<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 33-83740
REGISTRATION NO. 33-98374
PROSPECTUS SUPPLEMENT NO. 3 TO PROSPECTUS DATED SEPTEMBER 17, 1996
DIAMOND CABLE COMMUNICATIONS PLC
13 1/4% SENIOR DISCOUNT NOTES DUE SEPTEMBER 30, 2004
11 3/4% SENIOR DISCOUNT NOTES DUE DECEMBER 15, 2005
________________________
Interest will not accrue on the 13 1/4% Senior Discount Notes due
September 30, 2004 (the "Initial Senior Notes") prior to September 30, 1999.
Interest on the Initial Senior Notes will be payable on March 31 and September
30 of each year, commencing March 31, 2000, at a rate of 13 1/4% per annum. See
"Description of Initial Senior Notes" in the accompanying Prospectus. The
Initial Senior Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after September 30, 1999, at the redemption prices
set forth herein plus accrued interest to the date of redemption. The Initial
Senior Notes are also redeemable in whole, but not in part, at the option of
the Company at any time at 100% of the principal amount plus accrued interest
to the date of redemption (or, prior to September 30, 1999, at 100% of Accreted
Value) in the event of certain tax law changes requiring the payment of
additional amounts as described herein. In addition, in the event that the
Company (i) sells certain Equity Securities in a Public Offering or (ii)
consummates a Trade Sale, prior to March 31, 1997, the Company may, at its
option, redeem up to a maximum of $71,275,250 in aggregate principal amount at
maturity of Initial Senior Notes at a redemption price of 113.25% of Accreted
Value. The Company is required to offer to repurchase all outstanding Initial
Senior Notes at 101% of principal amount plus accrued interest to the date of
repurchase (or, prior to September 30, 1999, at 101% of Accreted Value on the
date of repurchase) after the occurrence of a Change of Control. See
"Description of the Initial Senior Notes -- Redemption" in the accompanying
Prospectus. There can be no assurance that the Company will have the financial
resources necessary or otherwise be able to repurchase the Initial Senior Notes
under such circumstances.
Interest will not accrue on the 11 3/4% Senior Discount Notes due December
15, 2005 (the "New Senior Notes") prior to December 15, 2000. Interest on the
New Senior Notes will be payable on June 15 and December 15 of each year,
commencing June 15, 2001 at a rate of 11 3/4% per annum. See "Description of
the New Senior Notes" in the accompanying Prospectus. The New Senior Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 15, 2000, at the redemption prices set forth in the accompanying
Prospectus plus accrued interest to the date of redemption. The New Senior
Notes are also redeemable in whole, but not in part, at the option of the
Company at any time at 100% of the principal amount plus accrued interest to
the date of redemption (or, prior to December 15, 2000, at 100% of Accreted
Value) in the event of certain tax law changes requiring the payment of
additional amounts as described herein. Upon the occurrence of a Change of
Control the Company is required to offer to repurchase all outstanding New
Senior Notes at 101% of principal amount plus accrued interest to the date of
repurchase (or, prior to December 15, 2000, at 101% of Accreted Value on the
date of repurchase) after the occurrence of a Change of Control. In addition,
upon the occurrence of an Asset Disposition, the Company may be obligated to
make an Offer to Purchase all or a portion of the outstanding New Senior Notes
at 100% of the principal amount plus accrued interest to the date of repurchase
(or, prior to December 15, 2000, at 100% of Accredited Value on the date of
repurchase). See "Description of the New Senior Notes -- Redemption" in the
accompanying Prospectus. There can be no assurance that the Company will have
the financial resources necessary or otherwise be able to repurchase the New
Senior Notes under such circumstances.
The Senior Notes constitute unsecured senior indebtedness of the Company.
In August 1996, certain of the Company's subsidiaries entered into a senior
bank lending facility of up to L.340 million. In February and March 1997, the
senior bank lending facility was amended to reduce the aggregate amount
available for borrowing to L.175 million and to revise certain covenants and
conditions. Indebtedness under the senior bank lending facility is effectively
senior to the Senior Notes as such indebtedness will be incurred by a
subsidiary of the Company, guaranteed by certain of the Company's other
subsidiaries and secured by liens on the assets of certain of the Company's
subsidiaries and a pledge of the issued shares of certain of the Company's
subsidiaries other than Jewel Holdings Limited. At September 30, 1996, the
Company had approximately L.334 million of indebtedness outstanding, including
approximately L.124 million and L.210 million in accreted value of Initial
Senior Notes and the New Senior Notes, respectively. Total Group indebtedness
at such date was L.345 million. The Company has not issued, and does not have
any current plans to issue, any significant indebtedness that will be
subordinated to the Senior Notes. The Company is a holding company which
conducts substantially all of its business through subsidiaries, all of which
are wholly-owned. The Senior Notes effectively rank junior to any indebtedness
of the Company's subsidiaries to the extent of the assets of such subsidiaries
and to any secured indebtedness of the Company to the extent of the assets
securing such indebtedness. The New Senior Notes rank pari passu with the
Initial Senior Notes.
________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus Supplement, together with the Prospectus dated September
17, 1996, Prospectus Supplement No. 1 thereto dated November 14, 1996 and
Prospectus Supplement No. 2 thereto dated February 12, 1997, is to be used by
Goldman, Sachs & Co. in connection with offers and sales of the Senior Notes
related to market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. The Company will not receive any
of the proceeds of such transactions. Goldman, Sachs & Co. may act as a
principal or agent in such transactions. See "Plan of Distribution" in the
Prospectus.
GOLDMAN, SACHS & CO.
________________________
The date of this Prospectus Supplement is April 2, 1997.
<PAGE> 2
GENERAL
This Prospectus Supplement should be read in conjunction with the
Prospectus dated September 17, 1996, Prospectus Supplement No. 1 thereto dated
November 14, 1996 and Prospectus Supplement No. 2 thereto dated February 12,
1997 (collectively, the "Prospectus"). The Prospectus has been used by
Goldman, Sachs & Co. in connection with offers and sales related to
market-making transactions in the Senior Notes. This Prospectus Supplement,
together with the Prospectus, is to be used by Goldman, Sachs & Co. in
connection with such transactions and unsolicited purchases and sales.
Capitalized terms used in this Prospectus Supplement and not otherwise
defined have the same meanings as in the Prospectus.
2-
<PAGE> 3
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
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 (No fee required)
For the transition period from to
Commission file number: 33-83740
DIAMOND CABLE COMMUNICATIONS Plc
(Exact name of registrant as specified in the charter)
ENGLAND NONE
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
DIAMOND PLAZA, DALESIDE ROAD,
NOTTINGHAM NG2 3GG, ENGLAND NONE
(Address of Principal Executive Offices) (Zip Code)
011-44-115-912-2242
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------------------- ------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act: None
NONE
(Title of Class)
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
<PAGE> 4
INTRODUCTION
Diamond Cable Communications Plc (the "Company") is a public limited
company (with registered number 2965241) incorporated under the laws of England
and Wales. The Company is a holding company which holds all of the shares of
(i) Diamond Cable Communications (UK) Limited ("DCL") (formerly Diamond Cable
(Nottingham) Limited) and (ii) the group of companies comprising LCL (as
defined below), in both cases through an intermediate holding company, Jewel
Holdings Limited ("Jewel"). In this Annual Report, except as the context may
otherwise require, references to the Company refer to the Company and/or its
predecessor, references to the "Group" refer to the Company and its
subsidiaries, including as of September 27, 1995, LCL, and references to
"Diamond" refer to the Company and its subsidiaries excluding LCL.
The Group operates a telecommunications and cable television business
focused on the East Midlands area of England. The Group is currently
constructing a broadband fiber-optic network to serve its fifteen contiguous
franchise areas, comprising approximately 1.2 million homes and an estimated
60,600 businesses. As of December 31, 1996, the Group's cable television and
telecommunications network had passed by civils construction approximately
453,500 homes and an estimated 23,900 businesses, of which portions of the
network passing approximately 347,200 homes and an estimated 17,900 businesses
had been activated. As of that date, the Group had approximately 104,500
residential telephone lines, 59,200 cable television subscribers and 18,900
business telephone lines. Through that date, L.317 million had been invested
(at original cost) in the construction of the network and related systems. For
certain operating data as of December 31, 1996, see Item 1. "Business --
Certain Operating Data".
On September 27, 1995, the Group acquired substantially all of the share
capital of East Midlands Cable Group Limited ("EMCG"), East Midlands Cable
Communications Limited and East Midlands Cable Holdings Limited (collectively
"LCL"), and on October 4, 1995 the Group acquired the remaining share capital
(less than 1%) of LCL. For financial accounting purposes, the acquisition was
given effect as of September 30, 1995. At and prior to September 30, 1995,
substantially all of LCL's operating activities were carried out through LCL
Cable Communications Limited ("LCL Cable") (now Diamond Cable (Leicester)
Limited). On April 26, 1995, LCL Cable became the principal operating
subsidiary of EMCG. References herein to LCL may also refer to LCL Cable or
EMCG as appropriate.
