 1996 BT license modification provides for OFTEL to determine BT's
reasonable costs in providing portability and the charges BT can make to other
operators in order to recover these costs.
Legislation and Regulation
General. The operation of a cable/telephony network in the UK is regulated under
both the Broadcasting Act and the Telecommunications Act 1984 (the
"Telecommunications Act"). The operator of a cable/telephony franchise covering
over 1,000 homes must hold two principal licenses: (i) a cable television
license (called a "local delivery operator license" under the Broadcasting Act)
issued in the past under the Cable Act or since 1990 under the Broadcasting Act,
which allows the operator to provide cable television services in the franchise
area, and (ii) a telecommunications license issued under the Telecommunications
Act, which allows the operator to operate and use the physical network necessary
to provide cable television and telecommunications services. The ITC is
responsible for the licensing and regulation of cable television. The DTI is
responsible for issuing, and OFTEL is responsible for regulating the holders of
the telecommunications licenses. In addition, an operator is required to hold a
license under the Wireless Telegraphy Acts of 1949-67 for the use of microwave
distribution systems. Any system covering 1,000 homes or less requires a
telecommunications license but not a cable television license, and a system that
covers only one building or two adjacent buildings can operate pursuant to an
existing general telecommunications license.
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In addition, cable operators must comply with and are entitled to the benefits
of the New Roads and Street Works Act 1991, the principal benefit of which is to
allow cable operators to "piggy back" their construction on that of local
utilities. As a practical matter, however, the aggressive build schedules
followed by the Operating Companies make waiting for other local utilities to
undertake construction impractical.
The cable television licenses held by subsidiaries of the Operating Companies
were initially issued under the Cable Act for 15-year periods. With the
exception of the SEA Franchise (the cable television license which was granted
under the Broadcasting Act in 1995 for 15 years), the terms of these licenses
have been extended to 23 years and are scheduled to expire beginning in late
2012 (see "Cable Television License - New Cable Television Licenses and
Renewals"). The telecommunications licenses held by subsidiaries of the
Operating Companies are for 23-year periods and are scheduled to expire
beginning in late 2012 (see "Telecommunications License - New Telecommunications
Licenses; Renewal; Revocation; Transfer).
Cable Television License
General. The stated policy of the ITC is that only one cable television license
will be granted in each franchise area. Each such license gives the holder the
right to provide cable television services within the franchise area using cable
(and in the case of cable television licenses issued or renewed for 15-year
periods under the Broadcasting Act, also by means of microwave distribution
systems). Affiliates of BT, Mercury and other national public telephony
operators are currently allowed to apply for and hold cable television licenses
and, since March 1994, the telephony operators have been allowed to apply
directly for and hold licenses in new franchise areas.
Cable operators are subject to competition within their franchise areas from
direct reception over-the-air broadcast television, DTH satellite-delivered
television services and SMATV systems. With respect to the operation of a SMATV
system within a cable operator's franchise area, the DTI has stated that the
cable operator will have a right of first refusal to provide a similar or
superior service at a reasonable price before the SMATV system will be permitted
to begin operations, subject to, among other things, the cable operator being in
compliance with the build schedules of its telecommunications licenses and other
previous commitments to provide service elsewhere in its franchise areas.
New Cable Television Licenses and Renewals. Cable television licenses originally
issued under the Cable Act were for a period of 15 years and, upon expiration,
may either be extended for an eight-year period, if the cable operator holds a
23-year telecommunications license, or renewed for successive 15-year periods
under the Broadcasting Act. An application for renewal generally must be made to
the ITC within five years prior to the expiration of the license. A renewal will
be granted if the operator agrees with the ITC upon the fees to be paid and,
among other things, the operator's proposed telecommunications system is
acceptable to the DTI or OFTEL. If an operator chooses to extend its license for
an eight-year period, it will not be required to pay the annual fees referred to
below, but at the end of the eight-year period the license cannot be renewed
again and will be put out for tender and awarded to the highest bidder, as
described below. If an operator chooses to renew its license for a 15-year
period, it will be required to pay annually, during the renewal period, a
percentage to be fixed by the ITC of the operator's cable television related
revenues, plus an additional amount that the ITC believes a successful applicant
would have bid for the franchise if it were being offered as a new franchise. At
present, cable operators are only required to pay to the ITC annual fees, which
in the aggregate are intended to cover the ITC's administrative costs.
As of December 31, 1996, cable television licenses had been granted in the UK
covering franchise areas with approximately 17.8 million homes. The ITC is
continuing to offer for tender, cable television licenses for new franchise
areas covering the remaining 5.6 million homes in the UK. Under the Broadcasting
Act, a new cable television license will be granted to the applicant who submits
the highest cash bid (i.e. offers to pay the highest annual cash sum to the ITC
during each year of the license), except where it appears to the ITC that there
are "exceptional circumstances" which make it appropriate for the cable
television license to be awarded to another applicant. Under any new cable
television license, operators will be required to pay annually to the ITC,
during the term of the license, a percentage to be fixed by the ITC of the
operator's cable television related revenues, plus an additional amount equal to
the operator's cash bid. The percentage fixed by the ITC for the new franchises
so far to come up for bid under the Broadcasting Act have varied from 0% for the
term of the license to a graduated fee structure of 0% for the first five years,
3.0% for the next five years and 8.0% for the last five years. Certain entities,
including local authorities, political bodies or groups, religious organizations
and advertising agencies, are presently
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not allowed to bid for or have certain interests in entities holding cable
television licenses. Ownership restrictions also apply to holders of other
Broadcasting Act licenses or local newspapers serving the same area as that
served by the cable operator. The Secretary of State has broad discretion to
amend the rules relating to cross-media ownership and accumulations of interests
in licensed services. In May 1995, the UK Government published proposals for
certain changes relating to these rules which recognize the continuing need for
specific rules governing media ownership beyond those which apply under general
competition law but also need to liberalize existing ownership regulations both
within and across different media sectors. The 1996 Act creates a new licensing
regulation for initially up to 18 new digital terrestrial television channels.
The channels will be accommodated on six frequency groups known as multiplexes.
The 1996 Act set in place a two-tier licensing regulation for terrestrial
broadcasting comprising the licensing of digital program service. As an
inducement to encourage entrants into the digital broadcasting market, the UK
Government has said that there will be no requirements for licensees to pay
"PQRs" (percentage of qualifying revenues) for the 12 years of the franchise
period, and further that, subject to various conditions, a multiplex license can
be rolled over at the end of the franchise period for an additional 12 years.
The 1996 Act also established new media ownership rules, abolished certain
ownership and control rules and introduced new rules which limit, to 15%, the
total audience share attainable by commercial over-the-air television
broadcasters as calculated over the preceding 12 months.
Transfers of Licenses. The Broadcasting Act permits the transfer of a license to
a third party with the prior written consent of the ITC. The ITC has absolute
discretion to refuse any proposed transfer of a license. In addition, certain
changes in ownership of the licensee and certain acquisitions of an interest
(direct or indirect) in the licensee require 28 days notification to the ITC.
Revocation of Licenses. The ITC can, after consultation with the DTI and OFTEL,
revoke a cable television license if an operator fails to comply with its
conditions or with any direction of the ITC and the ITC considers revocation to
be in the public interest. If there is any change in either the nature or
characteristics of an operator that is a corporate entity, or any change in the
persons controlling or having an interest in it, the ITC can decide to revoke
the license if due to such changes it would not have awarded the license under
the new circumstances. With respect to licenses issued under the Broadcasting
Act, the ITC can also impose fines and shorten the license period.
Obligations of Licensees. Under the Broadcasting Act, cable operators may carry
certain licensed program services on their systems and are responsible for
ensuring that advertising and foreign satellite programs included by them in
their services conform to the restrictions set forth in the codes on
advertising, sponsorship and programming produced by the ITC. Both the cable
television and the telecommunications licenses impose obligations on the
licensees to provide any information which either OFTEL or the ITC may require
for purposes of exercising their statutory functions.
Telecommunications License
General. A telecommunications license permits the cable operator to operate the
system over which it provides cable communications and telecommunications
services. It also authorizes the operator to connect its system to other cable
communications or telecommunications systems including those operated by the
broadcasting authorities, satellite systems and certain other systems outside
the UK. Although the telecommunications license is granted for a particular
area, it is not exclusive, and as a result, a cable operator will have to
compete in the provision of telephony and other telecommunications services with
national public telephony operators, such as BT and Mercury, and other telephony
companies in their franchise areas.
A cable operator who holds a telecommunications license is subject to the
Telecommunications Code (the "Code"), which is contained in the
Telecommunications Act. The Code grants certain rights in respect of the keeping
of apparatus such as ducts, cables and equipment on private or public land and
the procedures to be used for installation of equipment on public highways.
Cable operators are generally required by the Code to enter into bonding
obligations with local authorities in order to ensure reinstatement of roads and
streets in the event the operator becomes insolvent, ceases to carry on its
business or has its telecommunications license terminated.
New Telecommunications Licenses; Renewal; Revocation; Transfer.
Telecommunications licenses that have been issued to date to cable operators
have been for periods of either 15 or 23 years. In connection with the grant or
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renewal of any telecommunications license involving new construction,
construction specifications and timetables (generally expressed in terms of the
number of homes passed) will be reviewed by the applicable authorities and will
be incorporated in the terms of the license that is ultimately granted, except
for new franchises, where the construction obligations are enforced by the ITC.
It is OFTEL's responsibility to enforce compliance with the build schedules and
the other conditions of the license. In addition, certain changes in ownership
of the licensee and certain acquisitions of an interest (direct or indirect) in
the licensee require 30 days' notification to DTI. Failure to comply with the
build schedules or other conditions, the occurrence of certain insolvency events
or changes in control of the licensee which are deemed by the DTI to be contrary
to the UK's national security interests or relations with any other country
could result in revocation of both the telecommunications license and the cable
television license. Unlike a cable television license, a telecommunications
license is not transferable.
Technical Requirements. The principal technical requirements for cable/telephony
systems are contained in the telecommunications licenses, which address, among
other things, technical requirements for transmissions, performance and radio
interference restrictions.
Telephony Operations
Duopoly Review. In 1991, pursuant to the Duopoly Review, the requirement that
cable operators provide voice telephony services only as an agent for either BT
or Mercury was removed, thereby enabling cable operators to provide all forms of
wired telecommunications services, including the ability to independently switch
their own traffic. In addition, cable operators were granted the right to
require BT and Mercury to provide interconnection.
Interconnection Agreements. The commercial viability of telephony and other
telecommunications services provided by cable operators depends on their ability
to connect cost-effectively with other telecommunications systems. Cable
operators' systems must connect with systems operated by national public
telephony operators, international telephony companies or other telephony
operators, as the case may be, for calls that do not originate and terminate on
their systems. Each national public telephony operator (including BT and
Mercury, as well as the Operating Companies) is required to negotiate an
interconnection agreement with any other such operator that seeks one and
intervention can be requested from OFTEL if the parties cannot agree on certain
terms. OFTEL also has the power to enforce the obligations of a party under an
interconnection agreement. In addition, BT is required by its license to publish
details of all interconnection agreements into which it enters.
In March 1994, OFTEL published a new framework for interconnection charges which
was to be developed in three stages. The first stage, which became effective
immediately, established an "interim list" of standard interconnect charges, for
guidance, based on the interconnection determination by OFTEL between BT and
Mercury in December 1993. Any disputes on conveyance rates and connection
charges referred to OFTEL would be determined in accordance with the BT/Mercury
determination. The second stage involved amendments to BT's license, including
implementation of (i) a list of standard interconnection charges, (ii) a more
transparent process for relating costs to charges and (iii) accounting
separation of BT's network, access and retail businesses. The necessary
modifications have now been made to BT's license. Charges are determined on an
interim basis for each fiscal year commencing April 1 based on BT's interim
accounts. A final determination and retrospective adjustments are made, if
necessary, once BT's final accounts are published. The Company does not believe
that this will have a material effect on the Company's financial position,
results of operations or liquidity. In November 1996, OFTEL issued an interim
determination for the year ending March 31, 1997, based on BT's accounts for
each of the fiscal years ended March 31, 1996 and 1995. No final determination
has yet been made for the fiscal year ended March 31, 1996. The third stage in
this process involved the publication by OFTEL in July 1995 of a statement on
the future of interconnection, competition and related issues entitled
"Effective Competition: Framework for Action" (the "Effective Competition
Document").
With respect to interconnection, OFTEL proposed moving to an incremental cost
basis for interconnection charges. Following earlier consultations on price
control in December 1996, OFTEL published a consultative document entitled
"Network Charges from 1997," in which OFTEL redefined its proposals for network
charges.
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The proposals established a framework effectively comprising four different
approaches OFTEL intends to adopt in relation to the pricing of BT's
interconnection services, dependent on the degree of competition as follows:
(i) for "competitive services", BT will be free to set the charges;
(ii) for "prospectively competitive services", BT will be subject to
a price cap on each such service equal to the percentage change
in the UK domestic retail price index ("RPI," plus zero);
(iii) for bottleneck and non-competitive services, two baskets of
services will be introduced, each subject to a cap equal to RPI
less X (a number yet to be determined); and
(iv) for interconnection-specific services, BT will be subject to
individual price caps equal to RPI less X (a number yet to be
determined).
The prices BT sets will be subject to the application of the fair trading
license condition (see below) and OFTEL intends to use "floors" and "ceilings"
as the main yardsticks to consider whether a charge is anti-competitive or not.
The consultative document does not propose values for X in the price cap
formulas but states that OFTEL is proposing that the statement to be released in
May 1997 (following consultation on the December 1996 document and a further
consultative document to be released in March 1997) will deal primarily with the
values of X and the starting values for interconnect charges. If BT agrees to
modifications to its license to implement these proposals, it is intended that
the new charge controls be in place on August 1, 1997, simultaneously with BT's
new retail price cap (see "Price Regulation"). As with other proposed
modifications to BT's license, BT's consent will be required and while BT has
accepted the retail price cap and the fair trading condition, no assurance can
be given that BT will accept modifications to implement these proposals. If that
consent is not forthcoming, OFTEL has indicated that the matter will be referred
to the MMC for determination. In such event, OFTEL has indicated that the
present charges for setting interconnect charges will continue until such time
as the MMC determines the issue.
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, although OFTEL does not currently
propose to require other operators to publish their interconnection agreements.
In the future, requirements may also be applied to other operators in respect of
interconnection obligations, such as accounting separation and transparency of
calculation of interconnection charges, if OFTEL concludes that any such
operator has market power and is in a position to distort competition to the
detriment of consumers.
Cable operators with adjoining franchises were initially unable to connect their
networks without the involvement of BT or Mercury unless the combined areas were
relatively small and the franchises were under common control. The Duopoly
Review relaxed this policy and operators of adjacent cable franchises are now
able to interconnect their systems irrespective of whether they are under common
ownership. In addition, applications by cable operators to connect more distant
franchises will also be considered by the DTI.
The Duopoly Review led to certain amendments being made to BT's license which
could potentially require operators who interconnect with BT to make a payment
(the "Access Deficit Payment") to BT, designed to compensate BT for losses
incurred by it in providing local exchange lines and which arise because of the
restrictions imposed on it in rebalancing its prices. However, as proposed in
the Effective Competition Document, BT's license has more recently been further
amended to remove the constraint in BT's license on its ability to raise line
rental prices and, accordingly, the Access Deficit Payment requirement has been
terminated.
Price Regulation. BT is currently subject to price regulation on approximately
65% of its revenues. Under these regulations, BT must, through July 31, 1997,
not increase its overall prices for public switched telephony services on an
annual basis by more than (or, as the case may be, must decrease such prices by
at least) the amount of the change in the domestic RPI minus 7.5%. Within this
limitation, BT may not increase its charges for certain specified services by
more than certain other price limitations. In particular, BT may not increase
charges for connections, private circuits and other switched services by more
than the domestic RPI minus 2%.
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OFTEL's June 1996 statement on the pricing of telecommunications services from
1997 set out proposals to modify the retail price control imposed on BT. These
proposals were agreed to by BT and modifications were made to BT's license in
October 1996 at the same time that the fair trading condition was incorporated
(see below). The new price control will be RPI minus 4.5% and will apply from
August 1, 1997 until 2001, but only in relation to the bottom 80% of residential
customers by billed amounts. However, OFTEL has indicated that this is likely to
be the last retail price control imposed on BT. OFTEL has conceded that this, in
combination with the proposed changes to network charges, will result in "vastly
more price freedom for a still dominant BT" at both the retail and network
level. However, OFTEL expects that the new fair trading provision (described
below) will protect others from BT's dominant position.
The new price control (together with the new fair trading provision) represents
a further withdrawal by OFTEL of detailed regulation giving BT greater pricing
freedom and reducing the number of activities which remain subject to price
control.
In October 1996 OFTEL modified BT's license to introduce a new fair trading
condition which provides for similar prohibitions to those set out in Articles
85 and 86 of the EC Treaty. The new license condition prohibits entering into
anti-competitive agreements and the abuse of a dominant position in the UK, in
addition to the prohibitions contained in the UK Competition Act and Fair
Trading Act. It will replace other, more specific fair trading conditions in
BT's license. While the condition will not render anti-competitive agreements
and practices void from the outset or impose automatic penalties for
non-compliance, it will enable the Director General to issue final and
provisional orders with respect to any such activity. The fair trading condition
is to be introduced in Mercury's license following the current statutory
consultation on its license modifications and will, in due course, be introduced
in other operators' licenses including those of the Operating Companies. The
Company does not believe that this will have a material effect on the Operating
Companies financial position, results of operations or liquidity.
OFTEL linked the acceptance by BT of the fair trading condition to the retail
price controls, presenting the proposals as a single set of modifications. BT
consented to OFTEL's proposal and the license modifications but initiated
judicial review proceedings in the High Court as to the legality under UK and EC
law of the introduction of the fair trading condition. BT's challenge was
unsuccessful and BT has advised OFTEL that it will not be filing an appeal.
OFTEL has published draft guidelines on the operation of the fair trading
condition which explain how it will determine the relevant market and apply the
prohibitions set out in the new condition. OFTEL has stated in these guidelines
that it proposes to follow the approach used by the European Commission and the
European Court of Justice in determining issues such as market definition,
dominance and abuse of market power. These measures represent a reduction of
detailed regulation and move by OFTEL to become more of a fair trading
authority.
The Duopoly Review resulted in the modification of BT's license to permit it to
offer discounts, subject to several conditions. Most importantly, BT is not
allowed to offer discounted services in local markets without offering them
nationally. For so long as this policy remains in effect, BT's ability to
respond to local competition will be restricted. In its Effective Competition
Document, OFTEL has proposed to make no change to its policy on limiting the
flexibility available to BT to target large volume customers or on restrictions
on BT offering locally-discounted services.
In the Effective Competition Document, OFTEL has also made certain proposals
with respect to a relatively basic voice telephony universal service, including
the funding of such service on a fair, transparent and proportional basis. In
December 1995, OFTEL published a consultation document entitled "Universal
Telecommunications Services," which contains a proposal for an independently
administered universal service fund (expected to be set up in August 1997) which
would receive payments from operators (unless the operators were prepared to
offer special tariffs, approved by OFTEL, in lieu of such payments) to be used
to make payments to those operators who incur a net loss as a result of
delivering universal service to customers. In February 1997, OFTEL issued for
consultation its further proposals for universal service in the UK. It has
concluded that, after benefits, the current net cost involved in the provision
of universal service in the UK is not proven and does not justify setting up a
universal service fund in the short-term. It has, however, proposed to amend
BT's license so as to require it to offer a "Life line" service package which
will be low cost, available to everyone and allow incoming calls and emergency
outgoing calls only. Amendments to BT's existing "Low User Scheme" are also
proposed together with an agreement with BT designed to reduce the number of
disconnections for debt. The proposals also include new draft guidelines
relating to the
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provision of public call boxes by BT, as well as suggestions for special help
for the elderly and disabled. OFTEL intends to carry out a full review of
universal service arrangements in the UK in 1999.
The rates of other telecommunications companies, including the Operating
Companies, are not regulated by any UK Government entity, although conditions
prohibiting undue discrimination and unfair cross-subsidy are commonly contained
in telecommunications licenses (including those held by the Operating Companies
and BT).
Equal Access. One advantage cable operators have maintained in marketing their
telephony services has been their ability to offer direct access to the system
of another operator (i.e. Mercury), whose long distance charges have
historically been less than those charged by BT. At present, in most areas, the
only way in which a residential BT customer can choose to route calls over the
Mercury trunk network is by purchasing a special telephone or using an indirect
access through which it is possible to select the Mercury network in preference
to the BT network. The stated policy of the UK Government in the Duopoly Review
is to introduce true equal access, whereby all local telephony systems will have
to offer access to each fixed link trunk system without discrimination. BT's and
Mercury's licenses have been amended to enable OFTEL to require them to make
available equal access, either by pre-selection or on a call-by-call basis,
subject to, among other things, a cost-benefit study indicating that the gains
to consumers will outweigh the likely costs. A cost-benefit study has now been
conducted and OFTEL has concluded that the study does not justify introducing
such equal access arrangements. Under existing licenses, a cable operator could
not be required by OFTEL to introduce equal access until it had acquired a
market share of 25% of local exchange lines. Many cable operators opposed the
equal access proposals in the Duopoly Review in this respect because equal
access would reduce one of the current attractions of a cable operator's
telephony system. BT's willingness, however, to offer cable operators
interconnection on competitive terms potentially will enable cable operators to
offer equal access benefits to their customers on attractive terms. The timing
and terms of the introduction of equal access is unclear. However, OFTEL stated
in July 1996 that it considers the "well established operator" threshold of 25%
of customer connections in a relevant market to be a useful guide in determining
whether a non-dominant operator should, in the future, be required to grant
indirect access to other operators. This threshold would not automatically mean
that the operator would be required to grant indirect access, but OFTEL would
investigate the issue further in respect of that operator once that threshold
was reached.
Telephone Number Portability. Telephony subscribers changing their phone
services to a cable operator must currently change their telephone numbers. BT
does not offer customers number portability (the ability of telephony customers
to keep their telephone number when changing telephony providers), which has
proven to be a serious impediment for cable operators in obtaining business
telephony customers. Cable operators have responded by trying, among other
things, to convince business customers to use cable/telephony lines for outbound
telephone calls while maintaining their Mercury or BT lines for inbound calls.
The Duopoly Review led to BT's license being amended to enable OFTEL to require
BT to allow number portability, and OFTEL directed BT to provide number
portability for certain BT customers who wish to transfer telephony services to
the cable operator Videotron. BT's charges for providing number portability were
referred to OFTEL, which proposed modifications to BT's license giving OFTEL the
power to determine such charges. In April 1995, OFTEL announced that, following
BT's failure to accept the proposed license modification concerning the costs of
portability, the matter was being referred to the MMC for resolution. In
December 1995, it was announced that the MMC had concluded that modifications to
BT's license were necessary to prevent BT from being able to recover from other
operators all its costs in bringing about number portability. The MMC
recommended that the split of costs between BT and other operators should be
approximately 70%: 30%, with BT bearing the larger share. The Network
Interoperability Consultants Committee (the "NICC") has produced a technical
specification for number portability based on existing capabilities within
exchanges. OFTEL has stated that it is looking to cable operators to implement
the NICC specifications as quickly as possible and that, although number
portability will be phased in gradually, it is expected to become a widespread
option for customers over the next few years. BT's license was modified in July
1996 to incorporate a condition which supports the implementation of number
portability. Commercial terms for number portability are now included in the BT
standard interconnect agreement.
Future Developments
In August 1995, OFTEL issued a consultative document entitled "Beyond the
Telephone, the Television and the PC," which looks at the way in which broadband
switched mass-market services ("BSM services") may develop in the UK, examines
the regulatory issues they will give rise to and considers some possible
solutions. Of importance to
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cable operators is the suggestion that dominant operators should be required to
provide broadband conveyance (including switching) as a network business to
service providers who should be allowed to have direct commercial relationships
with individual customers. Requirements for accounting separation and the
possible need for some form of price control, if this were to become a
regulatory issue, are also considered. OFTEL suggests that BT is likely, at an
early stage, to be considered a dominant operator, possibly when, even allowing
for the existing policy restrictions on BT's conveyance or provision of
broadcast entertainment services (mentioned above), it starts to roll out BSM
services aimed at covering a significant portion of the UK, either nationally or
in a specific regional market. OFTEL suggests that regulation, along the above
lines, should only be introduced to the cable sector when it becomes dominant,
either nationally or in a specific regional market, and is able to compete on
equal terms with BT and any other BSM services distributor. In the meantime, the
document recognizes the importance of encouraging continuing local investment in
the cable industry's infrastructure. The document also raises the question
whether license obligations on cable operators to provide cable communications
services where their systems have been installed should not apply to BSM
services (other than the broadcast entertainment services for which they have
exclusive cable distribution rights in their franchise areas) until they become
dominant in their relevant markets.
In December 1996, OFTEL published a consultative document on the practical
regulation of conditional access services for digital television. OFTEL has five
key objectives:
(i) To ensure that the control of conditional access technology is
not used to distort, restrict or prevent competition. This would
be of significance where a conditional access service provider
has an associated programming supply business and is also
providing conditional access services to its competitors.
(ii) To ensure that control of conditional access technology does not
lead to consumer choice being artificially constrained in
relation to consumers' choice of equipment or the range of
services available via that equipment.
(iii) To facilitate consumers being able to access services on more
than one delivery mechanism or switch between delivery
mechanisms, without having to incur unnecessary additional
expense.
(iv) To facilitate consumer choice by ensuring ease of access to
information about the range of services available and ease of
selection of those services.
(v) To ensure control of proprietary conditional access technology
is not exploited anti-competitively (e.g. by excessive pricing
for the use of that technology).
The guidelines set out the approach OFTEL will take in regulating conditional
access systems. This includes, in particular, enforcing the conditions of the
Conditional Access Service Class and the Advances Television Standard
Regulations (the "Regulations"), which both came into force in January 1997.
The Regulations include requirements on :
o The offer of technical conditional access services to
broadcasters "on a fair, reasonable and non-discriminatory
basis".
o The licensing on fair, reasonable and non-discriminatory terms
of industrial property rights in conditional access technology
to manufacturers of consumer equipment. This would prevent
licensors from including in the license agreements conditions
that would prohibit or discourage manufacturers of consumer
decoder units from including a common interface allowing
connection with other conditional access systems or means
specific to another conditional access system.
o The provision for cost-effective trans-control by cable
operators.
In February 1997, OFTEL issues a statement containing proposed measures designed
to promote competition in services over telecommunications networks and
addressing a number of issues of particular relevance to independent service
providers ("ISP"). The measures include an updated classification of BT's
systems (or network services) business ("SB") and supplemental services (or
enhanced services) business ("SSB") (the importance of which is that
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this classification underpins the prices that BT charges itself since BT's SSB
must pay the same for BT's network services as any ISP is required to) and
additional information to be published in BT's financial statements with respect
to the split between its SB and SSB. BT is being allowed greater flexibility to
offer lower prices to ISPs in order to promote competitively priced services to
all levels (although access to cost-based interconnection prices is largely to
be limited to operators installing networks). ISPs are now becoming entitled to
allocations of numbering capacity without having to have individual
telecommunications licenses.
International Facilities Liberalization
In June 1996, the DTI invited applications for licenses to install and operate
telecommunications systems for the provision of all types of telecommunications
services between the UK and the rest of the world.
The granting of international facilities licenses in December 1996 to 44
applicants marked the removal of one of the few remaining barriers to full
competition in the provisioning of infrastructure and services in the UK. On
January 1, 1998, the European Union will follow suit.
Employees
Comcast, through Comcast UK Cable Partners Consulting, Inc. ("Comcast
Consulting"), a wholly owned subsidiary of Comcast U.K. Holdings, Inc.
("Holdings"), which is an indirect, wholly owned subsidiary of Comcast, provides
all administrative services to the Company and provides all management and
consulting services to the Operating Companies that the Company is obligated to
provide.
As of December 31, 1996, Teesside, Birmingham Cable, Cable London and Cambridge
Cable had approximately 330, 680, 520 and 460 employees, respectively. The
Company believes that the Operating Companies' relationships with their
employees are good.
ITEM 2 PROPERTIES
The Company does not own or lease any significant real or personal property
other than through its interests in the Operating Companies.
The Operating Companies own their cable and telephony plant and equipment and
generally own or lease, under long-term leases, the head-end and switching node
sites. The Company believes that the Operating Companies' facilities are
adequate to serve their existing customers.
ITEM 3 LEGAL PROCEEDINGS
The Company and the Operating Companies are not party to litigation which, in
the opinion of the Company's management, will have a material adverse effect on
the Company's financial position, results of operations or liquidity.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through a solicitation
of proxies or otherwise, during the fourth quarter of the year ended December
31, 1996.
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has no executive officers. Certain officers of Comcast Consulting,
however, are deemed by the Company to be executive officers of the Company (the
"Designated Executive Officers") for purposes of US federal securities laws. The
current term of office of each of the officers expires at the first meeting of
the Board of Directors of the Company following the next Annual Meeting of
Shareholders, presently scheduled to be held in June 1997, or as soon thereafter
as each of their successors is duly elected and qualified.
- 15 -
<PAGE>
The following table sets forth certain Designated Executive Officers of the
Company, and their ages and designated positions as of February 1, 1997.
<TABLE>
<CAPTION>
Name Age Positions
<S> <C> <C>
Ralph J. Roberts 76 Chairman of the Board of Directors; Director
Julian A. Brodsky 63 Vice Chairman of the Board of Directors; Director
Brian L. Roberts 37 President; Director
Lawrence S. Smith 49 Executive Vice President; Director
John R. Alchin 48 Senior Vice President and Treasurer; Director
Stanley L. Wang 56 Senior Vice President
- ---------------
</TABLE>
Ralph J. Roberts was elected as Chairman of the Board of Directors of the
Company in September 1994. Mr. Roberts has served as a Director and Chairman of
the Board of Directors of Comcast for more than five years. He has been the
President and a Director of Sural Corporation ("Sural"), a privately-held
investment company and Comcast's controlling shareholder for more than five
years. Mr. Roberts currently has voting control of Sural. Mr. Roberts devotes a
major portion of his time to the business and affairs of Comcast. Mr. Roberts is
also a Director of Storer Communications, Inc.
Julian A. Brodsky was elected to the Board of Directors of the Company in
September 1992. He has served as a Director and Vice Chairman of Comcast for
more than five years. He serves as Treasurer and a Director of Sural, and is a
Director of Storer Communications, Inc. and RBB Fund, Inc. Mr. Brodsky devotes a
major portion of his time to the business and affairs of Comcast.
Brian L. Roberts was elected to the Board of Directors of the Company in
September 1992 and was elected President in August 1995. Mr. Roberts has served
as President and as a Director of Comcast for more than five years. He presently
serves as Vice President and a Director of Sural and is a Director of Teleport
Communications Group Inc. and Storer Communications, Inc. Mr. Roberts devotes a
major portion of his time to the business and affairs of Comcast. He is a son of
Ralph J. Roberts.
Lawrence S. Smith was elected to the Board of Directors in September 1994. Mr.
Smith has served as Executive Vice President of the Company since June 1996 and
Senior Vice President-Accounting and Administration of the Company from
September 1994 to June 1996. Mr. Smith has served as Executive Vice President of
Comcast since December 1995 and as Senior Vice President-Accounting and
Administration of Comcast for more than five years prior to December 1995. Mr.
Smith is the Principal Accounting Officer of the Company and Comcast, and is a
Director of Teleport Communications Group Inc. and is a Partnership Board
Representative of Sprint Spectrum Holdings Company, L.P. Mr. Smith devotes a
substantial amount of his time to the business and affairs of Comcast.
John R. Alchin was elected to the Board of Directors and designated Senior Vice
President and Treasurer of the Company in September 1994. He has served as
Treasurer and Senior Vice President of Comcast for more than five years. Mr.
Alchin is the Principal Financial Officer of the Company and Comcast. Mr. Alchin
devotes a substantial amount of his time to the business and affairs of Comcast.
Stanley L. Wang was designated Senior Vice President of the Company in September
1992. Mr. Wang has served as Senior Vice President, Secretary and General
Counsel of Comcast for more than five years and is a Director of Storer
Communication, Inc. Mr. Wang devotes a substantial amount of his time to the
business and affairs of Comcast.
- 16 -
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Class A Common Shares of the Company are traded in the over-the-counter
market and are included on Nasdaq under the symbol CMCAF. There is no
established public trading market for the Class B Common Shares of the Company.
The Class B Common Shares are convertible, on a share for share basis, into
Class A Common Shares. The following table sets forth, for the indicated
periods, the high and low sale price range of the Class A Common Shares as
furnished by Nasdaq. Such price ranges have been rounded to the nearest
one-eighth.
Class A
High Low
1996
First Quarter.................. $14 1/4 $11 1/2
Second Quarter................. 14 1/4 11 7/8
Third Quarter.................. 13 7/8 9 5/8
Fourth Quarter................. 14 10
1995
First Quarter.................. $19 1/4 $13 7/8
Second Quarter................. 16 5/8 13 1/4
Third Quarter.................. 17 3/8 14 1/8
Fourth Quarter................. 16 1/4 11 3/4
The Company does not anticipate paying any cash dividends on its common shares
for the foreseeable future (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources"). The Company is prohibited from paying dividends on the Class B
Common Shares without also paying pro rata dividends on the Class A Common
Shares. The Company has not paid cash dividends since inception. The 2007
Discount Debentures contain restrictive covenants which limit the Company's
ability to pay dividends.
The Class A Common Shares and Class B Common Shares vote together. Each record
holder of Class A Common Shares is entitled to one vote per share and each
record holder of Class B Common Shares is entitled to ten votes per share. In
the election of directors, Class A Common Shares and Class B Common Shares do
not have cumulative voting rights.
As of March 1, 1997, there were 29 record holders of the Company's Class A
Common Shares. Holdings, through its ownership of the Company's Class B Common
Shares, controls 77.6% of the total voting power of all of the outstanding
shares of the Company.
- 17 -
<PAGE>
ITEM 6 SELECTED FINANCIAL AND OTHER DATA
The following selected consolidated financial data have been derived from and
should be read in conjunction with the consolidated financial statements and
notes thereto included in Part II Item 8 of this Form 10-K.
The Company (1)(5)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992 (1)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service income............................ (UK Pound)31,358 (UK Pound)1,530 (UK Pound) (UK Pound) (UK Pound)
Consulting fee income..................... 1,070 1,313 1,356 1,248
Operating loss............................ (24,553) (11,809) (2,824) (1,124) (32)
Equity in net losses of affiliates........ (18,432) (23,677) (16,289) (13,143) (8,260)
Net loss.................................. (40,575) (28,962) (16,266) (13,183) (8,251)
Net loss per share (2).................... (.84) (0.70) (0.54) (0.50) (0.31)
Balance Sheet Data:
At year end:
Total assets......................... 484,492 431,889 254,739 95,239 61,993
Noncurrent liabilities............... 216,027 207,978 9,106
Contributed capital.................. 359,049 287,810 287,863 127,162 82,662
Accumulated deficit.................. (120,017) (79,442) (50,480) (34,214) (21,031)
</TABLE>
See Notes to Selected Financial and Other Data on page 21.
- 18 -
<PAGE>
Birmingham Cable - Selected Consolidated Financial and Other Data
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(In thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service income ........................ (UK Pound)52,472 (UK Pound)39,004 (UK Pound)27,505 (UK Pound)18,345 (UK Pound)7,218
Operating loss ........................ (11,694) (11,345) (9,674) (7,864) (5,485)
Net loss .............................. (20,378) (14,279) (9,293) (8,967) (6,401)
Balance Sheet Data:
At year end:
Total assets ..................... 325,646 331,589 160,044 119,018 78,123
Noncurrent liabilities ........... 188,863 185,864 6,222 4,989 827
Other Data:
Operating income (loss) before
depreciation and amortization(4).. 7,996 3,110 25 (2,217) (3,240)
</TABLE>
Cable London - Selected Consolidated Financial and Other Data
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(In thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service income ........................ (UK Pound)40,091 (UK Pound)30,277 (UK Pound)21,830 (UK Pound)14,403 (UK Pound)6,907
Operating loss ........................ (13,906) (13,808) (10,524) (9,863) (7,392)
Net loss .............................. (21,241) (17,675) (11,354) (11,304) (8,945)
Balance Sheet Data:
At year end:
Total assets ..................... 170,497 136,450 104,994 85,648 61,323
Noncurrent liabilities ........... 60,831 73,772 27,659 21,118 15,894
Other Data:
Operating income (loss) before
depreciation and amortization(4).. 956 (2,961) (3,531) (5,869) (5,431)
</TABLE>
Cambridge Cable - Selected Consolidated Financial and Other Data (5)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(In thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service income ........................ (UK Pound)6,401 (UK Pound)20,585 (UK Pound)12,064 (UK Pound)3,571 (UK Pound)725
Operating loss ........................ (2,133) (12,838) (8,807) (7,437) (3,702)
Net loss .............................. (4,419) (20,398) (12,223) (7,930) (3,354)
Balance Sheet Data:
At year end:
Total assets ..................... 118,885 99,275 56,799 24,263
Noncurrent liabilities ........... 109,662 74,916 22,163 1,174
Other Data:
Operating income (loss) before
depreciation and amortization(4).. 35 (5,688) (4,171) (4,770) (2,565)
</TABLE>
See Notes to Selected Financial and Other Data on page 21.
- 19 -
<PAGE>
Operating Companies - Proportionate Combined Selected Consolidated Financial and
Other Data
The following proportionate combined selected consolidated financial data have
been derived from the consolidated financial statements of the Company,
Birmingham Cable and Cable London, after giving effect to the Company's
ownership interests in each of the Operating Companies as of December 31, 1996.
As of December 31, 1996, the Company had a 27.5% interest in Birmingham Cable, a
50.0% interest in Cable London, a 100% interest in Cambridge Cable and a 100%
interest in Teesside. The Company believes that presentation of proportionate
combined selected consolidated financial data, although not in accordance with
US Generally Accepted Accounting Principles ("GAAP"), facilitates the
understanding and assessment of its operating performance since the Company
accounts for its interests in Birmingham Cable and Cable London under the equity
method. Prior to March 31, 1996, the Company accounted for its interest in
Cambridge Cable under the equity method (see Note 5 to Selected Financial and
Other Data on page 21). Beginning on March 31, 1996, the financial position and
results of operations of Cambridge Cable were consolidated with those of the
Company. The financial position and results of operations of Teesside are
consolidated with those of the Company.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(In thousands, except homes passed and subscriber information)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service income ................... (UK Pound)72,057 (UK Pound)47,965 (UK Pound)30,532 (UK Pound)15,810 (UK Pound)6,161
---------------- ---------------- ---------------- ---------------- ---------------
Operating, selling, general
and administrative expenses .... 74,728 60,629 37,093 24,123 12,331
Depreciation and amortization .... 30,570 18,923 10,839 6,215 2,734
---------------- ---------------- ---------------- ---------------- ---------------
Operating loss ................... (33,241) (31,587) (17,400) (14,528) (8,904)
---------------- ---------------- ---------------- ---------------- ---------------
Interest expense, net ............ 15,172 10,160 3,726 1,516 680
---------------- ---------------- ---------------- ---------------- ---------------
Operating Companies' proportionate
net loss ....................... (48,413) (41,747) (21,126) (16,044) (9,584)
Reconciliation to the Company's
consolidated net loss (3) ...... 7,838 12,785 4,860 2,861 1,333
---------------- ---------------- ---------------- ---------------- ---------------
Company's consolidated net loss ..((UK Pound)40,575) ((UK Pound)28,962) ((UK Pound)16,266) ((UK Pound)13,183) ((UK Pound)8,251)
================ ================ ================ ================ ===============
Other Data:
Operating loss before depreciation
and amortization (4) ........... ((UK Pound)2,671) ((UK Pound)12,664) ((UK Pound)6,561) ((UK Pound)8,313) ((UK Pound)6,170)
Homes passed (6) ................. 547,910 395,610 263,820 178,988 104,597
Cable subscribers (7) ............ 140,200 101,991 72,449 46,266 26,827
Telephony subscribers (8) ........ 168,563 108,598 67,157 31,768 12,852
</TABLE>
See Notes to Selected Financial and Other Data on page 21.