This document contains certain forward-looking statements, identified as
such, with respect to which the Company is seeking to utilize the safe harbor
provided by the Private Securities Litigation Reform Act of 1995. These
statements are accompanied by, and should be read in conjunction with,
explanations of important factors that could cause actual results to differ
materially from those in the forward-looking statements.
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. References herein to
"pounds sterling", "L.", "pence" or "p" are to the lawful currency of the
United Kingdom and references to "U.S. dollars", "dollars", "$" or "c." are to
the lawful currency of the United States. Merely for convenience, this Annual
Report contains translations of certain pound sterling amounts into U.S.
dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such U.S.
dollar amounts or could have been or could be converted into U.S. dollars at
the rate indicated or at any other rate. Unless otherwise indicated, the
translations of pound sterling amounts into U.S. dollars have been made at
$1.7123 per L.1.00, the noon buying rate in The City of New York for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 1996. See
Item 6. "Selected Financial Data -- Exchange Rates" for information regarding
the Noon Buying Rate for the past five fiscal years. On March 19, 1997 the Noon
Buying Rate was $1.5968 per L.1.00.
- 2 -
<PAGE> 5
PART I
ITEM 1. BUSINESS
The Group offers three basic services over its network infrastructure: (i)
residential telephone services allowing customers to place and receive local,
national and international calls and to use additional services such as
conference calling, call waiting, call forward, call barring and Internet
access, (ii) business telecommunications services which include the services
provided to residential customers as well as advanced telecommunications
services such as Centrex (which provides businesses, including those with
multiple sites, with virtual PABX and network services), direct dialing inward
(DDI), high speed data services and private circuits, and (iii) cable
television services offering more than 50 channels including movies, sports,
news and information, music, children's programming and general entertainment.
See "-- Business Telecommunications and Residential Telephone" and "-- Cable
Television".
CERTAIN OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1994, 1995 and 1996. The
combined operating data at and for the year ended December 31, 1995 reflects
the acquisition of LCL on a pro-forma basis as if it had been completed at the
beginning of 1995.
<TABLE>
<S> <C> <C> <C> <C> <C>
DECEMBER 31,
1994 1995 1996
DIAMOND LCL COMBINED
Homes passed by civils construction(1). 55,919 222,335 58,976 281,311 453,496
Homes activated(2)..................... 32,033 105,951 51,955 157,906 347,246
Homes marketed(3)...................... 31,330 77,657 48,950 126,607 252,601
CABLE TELEVISION
Basic service subscribers.............. 8,936 20,261 10,488 30,749 59,242
Penetration rate of homes marketed(4).. 28.5 % 26.1 % 21.4 % 24.3 % 23.5 %
Average monthly revenue per
subscriber(5).......................... L. 14.71 L. 16.80 L. 18.89 L. 17.62 L. 18.03
Churn(6)............................... 28.5 % 35.5 % 31.0 % 33.8 % 40.9 %
RESIDENTIAL TELEPHONE
Residential lines connected............ 14,150 36,122 16,576 52,698 104,460
Penetration rate of homes marketed(4).. 45.2 % 46.5 % 33.9 % 41.6 % 41.4 %
Average monthly revenue per line(7)(8). L. 18.83 L. 18.68 L. 22.19 L. 19.88 L. 18.40
Pro-forma average monthly revenue per
line(8)................................ L. 18.83 L. 18.11 L. 21.35 L. 19.22 L. 18.64
Churn(6)............................... 13.8 % 13.9 % 17.2 % 15.0 % 20.6 %
BUSINESS TELECOMMUNICATIONS
Business customers accounts............ 979 1,627 772 2,399 3,935
Business lines connected............... 3,928 7,036 2,843 9,879 18,932
Private circuits(9).................... 70 151 10 161 226
Average lines per business account(10). 4.0 4.3 3.7 4.1 4.8
Average monthly revenue per line(8)(11) L. 88.68 L. 74.60 L. 59.60 L. 70.23 L. 50.17
Pro-forma average monthly revenue per
line(8)................................ L. 88.68 L. 72.02 L. 56.88 L. 67.70 L. 51.25
</TABLE>
- 3 -
<PAGE> 6
(1) Homes passed by civils construction is the number of homes that have had
ducting buried outside.
(2) Homes activated is the number of homes that are capable of receiving
cable service without further extension of transmission lines, apart from
the final connection to the home.
(3) Homes marketed is the number of homes activated for which the initial
marketing phase has been completed.
(4) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television or the number of residential
lines connected, as the case may be, on the given date by the total number
of homes marketed for the given service as of such date, expressed as a
percentage.
(5) The average monthly revenue per cable television subscriber is calculated
by dividing total cable television subscriber revenues (excluding
installation revenues) for the period by the average number of cable
television subscribers (calculated as a simple average of the number of
basic service subscribers at the end of each month during the period) and
dividing that amount by 12.
(6) Churn is calculated by dividing net disconnections (total disconnections
less the number of disconnected accounts for which service is later
restored) in a period by the average number of subscribers in the period
(calculated as a simple average of the number of subscribers at the end of
each month during the period).
(7) The average monthly revenue per residential telephone line is calculated
by dividing (i) line and equipment rental, outgoing call charges and
incoming call charges for the period by (ii) the average number of
residential telephone lines (calculated as a simple average of the number
of subscribed lines at the end of each month during the period) and
dividing that amount by 12.
(8) The calculation of the average monthly revenue per line (for both
residential telephone and business telecommunication revenues) for the
year to December 31, 1996 reflects the reduction in revenues stemming from
rebates to BT on incoming termination revenues relating in part to 1995
but recorded in full against revenues in 1996. The rebates were calculated
in accordance with recently revised interconnect agreements with BT that
were made effective retroactively from April 1995. The pro-forma average
monthly revenue per line (for both residential telephone and business
telecommunications revenues) gives effect to the revised interconnect
agreements as if they had been in effect from April 1995 and allocates to
each period the portion of the rebates that relates to such period.
(9) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(10) Average lines per business account is calculated by dividing the number
of business lines connected on the given date by the number of business
customer accounts on such date.
(11) Average monthly business telecommunications revenue per line is
calculated by dividing (i) business telecommunications line and equipment
rental, outgoing call charges and incoming call charges (including revenue
from private circuits) for the period by (ii) the average number of
business telecommunications lines and private circuits (calculated as a
simple average of the number of subscribed lines and private circuits at
the end of each month during the period) and dividing that amount by 12.
- 4 -
<PAGE> 7
INDUSTRY OVERVIEW
Following the initial granting of licenses in 1984, development of the
cable television and telecommunications industry in the U.K. proceeded slowly.
This occurred for a number of reasons, including high construction costs (due
in large part to the fact that cable networks in the U.K. generally must be
buried underground), limitations on the cable companies' ability to offer
telephone services, the lack of access to attractive programming and the lack
of access to capital.
Fundamental changes in the U.K. regulatory framework in 1990 and 1991,
combined with increased availability of programming, have resulted in
significant investment in the cable industry since that time. In 1991, the
Secretary of State completed the liberalization review of the U.K.
telecommunications market (the "Duopoly Review"), which resulted in major
policy changes designed, among other things, to foster competition in the local
telephone loop, where BT held almost all of the market share. Pursuant to such
policy changes (i) new entrants (including foreign companies) could apply to
the government to operate new telecommunications networks over fixed links,
(ii) cable operators were permitted to provide voice telephony services and to
switch their own telephone customers' calls, instead of acting as agents of BT
or Mercury, and (iii) cable operators were permitted to form expanded
telecommunications networks by interconnecting their systems with one another.
See "-- Certain Regulatory Matters -- Cable Telecommunications -- Duopoly
Review" and "-- Certain Regulatory Matters -- Cable Telecommunications --
Interconnect Arrangements".
To further encourage cable companies to construct cable television and
telephone networks, current U.K. government policy restricts the ability of BT
and Mercury to use their telephone networks for conveying broadcast
entertainment to homes in cable franchise areas until at least 1998. U.K.
regulatory policy has also been to award only a single cable television license
for each franchise area. As a result of these government policies, cable
operators currently hold the only licenses to provide both cable television and
telecommunications services within their franchises. By operating a single
fiber-optic network infrastructure to provide both cable television and
telecommunications services, the cable operators can achieve significant
economies in designing, constructing, marketing and operating their networks.
BT cannot offer broadcast entertainment on its dedicated telecommunications
network and achieve similar economies of scope in existing cable franchise
areas, and BT has stated that these government policies have limited its
ability to develop and implement a national fiber-optic local access network in
the U.K. See "-- Certain Regulatory Matters -- Cable Telecommunications --
Restrictions on National PTOs".
Further, the extensive use of fiber optics and digital switches, the use of
synchronous digital hierarchy ("SDH") and other advanced technologies, have
enabled cable operators to offer advanced telecommunications services. In
addition, the availability of programming has improved substantially since the
1980s. As a result of the foregoing factors, significant investment in U.K.
cable television followed the conclusion of the Duopoly Review. In particular,
several North American cable operators and telephone companies initiated
significant investment in the U.K. cable industry. In addition, cable companies
in the U.K. began to access capital markets to finance construction. The U.K.
cable industry has also begun to consolidate as evidenced by the 1995 merger of
SBC CableComms and TeleWest Communications plc and the announcement on October
22, 1996 that NYNEX CableComms Group plc, Videotron Holdings Plc, Mercury and
Bell Cablemedia plc intend to merge.
BUSINESS TELECOMMUNICATIONS AND RESIDENTIAL TELEPHONE
OVERVIEW
The Group derives its business telecommunications and residential
telephone revenues from connection charges, monthly line rental charges, call
charges, special residential service charges, special business service charges
(e.g., private business circuits) and interconnection fees payable to the
Group. In the U.K., the historical practice has been that all calls, local or
national, are charged by time and distance.
- 5 -
<PAGE> 8
Switching its own traffic enables the Group to offer a wider range of
services than would otherwise be possible, to monitor usage and manage doubtful
accounts, to gather information about customer calling patterns and use this
information in its marketing programs, and to structure rates and discount
programs accordingly. As part of the Company's strategy of increasing the
volume of calls switched locally and minimizing interconnect charges payable to
BT, Mercury, Energis and other telecommunications providers, the Group has from
time to time discussed with other cable operators the development of
inter-franchise telephone networks. However, no assurance can be given as to
whether or when any such inter-franchise networks will be developed.
BUSINESS TELECOMMUNICATIONS
The Group has achieved its share of the business telecommunications market
in the areas which its network has passed by providing high-quality services at
competitive prices. The Group had 3,935 business telecommunications customer
accounts at December 31, 1996 including connections to a number of important
corporate and governmental entities such as The Boots Company, Imperial
Tobacco, Cargill, CCN, the Nottinghamshire County Council, the Nottingham City
Council, Leicestershire County Council, Leicester City Council, Ashfield
District Council, North East Lincolnshire District Council, Lincoln City
Council, the Nottinghamshire Constabulary (including the local 999 emergency
number), the Leicestershire Constabulary and the Lincolnshire Constabulary, the
U.K. Inland Revenue national headquarters and their main sites in Leicester,
Nottingham, Lincoln and Mansfield, the Nottingham Health Care N.H.S. Trust, the
Nottingham City Hospital N.H.S. Trust, Nottingham Trent University, Leicester
University, Lincoln University, BBC Radio Nottingham, Radio Trent, the
Nottingham Building Society, Vision Express Group, Knoll Pharmaceuticals,
Pedigree Pet Foods and the Northcliff Newspaper Group (four regional newspapers
including Nottingham's Evening Post and the Leicester Mercury).
The focus of the business marketing effort in the Group's franchise areas
has been to attract large and medium-sized corporate and governmental
customers, which generate high volumes of traffic and revenue. At December 31,
1996, the Group provided 18,932 business lines to its 3,935 business accounts
giving the Group an average of approximately 4.8 lines per business account. In
many cases these customers have transferred all or a portion of their telephone
lines to the Group's service from those of the Group's principal competitors. A
number of these customers have been specifically targeted, and in some cases
the network has been built out to pass these customers. The Company plans to
continue this strategy of focusing a portion of the Group's network build and
marketing effort on town centers and industrial estates in its other franchise
areas in order to capitalize on business telecommunications opportunities. The
Company believes that its success in attracting these important customers has
fostered a positive image in the community and enhanced the Group's credibility
with other business customers.
The Group currently offers a range of special business services,
including:
o Custom Calling Features. The Group offers business customers
three-way conference calling and fully itemized and analyzed monthly
billing at no extra fee. At an extra charge, the Group provides
services similar to those offered to residential customers including
call waiting, call forward and alarm calls. Additionally, billing data
on high density 3.5" floppy disks is made available to customers.
o Centrex. Centrex allows the customer to use the facilities of
the Group's central exchange instead of purchasing its own PABX
(electronic switchboard), and allows the customer to link
geographically separated sites within the Group's network with common
numbering, features and facilities. Centrex offers significant
advantages over networking PABXs including reduced call charges and
data calls using ISDN instead of point-to-point data circuits.
o DDI (Direct Dialing Inward). Direct Dialing Inward offers
multiple unique numbers at a customer's premises via a smaller number
of access lines.
- 6 -
<PAGE> 9
o Private Circuits. Private (leased) circuits permit the
subscriber to rent a circuit between two points, for example between
two office buildings, at fixed rates. This permits the rapid exchange
of data between subscriber owned computers or exchanges without
passing through the public network. The subscriber can choose from
among different circuit capacities, such as 64 KBit/s for low speed
applications, and 2, 8, 34 and higher MBit/s speeds for other
computer, moving image, multiplexed voice and other high capacity data
applications such as main frame computer lines, video conferencing and
local area networks (LANs) between local offices.
o Digital Services. The Group offers digital connection to the
public network using DASS2 (Digital Access Signalling System) and Q931
(European specification). The Group offers Primary Rate ISDN (30 X
64kbps channels) for voice and data, or Basic Rate ISDN offering 2
channels of 64kbit and a 16kbps overhead which the Group is planning
to use for "D" channel services (i.e. telemetry, alarm circuits etc).
The network allows transparency for DPNSS (Digital Private Network
Signalling System) where customers are linking privately owned
telephone systems over the public network.
C Caller ID. Caller identification allows the customer to identify
the origin of the inbound call, which is essential for the successful
operation of computer telephone integration.
The Group has recently commenced other telecommunications services such as
Internet access, which it is making available to business and residential
customers, as well as voice mail which it has begun test marketing and expects
to make available during the second quarter of 1997. In addition, the Group is
currently conducting trials on a fully managed data service based upon frame
relay technology.
In the business telecommunications area, the Group generally competes on
the basis of the quality of services provided rather than on price, although
the Company believes that its charges for services to business customers are
competitive with those of BT, Mercury and other operators.
The Company believes the Group has achieved favorable penetration in the
business telecommunications market due to three factors. First, the Group's
strategy in business telecommunications is to target large and medium-sized
corporate and governmental customers, which generate the most revenue and the
Company has given priority to building out its network to such customers.
Second, the Group's fiber-optic network infrastructure provides customers with
several advantages including superior service reliability (due to the
self-healing loop architecture), greater system capacity and the ability to
provide an extensive range of digital services. Third, the Group provides a
high level of customer service including custom tailored network services and
frequent communication with major customers. The Company believes that this
combination of quality service and attractive rates has enabled the Group to
achieve a substantial share of the market of large and medium-sized business
telecommunications customers in the areas it has marketed.
Telephone subscribers changing to the Group have to change their telephone
numbers. As a result certain business customers have been reluctant to switch
carriers because they would lose their existing telephone numbers. In response
to this, Diamond has provided its business customers with the opportunity to use
the Group's telephone service for their outgoing telephone calls, which carry
higher revenues than incoming calls, and for their specialized
telecommunications needs, while retaining their existing service provider (and
their existing telephone number) for incoming telephone calls. For a description
of certain developments relating to number portability, see "-- Certain
Regulatory Matters -- Cable Telecommunications -- Number Portability" and "--
Competition -- Business Telecommunications".
RESIDENTIAL TELEPHONE
The Group had residential telephone line penetration of 41.4% of homes
marketed at December 31, 1996. The Company believes the Group is achieving these
residential telephone penetration rates due to (i) Diamond's well-recognized
brand name and (ii) the Group's competitive rates (including free voice calls
between the Group's residential customers in the same local and adjacent calling
areas during off peak evening and weekend hours). In the residential telephone
area, the Group generally competes on the following basis:
- 7 -
<PAGE> 10
Reliability. The Group's fiber-optic network infrastructure provides
reliable, high-quality transmission across a modern network. In addition, the
Company believes that the Group's early concentration on attracting prominent
business and governmental customers has enhanced its credibility with
residential customers.