- 20 -
<PAGE>
Notes to Selected Financial and Other Data
(1) Since the transfer of the interests in the Equity Investees from Holdings
to the Company in 1992 did not result in a change in control of the Equity
Investees, the financial information of the Company has been presented
herein as if the Company held such interests since their initial
acquisition by Holdings.
(2) For 1992 through 1994, net loss per share has been presented on a pro forma
basis as if the restructuring of the Company's equity in September 1994 and
the conversion of the redeemable convertible preference shares issued in
connection with the acquisition of Teesside were outstanding for all
periods presented.
(3) Includes the effects of differences between the Company's ownership
percentages in the Operating Companies during the relevant periods and its
ownership percentages as of December 31, 1996, as well as net income
(losses) of the Company and its subsidiaries, other than Teesside and
Cambridge in 1996.
(4) Operating income (loss) before depreciation and amortization is commonly
referred to in the Company's business as "operating cash flow (deficit)."
Operating cash flow (deficit) is a measure of a company's ability to
generate cash to service its obligations, including debt service
obligations, and to finance capital and other expenditures. In part due to
the capital intensive nature of the Company's business and the significant
level of non-cash depreciation and amortization expense, operating cash
flow (deficit) is frequently used as one of the bases for comparing
cable/telephony companies. Operating cash flow (deficit) does not purport
to represent net income or net cash provided by operating activities, as
those terms are defined under GAAP, and should not be considered as an
alternative to such measurements as an indicator of the Company's or
Operating Companies' performance.
(5) As a result of the Singtel Transaction, the Company owns 100% of Cambridge
Cable and has consolidated the financial position and results of operations
of Cambridge Cable beginning on March 31, 1996. The 1996 results of
operations information for Cambridge Cable is for the three months ended
March 31, 1996.
(6) A home is deemed "passed" if it can be connected to the system without
further extension of the transmission lines.
(7) A dwelling with one or more television sets connected to the system is
counted as one cable subscriber.
(8) A dwelling with one or more telephone lines connected to the system is
counted as one telephony subscriber.
- 21 -
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Comcast UK Cable Partners Limited and its subsidiaries (the "Company"), an
indirect controlled subsidiary of Comcast Corporation ("Comcast") (see Item 5 -
"Market for the Registrant's Common Equity and Related Shareholder Matters"),
was incorporated in 1992 to develop, construct, manage and operate the interests
of Comcast in the United Kingdom ("UK") cable and telecommunications industry.
As of December 31, 1996, the Company has interests in four operations (the
"Operating Companies"): Birmingham Cable Corporation Limited ("Birmingham
Cable"), in which the Company owns a 27.5% interest, Cable London PLC ("Cable
London"), in which the Company owns a 50.0% interest, Cambridge Holding Company
Limited ("Cambridge Cable"), in which the Company owns a 100% interest and two
companies holding the franchises for Darlington and Teesside, England
("Teesside"), in which the Company owns a 100% interest.
When build-out of the Operating Companies' systems is complete, these systems
will have the potential to serve approximately 1.6 million homes and the
businesses within their franchise areas. As of December 31, 1996, the Operating
Companies' systems passed more than 975,000 homes or approximately 61% of the
homes in their franchise areas and served more than 254,000 cable subscribers,
268,000 residential telephony subscribers and 8,300 business telephony
subscribers.
The Company accounts for its interests in Birmingham Cable and Cable London
under the equity method. Through March 31, 1996, the Company also accounted for
its interest in Cambridge Cable under the equity method (see below).
Collectively, Birmingham Cable, Cable London and Cambridge Cable are referred to
herein as the "Equity Investees" (which term excludes Cambridge Cable as of
March 31, 1996).
General Developments of Business
Industry Consolidation
Based on closed and announced transactions, it is apparent that the UK cable and
telecommunications industry is undergoing a significant consolidation, which
trend the Company expects to continue in the foreseeable future. The Company has
engaged an investment advisor to assist it in evaluating the current state of
the UK marketplace, the position of other participants and its alternatives.
There can be no assurance that the Company will take any action, or in what time
frame any such action, if undertaken, might be accomplished.
SingTel Transaction
In March 1996, the Company completed the acquisition (the "Singtel Transaction")
of Singapore Telecom International Pte. Limited's ("Singapore Telecom") 50%
interest in Cambridge Cable, pursuant to the terms of a Share Exchange Agreement
executed by the parties in December 1995. In exchange for Singapore Telecom's
50% interest in Cambridge Cable and certain loans made to Cambridge Cable, with
accrued interest thereon, the Company issued approximately 8.9 million of its
Class A Common Shares and paid approximately (UK Pound)11.8 million to Singapore
Telecom. The Company has accounted for the Singtel Transaction under the
purchase method. As a result of the Singtel Transaction, the Company now owns
100% of Cambridge Cable and Cambridge Cable was consolidated with the Company
effective March 31, 1996.
Liquidity and Capital Resources
The Company
Historically, the Company has financed its cash requirements, including its
investments in the Equity Investees, through capital contributions from its
shareholders, as well as with the proceeds from the Company's initial public
offering of 15.0 million of its Class A Common Shares (net proceeds of $209.4
million or (UK Pound)132.6 million) in September 1994 and from the Company's
offering of its $517.3 million principal amount at maturity 11.20% Senior
Discount Debentures due 2007 (the "2007 Discount Debentures") (net proceeds of
$291.1 million or (UK Pound)186.9 million)
- 22 -
<PAGE>
in November 1995. Interest accretes on the 2007 Discount Debentures at 11.20%
per annum compounded semi-annually from November 15, 1995 to November 15, 2000,
after which date interest will be paid in cash on each May 15 and November 15
through November 15, 2007. The 2007 Discount Debentures contain restrictive
covenants which limit the Company's ability to pay dividends. The Operating
Companies have not paid any dividends or advances to the Company and are not
expected to pay any dividends or advances in the foreseeable future.
Except for its working capital requirements, the Company's cash needs will
depend on management's investment decisions. Investment considerations include
(i) whether further capital contributions will be made to the Equity Investees,
(ii) whether the Operating Companies can obtain debt financing, (iii) whether
the Operating Companies will be able to generate positive operating cash flow,
(iv) the timing of the build-out of the Operating Companies' systems, and (v)
whether there may be future acquisitions and trades funded in cash or Company
shares. There are no agreements or negotiations for specific material
acquisitions currently pending.
Historically, the Company has made investments in the Equity Investees in
conjunction with proportionate investments by its strategic and financial
partners. The Company made capital contributions and advances to the Operating
Companies in the aggregate of (UK Pound)92.1 million, (UK Pound)71.4 million and
(UK Pound)49.3 million during the years ended December 31, 1996, 1995 and 1994,
respectively. Of these amounts, (UK Pound)10.7 million, (UK Pound)25.2 million
and (UK Pound)47.0 million relate to capital contributions and advances to the
Equity Investees during the years ended December 31, 1996, 1995 and 1994,
respectively. Although the Company is not contractually committed to make any
additional capital contributions or advances to any of the Equity Investees, it
currently intends to fund its share of the amounts necessary for capital
expenditures and to finance operating deficits. Failure to do so could dilute
the Company's ownership interests in the Equity Investees.
The Company estimates that the Operating Companies will require an aggregate of
approximately (UK Pound)420 million to (UK Pound)520 million after 1996 to
complete the build-out of their systems. Although the Company expects that its
strategic and financial partners in the Equity Investees will provide their
share of such funds, they are not contractually obligated to do so, and thus no
assurance of such funding can be given. If the Company's strategic and financial
partners fail to provide such financing, the Equity Investees will be required
to seek additional funds elsewhere. Such additional funds may come from the
Company, from new strategic and financial partners, from borrowings under
existing or new credit facilities or from other sources, although there can be
no assurance that any such financing would be available on acceptable terms and
conditions. The Company and its strategic and financial partners generally have
veto rights over the Equity Investees' debt financing decisions. Failure of any
Operating Company to obtain financing necessary to complete the build-out of its
system could result in loss of its cable franchises and licenses.
The Company is exposed to market risk including changes in foreign currency
exchange rates. To manage the volatility relating to these exposures, the
Company enters into various derivative transactions pursuant to the Company's
policies in areas such as counterparty exposure and hedging practices. Positions
are monitored using techniques including market value and sensitivity analysis.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments. The credit risks
associated with the Company's derivative financial instruments are controlled
through the evaluation and monitoring of the creditworthiness of the
counterparties. Although the Company may be exposed to losses in the event of
nonperformance by the counterparties, the Company does not expect such losses,
if any, to be significant.
The Company has entered into certain foreign exchange option contracts ("FX
Options") as a normal part of its foreign currency risk management efforts.
During 1995, the Company entered into certain foreign exchange put option
contracts ("FX Puts") which may be settled only on November 16, 2000. These FX
Puts are used to limit the Company's exposure to the risk that the eventual cash
outflows related to net monetary liabilities denominated in currencies other
than its functional currency (the UK Pound Sterling or "UK Pound") (principally
the 2007 Discount Debentures) are adversely affected by changes in exchange
rates. As of December 31, 1996 and 1995, the Company has (UK Pound)250.0 million
notional amount of FX Puts to purchase United States ("US") dollars at an
exchange rate of $1.35 per (UK Pound)1.00 (the "Ratio"). The FX Puts provide a
hedge, to the extent the exchange rate falls below the Ratio, against the
Company's net monetary liabilities denominated in US dollars since gains and
losses realized on the FX Puts are offset against foreign exchange gains or
losses realized on the underlying net liabilities. Premiums paid for the FX Puts
of (UK Pound)13.9 million are included in foreign exchange put options and other
in the Company's consolidated balance sheet, net of related amortization. These
premiums are being amortized over the terms of the related
- 23 -
<PAGE>
contracts. As of December 31, 1996, the FX Puts had a carrying value of (UK
Pound)10.7 million and an estimated fair value of (UK Pound)3.2 million. The
differences between the carrying amounts and the estimated fair value of the FX
Puts were not significant as of December 31, 1995.
In the fourth quarter of 1995, in order to reduce hedging costs, the Company
sold foreign exchange call option contracts ("FX Calls") to exchange (UK
Pound)250.0 million notional amount. The Company received (UK Pound)3.4 million
from the sale of these contracts. These contracts may only be settled on their
expiration dates. Of these contracts, (UK Pound)200.0 million notional amount,
with an exchange ratio of $1.70 per (UK Pound)1.00, expired unexercised in
November 1996 while the remaining contract, with a (UK Pound)50.0 million
notional amount and an exchange ratio of $1.62 per (UK Pound)1.00, has a
settlement date in November 2000. In the fourth quarter of 1996, in order to
continue to reduce hedging costs, the Company sold additional FX Calls, for
proceeds of approximately (UK Pound)2.1 million, to exchange (UK Pound)200.0
million notional amount at average exchange ratio of $1.75 per (UK Pound)1.00.
These contracts may only be settled on their expiration dates during the fourth
quarter of 1997. The FX Calls are marked-to-market on a current basis in the
Company's consolidated statement of operations.
As of December 31, 1996 and 1995, the estimated fair value of the liabilities
related to the FX Calls, as recorded in the Company's consolidated balance
sheet, was (UK Pound)7.2 million and (UK Pound)3.7 million, respectively.
Changes in fair value between measurement dates relating to the FX Calls
resulted in exchange losses of (UK Pound)1.3 million during the year ended
December 31, 1996 in the Company's consolidated statement of operations. There
were not significant exchange gains or losses relating to these contracts for
the year ended December 31, 1995.
The Company's ability to meet its long-term liquidity and capital requirements
is contingent upon the Operating Companies' ability to obtain external financing
and generate positive operating cash flow and the continued funding by the
Company's strategic and financial partners. The Company believes that the net
proceeds from the sale of the 2007 Discount Debentures along with strategic
partner funding, to the extent necessary, will be sufficient to fund the
Company's expected capital contributions and advances to Birmingham Cable and
Cable London and to fund development and construction costs for Cambridge Cable
and Teesside through April 1998.
The Operating Companies
The following is a discussion of the liquidity and capital resources of each of
the Operating Companies. Such financial information has not been adjusted for
the Company's proportionate ownership percentages in the Operating Companies.
Birmingham Cable. Historically, Birmingham Cable's primary sources of funding
have been capital contributions and loans from the Company and the Company's
strategic and financial partners.
In February 1995, a subsidiary of Birmingham Cable issued 175,000 cumulative (UK
Pound)1.00 redeemable five year term preference shares for a paid up value of
(UK Pound)175.0 million. The cash received from the preference shares is being
used by Birmingham Cable, subject to certain restrictions contained in the
Birmingham Facility (as defined below) for capital expenditures and working
capital requirements relating to the build-out of its systems. The preference
shareholder has an option to require Birmingham Cable to purchase its
shareholding. This option is guaranteed by a syndicate of 15 banks which granted
the Birmingham Facility and is exercisable on or before February 14, 2000. The
preference shares have an effective dividend rate, including advanced
corporation tax, of 8.00%.
In February 1995, the Company entered into a (UK Pound)175.0 million five year
revolving credit facility (the "Birmingham Facility") which provided for
conversion into a five year term loan on March 31, 2000. In March 1997, the
terms of the Birmingham Facility were amended to extend the maturity of the term
loan to December 31, 2005 and to amend the required cash flow levels (as
defined) and certain other terms. The Birmingham Facility will be used by the
Company, subject to certain restrictions, to fund the redemption of the
preference shares.
The Birmingham Facility contains restrictive covenants which limit the Company's
ability to enter into arrangements for the acquisition and sale of property and
equipment, investments, mergers and the incurrence of additional debt. Certain
of these covenants require that certain minimum build requirements, financial
ratios and cash flow levels be maintained and contain restrictions on dividend
payments. The Company's three principal shareholders' right to receive
consulting fee payments from the Company has been subordinated to the banks
under the Birmingham Facility. The payment of consulting fees is restricted
until the Company meets certain financial ratio tests under the
- 24 -
<PAGE>
Birmingham Facility. The Company has pledged the shares of its material
subsidiaries to secure the Birmingham Facility. Upon a change of control, all
amounts due under the Birmingham Facility become immediately due and payable.
Birmingham Cable enters into interest rate exchange agreements ("Swaps") as a
normal part of its risk management efforts to limit its exposure to adverse
fluctuations in interest rates. Using Swaps, Birmingham Cable agrees to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed upon notional amount. In
conjunction with the Birmingham Facility, a subsidiary of Birmingham Cable and
Barclays Bank PLC entered into a five year (UK Pound)175.0 million Swap, whereby
the subsidiary receives fixed interest at a rate of 8.83% and pays floating rate
interest at the six month London Interbank Offered Rate ("LIBOR"). In addition,
a subsidiary of Birmingham Cable entered into a second series of five year
interest Swaps with three banks. Under the agreements, the subsidiary pays fixed
rate interest at 9.20% and receives floating rate interest at six month LIBOR,
based upon the outstanding notional amount of the Swaps. As of December 31,
1996, the notional amount outstanding on the second series of Swaps was (UK
Pound)106.0 million and will increase to (UK Pound)160.0 million by January 2,
1998. While Swaps represent an integral part of Birmingham Cable's interest rate
risk management program, their incremental effect on interest expense for the
years ended December 31, 1996 and 1995 was not significant.
The Company estimates that approximately (UK Pound)53.0 million will be required
in 1997 to continue development and construction of Birmingham Cable's
cable/telephony network. An additional (UK Pound)20.0 million to (UK Pound)40.0
million is expected to be required to complete the build-out in subsequent
years. The Company expects that the majority of such funds will be provided by
the Birmingham Facility. Any additional funding may come from the Company or its
strategic and financial partners, borrowings under new credit facilities, or
from other sources, although there can be no assurance that any such financing
will be available on acceptable terms and conditions.
Cable London. Historically, Cable London's primary source of funding has been
capital contributions and loans from the Company and the Company's strategic and
financial partner. In June 1995, Cable London entered into a (UK Pound)60.0
million revolving credit facility (the "London Facility") with various banks.
The London Facility has a two year term and an interest rate at LIBOR plus 2.5%
(8.75% as of December 31, 1996). The London Facility has been used by Cable
London for capital expenditures and working capital requirements relating to the
build-out of its systems. The Company's right to receive consulting fee payments
from Cable London has been subordinated to the banks under the London Facility.
In addition, the Company's shares in Cable London have been pledged to secure
the London Facility. Upon a change of control, all amounts due under the London
Facility become immediately due and payable.
Cable London is obligated to repay the London Facility on June 30, 1997. Cable
London is in the process of refinancing the London Facility and will attempt to
complete this refinancing by June 30, 1997, although there can be no assurance
that any such refinancing will be available on acceptable terms and conditions.
The Company believes that Cable London's obligation to repay the London Facility
does not result in the impairment of the Company's investment in Cable London as
of December 31, 1996.
The Company estimates that approximately (UK Pound)42.0 million will be required
in 1997 to continue development and construction of Cable London's
cable/telephony network. An additional (UK Pound)80.0 million to (UK Pound)100.0
million is expected to be required to complete the build-out in subsequent
years. The Company expects that the majority of such funds and Cable London's
1997 debt maturity requirements will be provided by the refinancing of the
London Facility and by the Company's strategic and financial partner, to the
extent necessary. Any additional funding may come from the Company or its
strategic and financial partner, borrowings under new credit facilities or from
other sources, although there can be no assurance that any such financing will
be available on acceptable terms and conditions.
Cambridge Cable. Historically, Cambridge Cable's primary source of funding has
been capital contributions and loans from the Company and Singapore Telecom
prior to March 1996. The Company estimates that approximately (UK Pound)33.0
million will be required in 1997 to continue development and construction of
Cambridge Cable's cable/telephony network. An additional (UK Pound)90.0 million
to (UK Pound)120.0 million is expected to be required to complete the build-out
in subsequent years. The Company expects that a portion of such funds will be
provided by the Company, borrowings under credit facilities, or from other
sources, although there can be no assurance that any such financing will be
available on acceptable terms and conditions.
- 25 -
<PAGE>
Teesside. Historically, Teesside's primary source of funding has been capital
contributions and loans from the Company. The Company estimates that
approximately (UK Pound)53.0 million will be required in 1997 to continue
development and construction of Teesside's cable/telephony network. An
additional (UK Pound)50.0 million to (UK Pound)70.0 million is expected to be
required to complete the build-out in subsequent years. The Company expects that
such funds will be provided by the Company, borrowings under new credit
facilities, or from other sources, although there can be no assurance that any
such financing will be available on acceptable terms and conditions.
Statement of Cash Flows
Cash and cash equivalents decreased (UK Pound)98.9 million as of December 31,
1996 from December 31, 1995, increased (UK Pound)62.1 million as of December 31,
1995 from December 31, 1994 and increased (UK Pound)96.9 million as of December
31, 1994 from December 31, 1993. Changes in cash and cash equivalents resulted
from cash flows from operating, financing and investing activities which are
explained below.
Net cash (used in) provided by operating activities amounted to ((UK Pound)3.0)
million, (UK Pound)491,000 and (UK Pound)5.3 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The changes in net cash provided
by operating activities for the respective periods are primarily due to changes
in working capital as a result of the timing of receipts and disbursements.
Net cash provided by financing activities, which includes the issuances of
securities as well as borrowings, was (UK Pound)2.1 million, (UK Pound)176.0
million and (UK Pound)155.0 million for the years ended December 31, 1996, 1995
and 1994, respectively. During 1995, the Company received proceeds of (UK
Pound)192.5 million in connection with its offering of the 2007 Discount
Debentures and paid premiums of (UK Pound)13.9 million in connection with the
purchase of the FX Puts. During 1994, the Company received proceeds of (UK
Pound)134.6 million from its initial public offering and proceeds from
borrowings from shareholders, net of repayments, of (UK Pound)20.5 million.