Special Services. By switching its own traffic, the Group is able to
offer a variety of special services to residential customers. All residential
customers receive three-way conference calling capabilities and fully itemized
monthly billing at no extra fee. The Group provides three-way conference
calling free of charge in order to stimulate additional call and/or termination
charges. Additional "Custom Calling Features" offered by the Group for an extra
charge include: call waiting, call barring (prevents unauthorized outgoing or
incoming calls) and call diversion (i.e., call forward). The Group's network
architecture provides a flexible platform for the Group to offer a wide range
of additional telephony services as they become available in the future. These
services are expected to include voice mail and distinctive telephone rings for
different members of a household.
Cost Savings. The Group seeks to provide residential telephone customers
with savings on the cost of line rental and usage charges compared to BT. In
order to encourage customers to subscribe to both television and telephone
services, the monthly line rental charge for customers who subscribe to both
services is offered at a discount to the monthly charge for customers who
subscribe to telephone service only. Further discounts are available if a
customer remains a subscriber to both services for an extended period of time.
Free Evening and Weekend Voice Calls. The Group allows free voice calls
between the Group's residential customers and by the Group's residential
customers to the Group's business customers located within the same local and
adjacent calling areas during off-peak evening and weekend hours. The
incremental cost of these calls to the Group is negligible because they do not
require interconnection with another operator. The Company believes that this
service has encouraged its subscribers to recommend its services to other
potential subscribers, particularly friends and family members, and is believed
by the Company to increase calling traffic generally. The Company believes this
word-of-mouth marketing reinforces its well-recognized brand name.
The Company regularly evaluates its pricing strategy and intends to remain
price competitive in its residential telephone business. The Company believes
competitive pricing is particularly important initially as it introduces
services and seeks to gain market share. However, over time the Company expects
customer service to become a more important component of its marketing
strategy.
The Group recently launched an Internet access service, Diamond Cable
Online, in its operating area. This service, available to both Diamond
telephone subscribers and others, is the result of an alliance with Cable
Online Ltd., a subsidiary of International CableTel Ltd., and provides users
with access to the Internet and World Wide Web. The Group expects to offer
expanded Internet services, including ISDN and leased line connections, during
the second quarter of 1997. The Group is also test marketing voice mail
services which it intends to make available to residential telephone customers
during the second quarter of 1997.
CABLE TELEVISION
PROGRAMMING
The Company currently offers a wide range of cable television programming,
including satellite and broadcast channels, tape delivered channels and FM
radio. This range includes more than 50 television channels, many of which are
available 24 hours a day. Local programming is provided only on a limited basis
and may be offered on a larger scale in the future. In addition, the Company
has carried pay-per-view events. The Company also offers a digital music
service providing 30 channels of continuous music.
The Company believes that the availability of a wide variety of quality
programming is one of the most important factors influencing a consumer's
decision to subscribe for and retain cable television service.
- 8 -
<PAGE> 11
Consequently, the Group devotes considerable resources to obtaining access to a
wide range of programming that it believes will be appealing to both existing
and potential subscribers of its basic and premium services. The Group may from
time to time pursue investments in programming providers.
The following sets forth the television programming currently offered by
the Company.
<TABLE>
<CAPTION>
PROGRAMMING DESCRIPTION
- ----------- -----------
<S> <C>
NEWS AND INFORMATION
CNN International 24-hour international news service
European Business News(1) European business news service
Parliamentary Channel Live coverage of the U.K. Parliament
Sky News(2) 24-hour U.K. news service
The Weather Channel 24-hour weather information
Channel Guide Summary of programming schedule
Preview Channel Sampling of all cable channels
Diamond Vision/Cable 7 Local programming
Bloomberg Information TV(3) News and financial information service
- ---------------------------------------------------------------------------
GENERAL INTEREST
BBC1 U.K. terrestrial television
BBC2 U.K. terrestrial television
ITV U.K. terrestrial television
Channel 4 U.K. terrestrial television
Bravo(1) Classic movies and television series
NBC Super Channel U.S. and world news and entertainment
QVC -- The Shopping Channel(4) Home shopping
Sky One(2) Drama, films and serials
Sky 2(2)(5) Drama, films and serials
Discovery Channel(6) Science and education programming
The Challenge Channel(7) Game show programming
The Learning Channel(6) Education and documentary programming
The History Channel(4) History programming
Travel Channel(3) Travel programming
TNT(8) Movies and other entertainment
U.K. Gold Classic U.K. television programming
Live TV 24 hour U.K. entertainment and news
Sky Soap(2)(4) Repeats of soap dramas
The Sci-Fi Channel Science fiction programming
Sky Travel(2)(4) Travel programming
Vision(9) Religious programming
Christian Channel(4) Religious programming
Carlton Select(10) Classic U.K. Television programming
Carlton Food Network(10) Food programming
Granada Plus(11) Classic U.K. Television programming
Granada Men and Motors(11) Male oriented programming
Granada Talk Talk shows
Granada Good Life Health, shopping and gardening programming
- -----------------------------------------------------------------------------
MOVIES
Sky Movies(2)(12) 24-hour feature movies
Sky Movies Gold(2)(12) Classic movies
Playboy TV(12) Adult entertainment
The Movie Channel(2)(12) 24-hour feature movies
HVC(12)(13) Cult thriller movies
The Adult Channel(12)(13) Adult entertainment
- -----------------------------------------------------------------------------
</TABLE>
- 9 -
<PAGE> 12
<TABLE>
<S> <C>
CHILDREN
The Disney Channel(2)(12) Children's entertainment
Cartoon Network(8) Children's cartoons
TCC(7) Children's entertainment
Nickelodeon(5) Children's entertainment
- ---------------------------------------------------------------------------
MUSIC
VH-1 Music videos
CMT Europe Country music videos
MTV Europe Music videos
Performance(9) Classical music and opera
The Box Music videos selected by customer requests
Landscape(9) Classical music accompanying scenic videos
MCM Euromusique Music Videos
- ---------------------------------------------------------------------------
SPORTS
Eurosport International sporting events
Sky Sports(2)(12) U.K. and international sports
Sky Sports2(2)(12) U.K. and international sports
Sky Sports3(2)(12) U.K. and international sports
- ---------------------------------------------------------------------------
INTERNATIONAL
Zee TV(12) Asian sub-continent related programming
Asia NET Asian programming
Namaste(14) Asian programming
ATM(14) Asian programming
SAT 1 German language programming
TV5 French language programming
CNE Chinese news and entertainment
</TABLE>
(1) European Business News and Bravo share a single channel.
(2) Programming acquired from BSkyB and governed by the BSkyB rate card.
(3) The Travel Channel and Bloomberg share a single channel.
(4) Sky Soap, Sky Travel, QVC, the History Channel and the Christian Channel
share a single channel.
(5) Sky 2 and Nickelodeon share a single channel.
(6) The Discovery Channel and the Learning Channel share a single channel.
(7) The Challenge Channel and TCC share a single channel.
(8) TNT and Cartoon Network share a single channel.
(9) Landscape, Performance and Vision share a single channel.
(10) Carlton Select and Carlton Food Network share a single channel.
(11) Granada Plus and Granada Men and Motors share a single channel.
(12) These services are offered for an additional charge or upon subscribing
to other services requiring an additional charge.
- 10 -
<PAGE> 13
(13) HVC and the Adult Channel share a single channel.
(14) ATM and Namaste share a single channel.
The Company believes that an important factor influencing a consumer's
decision to subscribe for and retain cable services is the consumer's ability
to choose and pay for only those channels the consumer desires. The Group has
been constrained in its ability to offer a range of channel packages due to
requirements imposed by programming suppliers to provide certain channels to
all subscribers if provided to any. The Group has recently negotiated with
certain suppliers reductions in these requirements which will allow the Group
greater flexibility in designing the packages of channels it can offer
consumers in certain franchise areas.
The Group currently charges L.13.99 per month (after a L.1 direct debit
discount) for its basic cable television service (49 or 50 channels, depending
on the franchise area, and one converter box that provides cable service to one
television) and offers additional premium pay services. In two of its franchise
areas, Nottingham and Mansfield, the Company has introduced a "Connect Pack", an
entry-level package of 13 channels of television plus telephone line rental for
L.12.98 (L.5.99 for cable television and L.6.99 for telephone line rental).
This package, which does not include access to premium channels, is aimed at
the Group's large base of telephone-only subscribers as well as first time
subscribers to multichannel television. In these franchise areas, the Group
also offers its Variety Pack, which consists of 29 channels and is offered for
L.9.99 per month (after a L.1 per month direct debit discount). This package
provides subscribers access to premium channels without having to purchase a
full basic package. The Company also believes that these programming packages
will encourage existing subscribers to remain as cable television customers by
providing a less costly alternative to a full programming package. Generally,
there is no charge to the subscriber for service or repair of the cable
television network or customer premises equipment.
The Group obtains most of its programming from suppliers pursuant to
informal arrangements that are typically contemplated to run from three to five
years. The arrangements generally provide for payments by the Group based on
the number of subscribers to the service. Some programming, such as that
provided by the BBC and other terrestrial broadcasters, is provided to the
Group without charge.
BSkyB PROGRAMMING
BSkyB currently provides the Group with 12 channels on a non-exclusive
basis and also offers this programming (together with additional programming)
directly to its DTH satellite customers, in competition with the Group and
other cable operators. BSkyB is the leading supplier of cable programming in
the U.K. and the exclusive supplier of certain programming. Its programming is
generally popular in the U.K. and is important in terms of attracting and
retaining cable television subscribers. In the absence of more alternative
programming sources, BSkyB may be able to set and raise prices for its
programming without significant competitive pricing pressure. In addition,
BSkyB distributes 18 other programming channels on behalf of other providers
(including some providers partly owned by BSkyB).
The Group pays a monthly fee to BSkyB for programming based on the number
of the Group's subscribers taking the various BSkyB channels at the end of each
month. The fees vary by channel. The aggregate amount payable by the Group to
BSkyB during the year ended December 31, 1996 was L.3.6 million.
It was reported on September 3, 1996 that the ITC was investigating the
bundling of certain channels by BSkyB and, in particular, requirements that
cable companies must acquire a package including two premium movie channels in
order to obtain the Disney Channel from BSkyB. The ITC has not yet reported a
decision.
The prices that BSkyB charges the Group have been governed by rate cards
established by BSkyB from time to time. The two most recent rate cards were
approved by the Director General of Fair
- 11 -
<PAGE> 14
Trading("DGFT") following inquiries by the Office of Fair Trading ("OFT").
Under its rate cards, BSkyB implemented significant price increases. BSkyB
submitted a revised rate card to the OFT in July 1996, which has been approved
and which was operative as of February 16, 1997.
In addition, under the new rate card, BSkyB has introduced a separate
charge to the Group for a third sports channel, which it currently provides to
its DTH sports subscribers at no additional charge. The Group has decided to
pass on this separate charge for this service to subscribers to the other BSkyB
sports services unless the subscriber takes three BSkyB premium channels.
During 1995 and 1996, the OFT conducted reviews of BSkyB's position in the
pay TV market. Following its review in 1996 of BSkyB's supply of programming to
pay TV (including to cable operators) and access to encryption and subscriber
management services, the OFT concluded that although BSkyB was not acting
anti-competitively, the competitive process was being impaired. BSkyB was not
referred to the Monopolies and Mergers Commission (the "MMC") but gave new
informal undertakings and accepted modifications to those it had previously
given in March 1995. BSkyB agreed not to require carriage of basic channels in
excess of 80% of homes; to unbundle channels, with the exception that two BSkyB
channels could be linked with specified other BSkyB channels; to ensure that
its Videocrypt conditional access system is made freely available without
discrimination to programmers on the basis of a published rate card on
cost-related terms; to maintain separate accounts for its DTH business, with
actual or notional charges not less than offered to cable operators; and to
revise the structure of the cable rate card.
The DGFT has announced that the informal undertakings given by BSkyB would
be reviewed by the end of 1998 or earlier if appropriate. The DGFT has also
concluded that BSkyB should offer cable operators reasonable contractual
security in terms of length of contract and that the OFT would regard a
demonstrable and unreasonable unwillingness to do so as an abuse of BSkyB's
market power.
The OFT has also reviewed agreements between BSkyB and subsidiaries of
NYNEX CableComms Group PLC and TeleWest Communications plc, which among other
things permitted the licensing of BSkyB's programming at rates not provided by
the rate card. These agreements originally included undertakings by the two
cable companies not to compete with BSkyB with respect to film or sport
programming. Following a suspension of these provisions, the DGFT announced in
July 1996, that the agreements had been amended to address the concerns
expressed by the DGFT.
On February 6, 1996, the DGFT announced that he was referring an agreement
between the Premier League, BSkyB and the BBC, by which the Premier League
sells the exclusive television rights for Premier League football matches, to
the Restrictive Practices Court (the "Court") because the agreement contained
significant restrictions on competition. The Court will decide whether the
restrictions are against the public interest in which case the Court may order
the parties not to give effect to, enforce, or try to enforce the restrictions
in the agreement and not make any other similar agreement. BSkyB, the Premier
League and the BBC are understood to have successfully resisted an attempt made
by the OFT to accelerate the review and the review has not yet been completed.
The OFT is currently considering whether a number of other arrangements
for televising soccer and other sporting events contain significantly
anticompetitive restrictions.
The Group has commenced discussions with other cable operators and media
companies for the purpose of exploring ways in which it could obtain viable
sources of alternative programming and has from time to time discussed the
development of cable television channels to provide programming, including
local programming, through the Group's network.
FUTURE SERVICES
The Group's network has been designed to enable it to provide customers
with a wide range of advanced interactive services as they become available. The
Company also currently expects to introduce a more extensive pay-per-view
service once one becomes more generally available to the industry. Such
- 12 -
<PAGE> 15
a service would enable cable subscribers to order specific sporting events,
concerts, feature films or other special events on a per-event basis for an
additional charge. However, the Company cannot provide any assurances as to
whether or when such a service will be generally implemented.
Other interactive services that may be offered by the Group in the future
include video games that would be transmitted periodically (or possibly upon
subscriber request) to a special converter box at a subscriber's home where
they would be available for use by the subscriber (as with a traditional video
game) and video-on-demand services that would enable individual subscribers to
request specific programming from the service provider's inventory for viewing
at a specific time. See "-- Competition -- Cable Television". Additional
services could include video telephone services and video conferencing, access
to on-line databases and interactive transactional services. However, there can
be no assurance that the Group will be able to develop and deliver any of these
products on a timely and competitive basis.
Digital technology allows operators to provide more channels, through
digital compression, and higher quality pictures and sound. The Group believes
that its network leaves it well placed to provide digital television services
if in the Company's view providing these services in its franchise areas
becomes commercially attractive. However, the Group has no immediate plans to
introduce digital television services.
The Group currently receives negligible revenues from advertising, and
does not expect to receive any significant advertising revenues until its
subscriber base has expanded significantly. The Company believes that there may
be potential for meaningful advertising revenues in the future due to the
relatively limited alternative outlets for local advertising in the Group's
franchise areas.
SALES AND MARKETING
Cable television and residential telephone services are marketed to the
residential customer on an integrated basis. Until February 1997, the
residential sales teams were comprised of approximately 150 residential
specialists employed by independent sub-contracting companies supervised by the
Company and paid on a commission basis. Since February 1997, DCL has begun to
employ residential salespeople directly. These employees are now paid on the
basis of a salary plus commissions.
During construction of the Group's network, a customer relations program
is in place, beginning with a "Sorry to Disturb You" pre-construction notice
providing general information about the Company's services and describing the
construction process, followed by a "Thank You for Your Patience" packet
containing an apology for the inconvenience caused during construction,
complete information on the cable television and telephone services offered by
the Company, and ending with an after-sale satisfaction survey. This approach
is designed to inform potential customers of construction status, to minimize
inconvenience during construction and to foster a loyal customer base.
COMPETITION
The Group's business telecommunications, residential telephone and cable
television businesses compete with various companies using a variety of
technologies.
BUSINESS TELECOMMUNICATIONS
The Group competes primarily with BT and Mercury in providing business
telecommunications services. The Group competes primarily in the business
telecommunications area on the basis of quality of service and to a lesser
extent price. The Company believes the Group's call charges are competitive
with those of BT and Mercury.
The Company believes that the Group's ability to compete effectively with
BT had been adversely affected, particularly with respect to businesses, because
there had historically been no telephone number portability in the U.K. (i.e., a
new customer could not transfer its BT telephone number to the Group's system).
The Company believes that this discouraged some customers from changing from BT
to the
- 13 -
<PAGE> 16
Group's service because of the costs and inconvenience associated with changing
numbers. In response to this, the Company provided its customers with the
opportunity to use its services for all outgoing telephone traffic, while
continuing to use other providers for incoming traffic. For a discussion of
certain regulatory developments regarding the introduction of number
portability in the U.K. See "-- Certain Regulatory Matters -- Cable
Telecommunications -- Number Portability". The Company believes that number
portability will offer little improvement to the Group's results in residential
areas but could offer marginal increased sales in the small business area where
number recognition and number advertising for the two and three line customer
is an issue. Overall, the Company believes that number portability will be
relatively neutral in its effect on the Group's business.