Net cash used in investing activities was (UK Pound)98.0 million, (UK
Pound)114.3 million and (UK Pound)63.5 million for the years ended December 31,
1996, 1995, and 1994, respectively. During 1996, net cash used in investing
activities includes the acquisition of Cambridge Cable of (UK Pound)10.4
million, net of cash acquired, capital expenditures of (UK Pound)72.3 million
and capital contributions and advances to affiliates of (UK Pound)10.7 million.
In 1995, the Company purchased (UK Pound)43.1 million of short-term investments,
made capital contributions and advances to affiliates of (UK Pound)25.8 million
and had capital expenditures of (UK Pound)45.3 million. During 1994, the Company
purchased (UK Pound)14.1 million of short-term investments and made capital
contributions and advances to affiliates of (UK Pound)47.0 million.
Results of Operations
The Company
The Company recognized net losses of (UK Pound)40.6 million, (UK Pound)29.0
million and (UK Pound)16.3 million for the years ended December 31, 1996, 1995
and 1994 respectively, representing increases of (UK Pound)11.6 million or 40%
from 1995 to 1996 and (UK Pound)12.7 million or 78% from 1994 to 1995. The
increases in the Company's net losses are due to interest expense on the 2007
Discount Debentures in 1996 and 1995, the effects of the continuing construction
of Teesside's cable/telephony network and the effects of the Singtel Transaction
in 1996.
Substantially all of the increases in service income, operating expenses,
selling, general and administrative expenses, and depreciation and amortization
expense from 1995 to 1996 are attributable to the effects of the continuing
construction of Teesside's cable/telephony network and the consolidation of the
results of operations of Cambridge Cable beginning on March 31, 1996. Cambridge
Cable's service income, operating expenses, selling, general and administrative
expenses and depreciation and amortization expense were (UK Pound)20.4 million,
(UK Pound)8.0 million, (UK Pound)12.8 million and (UK Pound)9.2 million,
respectively, for the nine months ended December 31, 1996. Substantially all of
the increases in service income, operating expenses, selling, general and
administrative expenses and depreciation and amortization expense from 1994 to
1995 are attributable to the effects of the continuing construction of
Teesside's cable/telephony network which commenced in the third quarter of 1994.
Comcast U.K. Consulting, Inc. ("UK Consulting"), a wholly owned subsidiary of
the Company, earns consulting fee income under consulting agreements with the
Equity Investees. The consulting fee income is generally based on a percentage
of gross revenues or a fixed amount per dwelling unit in the Equity Investees'
franchise areas.
- 26 -
<PAGE>
Management fee expense is incurred under agreements between the Company on the
one hand, and Comcast and Comcast UK Cable Partners Consulting, Inc. ("Comcast
Consulting"), an indirect wholly owned subsidiary of Comcast, on the other,
whereby Comcast and Comcast Consulting provide consulting services to the Equity
Investees on behalf of the Company and management services to the Company. Such
management fees are based on Comcast's and Comcast Consulting's cost of
providing such services.
Interest expense for the years ended December 31, 1996, 1995 and 1994 was (UK
Pound)23.6 million, (UK Pound)3.5 million and (UK Pound)1.0 million,
respectively, representing increases of (UK Pound)20.1 million from 1995 to 1996
and (UK Pound)2.5 million from 1994 to 1995. The increases are primarily
attributable to interest expense on the 2007 Discount Debentures.
Investment income for the years ended December 31, 1996, 1995 and 1994 was (UK
Pound)12.6 million, (UK Pound)11.8 million and (UK Pound)3.9 million,
respectively, representing increases of (UK Pound)800,000 from 1995 to 1996, and
(UK Pound)7.9 million from 1994 to 1995. The increases are primarily
attributable to the increase in the average balance of cash, cash equivalents
and short-term investments held by the Company, primarily as a result of the
proceeds from the offering of the 2007 Discount Debentures in November 1995 and
the proceeds from the Company's initial public offering in September 1994.
Equity in net losses of affiliates for the years ended December 31, 1996, 1995
and 1994 was (UK Pound)18.4 million, (UK Pound)23.7 million and (UK Pound)16.3
million, respectively, representing a decrease of (UK Pound)5.3 million or 22%
from 1995 to 1996 and an increase of (UK Pound)7.4 million or 45% from 1994 to
1995. The decrease from 1995 to 1996 is attributable to the consolidation of
Cambridge Cable effective March 31, 1996, partially offset by the effects of
increases in the net losses of Birmingham Cable and Cable London. The increase
from 1994 to 1995 is attributable to the increases in net losses of the Equity
Investees.
Exchange (gains) losses and other for the years ended December 31, 1996, 1995
and 1994 were ((UK Pound)13.5) million, (UK Pound)1.7 million and (UK
Pound)18,000, respectively, representing changes of (UK Pound)15.2 million from
1995 to 1996 and (UK Pound)1.7 million from 1994 to 1995. These changes
primarily result from the impact of fluctuations in the valuation of the UK
Pound on the 2007 Discount Debentures, which are denominated in US Dollars, and
on the Company's foreign exchange call option contracts. The Company's results
of operations will continue to be affected by exchange rate fluctuations.
The Operating Companies
Due to the similar nature of their operations, the following discussion with
respect to the Operating Companies' results of operations for the years ended
December 31, 1996, 1995 and 1994 is based on their proportionate combined
results of operations. Such proportionate combined results of operations have
been derived from the financial statements of the Company and the Equity
Investees, after giving effect to the Company's ownership interests in each of
the Operating Companies as of December 31, 1996. The Company believes that
presentation of proportionate combined financial data, although not in
accordance with generally accepted accounting principles, facilitates the
understanding and assessment of its operating performance since the Company
accounts for its interests in Birmingham Cable, Cable London and Cambridge Cable
(through March 31, 1996) under the equity method. The results of operations of
Teesside and Cambridge Cable (subsequent to March 31, 1996) are consolidated
with those of the Company.
The Operating Companies account for costs and expenses applicable to the
construction and operation of their cable telecommunications systems under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 51,
"Financial Reporting by Cable Television Companies." Under SFAS No. 51, during
the period while a system is partially under construction and partially in
service (the "Prematurity Period"), costs of telecommunications plant, including
materials, direct labor and construction overhead are capitalized.
Subscriber-related costs and general and administrative costs are expensed as
incurred. Costs incurred in anticipation of servicing a fully operating system
that will not vary regardless of the number of subscribers are partially
expensed and partially capitalized based upon the percentage of average actual
or estimated subscribers, whichever is greater, to the total number of
subscribers expected at the end of the Prematurity Period (the "Fraction").
During the Prematurity Period, depreciation and amortization of system assets is
determined by multiplying the depreciation and amortization of the total
capitalized system assets expected at the end of the Prematurity Period by the
Fraction. At the end of the Prematurity Period, depreciation and amortization of
system assets is based on the remaining undepreciated cost at that date.
- 27 -
<PAGE>
Proportionate combined service income was (UK Pound)72.1 million, (UK Pound)48.0
million and (UK Pound)30.5 million for the years ended December 31, 1996, 1995
and 1994, respectively, representing increases of (UK Pound)24.1 million or 50%
from 1995 to 1996 and (UK Pound)17.5 million or 57% from 1994 to 1995.
Substantially all of the growth in service income during these periods was due
to increases in the number of cable communications and telephony subscribers,
primarily as a result of additional homes passed. Approximately one-half of the
Operating Companies' service income for the years ended December 31, 1996, 1995
and 1994, respectively, is derived from monthly subscription charges relating
primarily to cable communications services and approximately one-half of their
service income for these periods is derived primarily from usage charges
relating to telephony services.
Proportionate combined operating, selling, general and administrative expenses
were (UK Pound)74.7 million, (UK Pound)60.6 million and (UK Pound)37.1 million
for the years ended December 31, 1996, 1995 and 1994, respectively, representing
increases of (UK Pound)14.1 million or 23% from 1995 to 1996 and (UK Pound)23.5
million or 63% from 1994 to 1995. Substantially all of the increases were
attributable to the continued development of Teesside's operations and increased
business activity resulting from the growth in the number of subscribers and
development of the Operating Companies' franchise areas.
Proportionate combined depreciation and amortization expense was (UK Pound)30.6
million, (UK Pound)18.9 million and (UK Pound)10.8 million for the years ended
December 31, 1996, 1995 and 1994, respectively, representing increases of (UK
Pound)11.7 million or 62% from 1995 to 1996 and (UK Pound)8.1 million or 75%
from 1994 to 1995. These increases were due to certain of the Operating
Companies' discrete build areas ending their Prematurity Periods as set out
under SFAS No. 51, as well as an increase in the percentage used to calculate
depreciation expense as a result of an increased number of subscribers in those
discrete franchise areas remaining in their Prematurity Period.
Proportionate combined interest expense was (UK Pound)18.0 million, (UK
Pound)13.8 million and (UK Pound)4.2 million for the years ended December 31,
1996, 1995 and 1994, respectively, representing increases of (UK Pound)4.2
million or 30% from 1995 to 1996 and (UK Pound)9.6 million or 229% from 1994 to
1995. The increases were primarily attributable to additional loans from
shareholders and borrowings under credit facilities.
Proportionate combined investment income was (UK Pound)2.9 million, (UK
Pound)3.6 million and (UK Pound)478,000 for the years ended December 31, 1996,
1995 and 1994, respectively, representing a decrease of (UK Pound)700,000 or 19%
from 1995 to 1996 and an increase of (UK Pound)3.1 million from 1994 to 1995.
The decrease from 1995 to 1996 and the increase from 1994 to 1995 were
attributable to a decrease and increase, respectively, in the average balance of
cash, cash equivalents and restricted cash held by the Operating Companies
during the respective periods.
- 28 -
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Comcast UK Cable Partners Limited
We have audited the accompanying consolidated balance sheet of Comcast UK Cable
Partners Limited (a company incorporated in Bermuda) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and of cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comcast UK Cable Partners Limited
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 28, 1997
- 29 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Comcast UK Cable Partners Limited
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Comcast UK Cable Partners Limited (a
company incorporated in Bermuda) and subsidiaries for the year ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Comcast UK
Cable Partners Limited and subsidiaries for the year ended December 31, 1994 in
conformity with the accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 17, 1995
- 30 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in (UK Pound)000's, except share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................ (UK Pound)63,314 (UK Pound)162,231
Short-term investments ........................................................... 61,466 57,240
Accounts receivable, less allowance for
doubtful accounts of (UK Pound)1,338 and(UK Pound)40 .......................... 2,922 135
Other current assets ............................................................. 5,219 4,585
---------------- -----------------
Total current assets .......................................................... 132,921 224,191
---------------- -----------------
INVESTMENTS IN AFFILIATES ............................................................ 69,472 127,858
---------------- -----------------
PROPERTY AND EQUIPMENT ............................................................... 231,616 47,750
Accumulated depreciation ......................................................... (12,885) (1,271)
---------------- -----------------
Property and equipment, net ...................................................... 218,731 46,479
---------------- -----------------
DEFERRED CHARGES ..................................................................... 60,734 23,162
Accumulated amortization ......................................................... (8,368) (3,600)
---------------- -----------------
Deferred charges, net ............................................................ 52,366 19,562
---------------- -----------------
FOREIGN EXCHANGE PUT OPTIONS AND OTHER, net .......................................... 11,002 13,799
---------------- -----------------
(UK Pound)484,492 (UK Pound)431,889
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............................................ (UK Pound)23,208 (UK Pound)11,658
Current portion of long-term debt ................................................ 1,463 84
Foreign exchange call options .................................................... 4,086 1,577
Due to affiliates ................................................................ 676 2,224
---------------- -----------------
Total current liabilities ..................................................... 29,433 15,543
---------------- -----------------
LONG-TERM DEBT, less current portion ................................................. 202,626 196,341
---------------- -----------------
FOREIGN EXCHANGE CALL OPTIONS AND OTHER .............................................. 3,079 2,184
---------------- -----------------
LONG-TERM DEBT, due to shareholder ................................................... 10,322 9,453
---------------- -----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred shares, (UK Pound).01 par value - authorized,
10,000,000 shares; issued none ................................................
Class A common shares, (UK Pound).01 par value -
authorized, 50,000,000 shares; issued, 37,231,997
and 28,372,334 ................................................................ 372 284
Class B common shares,(UK Pound).01 par value -
authorized, 50,000,000 shares; issued, 12,872,605 ............................. 129 129
Additional capital ............................................................... 358,548 287,397
Accumulated deficit .............................................................. (120,017) (79,442)
---------------- -----------------
Total shareholders' equity .................................................... 239,032 208,368
---------------- -----------------
(UK Pound)484,492 (UK Pound)431,889
================ ================
</TABLE>
See notes to consolidated financial statements.
- 31 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in (UK Pound)000's, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Service income ...................... (UK Pound)31,358 (UK Pound)1,530 (UK Pound)
Consulting fee income ............... 1,070 1,313 1,356
----------------- ----------------- -----------------
32,428 2,843 1,356
----------------- ----------------- -----------------
COSTS AND EXPENSES
Operating ........................... 12,211 683
Selling, general and administrative . 25,073 7,815 777
Management fees ..................... 2,997 3,105 2,175
Depreciation and amortization ....... 16,700 3,049 1,228
----------------- ----------------- -----------------
56,981 14,652 4,180
----------------- ----------------- -----------------
OPERATING LOSS ......................... (24,553) (11,809) (2,824)
OTHER (INCOME) EXPENSE
Interest expense .................... 23,627 3,539 1,036
Investment income ................... (12,555) (11,758) (3,901)
Equity in net losses of affiliates .. 18,432 23,677 16,289
Exchange (gains) losses and other ... (13,482) 1,695 18
----------------- ----------------- -----------------
16,022 17,153 13,442
----------------- ----------------- -----------------
NET LOSS ...............................((UK Pound)40,575) ((UK Pound)28,962) ((UK Pound)16,266)
================= ================= =================
NET LOSS PER SHARE (PRO FORMA IN 1994) . ((UK Pound).84) ((UK Pound).70) ((UK Pound).54)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (PRO FORMA IN 1994) ..... 48,216 41,245 30,117
================= ================= =================
</TABLE>
See notes to consolidated financial statements.
- 32 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................ ((UK Pound)40,575) ((UK Pound)28,962) ((UK Pound)16,266)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... 16,700 3,049 1,228
Amortization on foreign exchange contracts ............ 2,752 (75) (150)
Non-cash interest expense ............................. 23,209 3,539 723
Non-cash investment income ............................ (2,854) (5,016) (1,761)
Exchange (gains) losses ............................... (18,857) 944
Equity in net losses of affiliates .................... 18,432 23,677 16,289
Net increase in foreign exchange contracts and other .. (199) 619 567
---------------- ----------------- -----------------
(1,392) (2,225) 630
Increase in accounts receivable and other
current assets ...................................... (1,154) (2,658) (1,292)
Increase in accounts payable and accrued expenses ..... 1,045 10,002 1,225
(Decrease) increase in due to affiliates .............. (1,548) (4,628) 4,734
---------------- ----------------- -----------------
Net cash (used in) provided by operating activities (3,049) 491 5,297
---------------- ----------------- -----------------
FINANCING ACTIVITIES
Proceeds from borrowings ................................ 192,542
Repayment of debt ....................................... (38)
Debt acquisition costs .................................. (6,089)
Purchase of foreign exchange put options ................ (13,855)
Proceeds from sale of foreign exchange call options ..... 2,125 3,415
Borrowings from shareholders ............................ 32,647
Repayment of loans to shareholders ...................... (12,193)
Issuances of shares, net ................................ 134,560
Other ................................................... (53)
---------------- ----------------- -----------------
Net cash provided by financing activities ......... 2,087 175,960 155,014
---------------- ----------------- -----------------
INVESTING ACTIVITIES
Acquisition, net of cash acquired ....................... (10,373)
Purchases of short-term investments, net ................ (4,226) (43,141) (14,099)
Capital contributions and advances to affiliates ........ (10,667) (25,829) (46,963)
Capital expenditures .................................... (72,297) (45,308) (1,718)
Deferred charges and other .............................. (392) (59) (680)
---------------- ----------------- -----------------
Net cash used in investing activities ............. (97,955) (114,337) (63,460)
---------------- ----------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................. (98,917) 62,114 96,851
CASH AND CASH EQUIVALENTS, beginning of year ............... 162,231 100,117 3,266
---------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS, end of year ..................... (UK Pound)63,314 (UK Pound)162,231 (UK Pound)100,117
================ ================= =================
</TABLE>
See notes to consolidated financial statements.
- 33 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
A1 Preferred A2 Preferred A3 Preferred B Preferred
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994.............. 51,425 (UK Pound)514 8,075 (UK Pound)8,075 24,009 (UK Pound)24,009 43,653 (UK Pound)43,653
Net loss...................
Shares issued under
former shareholders
agreement................ 1,729 18 271 271
Shares issued in
connection with
Teesside acquisition ....
Shares issued in
connection with
Initial Public Offering .
Conversion of shares
in connection with
Initial Public Offering .
Restructuring..............(53,154) (532) (8,346) (8,346) (24,009) (24,009) (43,653) (43,653)
------ ------------- ----- --------------- ------ ---------------- ------ -----------------
BALANCE,
DECEMBER 31, 1994............
Net loss...................
Other......................
------ ------------- ----- --------------- ------ ---------------- ------ -----------------
BALANCE,
DECEMBER 31, 1995............
Net loss...................
Shares issued in
connection with
Singtel Transaction......
------ ------------- ----- --------------- ------ ---------------- ------ -----------------
BALANCE,
DECEMBER 31, 1996............ (UK Pound) (UK Pound) (UK Pound) (UK Pound)
====== ============= ===== =============== ====== ================ ====== =================
</TABLE>
<TABLE>
<CAPTION>
Redeemable Convertible
A Ordinary B Ordinary Preference A Common
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994.............. 6 (UK Pound)6 4 (UK Pound) (UK Pound) (UK Pound)
Net loss...................
Shares issued under
former shareholders
agreement................
Shares issued in
connection with
Teesside acquisition .... 13,620 13,620
Shares issued in
connection with
Initial Public Offering . 15,000 150
Conversion of shares
in connection with
Initial Public Offering . (13,620) (13,620) 1,431 14
Restructuring.............. (6) (6) (4) 11,941 120
--- ----------- --- ---------- ------- -------------- ------ -------------
BALANCE,
DECEMBER 31, 1994............ 28,372 284
Net loss...................
Other......................
--- ----------- --- ---------- ------- -------------- ------ -------------
BALANCE,
DECEMBER 31, 1995............ 28,372 284
Net loss...................
Shares issued in
connection with
Singtel Transaction...... 8,860 88
--- ----------- --- ---------- ------- ------------- ------ -------------
BALANCE,
DECEMBER 31, 1996............ (UK Pound) (UK Pound) (UK Pound) 37,232 (UK Pound)372
=== =========== === =========== ======= ============ ======= =============
</TABLE>
<TABLE>
B Common Additional Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994.............. (UK Pound) (UK Pound)50,905 ((UK Pound)34,214) (UK Pound)92,948
Net loss................... (16,266) (16,266)
Shares issued under
former shareholders
agreement................ 1,714 2,003
Shares issued in
connection with
Teesside acquisition .... 13,620
Shares issued in
connection with
Initial Public Offering . 132,407 132,557
Conversion of shares
in connection with
Initial Public Offering . 13,606
Restructuring.............. 12,873 129 88,818 12,521
------ ------------- ----------------- ------------------ -----------------
BALANCE,
DECEMBER 31, 1994............ 12,873 129 287,450 (50,480) 237,383
Net loss................... (28,962) (28,962)
Other...................... (53) (53)
------ ------------- ----------------- ------------------ -----------------
BALANCE,
DECEMBER 31, 1995............ 12,873 129 287,397 (79,442) 208,368
Net loss................... (40,575) (40,575)
Shares issued in
connection with
Singtel Transaction...... 71,151 71,239
------ ------------- ----------------- ------------------ -----------------
BALANCE,
DECEMBER 31, 1996............ 12,873 (UK Pound)129 (UK Pound)358,548 ((UK Pound)120,017) (UK Pound)239,032
====== ============= ================= ================== =================
</TABLE>
See notes to consolidated financial statements.