Both BT and Mercury have resources substantially greater than those of the
Group, and each has a national presence which may permit it to offer
telecommunications, data transmission and other services on a national basis to
business telecommunications customers with national operations beyond those
that the Group is currently able to offer on its own. The Company expects that
competition with Mercury and BT and other service providers, including the AT&T
group, entering the business telecommunications market will continue to
intensify.
Energis has nearly completed construction of a national network along
existing electrical power pylons and has launched telephony services. To date,
Energis has not marketed residential telephony lines and generally has
concentrated on the larger business telecommunications market. Energis' service
offering, along with indirect service from ACC and other, smaller, long
distance operators, and the emergence of International Simple Reseller
companies have increased competition in the long distance and international
telecommunications markets. It is also possible that utilities, such as rail or
water companies, will seek to use their existing infrastructures to construct
telecommunications networks that will compete with the Group's
telecommunications business.
RESIDENTIAL TELEPHONE
BT, with the large majority of the residential telephone market in the
U.K., is the Group's principal competitor in providing residential telephone
services. BT has a fully built national telephone network and, due to its
extensive experience in the marketing and operation of telecommunications
services in the U.K. and its large financial resources, it is a formidable
competitor to the Group. However, BT's ability to respond to price competition
from local cable operators is restricted by its license obligation not to show
undue preference to, or unduly discriminate against, different classes of
customers throughout the U.K. This effectively obligates BT to price all of its
services equally to the same classes of customer throughout the U.K., although
BT may provide discounts to high volume users. However, as the U.K.
telecommunications market becomes more competitive, there can be no assurance
that BT will not be given greater pricing flexibility in the future.
The Group seeks to compete with BT in the residential market primarily by
emphasizing the competitive cost and, to a lesser extent, quality of service
advantages of its cable telephone services. For example, the Group currently
seeks to provide its telephone subscribers with monthly savings on the cost of
calls compared to BT. To date, the Group generally has been able to price its
cable telephone call charges below those of BT; however, there can be no
assurance that the Group will be able to continue to do so in the future. BT
currently is subject to regulatory controls over the prices it may charge
customers, which last until July 31, 1997. OFTEL has issued proposals for
revised price controls to be in effect until 2001. See "-- Certain Regulatory
Matters -- Cable Telecommunications -- Price Regulation". These current controls
impose significant downward pricing pressure on charges in the U.K. telephone
service market. As a result, BT has implemented significant price reductions for
certain categories of calls and has implemented a new price initiative
concerning per second pricing, which has led to further price reductions for
certain users. In the past, the Group has generally reduced certain of its rates
following BT's price reductions in an effort to maintain its price
competitiveness versus BT. OFTEL's proposals for revised price controls until
2001 indicate that BT will be required by its telecommunications license to
reduce the average level of its prices further in each of the next few years.
The impact of BT's price reductions on the financial performance of the Group
has been partially offset by reduced interconnection costs charged by BT for the
conveyance
- 14 -
<PAGE> 17
of calls. There can be no assurance, however, that any such price cuts will not
adversely impact the financial performance of the Group's telephone operations.
BT has also started to market its services more aggressively to maintain
its market position over other service providers. For example, BT recently
began providing voice mail services on a national basis and caller ID services
in digital switch areas, and has implemented on a national basis other services
currently offered by the Group in its franchises, such as itemized billing and
time-based charges. BT has also implemented extensive marketing campaigns to
win back customers from cable operators.
The introduction of international facilities licensing in 1996 has
increased competition for international traffic, and the Group's telephone
subscribers can obtain access to these alternative international service
providers.
In both the business telecommunications and residential telephone areas,
the Group faces additional competition from (or may in the future compete with)
Mercury and mobile telecommunications providers such as Vodafone, Cellnet,
Mercury One2One and Orange and also faces competition from radio based
telecommunications providers such as Ionica.
CABLE TELEVISION
As a result of the ITC's practice of not granting more than one cable
television license within a franchise area, the Group does not compete with
other cable operators for subscribers within its franchise areas. The Group
does, however, compete with programming provided by terrestrial stations, DTH
satellite services, video cassette rental stores and SMATV systems and may in
the future compete with programming provided by video-on-demand and other
entertainment services provided by national PTOs and others.
The principal current (and potential) competitors for the Group's cable
television business are the following:
Broadcast. Television viewing in the U.K. has long been one of the most
popular forms of entertainment, and daily viewing time in the U.K. averages
over 230 minutes per person (Source: BARB). Until 1989, four broadcast channels
were the only source of television programming. Although the national
television channels in the U.K. generally are perceived as providing
high-quality programming, the Company believes that most viewers prefer a wider
variety of television programming. The market share of cable television and
satellite service programming is approximately one-third of all viewing in
homes with cable television and satellite services (Source: BARB). In addition,
the Company believes that the penetration of cable and DTH satellite services
and the widespread use of VCRs, indicates a willingness on the part of many
consumers in the U.K. to pay for additional programming.
In addition to the four existing terrestrial channels, an additional
commercial terrestrial channel (Channel 5) is expected to commence broadcasting
before March 30, 1997.
The Company believes that its primary competitive advantages over existing
terrestrial television are significantly more programming options, access in
the future to advanced interactive services and, in some areas, improved
television reception. The Company believes that terrestrial television benefits
from its position as the traditional source of low cost television in the U.K.
Under the Broadcasting Act 1996, the ITC has been given responsibility for
the licensing and future regulation of digital terrestrial television which, on
introduction, is expected to provide an additional 30 or more new terrestrial
channels serving between 60% and 90% of the U.K. population. Forty percent of
the channels will be reserved for digital broadcasting by the existing
terrestrial broadcasters. In January 1997, BSkyB, Carlton Communications and
Granada Group announced they had formed a joint venture and applied (in
competition with another applicant) to the ITC for three frequency ranges to
provide 15 digital terrestrial television channels, which will broadcast
programming that may include BSkyB programming currently available only through
DTH satellite or cable television as well as programming from the BBC.
- 15 -
<PAGE> 18
Digital terrestrial television would broadcast from land-based transmitters and
could be received by consumers with conventional aerials. A digital decoder box
would be needed to view the new channels, which would have digital picture and
sound quality. The introduction of digital terrestrial, as well as digital
satellite, television will provide additional competition for the Group. See
"-- Certain Regulatory Matters -- Future Developments -- Digital Broadcasting".
The Group believes that its network has been designed such that the Group
would be well placed to provide digital television services if providing these
services in its franchise areas were to become commercially attractive.
However, the Group has no immediate plans to introduce digital television
services.
DTH Satellite. DTH satellite television service providers obtain
programming from a variety of sources (including some of those used by the
Group) and transmit the programming signal up to a satellite which then
retransmits the signal down to customers. In order to receive a satellite
service, the customer must have an outdoor reception dish.
DTH satellite services are widely available in the U.K., and the number of
DTH satellite subscribers has increased from 500,000 in 1989 to approximately
3.5 million at December 31, 1996. BSkyB is the leading supplier of satellite
programming in the U.K. See "-- Cable Television -- Programming". The Sky
Multi-Channels package provided by BSkyB currently offers subscribers
approximately thirty channels.
In the multichannel television market, BSkyB is the Group's principal
competitor as well as one of its most important sources of programming. The
Group provides to its subscribers all of the channels included in the Sky
Multi-Channels package. There can be no assurance that BSkyB will continue to
provide programming to the Group on acceptable terms. However, as other
programming sources become available, the Company believes that the Group may
become less dependent on programming from BSkyB. See "-- Cable Television --
Programming".
The Company believes that DTH satellite services will continue to be
significant competitors in the future. However, the Company believes that cable
television has a number of competitive advantages over DTH satellite service,
including the following: (a) the significant up-front or ongoing costs for the
purchase or rental of a satellite dish and related equipment required for DTH
(normally starting from approximately L.150 for the purchase of a satellite
dish and related equipment, including typical installation charges of
approximately L.50, or approximately L.12.50 per month for rental of a dish and
related equipment); (b) the perception that satellite dishes are unsightly; (c)
the long-term contracts (one-year) generally required for DTH satellite
services; and (d) the ability of cable networks to offer telephone services and
in the future to offer interactive and integrated entertainment,
telecommunications and information services in addition to television
programming.
The Company believes that the principal competitive advantage of DTH
satellite service is the monthly service charges for basic services and premium
services which are lower than those for comparable services provided by the
Group. BSkyB has announced its intention to introduce a digital DTH satellite
service (offering the possibility of over 200 television channels) by the end
of 1997. The Company believes that DTH satellite services may become more
competitive with cable service if digital compression technology is
successfully introduced in the U.K. such that satellite services can provide
more channels and direct specific programming to particular subscribers.