- 34 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BUSINESS
Comcast UK Cable Partners Limited and subsidiaries (the "Company"), a
Bermuda company incorporated in 1992, was formed to develop, construct,
manage and operate the interests of Comcast Corporation ("Comcast") in the
United Kingdom ("UK") cable and telecommunications industry. The Company is
a controlled subsidiary of Comcast U.K. Holdings, Inc. ("Holdings"), a
Delaware corporation indirectly wholly owned by Comcast. As of December 31,
1996, the Company has interests in four operations (the "Operating
Companies"): Birmingham Cable Corporation Limited ("Birmingham Cable"), in
which the Company owns a 27.5% interest, Cable London PLC ("Cable London"),
in which the Company owns a 50.0% interest, Cambridge Holding Company
Limited ("Cambridge Cable"), in which the Company owns a 100% interest and
two companies holding the franchises for Darlington and Teesside, England
("Teesside"), in which the Company owns a 100% interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
Subsidiaries of the Company maintain their books and records in accordance
with accounting principles generally accepted in the UK. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles as practiced in the United States ("US") and
are stated in UK pounds sterling ("UK Pound"). There were no significant
differences between accounting principles followed for UK purposes and
generally accepted accounting principles practiced in the US. The UK Pound
exchange rate as of December 31, 1996 and 1995 was US $1.71 and US $1.55,
respectively.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts
and transactions among the consolidated entities have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1996 and 1995, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates. A reasonable estimate of the due to affiliates
is not practicable to obtain because of the related party nature of these
items and the lack of quoted market prices.
Cash Equivalents and Short-term Investments
Cash equivalents consist principally of commercial paper, time deposits and
money market funds with maturities of three months or less when purchased.
Short-term investments consist principally of commercial paper and
corporate floating rate notes with maturities greater than three months
when purchased. The carrying amounts of the Company's cash equivalents and
short-term investments, classified as available for sale securities,
approximate their fair values.
- 35 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Investments in Affiliates
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investee are accounted for under the equity method. Equity method
investments are recorded at original cost and adjusted periodically to
recognize the Company's proportionate share of the investees' net income or
losses after the date of investment, additional contributions made and
dividends received. The differences between the Company's recorded
investments and its proportionate interests in the book value of the
investees' net assets are being amortized to equity in net losses of
affiliates over the remaining original lives of the related franchises of
eight years.
Prematurity Period
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable telecommunications systems in
Teesside and Cambridge Cable under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 51, "Financial Reporting by Cable
Television Companies."
Under SFAS No. 51, during the period while the systems are partially under
construction and partially in service (the "Prematurity Period"), costs of
cable telecommunications plant, including materials, direct labor and
construction overhead are capitalized. Subscriber-related costs and general
and administrative costs are expensed as incurred. Costs incurred in
anticipation of servicing a fully operating system that will not vary
regardless of the number of subscribers are partially expensed and
partially capitalized, based upon the percentage of average actual or
estimated subscribers, whichever is greater, to the total number of
subscribers expected at the end of the Prematurity Period (the "Fraction").
During the Prematurity Period, depreciation and amortization of system
assets is determined by multiplying the depreciation and amortization of
the total capitalized system assets expected at the end of the Prematurity
Period by the Fraction. At the end of the Prematurity Period, depreciation
and amortization of system assets is based on the remaining undepreciated
cost at that date.
As of December 31, 1996, two of the Company's five franchise areas which
are under construction have completed their Prematurity Period. The
remaining Prematurity Periods are expected to terminate at various dates
from 1998 to 1999.
Property and Equipment
Property and equipment, which principally consists of system assets, is
shown at historical cost less accumulated depreciation. Improvements that
extend asset lives are capitalized; other repairs and maintenance charges
are expensed as incurred. The cost and related accumulated depreciation
applicable to assets sold or retired are removed from the accounts and the
gain or loss on disposition is recognized as a component of depreciation
expense.
System assets
Prior to the Prematurity Period, no depreciation is provided on system
assets. During the Prematurity Period, depreciation is provided in
accordance with SFAS No. 51.
Depreciation of system assets is provided by the straight-line method over
estimated useful lives as follows:
Plant 15-40 years
Network 15 years
Subscriber equipment 6-10 years
Switch 10 years
- 36 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Non-system assets
Depreciation of non-system assets is provided by the straight-line method
over estimated useful lives as follows:
Buildings 40 years
Fixtures, fittings and equipment 5 years
Vehicles 4 years
Computers 4 years
Leased Assets
Assets held under capital leases are treated as if they had been purchased
outright and the corresponding liability is included in long-term debt.
Capital lease payments include principal and interest, with the interest
portion being expensed. Payments on operating leases are expensed on a
straight-line basis over the lease term.
Deferred Charges
Deferred charges consist primarily of franchise acquisition costs
attributable to obtaining, developing and maintaining the franchise
licenses of Teesside and Cambridge Cable, organization costs incurred in
connection with the formation of the Company, debt acquisition costs
relating to the sale of approximately $517.3 million principal amount at
maturity of the Company's 11.20% Senior Discount Debentures Due 2007 (the
"2007 Discount Debentures" - see Note 7) and goodwill arising from the
Singtel Transaction (see Note 4). Franchise acquisition costs are being
amortized on a straight-line basis over the remaining original lives of the
related franchises of 12 to 15 years. Organization costs are being
amortized on a straight-line basis over five years. Debt acquisition costs
are being amortized on a straight-line basis over the term of the 2007
Discount Debentures of 12 years. Goodwill is being amortized on a
straight-line basis over the remaining original lives of the related
franchises of 11 years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to subscribers who are delinquent.
Stock Based Compensation
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock- Based Compensation." SFAS No. 123 encourages,
but does not require, companies to record compensation cost for stock-based
compensation plans at fair value. The Company has elected to continue to
account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, as permitted by SFAS No. 123.
Compensation expense for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. Compensation expense
for stock appreciation rights is recorded annually based on changes in
quoted market prices of the Company's stock or other determinants of fair
value at the end of the year (see Note 9).
Income Taxes
The Company is exempt from US federal, state and local income taxes. At the
present time, no income, profit, capital or capital gains taxes are levied
in Bermuda and, accordingly, no provision for such taxes has been recorded
by the Company. In the event that such taxes are levied, the Company has
received an undertaking from the Bermuda Government exempting it from all
such taxes until March 2016.
The Company's wholly owned subsidiaries recognize deferred tax assets and
liabilities for temporary differences between the financial reporting basis
and the tax basis of their assets and liabilities and expected benefits of
- 37 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
utilizing net operating loss carryforwards. The impact on deferred taxes of
changes in tax rates and laws, if any, applied to the years during which
temporary differences are expected to be settled, are reflected in the
financial statements in the period of enactment.
Pro Forma Net Loss per Share
Pro forma net loss per share has been presented in the Company's
consolidated statement of operations as if the Restructuring (see Note 8)
and the conversion of the Company's Redeemable Convertible Preference
Shares issued in connection with the Teesside acquisition (see Note 3) were
outstanding for all periods presented.
Derivative Financial Instruments
The Company uses derivative financial instruments, principally foreign
exchange option contracts ("FX Options"), to manage its exposure to
fluctuations in foreign currency exchange rates.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Notes 6
and 7). The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed
to losses in the event of nonperformance by the counterparties, the Company
does not expect such losses, if any, to be significant.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This standard, which clarifies and supersedes
the current authoritative accounting literature regarding the computation
and disclosure of earnings per share, is applicable to interim and annual
periods ending after December 15, 1997 and may not be applied earlier. The
Company does not expect adoption of this standard to result in significant
changes to the Company's calculation or presentation of loss per share.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1996.
3. TEESSIDE ACQUISITION
In June 1994, the Company acquired all of the outstanding shares of two
companies that owned Teesside, which comprise an area containing
approximately 254,000 homes. As consideration for Teesside, the Company
issued 13.6 million Redeemable Convertible Preference Shares, par value (UK
Pound)1.00 per share. In September 1994, in connection with the IPO (see
Note 8), the Redeemable Convertible Preference Shares were converted into
1.4 million of the Company's Class A Common Shares. The construction of
Teesside's cable telecommunications network commenced in the third quarter
of 1994. Teesside added its initial cable and telephony subscribers in June
1995.
4. SINGTEL TRANSACTION
In March 1996, the Company completed the acquisition (the "Singtel
Transaction") of Singapore Telecom International Pte. Limited's ("Singapore
Telecom") 50% interest in Cambridge Holding Company Limited ("Cambridge
Cable"), pursuant to the terms of a Share Exchange Agreement executed by
the parties in December 1995. In exchange for Singapore Telecom's 50%
interest in Cambridge Cable and certain loans made to Cambridge Cable, with
accrued interest thereon, the Company issued approximately 8.9 million of
its Class A Common Shares and paid approximately (UK Pound)11.8 million to
Singapore Telecom. The Company has accounted for the Singtel Transaction
under the purchase method. As a result of the Singtel Transaction, the
Company owns 100% of Cambridge Cable and Cambridge Cable was consolidated
with the Company effective March 31, 1996.
- 38 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
The following unaudited pro forma information for the years ended December
31, 1996 and 1995 has been presented as if the Singtel Transaction had
occurred at the beginning of each period. This unaudited pro forma
information is based on historical results of operations adjusted for
acquisition costs and, in the opinion of management, is not necessarily
indicative of what results would have been had the Company owned 100% of
Cambridge Cable since such dates (in thousands, except per share data).
Year Ended December 31,
1996 1995
Revenues.......................... (UK Pound)38,651 (UK Pound)22,859
Net loss.......................... (42,300) (37,616)
Net loss per share................ (.84) (.75)
5. INVESTMENTS IN AFFILIATES
The Company has historically invested in three affiliates (the "Equity
Investees," which term excludes Cambridge Cable as of March 31, 1996 - see
Note 4): Birmingham Cable, Cable London and Cambridge Cable. The Equity
Investees operate integrated cable communications, residential telephony
and business telecommunications systems in their respective major
metropolitan areas under exclusive cable television licenses and
non-exclusive telecommunications licenses. As of December 31, 1996, the
Company's ownership interest in the Equity Investees is as follows:
Birmingham Cable................................27.5%
Cable London (1)................................50.0%
---------------
(1) Increased in September 1996 from 49.0% due to the buyout of certain
minority shareholders.
The Company also has a 16.4% interest in Cable Programme Partners-1 Limited
Partnership ("CPP-1") which previously developed and distributed cable
programming in the UK. During 1995, CPP-1 sold its only channel and has
wound down its operations to a minimal level of activity. The carrying
value of the Company's investment in CPP-1 has been reduced to zero and the
Company has no future funding commitments to CPP-1.
Included in investments in affiliates as of December 31, 1996 and December
31, 1995, are loans to Cable London of (UK Pound)22.5 million and (UK
Pound)21.0 million and accrued interest of (UK Pound)3.6 million and (UK
Pound)1.9 million, respectively. The loans accrue interest at a rate of 2%
above the published base lending rate of Barclays Bank plc (8.00% effective
rate as of December 31, 1996) and are subordinate to Cable London's
revolving bank credit facility. Of these loans, (UK Pound)21.0 million as
of December 31, 1996 and 1995 are convertible into ordinary shares of Cable
London at a per share conversion price of (UK Pound)2.00. Also included in
investments in affiliates as of December 31, 1995 are loans to Cambridge
Cable of (UK Pound)47.4 million and accrued interest of (UK Pound)5.1
million. The Cambridge Cable loans and related accrued interest have been
eliminated in consolidation subsequent to the Singtel Transaction (see Note
4).
Cable London is obligated to repay a (UK Pound)60.0 million revolving
credit facility (the "London Facility") on June 30, 1997. Cable London is
in the process of refinancing the London Facility and will attempt to
complete this refinancing by June 30, 1997, although there can be no
assurance that any such refinancing will be available on acceptable terms
and conditions. In the event this refinancing cannot be accomplished, Cable
London intends to seek financing from alternative sources. The Company
believes that Cable London's obligation to repay the London Facility does
not result in the impairment of the Company's investment in Cable London as
of December 31, 1996.
- 39 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Although the Company is not contractually committed to make any additional
capital contributions or advances to any of the Equity Investees, it
currently intends to fund its share of the amounts necessary for capital
expenditures and to finance operating deficits. Failure to do so could
dilute the Company's ownership interests in the Equity Investees.
Summarized financial information for affiliates accounted for under the
equity method for 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
Birmingham Cable Cambridge
Cable London Cable (2) CPP-1 (1) Combined
(UK Pound)000 (UK Pound)000 (UK Pound)000 (UK Pound)000 (UK Pound)000
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Results of operations
Service income...................(UK Pound)52,472 (UK Pound)40,091 (UK Pound)6,401 (UK Pound) (UK Pound)98,964
Operating, selling, general and
administrative expenses........ (44,476) (39,135) (6,366) (89,977)
Depreciation and amortization.... (19,690) (14,862) (2,168) (36,720)
Operating loss................... (11,694) (13,906) (2,133) (27,733)
Net loss......................... (20,378) (21,241) (4,419) (46,038)
Company's equity in net loss..... (5,671) (10,551) (2,210) (18,432)
AT DECEMBER 31, 1996
Financial position
Current assets................... 70,531 10,217 80,748
Noncurrent assets................ 255,115 160,280 415,395
Current liabilities.............. 33,628 85,557 119,185
Noncurrent liabilities........... 188,863 60,831 249,694
YEAR ENDED DECEMBER 31, 1995
Results of operations
Service income................... 39,004 30,277 20,585 1,088 90,954
Operating, selling, general and
administrative expenses........ (35,894) (33,238) (26,273) (5,673) (101,078)
Depreciation and amortization.... (14,455) (10,847) (7,150) (34) (32,486)
Operating loss................... (11,345) (13,808) (12,838) (4,619) (42,610)
Net loss......................... (14,279) (17,675) (20,398) (5,388) (57,740)
Company's equity in net loss..... (3,922) (8,657) (10,200) (898) (23,677)
AT DECEMBER 31, 1995
Financial position
Current assets................... 78,304 8,869 5,009 92,182
Noncurrent assets................ 253,285 127,581 113,876 494,742
Current liabilities.............. 22,192 17,328 18,954 58,474
Noncurrent liabilities........... 185,864 73,772 109,662 369,298
YEAR ENDED DECEMBER 31, 1994
Results of operations
Service income................... 27,505 21,830 12,064 1,903 63,302
Operating, selling, general and
administrative expenses........ (27,480) (25,361) (16,235) (12,027) (81,103)
Depreciation and amortization.... (9,699) (6,993) (4,636) (41) (21,369)
Operating loss................... (9,674) (10,524) (8,807) (10,165) (39,170)
Net loss......................... (9,293) (11,354) (12,223) (9,853) (42,723)
Company's equity in net loss..... (2,657) (5,550) (6,112) (1,970) (16,289)
<FN>
(1) 1995 results of operations information for CPP-1 is for the six months
ended June 30, 1995.
(2) 1996 results of operations information for Cambridge Cable is for the three
months ended March 31, 1996 (see Note 4).
</FN>
</TABLE>
- 40 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
6. FOREIGN CURRENCY RISK MANAGEMENT
The Company is exposed to market risk including changes in foreign currency
exchange rates. To manage the volatility relating to these exposures, the
Company enters into various derivative transactions pursuant to the
Company's policies in areas such as counterparty exposure and hedging
practices. Positions are monitored using techniques including market value
and sensitivity analysis.
The Company has entered into certain foreign exchange option contracts ("FX
Options") as a normal part of its foreign currency risk management efforts.
During 1995, the Company entered into certain foreign exchange put option
contracts ("FX Puts") which may be settled only on November 16, 2000. These
FX Puts are used to limit the Company's exposure to the risk that the
eventual cash outflows related to net monetary liabilities denominated in
currencies other than its functional currency (the UK Pound Sterling or "UK
Pound") (primarily the $517.3 million principal amount at maturity of the
2007 Discount Debentures) are adversely affected by changes in exchange
rates. As of December 31, 1996 and 1995, the Company has (UK Pound)250.0
million notional amount of FX Puts to purchase US dollars at an exchange
rate of $1.35 per (UK Pound)1.00 (the "Ratio"). The FX Puts provide a
hedge, to the extent the exchange rate falls below the Ratio, against the
Company's net monetary liabilities denominated in US dollars since gains
and losses realized on the FX Puts are offset against foreign exchange
gains or losses realized on the underlying net liabilities. Premiums paid
for the FX Puts of (UK Pound)13.9 million are included in foreign exchange
put options and other in the Company's consolidated balance sheet, net of
related amortization. These premiums are being amortized over the terms of
the related contracts. As of December 31, 1996, the FX Puts had a carrying
value of (UK Pound)10.7 million and an estimated fair value of (UK
Pound)3.2 million. The differences between the carrying amounts and the
estimated fair value of the FX Puts were not significant as of December 31,
1995.
In the fourth quarter of 1995, in order to reduce hedging costs, the
Company sold foreign exchange call option contracts ("FX Calls") to
exchange (UK Pound)250.0 million notional amount. The Company received (UK
Pound)3.4 million from the sale of these contracts. These contracts may
only be settled on their expiration dates. Of these contracts, (UK
Pound)200.0 million notional amount, with an exchange ratio of $1.70 per
(UK Pound)1.00, expired unexercised in November 1996 while the remaining
contract, with a (UK Pound)50.0 million notional amount and an exchange
ratio of $1.62 per (UK Pound)1.00, has a settlement date in November 2000.
In the fourth quarter of 1996, in order to continue to reduce hedging
costs, the Company sold additional FX Calls, for proceeds of approximately
(UK Pound)2.1 million, to exchange (UK Pound)200.0 million notional amount
at an average exchange ratio of $1.75 per (UK Pound)1.00. These contracts
may only be settled on their expiration dates during the fourth quarter of
1997. The FX Calls are marked-to-market on a current basis in the Company's
consolidated statement of operations.
As of December 31, 1996 and 1995, the estimated fair value of the
liabilities related to the FX Calls, as recorded in the Company's
consolidated balance sheet, was (UK Pound)7.2 million and (UK Pound)3.7
million, respectively. Changes in fair value between measurement date
relating to the FX Calls resulted in exchange losses of (UK Pound)1.3
million during the year ended December 31, 1996 in the Company's
consolidated statement of operations. There were no significant exchange
gains or losses relating to these contracts for the year ended December 31,
1995.
7. LONG-TERM DEBT
In November 1995, the Company received net proceeds of approximately $291.1
million ((UK Pound)186.9 million) from the sale of its 2007 Discount
Debentures in a public offering ($517.3 million principal at maturity).
Interest accretes on the 2007 Discount Debentures at 11.20% per annum
compounded semi-annually from November 15, 1995 to November 15, 2000, after
which date interest will be paid in cash on each May 15 and November 15
through November 15, 2007. The accreted value of the 2007 Discount
Debentures was (UK Pound)198.1 million and (UK Pound)195.9 million as of
December 31, 1996 and 1995, respectively.
As of December 31, 1996, Cambridge Cable has outstanding bank loans of (UK
Pound)533,000 which are included in long-term debt. These bank loans are
secured by Cambridge Cable's land and buildings in Cambridge and Bishop
- 41 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Stortford and are payable over 17 years at (UK Pound)39,000 per year.
Interest is charged at a variable rate of 1% over the London Interbank
Offered Rate ("LIBOR") (7.25% as of December 31, 1996). Also included in
long-term debt as of December 31, 1996 are capital lease obligations of
Cambridge Cable and Teesside (see Note 13).
The difference between the carrying amounts and the estimated fair value of
the Company's long-term debt was not significant as of December 31, 1996.
The estimated fair value of the Company's publicly traded debt is based on
quoted market prices for that debt.
The 2007 Discount Debentures contain restrictive covenants which limit the
Company's ability to enter into arrangements for the sale of assets,
mergers, the incurrence of additional debt and the payment of dividends.
The Company was in compliance with such restrictive covenants as of
December 31, 1996.
8. SHAREHOLDERS' EQUITY
In September 1994, the Company consummated an initial public offering (the
"IPO") of 15.0 million of its Class A Common Shares for net proceeds of
$209.4 million ((UK Pound)132.6 million).
Contemporaneously with the IPO, Holdings and UK Cable Partners Limited
("UKCPL"), which was owned by Warburg, Pincus Investors, L.P. and Bankers
Trust Investments PLC, restructured their arrangements with respect to the
Company (the "Restructuring"). Pursuant to the Restructuring, Holdings and
UKCPL exchanged their ordinary shares and preferred shares in the Company
and a portion of their loans, with accrued interest thereon through the
date of the Restructuring, to the Company for an aggregate of 12.9 million
Class B Common Shares and 11.9 million Class A Common Shares, respectively.
As a result of the IPO, the Restructuring and the Singtel Transaction (see
Note 4), Holdings owns 25.7% of the total outstanding shares of the
Company. Because the Class A Common Shares are entitled to one vote per
share and the Class B Common Shares are entitled to ten votes per share,
Holdings, through its ownership of the Class B Common Shares, controls
approximately 77.6% of the total voting power of all outstanding shares of
the Company. The Class A Common Shares which UKCPL would otherwise have
been entitled to receive in the Restructuring were distributed to its
shareholders.
9. STOCK OPTION/SAR PLANS
The Company implemented a Stock Appreciation Rights ("SAR") plan during
1995 for certain outside directors under which the terms of the SARs
granted are determined by the Compensation Committee of the Board of
Directors (the "SAR Plan"). Under the SAR Plan, eligible participants are
entitled to receive a cash payment from the Company equal to 100% of the
excess, if any, of the fair market value of a share of the Company's Class
A Common Stock at the time of exercise over the fair market value of such a
share at the grant date. Under the plan, a total of 50,000 SARs may be
granted. The SARs have a term of ten years from the date of grant and are
immediately exercisable. A total of 6,000 and 15,000 SARs were awarded in
1996 and 1995, respectively, and 21,000 SARs were outstanding at December
31, 1996, all exercisable. The fair value of the Company's stock at the
grant date of the SARs was $12.63 and $16.25 for 1996 and 1995 grants,
respectively. Compensation expense recorded during the year ended December
31, 1996 was not significant. No compensation expense was recognized during
the year ended December 31, 1995 as the exercise price of the SARs was not
less then the fair value of a share of the Company's Class A Common Stock
at December 31, 1995.
The Company implemented a qualified stock option plan during 1995 for
certain employees, officers, and directors, under which the option prices
and other terms are determined by the Compensation Committee of the Board
of Directors (the "Option Plan"). Under the Option Plan, not more than
250,000 of the Company's Class
- 42 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
A Common Shares may be issued pursuant to the plan upon exercise of
qualified stock options. All options must be granted within ten years from
the date of adoption of the plan, with options becoming exercisable over
four years from the date of grant. A total of 20,250 options, with an
exercise price of $12.63, were granted in 1996 and are outstanding (none
exercisable) at December 31, 1996. No options were granted in 1995. No
compensation expense has been recognized during the year ended December 31,
1996 under this plan as the exercise price of the grants were not less than
the fair market value of the shares at the grant date. The fair market
value of the options granted in 1996 was not significant.
10. RELATED PARTY TRANSACTIONS
Comcast U.K. Consulting, Inc. ("UK Consulting"), a wholly owned subsidiary
of the Company, earns consulting fee income under consulting agreements
with the Equity Investees. The consulting fee income is generally based on
a percentage of gross revenues or a fixed amount per dwelling unit in the
Equity Investees' franchise areas.
The Company's right to receive consulting fee payments from Birmingham
Cable and Cable London has been subordinated to the banks under their
credit facilities. Accordingly, a portion of these fees have been
classified as long-term receivables and are included in investments in
affiliates in the Company's consolidated balance sheet. In addition, the
Company's shares in Cable London have been pledged to secure amounts
outstanding under the London Facility.
Management fee expense is incurred under agreements between the Company on
the one hand, and Comcast, the Company's controlling shareholder, and
Comcast UK Cable Partners Consulting, Inc. ("Comcast Consulting"), an
indirect wholly owned subsidiary of Comcast, on the other, whereby Comcast
and Comcast Consulting provide consulting services to the Equity Investees
on behalf of the Company and management services to the Company. Such
management fees are based on Comcast's and Comcast Consulting's cost of
providing such services. As of December 31, 1996 and 1995, due to
affiliates consists primarily of this management fee and operating expenses
paid by Comcast and its affiliates on behalf of the Company.
Investment income includes (UK Pound)2.9 million, (UK Pound)5.0 million and
(UK Pound)1.9 million of interest income in 1996, 1995 and 1994,
respectively, relating to the loans to Cable London and Cambridge Cable
described in Note 5.
Long-term debt due to shareholder consists of 9% Subordinated Notes payable
to Holdings (the "Notes") which are due in 1999. During the years ended
December 31, 1996, 1995 and 1994, interest expense on the Notes was (UK
Pound)870,000, (UK Pound)800,000 and (UK Pound)200,000, respectively.
Interest expense for the year ended December 31, 1994 also includes (UK
Pound)831,000 relating to 1994 loans from shareholders that were converted
or repaid in connection with the Restructuring (see Note 8).
In management's opinion, the foregoing transactions were entered into on
terms no more or less favorable than those with non-affiliated parties.
11. INCOME TAXES
The Company's wholly owned subsidiaries have a deferred tax asset arising
from the carryforward of net operating losses and the differences between
the book and tax basis of property. However, a valuation allowance has been
recorded to fully reserve the deferred tax asset as its realization is
uncertain.
- 43 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
Net operating loss carryforwards
(carried forward indefinitely)............................(UK Pound)13,485 (UK Pound)2,361
Differences between book and tax
basis of property......................................... 1,024 284
Other....................................................... 170 19
Less: Valuation allowance................................... (14,679) (2,664)
---------------- ---------------
(UK Pound) (UK Pound)
================ ===============
</TABLE>
12. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of approximately (UK
Pound)418,000 and (UK Pound)313,000 during the years ended December 31,
1996 and 1994, respectively.
13. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities and equipment are held under operating
or capital leases which expire through 2001.
A summary of assets held under capital lease are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
Land, buildings and equipment...............................(UK Pound)8,605 (UK Pound)490
Less: Accumulated depreciation.............................. (834) (90)
--------------- ---------------
(UK Pound)7,771 (UK Pound)400
=============== ===============
</TABLE>
Future minimum rental payments under lease commitments with an initial or
remaining term of more than one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
(UK Pound)000 (UK Pound)000
<S> <C> <C>
1997........................................................(UK Pound)1,861 (UK Pound)1,369
1998........................................................ 1,610 1,030
1999........................................................ 1,249 410
2000........................................................ 627 59
2001........................................................ 395 27
Thereafter.................................................. 1,137
-------------- ---------------
Total minimum rental commitments............................ 6,879 (UK Pound)2,895
===============
Less: Amount representing interest.......................... (1,410)
--------------
Present value of minimum rental commitments................. 5,469
Less: Current portion of capital lease obligations.......... (1,424)
--------------
Long-term portion of capital lease obligations..............(UK Pound)4,045
==============
</TABLE>
- 44 -
<PAGE>
COMCAST UK CABLE PARTNERS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Concluded)
Capital lease obligations of (UK Pound)1.5 million and (UK Pound)490,000
were incurred during the years ended December 31, 1996 and 1995,
respectively.
Operating lease expense for the years ended December 31, 1996, 1995 and
1994 was (UK Pound)1.5 million, (UK Pound)328,000 and (UK Pound)41,000,
respectively.
The Company is subject to claims which arise in the ordinary cause of its
business and other legal proceedings. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or
liquidity of the Company.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter (1) Quarter Quarter (2) Year
((UK Pound)000, except per share data)
1996
<S> <C> <C> <C> <C> <C>
Revenues ......................... (UK Pound)2,334 (UK Pound)9,452 (UK Pound)10,090 (UK Pound)10,552 (UK Pound)32,428
Operating loss ................... (3,765) (6,128) (7,398) (7,262) (24,553)
Equity in net losses of affiliates (5,698) (3,942) (4,166) (4,626) (18,432)
Net loss ......................... (11,987) (11,292) (14,571) (2,725) (40,575)
Net loss per share ............... (.28) (.22) (.30) (.04) (.84)
1995
Revenues ......................... (UK Pound)335 (UK Pound)318 (UK Pound)667 (UK Pound)1,523 (UK Pound)2,843
Operating loss ................... (1,833) (2,887) (3,578) (3,511) (11,809)
Equity in net losses of affiliates (4,738) (5,937) (6,571) (6,431) (23,677)
Net loss ......................... (4,208) (6,995) (7,742) (10,017) (28,962)
Net loss per share ............... (.10) (.17) (.19) (.24) (.70)
<FN>
(1) The Company began consolidating Cambridge Cable effective March 31, 1996.
(2) The fourth quarter of 1996 net loss includes (UK Pound)12.9 million of foreign
currency exchange rate gains resulting from fluctuations in the foreign
currency exchange rate.
</FN>
</TABLE>
- 45 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Birmingham Cable Corporation Limited
We have audited the accompanying consolidated balance sheet of Birmingham Cable
Corporation Limited (a company incorporated in the United Kingdom) and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and of cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Birmingham Cable Corporation
Limited and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche
Birmingham, England
February 28, 1997 (March 12, 1997, as to Note 3)
- 46 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Birmingham Cable Corporation Limited
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Birmingham Cable Corporation Limited (a
United Kingdom corporation in the prematurity stage) and subsidiaries for the
year ended December 31, 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Birmingham
Cable Corporation Limited and subsidiaries for the year ended December 31, 1994
in conformity with the accounting principles generally accepted in the United
States.
/s/ Arthur Andersen
1 Victoria Square
Birmingham
Bl 1BD
England
February 3, 1995
- 47 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in (UK Pound)000's, except share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................ (UK Pound)7,689 (UK Pound)12,523
Restricted cash .................................................................. 53,000 51,000
Accounts receivable, less allowance for
doubtful accounts of(UK Pound)2,360 and(UK Pound)3,357 ........................ 4,809 4,304
Interest receivable .............................................................. 2,016 4,541
Other current assets ............................................................. 3,017 5,936
---------------- ----------------
Total current assets ....................................................... 70,531 78,304
---------------- ----------------
RESTRICTED CASH ...................................................................... 22,000 63,000
---------------- ----------------
PROPERTY AND EQUIPMENT ............................................................... 268,833 207,281
Accumulated depreciation ......................................................... (49,129) (30,908)
---------------- ----------------
Property and equipment, net ...................................................... 219,704 176,373
---------------- ----------------
DEFERRED CHARGES ..................................................................... 16,890 15,899
Accumulated amortization ......................................................... (3,479) (1,987)
---------------- ----------------
Deferred charges, net ............................................................ 13,411 13,912
---------------- ----------------
(UK Pound)325,646 (UK Pound)331,589
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............................................ (UK Pound)24,381 (UK Pound)14,374
Accrued interest ................................................................. 7,398 7,004
Current portion of capital lease obligations ..................................... 1,849 814
---------------- ----------------
Total current liabilities .................................................. 33,628 22,192
---------------- ----------------
CAPITAL LEASE OBLIGATIONS, less current portion ...................................... 11,625 8,784
---------------- ----------------
OTHER LIABILITIES .................................................................... 2,238 2,080
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
PREFERENCE SHARES .................................................................... 175,000 175,000
---------------- ----------------
SHAREHOLDERS' EQUITY
Ordinary shares, (UK Pound)1.00 par value -
authorized, 60,000,000 shares; issued, 51,073,486 ............................. 51,073 51,073
Additional capital ............................................................... 112,399 112,399
Accumulated deficit .............................................................. (60,317) (39,939)
---------------- ----------------
Total shareholders' equity ................................................. 103,155 123,533
---------------- ----------------
(UK Pound)325,646 (UK Pound)331,589
================ =================
</TABLE>
See notes to consolidated financial statements.
- 48 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
SERVICE INCOME ....................... (UK Pound)52,472 (UK Pound)39,004 (UK Pound)27,505
---------------- ---------------- ----------------
COSTS AND EXPENSES
Operating ......................... 20,912 16,358 10,814
Selling, general and administrative 23,564 19,536 16,666
Depreciation and amortization ..... 19,690 14,455 9,699
---------------- ---------------- ----------------
64,166 50,349 37,179
---------------- ---------------- ----------------
OPERATING LOSS ....................... (11,694) (11,345) (9,674)
INTEREST EXPENSE ..................... 17,202 13,993 443
INVESTMENT INCOME .................... (8,518) (11,059) (824)
---------------- ---------------- ----------------
NET LOSS .............................((UK Pound)20,378) ((UK Pound)14,279) ((UK Pound)9,293)
================ ================ ===============
</TABLE>
See notes to consolidated financial statements.
- 49 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................ ((UK Pound)20,378) ((UK Pound)14,279) ((UK Pound)9,293)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 19,690 14,455 9,699
--------------- ---------------- ---------------
(688) 176 406
Decrease (increase) in accounts receivable,
interest receivable and other current assets ........ 4,939 (7,438) (1,637)
Increase in accounts payable and accrued expenses,
accrued interest and other liabilities .............. 10,559 6,469 3,683
--------------- ---------------- ---------------
Net cash provided by (used in) operating activities 14,810 (793) 2,452
--------------- ---------------- ---------------
FINANCING ACTIVITIES
Proceeds from borrowings ................................ 175,000 7,800
Debt acquisition costs .................................. (2,977)
Repayments of debt ...................................... (8,300)
Issuances of shares, net ................................ 47,251
--------------- ---------------- ---------------
Net cash provided by financing activities ......... 172,023 46,751
--------------- ---------------- ---------------
INVESTING ACTIVITIES
Restricted cash ......................................... 39,000 (114,000)
Capital expenditures .................................... (57,653) (48,219) (46,673)
Deferred charges and other .............................. (991) (601) (1,070)
--------------- ---------------- ---------------
Net cash used in investing activities ............. (19,644) (162,820) (47,743)
--------------- ---------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........... (4,834) 8,410 1,460
CASH AND CASH EQUIVALENTS, beginning of year ............... 12,523 4,113 2,653
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, end of year ..................... (UK Pound)7,689 (UK Pound)12,523 (UK Pound)4,113
=============== ================ ===============
</TABLE>
See notes to consolidated financial statements.
- 50 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Ordinary Additional Accumulated
Shares Capital Deficit Total
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994........................ (UK Pound)38,754 (UK Pound)77,467 ((UK Pound)16,367) (UK Pound)99,854
Net loss .................................. (9,293) (9,293)
Shares issued ............................. 12,319 34,932 47,251
---------------- ----------------- ----------------- -----------------
BALANCE, DECEMBER 31, 1994 ..................... 51,073 112,399 (25,660) 137,812
Net loss .................................. (14,279) (14,279)
---------------- ----------------- ----------------- -----------------
BALANCE, DECEMBER 31, 1995 ..................... 51,073 112,399 (39,939) 123,533
Net loss .................................. (20,378) (20,378)
---------------- ----------------- ----------------- -----------------
BALANCE, DECEMBER 31, 1996 ..................... (UK Pound)51,073 (UK Pound)112,399 ((UK Pound)60,317) (UK Pound)103,155
================ ================= ================= =================
</TABLE>
See notes to consolidated financial statements.
- 51 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BUSINESS
Birmingham Cable Corporation Limited, a company incorporated in the United
Kingdom ("UK"), and subsidiaries (the "Company") is in the prematurity
stage. The Company is principally engaged in the development, construction,
management and operation of cable telecommunications systems. The Company
holds two franchises in Birmingham/Solihull and Wythall, England.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company maintains its books and records in accordance with accounting
principles generally accepted in the UK. The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles as practiced in the United States ("US") and are
stated in UK pounds sterling ("UK Pound"). There were no significant
differences between accounting principles followed for UK purposes and
generally accepted accounting principles practiced in the US. The UK Pound
exchange rate as of December 31, 1996 and 1995 was US $1.71 and US $1.55,
respectively.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts
and transactions among the consolidated entities have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1996 and 1995, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates. A reasonable estimate of the amounts due to
shareholders is not practicable to obtain because of the related party
nature of these items and lack of quoted market prices.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash includes cash held on deposit as
part of a (UK Pound)175.0 million financing arrangement entered into by the
Company in 1995 (see Note 3). Under the terms of this financing
arrangement, there are restrictions imposed on the Company as to the amount
of cash held on deposit that is available to be drawn down. The amount
which can be drawn down as of December 31, 1995, (UK Pound)6.0 million, is
classified as cash and cash equivalents. Current restricted cash as of
December 31, 1996 and 1995 represents cash that is expected to be available
during 1997 and 1996, respectively. Long-term restricted cash as of
December 31, 1996 and 1995 represents the balance of the cash which is not
expected to be available prior to December 31, 1997 and 1996, respectively.
Prematurity Period
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable telecommunications systems under
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
51, "Financial Reporting by Cable Television Companies."
- 52 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Under SFAS No. 51, during the period while the systems are partially under
construction and partially in service (the "Prematurity Period"), costs of
cable telecommunications plant, including materials, direct labor and
construction overhead are capitalized. Subscriber-related costs and general
and administrative costs are expensed as incurred. Costs incurred in
anticipation of servicing a fully operating system that will not vary
regardless of the number of subscribers are partially expensed and
partially capitalized, based upon the percentage of average actual or
estimated subscribers, whichever is greater, to the total number of
subscribers expected at the end of the Prematurity Period (the "Fraction").
During the Prematurity Period, depreciation and amortization of system
assets is determined by multiplying the depreciation and amortization of
the total capitalized system assets expected at the end of the Prematurity
Period by the Fraction. At the end of the Prematurity Period, depreciation
and amortization of system assets is based on the remaining undepreciated
cost at that date.
As of December 31, 1996, six of the Company's seven discrete build areas
have completed their Prematurity Period and one of the Company's seven
discrete build areas is in the Prematurity Period. The remaining
Prematurity Period is expected to terminate in December 1997.
Property and Equipment
Property and equipment, which consists principally of system assets, is
shown at historical cost less accumulated depreciation. Improvements that
extend asset lives are capitalized; other repairs and maintenance charges
are expensed as incurred. The cost and related accumulated depreciation
applicable to assets sold or retired are removed from the accounts and the
gain or loss on disposition is recognized as a component of depreciation
expense.
System assets
Prior to the Prematurity Period, no depreciation is provided on system
assets. During the Prematurity Period, depreciation is provided in
accordance with SFAS No. 51.
Depreciation of system assets is provided by the straight-line method over
estimated useful lives as follows:
Plant 15-40 years
Network 15 years
Subscriber equipment 6-10 years
Switch 10 years
Non-system assets
Depreciation of non-system assets is provided by the straight-line method
over estimated useful lives as follows:
Buildings 40 years
Leasehold buildings term of lease
Fixtures, fittings and equipment 5 years
Computers 4 years
Vehicles 4 years
Leased Assets
Assets held under capital leases are treated as if they had been purchased
outright and the corresponding liability is included in capital lease
obligations. Capital lease payments include principal and interest, with
the interest portion being expensed. Payments on operating leases are
expensed on a straight-line basis over the lease term.
Deferred Charges
Deferred charges consist primarily of franchise acquisition and development
costs directly attributable to obtaining, developing and maintaining the
franchise licenses and debt acquisition costs incurred by the Company
- 53 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
in entering into the Birmingham Facility (see Note 3). Franchise
acquisition and development costs have been allocated evenly between each
build area and are amortized, by build area, on a straight-line basis, over
the lives of the franchises of 15 to 23 years. Debt acquisition costs are
being amortized on a straight-line basis over the term of the related debt
of five to ten years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to subscribers who are delinquent.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the financial
statements in the period of enactment.