Other Competitors. The Group also faces competition from video cassette
rentals and SMATV systems (which receive signals from either broadcast or
satellite sources and then distribute them by cable to a discrete group of
subscribers). Currently, no video-on-demand service is commercially available in
the U.K. (although BT has conducted residential trials). However, the successful
introduction of a video-on-demand service in the Group's franchise areas,
particularly by a national PTO, would result in the Group's services being
subject to increased competition. See "-- Certain Regulatory Matters --
Restrictions on National PTOs". SMATV systems can compete with cable television
within a franchise area, but currently there are no SMATV systems licensed to
provide service to more than 1,000 homes in the Group's franchise areas.
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<PAGE> 19
New Technologies. The extent to which new media and technologies will
compete with cable television systems in the future cannot be predicted and
such media or technologies may become dominant in the future and render cable
television systems less profitable or even obsolete. Certain operators
currently are deploying digital compression technology in the U.S. If digital
compression technology is deployed successfully in the U.K., it will enable the
Group, as well as its terrestrial and digital DTH satellite competitors, to
increase significantly the number of channels they are currently able to offer
to their customers. An increase in the number of channels offered by
terrestrial and DTH satellite services at competitive costs could affect the
Group's current competitive position.
FRANCHISE AREAS
The Group has been granted cable television licenses to provide cable
television services in fifteen franchise areas that form a contiguous cluster
of approximately 1,229,900 equity homes. The Group has been granted
telecommunications licenses in eight of its fifteen franchises. In addition,
DCL has applied for a national telecommunications license which will enable the
provision of business and residential telecommunications in the Group's seven
remaining franchises and elsewhere in the U.K. The table below sets forth the
number of homes in the individual franchises areas according to CACI
Information Services (for the franchises governed by telecommunications
licenses and the Burton-upon-Trent and Hinckley LDLs) and the ITC (for the
other LDLs).
<TABLE>
<S> <C> <C>
OWNERSHIP EQUITY HOMES
TELECOMMUNICATIONS LICENSES
Nottingham....................... 100 % 270,000
Mansfield........................ 100 % 85,000
Newark-on-Trent.................. 100 % 42,000
Grantham......................... 100 % 22,000
Melton Mowbray................... 100 % 19,000
Lincoln.......................... 100 % 52,000
Grimsby and Cleethorpes.......... 100 % 64,000
Leicester and Loughborough....... 100 % 203,000
LDLS(1)
Burton-upon-Trent................ 100 % 94,000
Hinckley......................... 100 % 45,000
Ravenshead....................... 100 % 2,900
Bassetlaw........................ 100 % 41,000
Lincolnshire and South Humberside 100 % 174,000
Chesterfield..................... 100 % 107,000
Vale of Belvoir.................. 100 % 9,000
---------
Total............................ 1,229,900
=========
</TABLE>
(1) The Group has been granted an LDL for each of these franchise areas and is
awaiting the grant of the necessary telecommunications license. It is
expected that these franchises will be covered by the national
telecommunications license.
Diamond's original franchise areas comprise a substantial regional market
centered around the City of Nottingham. In addition, the LCL franchises and the
Ravenshead, Bassetlaw, Lincolnshire and South Humberside, Chesterfield and Vale
of Belvoir franchise areas are contiguous to the original Diamond franchises.
All of the Group's franchises are concentrated in a single region and the Group
owns a 100% interest in the licenses associated with each franchise. The
Company believes that the Group's regional focus provides it with a number of
advantages, including the ability to (a) achieve significant cost benefits in
designing, constructing and managing a single network infrastructure and
providing telecommunications services over an extensive area, (b) be more
responsive to customer needs than its national competitors, thereby increasing
customer loyalty and (c) increase its name recognition.
- 17 -
<PAGE> 20
Under present rules, the telecommunications licenses covering these
franchises last for 23 years from the date from which the cable system first
becomes operative. Thereafter, these licenses are not extendable and
application must be made for a new license. The telecommunications license for
the Nottingham franchise, which was the first to become operative, expires in
2013. The telecommunications licenses currently held by the Group all
incorporate construction milestones which are reviewed by OFTEL. LDLs include
milestones that are reviewed by the ITC. See "-- Milestones". For further
descriptions of the Group's licenses, see "-- Certain Regulatory Matters".
The Company may from time to time seek to acquire one or more new or
existing franchises either in public tenders by the ITC or by private purchases
from third parties. The Company anticipates that it will generally seek to
acquire franchises that are contiguous to the Group's existing franchises and
therefore can effectively be integrated into the Group's existing operations.
No agreement for any specific material acquisition has been reached or is
currently pending. The Group currently operates solely in the U.K. and
currently expects that any future acquisitions would be of franchises or
businesses in the U.K.
An LDL enables an operator to provide cable television and (when held in
conjunction with a telecommunications license) telecommunications services,
utilizing not only cable networks but also microwave distribution systems. See
"-- Certain Regulatory Matters". When such licenses are applied for by one
operator, they are then generally advertised for competitive auction by the
ITC. No license has been awarded for certain other geographic areas that are
contiguous to the Group's franchise areas. The Group may bid for additional
LDLs, if the bid price (including the estimated additional capital costs to
complete the network) for the additional franchise areas provide an attractive
return, in order to further improve the Group's operating leverage and increase
asset value. If the Group were to be awarded any of the LDLs it may bid for in
the future, the areas would be constructed in parallel with the existing
franchises, but it is expected that the completion of the network for the
enlarged area would be later than that planned for the existing area. In
addition, to complete construction of an enlarged franchise area, the Group
would be required to expend additional funds which, depending on the size of
the franchise area, could be significant. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
In addition, the Group operates a master antenna television service to
approximately 16,000 council properties in Nottingham. This service is provided
by the primary cable television network without the necessity to build and
operate a separate master antenna service system.
CONSTRUCTION
As of December 31, 1996, approximately 477,000 of the premises in the
Group's franchise areas had been passed by civils construction and a portion of
the network passing approximately 365,000 premises had been activated. The
number of premises activated represents 36% of the Group's aggregate milestone
requirements. Construction has now commenced in eight of the Group's franchise
areas. While the projected rate of construction is governed principally by the
applicable regulatory milestones, the path of construction in the Diamond
franchises has, to date, been driven in part by the Company's strategy of
targeting large business telecommunications customers. As a result, Diamond
often concentrated the build out of its network to business telecommunications
customers who were being solicited or to areas with a higher density of
potential business telecommunications customers.
The Group has undertaken a rapid acceleration in the build out of its
existing franchise areas. During 1996 and 1995 over 172,000 and 173,000 homes,
respectively were passed by civils construction as compared with approximately
27,000 homes passed during all of 1994. The Company intends to continue the
rapid growth and development of network construction and activation to meet the
Group's regulatory milestones. The Group may encounter difficulty in obtaining
qualified contractors and may encounter cost overruns or delays in construction.
As with other U.K. cable operators, the Group is generally required to use
underground construction and cannot broadly employ mechanized construction
methods due to existing underground utility infrastructure. The number of homes
passed by the Group's civils construction substantially exceeded homes activated
and homes marketed at December 31, 1996. At that date,
- 18 -
<PAGE> 21
approximately 23% of the network passed by civils construction had not been
activated (as measured by homes activated as a percentage of homes passed by
civils construction). At that date, approximately 27% of the homes activated by
the Group's network had not yet been marketed. The Company expects to accelerate
the release of homes for marketing as more homes are activated and as the
percentage of homes activated but not marketed is reduced. This may place
additional stress on the Company's management and operational resources. If the
Group is unable to manage its expected rapid growth and development
successfully, the Group's operating results and financial condition could be
materially adversely affected.
Diamond originally relied on its own construction team for the build out
of its network. Since 1994, the Group has primarily used outside contractors,
but believes that maintaining some in-house construction capability enables it
to reduce the costs of construction and to manage its build out better. In
particular, the in-house construction team provides a benchmark against which
to measure fees from outside contractors and provides a reliable construction
team for building out particularly difficult areas. Approximately 16% of the
network constructed during 1996 was constructed using the Group's in-house
team.
Cable operators have the benefit of and must comply with the New Roads and
Street Works Act 1991 (the "Street Works Act") which permits them to construct
on public highways on the same basis as public utilities. This has, to some
extent, reduced construction delays. See "-- Certain Regulatory Matters --
Cable Telecommunications -- Network Construction and Service Obligations".
For a discussion of the Company's plans to fund construction see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
MILESTONES
The Group is obliged by the milestones in its telecommunications licenses
and LDLs to construct a network to pass an aggregate of 1,021,894 premises
within prescribed time periods. See "-- Certain Regulatory Matters -- Cable
Telecommunications -- Network Construction and Service Obligations".
Both Diamond and LCL failed to meet their original regulatory milestones.