Derivative Financial Instruments
The Company uses interest rate exchange agreements ("Swaps"), to manage its
exposure to fluctuations in interest rates. Swaps are matched with either
fixed or variable rate debt and periodic cash payments are accrued on a
settlement basis as an adjustment to interest expense.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to any leveraged instruments (see Note
3). The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed
to losses in the event of nonperformance by the counterparties, the Company
does not expect such losses, if any, to be significant.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1996.
3. PREFERENCE SHARES
In February 1995, a subsidiary of the Company issued 175,000 cumulative (UK
Pound)1.00 redeemable five year term preference shares for a paid up value
of (UK Pound)175.0 million. The cash received from the preference shares
will be used by the Company, subject to certain restrictions contained in
the Birmingham Facility (as defined below), for capital expenditures and
working capital requirements relating to the build-out of its systems (see
Note 2). The preference shareholder has an option to require the Company to
purchase its shareholding. This option is guaranteed by a syndicate of
fifteen banks which granted the Birmingham Facility and is exercisable on
or before February 14, 2000. The preference shares have an effective
dividend rate, including Advanced Corporation Tax ("ACT"), of 8.00%.
In February 1995, the Company entered into a (UK Pound)175.0 million five
year revolving credit facility (the "Birmingham Facility") which provided
for conversion into a five year term loan on March 31, 2000. In March 1997,
the terms of the Birmingham Facility were amended to extend the maturity of
the term loan to December 31, 2005 and to amend the required cash flow
levels and certain other terms. The Birmingham Facility will be used by the
Company, subject to certain restrictions, to fund the redemption of the
preference shares. The Company's three principal shareholders' right to
receive consulting fee payments from the Company has been
- 54 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
subordinated to the banks under the Birmingham Facility. The payment of
consulting fees is restricted until the Company meets certain financial
ratio tests under the Birmingham Facility. The Company has pledged the
shares of its material subsidiaries to secure the Birmingham Facility. Upon
a change of control, all amounts due under the Birmingham Facility become
immediately due and payable.
A reasonable estimate of the fair value of the preference shares is not
practicable to obtain due to the nature of the instrument and the lack of
quoted market prices.
The Birmingham Facility contains restrictive covenants which limit the
Company's ability to enter into arrangements for the acquisition and sale
of property and equipment, investments, mergers and the incurrence of
additional debt. Certain of these covenants require that certain minimum
build requirements, financial ratios and cash flow levels be maintained and
contain restrictions on dividend payments.
The Company enters into Swaps as a normal part of its risk management
efforts to limit its exposure to adverse fluctuations in interest rates.
The differentials to be received or paid under the Company's Swaps
designated as hedges are recognized in income over the life of the related
contract as adjustments to interest expense. In conjunction with the
Birmingham Facility, a subsidiary of the Company and Barclays Bank PLC
entered into a five year (UK Pound)175.0 million Swap, whereby the
subsidiary receives fixed interest at a rate of 8.83% and pays floating
rate interest at the six month London Interbank Offered Rate ("LIBOR"). In
addition, a subsidiary of the Company entered into a second series of five
year Swaps with three banks. Under the agreements, the subsidiary pays
fixed rate interest at 9.20% and receives floating rate interest at six
month LIBOR, based upon the outstanding notional amount of the Swaps. As of
December 31, 1996 and 1995, the notional amount outstanding on the second
series of Swaps was (UK Pound)106.0 million and (UK Pound)47.0 million,
respectively and will increase to (UK Pound)160.0 million by January 2,
1998. The estimated amount that would be received upon settlement of the
Company's Swaps was (UK Pound)168,000 and (UK Pound)2.6 million as of
December 31, 1996 and 1995, respectively.
4. SHAREHOLDERS' EQUITY
In March 1994, the Company's shareholders executed an agreement which,
among other things, provided for the sale by the Company of 12.3 million of
newly issued Ordinary Shares to General Cable PLC ("General Cable"), a
wholly owned subsidiary of Compagnie Generale des Eaux, for (UK Pound)46.6
million.
5. RELATED PARTY TRANSACTIONS
The Company has consulting agreements with Comcast U.K. Consulting, Inc.
("Comcast Consulting") and TeleWest Communications Group Ltd., subsidiaries
of two of the Company's principal shareholders, Comcast UK Cable Partners
Limited and TeleWest Communications plc ("TeleWest"). The Company also has
a consulting agreement with General Cable, the Company's other principal
shareholder. The Company pays a fee to TeleWest each year as a contribution
to the operating expenses and capital expenditures of TeleWest's Network
Service Center, which provides telephony support to the Company.
A summary of related party charges included in the Company's consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(UK Pound)000 (UK Pound)000 (UK Pound)000
<S> <C> <C> <C>
Consulting fees (UK Pound)1,326 (UK Pound)1,070 (UK Pound)854
Network Service Center fees 814 680 919
--------------- --------------- ---------------
(UK Pound)2,140 (UK Pound)1,750 (UK Pound)1,773
=============== =============== ===============
</TABLE>
As of December 31, 1996 and 1995, accounts payable and accrued expenses
include (UK Pound)2.3 million and (UK Pound)726,000, respectively, payable
to the Company's three principal shareholders, principally for consulting
fees and normal
- 55 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
operating expenses paid by the shareholders and their affiliates on behalf
of the Company. As of December 31, 1996 and 1995, other long-term
liabilities includes (UK Pound)1.3 million and (UK Pound)1.1 million,
respectively, of consulting fees payable to the Company's three principal
shareholders as payment is restricted under the Birmingham Facility.
In management's opinion, the foregoing transactions were entered into on
terms no more or less favorable than those with non-affiliated third
parties.
6. INCOME TAXES
The Company has a deferred tax asset arising from the carryforward of net
operating losses and the differences between the book and tax basis of
property. However, a valuation allowance has been recorded to fully reserve
the deferred tax asset as its realization is uncertain.
Significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
Net operating loss carryforwards (carried forward indefinitely)..........(UK Pound)3,218 (UK Pound) 2,939
Differences between book and tax basis of property....................... 10,134 6,261
Less: Valuation allowance................................................ (13,352) (9,200)
--------------- ------------------
(UK Pound) (UK Pound)
=============== ==================
</TABLE>
In connection with the Birmingham Facility and the related preference share
arrangement (see Note 3), the Company is obligated to pay ACT on all
preference share dividends. Related ACT for 1996 and 1995 was (UK Pound)2.8
million and (UK Pound)2.5 million, respectively, and has been classified as
a component of interest expense in the Company's consolidated statement of
operations. ACT may be carried forward indefinitely to offset potential
future tax liabilities of the Company.
7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest and preferred stock dividends
of approximately (UK Pound)31.2 million, (UK Pound)11.3 million and (UK
Pound)443,000 during the years ended December 31, 1996, 1995 and 1994,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities and equipment are held under operating
or capital leases which expire through 2003.
A summary of assets held under capital leases are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
System, fixtures, fittings, equipment and vehicles..........(UK Pound)14,925 (UK Pound)9,888
Less: Accumulated depreciation.............................. (3,556) (1,816)
---------------- ---------------
(UK Pound)11,369 (UK Pound)8,072
================ ===============
</TABLE>
- 56 -
<PAGE>
BIRMINGHAM CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Concluded)
Future minimum rental payments under lease commitments with an initial or
remaining term of more than one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
(UK Pound)000 (UK Pound)000
<S> <C> <C>
1997........................................................ (UK Pound)2,618 (UK Pound)221
1998........................................................ 2,380 221
1999........................................................ 2,238 221
2000........................................................ 2,250 141
2001........................................................ 1,838 141
Thereafter.................................................. 6,086 1,531
--------------- ---------------
Total minimum rental commitments............................ 17,410 (UK Pound)2,476
===============
Less: Amount representing interest.......................... (3,936)
---------------
Present value of minimum rental commitments................. 13,474
Less: Current portion of capital lease obligations.......... (1,849)
---------------
Long-term portion of capital lease obligations..............(UK Pound)11,625
================
</TABLE>
Capital lease obligations of (UK Pound)5.0 million, (UK Pound)4.6 million
and (UK Pound)1.5 million were incurred during the years ended December 31,
1996, 1995 and 1994, respectively.
Operating lease expense for the years ended December 31, 1996, 1995 and
1994 was (UK Pound)428,000, (UK Pound)947,000 and (UK Pound)1.1 million,
respectively.
Included within deferred charges and other long-term liabilities as of
December 31, 1996 and 1995 is (UK Pound)665,000 and (UK Pound)760,000,
respectively, which represents the obligation incurred by the Company in
connection with the termination of a contractual obligation under an
agreement with the Local Authority to service and maintain the Company's
satellite master antenna television installations in the franchise area.
This liability is noninterest bearing and will be discharged by the payment
of (UK Pound)95,000 annually through 2003. The effect of discounting the
liability is not significant to the Company's financial position or results
of operations.
- 57 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Cable London PLC
We have audited the accompanying consolidated balance sheet of Cable London PLC
(a company incorporated in the United Kingdom) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cable London PLC and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Cable London PLC will continue as a going concern. As discussed in Notes 1
and 3 to the consolidated financial statements, Cable London PLC's 1997 debt
maturities and recurring losses from operations raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche
London, England
February 28, 1997
- 58 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Cable London PLC
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Cable London PLC (a United Kingdom
corporation in the prematurity stage) and subsidiaries for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Cable London
PLC and subsidiaries for the year ended December 31, 1994 in conformity with the
accounting principles generally accepted in the United States.
/s/ Arthur Andersen
1 Surrey Street
London
WC2R 2PS
England
February 3, 1995
- 59 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in (UK Pound)000's, except share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................................................ (UK Pound)3,213 (UK Pound)4,293
Accounts receivable, less allowance for doubtful accounts of
(UK Pound)1,465 and(UK Pound)585 ................................................. 3,670 2,389
Other current assets ................................................................ 3,334 2,187
----------------- -----------------
Total current assets .......................................................... 10,217 8,869
----------------- -----------------
PROPERTY AND EQUIPMENT .................................................................. 192,630 145,069
Accumulated depreciation ............................................................ (36,106) (22,131)
----------------- -----------------
Property and equipment, net ......................................................... 156,524 122,938
----------------- -----------------
DEFERRED CHARGES ........................................................................ 6,986 6,986
Accumulated amortization ............................................................ (3,230) (2,343)
----------------- -----------------
Deferred charges, net ............................................................... 3,756 4,643
----------------- -----------------
(UK Pound)170,497 (UK Pound)136,450
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............................................... (UK Pound)22,079 (UK Pound)15,555
Other current liabilities ........................................................... 3,117 1,740
Current portion of long-term debt and capital lease obligations ..................... 60,361 33
----------------- -----------------
Total current liabilities ..................................................... 85,557 17,328
----------------- -----------------
LONG-TERM DEBT, less current portion .................................................... 718 20,755
----------------- -----------------
CAPITAL LEASE OBLIGATIONS, less current portion ......................................... 7,869 6,735
----------------- -----------------
CONVERTIBLE DEBT AND OTHER .............................................................. 52,244 46,282
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Ordinary shares, (UK Pound).10 par value -
authorized, 100,000,000 shares; issued, 55,125,690 ............................... 5,513 5,513
Additional capital .................................................................. 96,486 96,486
Accumulated deficit ................................................................. (77,890) (56,649)
----------------- -----------------
Total shareholders' equity .................................................... 24,109 45,350
----------------- -----------------
(UK Pound)170,497 (UK Pound)136,450
================= =================
</TABLE>
See notes to consolidated financial statements.
- 60 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
SERVICE INCOME ....................... (UK Pound)40,091 (UK Pound)30,277 (UK Pound)21,830
----------------- ----------------- -----------------
COSTS AND EXPENSES
Operating ......................... 17,978 14,622 10,666
Selling, general and administrative 21,157 18,616 14,695
Depreciation and amortization ..... 14,862 10,847 6,993
----------------- ----------------- -----------------
53,997 44,085 32,354
----------------- ----------------- -----------------
OPERATING LOSS ....................... (13,906) (13,808) (10,524)
INTEREST EXPENSE ..................... 7,556 4,133 1,111
INVESTMENT INCOME .................... (221) (266) (281)
----------------- ----------------- -----------------
NET LOSS ............................. ((UK Pound)21,241) ((UK Pound)17,675) ((UK Pound)11,354)
================= ================= =================
</TABLE>
See notes to consolidated financial statements.
- 61 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. ((UK Pound)21,241) ((UK Pound)17,675) ((UK Pound)11,354)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ....................... 14,862 10,847 6,993
Non-cash interest expense ........................... 3,355 3,311 497
----------------- ----------------- -----------------
(3,024) (3,517) (3,864)
(Increase) decrease in accounts receivable and
other current assets .............................. (2,428) (214) 606
Increase in accounts payable and accrued expenses
and other current liabilities ...................... 7,508 3,992 3,554
----------------- ----------------- -----------------
Net cash provided by operating activities ....... 2,056 261 296
----------------- ----------------- -----------------
FINANCING ACTIVITIES
Proceeds from borrowings .............................. 40,000 38,000 27,000
Debt acquisition costs ................................ (493)
Loans from shareholders ............................... 3,000
Repayments of debt .................................... (33) (30) (29)
Issuances of shares, net .............................. 703
----------------- ----------------- -----------------
Net cash provided by financing activities ....... 42,967 37,477 27,674
----------------- ----------------- -----------------
INVESTING ACTIVITIES
Capital expenditures .................................. (46,103) (36,780) (27,369)
Deferred charges and other ............................ (834) (957)
----------------- ----------------- -----------------
Net cash used in investing activities ........... (46,103) (37,614) (28,326)
----------------- ----------------- -----------------
(DECREASE) INCREASE IN CASH .............................. (1,080) 124 (356)
CASH, beginning of year .................................. 4,293 4,169 4,525
----------------- ----------------- -----------------
CASH, end of year ........................................ (UK Pound)3,213 (UK Pound)4,293 (UK Pound)4,169
================= ================= =================
</TABLE>
See notes to consolidated financial statements.
- 62 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in (UK Pound)000's)
<TABLE>
<CAPTION>
Ordinary Additional Accumulated
Shares Capital Deficit Total
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 . (UK Pound)4,433 (UK Pound)75,966 ((UK Pound)27,620) (UK Pound)52,779
Net loss ............ (11,354) (11,354)
Shares issued ....... 1,080 20,520 21,600
--------------- ---------------- ----------------- ----------------
BALANCE, DECEMBER 31, 1994 5,513 96,486 (38,974) 63,025
Net loss ............ (17,675) (17,675)
--------------- ---------------- ----------------- ----------------
BALANCE, DECEMBER 31, 1995 5,513 96,486 (56,649) 45,350
Net loss ............ (21,241) (21,241)
--------------- ---------------- ----------------- ----------------
BALANCE, DECEMBER 31, 1996 (UK Pound)5,513 (UK Pound)96,486 ((UK Pound)77,890) (UK Pound)24,109
=============== ================ ================= ================
</TABLE>
See notes to consolidated financial statements.
- 63 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BUSINESS
Cable London PLC, a company incorporated in the United Kingdom ("UK"), and
subsidiaries (the "Company") is in the prematurity stage. The Company is
principally engaged in the development, construction, management and
operation of cable telecommunications systems. The Company holds four
franchises covering Camden, Haringey, Hackney/Islington and Enfield,
England.
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is obligated to
repay its (UK Pound)60.0 million revolving credit facility (the "London
Facility" - see Note 3) on June 30, 1997 and the Company does not expect
that cash flows generated from operations will satisfy this obligation.
This factor, along with the Company's recurring losses from operations, may
indicate that the Company will be unable to continue as a going concern for
a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company is in the
process of refinancing the London Facility and the Company's management
believes that it will be able to complete this refinancing by June 30,
1997, although there can be no assurance that any such refinancing will be
available on acceptable terms and conditions. In the event this refinancing
cannot be completed, the Company intends to seek financing from other
sources.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company maintains its books and records in accordance with accounting
principles generally accepted in the UK. The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles as practiced in the United States ("US") and are
stated in UK pounds sterling ("UK Pound"). There were no significant
differences between accounting principles followed for UK purposes and
generally accepted accounting principles practiced in the US. The UK Pound
exchange rate as of December 31, 1996 and 1995 was US $1.71 and US $1.55,
respectively.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts
and transactions among the consolidated entities have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1996 and 1995, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
- 64 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Prematurity Period
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable telecommunications systems under
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
51, "Financial Reporting by Cable Television Companies."
Under SFAS No. 51, during the period while the systems are partially under
construction and partially in service (the "Prematurity Period"), costs of
cable telecommunications plant, including materials, direct labor and
construction overhead are capitalized. Subscriber-related costs and general
and administrative costs are expensed as incurred. Costs incurred in
anticipation of servicing a fully operating system that will not vary
regardless of the number of subscribers are partially expensed and
partially capitalized, based on the percentage of average actual or
estimated subscribers, whichever is greater, to the total number of
subscribers expected at the end of the Prematurity Period (the "Fraction").
During the Prematurity Period, depreciation and amortization of system
assets is determined by multiplying the depreciation and amortization of
the total capitalized system assets expected at the end of the Prematurity
Period by the Fraction. At the end of the Prematurity Period, depreciation
and amortization of system assets is based on the remaining undepreciated
cost at that date.
As of December 31, 1996, one of the Company's four franchise areas has
completed its Prematurity Period. The remaining Prematurity Periods are
expected to terminate at various dates from 1997 to 1998.
Property and Equipment
Property and equipment, which consists principally of system assets, is
shown at historical cost less accumulated depreciation. Improvements that
extend asset lives are capitalized; other repairs and maintenance charges
are expensed as incurred. The cost and related accumulated depreciation
applicable to assets sold or retired are removed from the accounts and the
gain or loss on disposition is recognized as a component of depreciation
expense.
System assets
Prior to the Prematurity Period, no depreciation is provided on system
assets. During the Prematurity Period, depreciation is provided in
accordance with SFAS No. 51.
Depreciation of system assets is provided by the straight-line method over
estimated useful lives as follows:
Plant 40 years
Network 15 years
Subscriber equipment 6-8 years
Switch 10 years
Non-system assets
Depreciation of non-system assets is provided by the straight-line method
over estimated useful lives as follows:
Leased buildings 40 years
Fixtures, fittings and equipment 5 years
Computers 4 years
Vehicles 3 years
- 65 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Leased Assets
Assets held under capital leases are treated as if they had been purchased
outright and the corresponding liability is included in capital lease
obligations. Capital lease payments include principal and interest, with
the interest portion being expensed. Payments on operating leases are
expensed on a straight-line basis over the lease term.
Deferred Charges
Deferred charges consist primarily of franchise acquisition and development
costs directly attributable to obtaining, developing and maintaining the
franchise licenses and debt acquisition costs incurred by the Company in
entering into the London Facility (see Note 3). Franchise acquisition and
development costs are being amortized, on a straight-line basis, over
periods from two to fifteen years. Debt acquisition costs are being
amortized on a straight-line basis over the term of the related debt.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to subscribers who are delinquent.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the financial
statements in the period of enactment.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1996.
3. LONG-TERM DEBT
In June 1995, the Company entered into the London Facility with various
banks. The London Facility has a two year term and an interest rate at the
London Interbank Offered Rate ("LIBOR") plus 2.5% (8.75% as of December 31,
1996). The Company has fully drawn under the London Facility as of December
31, 1996. The Company's two principal shareholders' right to receive
consulting fee payments from the Company has been subordinated to the banks
under the London Facility. Included in convertible debt and other in the
Company's consolidated balance sheet as of December 31, 1995 is (UK
Pound)393,000 of subordinated shareholder consulting fees. Upon a change of
control, all amounts due under the London Facility become immediately due
and payable. In addition, the Company's two principal shareholders' shares
in Cable London have been pledged to secure the London Facility. The
Company is in the process of refinancing the London Facility.
Also included in long-term debt is a mortgage note, payable over a period
of 18 years at (UK Pound)37,000 per year, which is secured by property of
the Company. The mortgage note bears interest at a fixed rate of 10.5%.
The differences between the carrying amounts and estimated fair value of
the Company's long-term debt was not significant as of December 31, 1996
and 1995. Interest rates that are currently available to the Company for
debt with similar terms and remaining maturities are used to estimate fair
value for debt issues for which quoted market prices are not available.
- 66 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
The London Facility contains restrictive covenants which limit the
Company's ability to enter into arrangements for the acquisition of
property and equipment, investments, mergers and the incurrence of
additional debt. Certain of these covenants require that certain minimum
build requirements and cash flow levels be maintained and contain certain
restrictions on dividend payments. The Company was in compliance with such
restrictive covenants as of December 31, 1996.
4. CONVERTIBLE DEBT AND OTHER
As of December 31, 1996 and 1995, the Company had outstanding convertible
debt due to affiliates of (UK Pound)42.0. In addition, the Company had
outstanding loans from shareholders of (UK Pound)3.0 million as of December
31, 1996. The convertible debt outstanding as of December 31, 1993 and (UK
Pound)3.0 million of additional convertible debt issued in January 1994, as
well as all interest accrued thereon, was converted by the Company's two
principal shareholders into Ordinary Shares of the Company at a per share
conversion price of (UK Pound)2.00 in January 1994. The convertible debt
and loans from shareholders outstanding as of December 31, 1996 bear
interest at 2% above the base lending rate of Barclays Bank plc (8.0%
effective rate as of December 31, 1996). Under the London Facility,
principal and interest cannot be paid until the London Facility is repaid.
Accrued interest on the convertible debt and loans from shareholders of (UK
Pound)7.2 million and (UK Pound)3.9 million as of December 31, 1996 and
1995, respectively, has therefore been classified as long-term convertible
debt and other in the Company's consolidated balance sheet. Interest
expense on the loans and convertible debt due to affiliates was (UK
Pound)3.3 million, (UK Pound)3.2 million and (UK Pound)851,000 during the
years ended December 31, 1996, 1995 and 1994, respectively. A reasonable
estimate of the amounts due to shareholders and the convertible debt is not
practicable to obtain because of the related party nature of these items
and the lack of quoted market prices.
5. RELATED PARTY TRANSACTIONS
The Company has consulting agreements with Comcast UK Consulting, Inc.
("Comcast Consulting"), and TeleWest Communications Group Ltd.,
subsidiaries of the Company's two principal shareholders, Comcast UK Cable
Partners Limited and TeleWest Communications plc ("TeleWest"),
respectively. The Company pays a fee to Telewest each year as a
contribution to the operating expenses and capital expenditures of
TeleWest's Network Service Center, which provides telephony support to the
Company.
A summary of related party charges included in the Company's consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(UK Pound)000 (UK Pound)000 (UK Pound)000
<S> <C> <C> <C>
Consulting fees (UK Pound)790 (UK Pound)962 (UK Pound)847
Network Service Center fees 639 503 766
Other 125 33 58
--------------- --------------- ---------------
(UK Pound)1,554 (UK Pound)1,498 (UK Pound)1,671
=============== =============== ===============
</TABLE>
As of December 31, 1996 and 1995, accounts payable and accrued expenses
include (UK Pound)1.6 million and (UK Pound)86,000, respectively, payable
to the Company's two principal shareholders, principally for consulting
fees and normal operating expenses paid by the shareholders and their
affiliates on behalf of the Company.
In management's opinion, the foregoing transactions were entered into on
terms no more or less favorable than those with non-affiliated third
parties.
- 67 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
6. INCOME TAXES
The Company has a deferred tax asset arising from the carryforward of net
operating losses and the differences between the book and tax basis of
property. However, a valuation allowance has been recorded to fully reserve
the deferred tax asset as its realization is uncertain.
Significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
Net operating loss carryforwards (carried forward indefinitely)..............(UK Pound)15,852 (UK Pound)14,940
Differences between book and tax basis of property........................... 7,329 3,525
Other........................................................................ (756) (1,338)
Less: Valuation allowance.................................................... (22,425) (17,127)
---------------- ----------------
(UK Pound) (UK Pound)
================ ================
</TABLE>
7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of approximately (UK Pound)3.7
million, (UK Pound)691,000 and (UK Pound)369,000 during the years ended
December 31, 1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities and equipment are held under operating
or capital leases which expire through 2013.
A summary of assets held under capital leases are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(UK Pound)000 (UK Pound)000
<S> <C> <C>
System, fixtures, fittings, equipment and vehicles..........(UK Pound)8,219 (UK Pound)6,739
Less: Accumulated depreciation.............................. (1,523) (813)
--------------- ---------------
(UK Pound)6,696 (UK Pound)5,926
=============== ===============
</TABLE>
- 68 -
<PAGE>
CABLE LONDON PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Concluded)
Future minimum rental payments under lease commitments with an initial or
remaining term of more than one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
(UK Pound)000 (UK Pound)000
<S> <C> <C>
1997........................................................ (UK Pound)969 (UK Pound)991
1998........................................................ 1,090 882
1999........................................................ 1,499 471
2000........................................................ 1,466 172
2001........................................................ 1,652 146
Thereafter.................................................. 4,634 1,101
--------------- ---------------
Total minimum rental commitments............................(UK Pound)11,310 (UK Pound)3,763
===============
Less: Amount representing interest.......................... (3,117)
---------------
Present value of minimum rental commitments................. 8,193
Less: Current portion of capital lease obligations.......... (324)
---------------
Long-term portion of capital lease obligations.............. (UK Pound)7,869
===============
</TABLE>
Capital lease obligations of (UK Pound)1.5 million and (UK Pound)3.9
million were incurred during the years ended December 31, 1996 and 1995,
respectively.
Operating lease expense for the years ended December 31, 1996, 1995 and
1994 was (UK Pound)1.2 million, (UK Pound)1.1 million and (UK
Pound)721,000, respectively.
- 69 -
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 or Regulation S-K which is included in Part I hereof as Item 4A in
accordance with General Instruction G(3)), Item 11, Executive Compensation, Item
12, Security Ownership of Certain Beneficial Owners and Management, and Item 13,
Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders presently scheduled to be held in June 1997, which shall be
filed with the Securities and Exchange Commission within 120 days of the end of
the Registrant's last fiscal year.
- 70 -
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
<TABLE>
<S> <C>
Comcast UK Cable Partners Limited and Subsidiaries
Independent Auditors' Report............................................29
Report of Independent Public Accountants ...............................30
Consolidated Balance Sheet--December 31, 1996 and 1995..................31
Consolidated Statement of Operations--Years
Ended December 31, 1996, 1995 and 1994................................32
Consolidated Statement of Cash Flows--Years
Ended December 31, 1996, 1995 and 1994................................33
Consolidated Statement of Shareholders'
Equity--Years Ended December 31, 1996, 1995 and 1994..................34
Notes to Consolidated Financial Statements..............................35
Birmingham Cable Corporation Limited and Subsidiaries
Independent Auditors' Report............................................46
Report of Independent Public Accountants................................47
Consolidated Balance Sheet--December 31, 1996 and 1995..................48
Consolidated Statement of Operations--Years
Ended December 31, 1996, 1995 and 1994................................49
Consolidated Statement of Cash Flows--Years
Ended December 31, 1996, 1995 and 1994................................50
Consolidated Statement of Shareholders'
Equity--Years Ended December 31, 1996, 1995 and 1994..................51
Notes to Consolidated Financial Statements..............................52
Cable London PLC and Subsidiaries
Independent Auditors' Report............................................58
Report of Independent Public Accountants ...............................59
Consolidated Balance Sheet--December 31, 1996 and 1995..................60
Consolidated Statement of Operations--Years
Ended December 31, 1996, 1995 and 1994................................61
Consolidated Statement of Cash Flows--Years
Ended December 31, 1996, 1995 and 1994................................62
Consolidated Statement of Shareholders'
Equity--Years Ended December 31, 1996, 1995 and 1994..................63
Notes to Consolidated Financial Statements..............................64
</TABLE>
(b) All financial statement schedules are omitted because they are not
applicable, not required or the required information is included in
the financial statements or notes thereto.
(c) Exhibits required to be filed by Item 601 of Regulation S-K:
2.l* Reorganization Agreement, dated 19 September 1994, among
Warburg, Pincus Investors, L.P., Bankers Trust Investments
PLC ("Bankers Trust"), Comcast Corporation ("Comcast"),
Comcast UK Holdings, Inc., ("Holdings"), the Company and UK
Cable Partners Limited ("UKCPL")
3(i)+ Memorandum of Association of the Company
3(ii)+ Bye-laws of the Company
4.l+ Form of Certificate for Class A Common Shares, par value (UK
Pound)0.01 per share
- 71 -
<PAGE>
4.2* Indenture dated as of November 15, 1995, between the Company
and Bank of Montreal Trust Company, as Trustee, in respect
of the Company's 11.20% Senior Discount Debentures Due 2007
(the "Debentures")
4.2a Form of certificate of the Debentures (included in Exhibit
4.2)
10.1+ Subscription and Contribution Agreement, dated 26 October
1992, among Comcast, UKCPL, the Company, Holdings, Comcast
Cablevision of Birmingham, Inc. ("Comcast Birmingham") and
Comcast Cablevision of London, Inc.
10.2+ Shareholders Agreement, dated 11 December 1992 (the
"Shareholders Agreement"), among Holdings, UKCPL, the
Company and Comcast
10.3+ Delegation Agreement, dated 11 December 1992 (the
"Delegation Agreement"), among LTK Consulting, Comcast and
Comcast UK Consulting, Inc. ("Comcast Consulting")
10.4+ NewCo Services Agreement, dated 11 December 1992 (the "NewCo
Services Agreement"), between the Company and Comcast UK
Cable Partners Consulting, Inc. ("UK Consulting")
10.5++ Supplemental Agreement, dated as of June 21, 1995, among the
Company, Comcast Consulting, Comcast, Holdings, Warburg
Pincus and UK Consulting to the NewCo Services Agreement,
the Delegation Agreement and the Shareholders Agreement
10.6+ Memorandum of Association and Articles of Association of
Birmingham Cable Corporation Limited ("Birmingham Cable")
10.7+ Co-ownership Agreement, dated 12 March 1990, between US West
International Holdings, Inc. ("US West") and Comcast
Birmingham
10.7a+ Letter, dated 29 April 1992, from US West to Comcast
Birmingham relating to the Co-ownership Agreement
10.7b+ Letter, dated 6 May 1992, from US West to Comcast Birmingham
relating to the Co-ownership Agreement
10.8+ Subscription Agreement, dated 4 May 1989, between Birmingham
Cable and US West
10.8a+ Subscription Agreement, dated 31 May 1989, among Birmingham
Cable, US West, Compagnie Generale des Eaux ("CGE"), The
Cable Corporation Limited ("TCC") and the Standard Life
Insurance Company ("Standard Life")
10.8b+ Supplemental Subscription Agreement, dated 16 March 1990,
among Birmingham Cable, US West, CGE, TCC, Standard Life,
Comcast Birmingham and General Cable PLC ("General Cable")
10.8c+ Second Supplemental Subscription Agreement, dated 16 March
1990, among Birmingham Cable, US West, CGE, TCC, Standard
Life, Comcast Birmingham and General Cable
10.8d+ Third Supplemental Subscription Agreement, dated 12 May
1992, among Birmingham Cable, US West, CGE, TCC, Standard
Life, Comcast Birmingham, General Cable and US West Cable
Programming Corporation
10.8e* Agreement relating to Birmingham Cable, dated 30 March 1994,
among General Cable, CGE, TeleWest Communications plc
("TeleWest"), US West, United Artists Cable Television
International Holdings, Inc., the Company, Comcast, TCC,
Birmingham Cable, Birmingham Cable Limited and Standard Life
10.9+ Management Agreement, dated 25 April 1990 (the "Management
Agreement"), among Birmingham Cable, Birmingham Cable
Limited, US West and Comcast Birmingham
10.9a+ Assignment Agreement, dated 27 August 1990, relating to the
Management Agreement
10.9b+ Assignment and Amendment Agreement, dated 5 August 1992,
relating to the Management Agreement
10.10+ Consultant Agreement, dated 17 July 1992, among Birmingham
Cable, Birmingham Cable Limited and TeleWest Communications
Group Limited
10.12+ Memorandum of Association and Articles of Association of
Cable London PLC ("Cable London")
10.13+ Consultant Agreement, dated 16 August 1989, between Cable
London and US West Cable Communications Limited
10.14+ Consultant Agreement, dated 17 August 1989 (the "London
Consultant Agreement"), between Cable London and Comcast
10.14a+ Assignment Agreement, dated 14 September 1990, relating to
the London Consultant Agreement
- 72 -
<PAGE>
10.15+ Subscription Agreement, dated 10 July 1989, among Cable
London, US West, Comcast, Jerrold Samuel Nathan, Malcolm
John Gee, Sally Margaret Davis and Steven Michael Kirk
10.16x Share Exchange Agreement, dated 4 December 1995, among
SingTel, Cambridge Cable, the Company and Holdings
10.17+ Share Exchange Agreement, dated 5 May 1994, between Avalon
Telecommunications L.L.C. and the Company
10.18ss. 1995 Stock Appreciation Rights Plan (1)
10.19y 1995 Stock Option Plan (1)
21.1+ List of subsidiaries of the Company
23.1 Consents of Arthur Andersen LLP
23.2 Consent of Arthur Andersen--Birmingham
23.3 Consent of Arthur Andersen--London
23.4 Consents of Deloitte & Touche LLP
23.5 Consent of Deloitte & Touche--Birmingham
23.6 Consent of Deloitte & Touche--London
27.1 Financial Data Schedule
99.1y Consolidated financial statements of Cambridge Holding
Company Limited (a United Kingdom corporation in the
prematurity stage) and subsidiaries as of and for the years
ended December 31, 1995 and 1994
- ---------------
(1) Constitutes a management contract or compensatory plan or arrangement.
* Incorporated by reference to the Company's registration statement on Form
S-1 (file number 33-96932) declared effective November 9, 1995.
+ Incorporated by reference to the Company's registration statement on Form
S-1 (file number 33-76160) declared effective September 20, 1994.
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (file number 0-24792).
ss. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 (file number 0-24792).
x Incorporated by reference to the Company's Current Report on Form 8-K dated
January 22, 1996.
y Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (file number 0-24792).
(d) Reports of Form 8-K - none.
- 73 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 1997.
COMCAST UK CABLE PARTNERS LIMITED
By: /s/ JOHN R. ALCHIN
----------------------------
JOHN R. ALCHIN
Senior Vice President and Treasurer
(Principal Financial Officer);
Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RALPH J. ROBERTS
- ------------------------------------
RALPH J. ROBERTS Chairman of the Board of March 28, 1997
Directors; Director
/s/ BRIAN L. ROBERTS
- ------------------------------------
BRIAN L. ROBERTS President (Principal March 28, 1997
Executive Officer); Director
/s/ JULIAN A. BRODSKY
- ------------------------------------
JULIAN A. BRODSKY Vice Chairman of the Board March 28, 1997
of Directors; Director
/s/ LAWRENCE S. SMITH
- ------------------------------------
LAWRENCE S. SMITH Executive Vice President March 28, 1997
(Principal Accounting Officer);
Director
/s/ JOHN R. ALCHIN
- ------------------------------------
JOHN R. ALCHIN Senior Vice President and March 28, 1997
Treasurer (Principal Financial
Officer); Director
- ------------------------------------
ROBERT B. CLASEN Director
- ------------------------------------
JONATHAN PERRY Director
- 74 -
<PAGE>
Signature Title Date
/s/ HOWARD H. NEWMAN
- ------------------------------------
HOWARD H. NEWMAN Director March 28, 1997
/s/ JEFFREY A. HARRIS
- ------------------------------------
JEFFREY A. HARRIS Director March 28, 1997
/s/ H. BRIAN THOMPSON
- ------------------------------------
H. BRIAN THOMPSON Director March 28, 1997
/s/ JOHN R. ALCHIN
- ------------------------------------
JOHN R. ALCHIN Authorized Representative March 28, 1997
in the United States
</TABLE>
- 75 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
23.1 Consents of Arthur Andersen LLP
23.2 Consent of Arthur Andersen -- Birmingham
23.3 Consent of Arthur Andersen -- London
23.4 Consents of Deloitte & Touche LLP
23.5 Consent of Deloitte & Touche -- Birmingham
23.6 Consent of Deloitte & Touche -- London
27.1 Financial Data Schedule
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 17, 1995 on Comcast UK Cable Partners Limited and
subsidiaries, included in Comcast UK Cable Partners Limited's Form 10-K for the
year ended December 31, 1996, into Comcast UK Cable Partners Limited's
previously filed Registration Statement File No. 333-02718.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 26, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 17, 1995 on Cambridge Holding Company Limited and
subsidiaries, incorporated by reference in Comcast UK Cable Partners Limited's
Form 10-K for the year ended December 31, 1996, into Comcast UK Cable Partners
Limited's previously filed Registration Statement File No. 333-02718.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 26, 1997
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 3, 1995 on Birmingham Cable Corporation Limited and
subsidiaries, included in Comcast UK Cable Partners Limited's Form 10-K for the
year ended December 31, 1996, into Comcast UK Cable Partners Limited's
previously filed Registration Statement File No. 333-02718.
/s/ ARTHUR ANDERSEN
Birmingham, England
March 26, 1997
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 3, 1995 on Cable London PLC and subsidiaries, included in
Comcast UK Cable Partners Limited's Form 10-K for the year ended December 31,
1996, into Comcast UK Cable Partners Limited's previously filed Registration
Statement File No. 333-02718.
/s/ ARTHUR ANDERSEN
London, England
March 26, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-02718 of Comcast UK Cable Partners Limited and subsidiaries on Form S-8 of
our report on Comcast UK Cable Partners Limited and subsidiaries dated February
28, 1997, appearing in this Annual Report on Form 10-K of Comcast UK Cable
Partners Limited and subsidiaries for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-02718 of Comcast UK Cable Partners Limited and subsidiaries on Form S-8 of
our report on Cambridge Holding Company Limited and subsidiaries dated February
29, 1996, incorporated by reference in this Annual Report on Form 10-K of
Comcast UK Cable Partners Limited and subsidiaries for the year ended December
31, 1996.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-02718 of Comcast UK Cable Partners Limited and subsidiaries on Form S-8 of
our report on Birmingham Cable Corporation Limited and subsidiaries dated
February 28, 1997 (March 12, 1997 as to Note 3), appearing in this Annual Report
on Form 10-K of Comcast UK Cable Partners Limited and subsidiaries for the year
ended December 31, 1996.
/s/ DELOITTE & TOUCHE
Birmingham, England
March 26, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-02718 of Comcast UK Cable Partners Limited and subsidiaries on Form S-8 of
our report on Cable London PLC and subsidiaries dated February 28, 1997,
appearing in this Annual Report on Form 10-K of Comcast UK Cable Partners
Limited and subsidiaries for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE
London, England
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of operations and consolidated balance sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000919957
<NAME> COMCAST UK CALBE PARTNERS LTD
<MULTIPLIER> 1,000
<CURRENCY> U. K. POUNDS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.7125
<CASH> 63,314
<SECURITIES> 61,466
<RECEIVABLES> 4,260
<ALLOWANCES> (1,338)
<INVENTORY> 0
<CURRENT-ASSETS> 132,921
<PP&E> 231,616
<DEPRECIATION> (12,885)
<TOTAL-ASSETS> 484,492
<CURRENT-LIABILITIES> 29,433
<BONDS> 202,626
0
0
<COMMON> 501
<OTHER-SE> 238,531
<TOTAL-LIABILITY-AND-EQUITY> 484,492
<SALES> 31,358
<TOTAL-REVENUES> 32,428
<CGS> 0
<TOTAL-COSTS> (56,981)
<OTHER-EXPENSES> (18,432)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (23,627)
<INCOME-PRETAX> (40,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,575)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