Diamond had failed to meet the milestones in its original licenses due
principally to the unavailability of sufficient funding in periods prior to the
acquisition in May 1994 by European Cable Capital Partners, L.P. ("ECCP") of a
majority stake in Diamond and the decision to allocate resources to the
building out of the Nottingham franchise. Having obtained revisions to its
licenses, Diamond raised approximately $143 million at the end of September
1994 through the issuance of its 13 1/4% Senior Discount Notes due September
30, 2004 (the "1994 Notes") and, after a slight delay due to construction
planning and the hiring of contractors, began to accelerate the pace of the
build out of its network.
At December 31, 1995, the Group was obligated to meet specified milestones
in eight of the Group's franchise areas where building was due to have
commenced. Compliance with the milestones in these areas is in each case
monitored by OFTEL. During June 1996, OFTEL informed the Company that it did
not agree with the Company's historical method for calculating compliance with
its milestone obligations and that the number of premises passed should be
based only on the number of premises activated (the number of premises that can
be connected to the cable network without further extension of transmission
lines, apart from the final drop to the home). In calculating premises passed,
the Company had historically included premises passed by civils construction
(premises with ducting buried outside) but not yet activated. Based on OFTEL's
method of calculating premises passed, the Group failed to meet its year-end
1995 milestones in six of its eight franchise areas. In three of these
franchise areas -- Grantham, Newark-on-Trent and Melton Mowbray, the 1995
year-end milestones represented the final milestones required under each
license.
The Group has renegotiated its eight telecommunications license milestone
obligations with OFTEL. In five franchise areas where the final milestone has
not yet fallen due, the Director General of OFTEL has formally modified the
interim but not the final milestone obligations under the licenses to provide
new
- 19 -
<PAGE> 22
quarterly milestones which the Group had met as at December 31, 1996. In the
other three franchise areas, OFTEL did not make any formal modification to the
existing licenses, and the final milestones in these three franchise areas have
now been met.
In four of the seven franchise areas covered by LDLs, the Group was
originally required to meet its first milestone obligations by the end of 1996.
However, due to delays by the DTI in the granting of telecommunications
licenses covering these franchises, which are required before construction can
commence, the ITC has formally modified the Group's licenses to remove
milestones that fell due at year-end 1996 and otherwise shift the annual
milestones for those licenses back by 12 months. DCL has applied to the DTI for
a national telecommunications license which it expects to be granted shortly.
Delays in obtaining this license may adversely affect the Group's ability to
meet LDL milestones for 1997.
The following table sets forth the milestones that are incorporated into
the Group's telecommunications licenses and LDLs. Since the actual milestones
that the Group is required to meet are specified individually for each of the
franchises, the Group could meet the aggregate milestones but still fail to
meet one or more individual franchise milestones and therefore subject a
telecommunications license or LDL to the risk of revocation or termination.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP FRANCHISE AREAS 1994 1995 1996 1997 1998 1999 2000 AFTER
2000
TELECOMMUNICATIONS LICENSE
MILESTONES(1)
Nottingham....................... 45,000 80,000 132,000 190,000 230,000 230,000 230,000 230,000
Mansfield........................ 15,000 35,000 42,000 66,000 66,000 66,000 66,000 66,000
Newark-on-Trent.................. 3,000 13,500 13,500 13,500 13,500 13,500 13,500 13,500
Grantham......................... 3,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000
Melton Mowbray................... 3,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Lincoln.......................... 3,000 20,000 18,000 43,000 43,000 43,000 43,000 43,000
Grimsby and Cleethorpes.......... 3,000 25,000 35,000 57,000 63,000 63,000 63,000 63,000
Leicester and Loughborough....... 40,620 53,620 76,000 100,000 149,000 200,670 200,670 200,670
LDL MILESTONES
Ravenshead....................... -- -- -- 2,500 2,500 2,500 2,500 2,500
Bassetlaw........................ -- -- -- 1,000 10,000 19,000 28,000 32,800
Lincolnshire and South Humberside -- -- -- 5,000 25,000 45,000 70,000 144,000
Chesterfield..................... -- -- -- 8,000 28,000 60,000 80,000 89,000
Vale of Belvoir.................. -- -- -- 1,000 2,000 3,000 4,545 4,545
Burton-upon-Trent................ -- -- -- 10,000 29,000 45,000 66,000 77,675
Hinckley......................... -- -- -- 8,000 16,000 23,000 31,204 31,204
Aggregate Cumulative Totals...... 115,620 251,120 340,500 529,000 701,000 837,670 922,419 1,021,894
Aggregate Annual Totals.......... 115,620 135,500 89,380 188,500 172,000 136,670 84,749
</TABLE>
(1) Although reflected above on an annual basis, the Group's
telecommunications license milestones are measured on a quarterly basis.
- 20 -
<PAGE> 23
The table below sets forth by franchise and date the number of premises
activated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1996 1996 1996 1996
Nottingham 57,697 79,866 98,504 110,548 123,910 139,286
Mansfield 11,686 11,686 20,863 32,755 40,474 46,916
Newark-on-Trent 5,634 7,420 7,420 8,392 12,707 13,509
Grantham 0 0 0 3,503 11,515 14,894
Melton Mowbray 0 0 0 0 9,819 10,045
Lincoln 0 5,177 5,177 12,459 16,887 20,131
Grimsby and Cleethorpes 7,806 8,057 13,386 21,604 30,699 37,130
Leicester and Loughborough 51,409 57,366 61,007 67,766 77,017 83,280
Cumulative Total 134,232 169,572 206,357 257,027 323,028 365,191
</TABLE>
The Group is potentially subject to enforcement orders from the Director
General for failure to meet its telecommunications license milestones, which
could lead to revocation of the relevant licenses. Similarly, in the event that
the Group failed to meet the milestones for any of its LDLs, the ITC would have
power to shorten the LDL period, impose fines or commence proceedings leading
to revocation. In addition, under the Senior Banking Facility, failure to meet
the Group's milestone obligations could under certain circumstances prevent
further borrowing or result in an event of default. See "-- Certain Regulatory
Matters -- Cable Telecommunications -- Network Construction and Service
Obligations". The Group has not been subject to date to any enforcement action
by OFTEL or the ITC due to missed milestones; however, there can be no
assurance that OFTEL or the ITC will not take such action in the future.
SOURCES OF SUPPLY
The Group obtains services and equipment for the construction and
operation of its cable systems from numerous independent suppliers. As the
Group has grown and its construction and purchasing needs have increased, the
Group has sought to use its increased buying power to obtain more favorable
pricing and contract terms.
With certain exceptions, the Company believes that the Group can purchase
the services and equipment it needs to operate its business from more than one
source. However if a supplier of a product that involves significant lead time
for production and delivery were to be unwilling or unable to supply the Group,
the Group could suffer delays in the operation of its business, which could
have an adverse effect on the Group. Further, in the case of certain supplies,
limited competition in the provision of these materials has subjected (and may
in the future subject) the Group to price increases higher than those
experienced with other supplies.
For certain products, the Group depends on a single supplier. Diamond has
obtained exclusively from GPT certain telephone equipment, namely its switches,
primary multiplexers and certain telephone transmission equipment. LCL has
obtained such equipment from Nortel Limited. The Group obtains all of its cable
television transmission equipment and set top converters from Scientific
Atlanta. Scientific Atlanta, GPT and Nortel Limited are among the largest
providers of cable television and telephone equipment in their respective
markets. While the Group to date has experienced no significant difficulty in
receiving products from these companies, the failure or inability of any of
these companies to continue to supply the Group with these products in the
future would have a material adverse effect on the Group.
The Group has not experienced significant difficulty in obtaining timely
deliveries of equipment and services. In order to reduce warehousing expenses,
maximize inventory control and minimize the possibility that the Group will not
have the required inventory to proceed with construction in a timely manner,
the Group recently centralized its warehouse operations. Due to the high level
of construction in the U.K. cable industry, delays may be encountered in
obtaining certain supplies such as fiber optic cable; however the Group is
making efforts to avoid such delays.
- 21 -
<PAGE> 24
NETWORK ARCHITECTURE
The network being constructed by the Group comprises an overlay of a cable
television network and a telecommunications network. Portions of the network
currently in the ground utilize conventional tree and branch architecture and
the other portions utilize optical fiber node architecture with nodes serving
up to 2,500 homes. Both of these portions of the network may need to be
upgraded to achieve higher capability and reliability. This upgrading is not
expected to require significant additional capital expenditure.
The Group is now constructing a cable system in which optical fiber is
employed to areas serving approximately 500 homes for both cable television and
telecommunications services. The geography of the Group's franchise areas and
the location of the cable television network's headends and the
telecommunications network's switches dictate to some degree the physical
construction of the cable television and telecommunications network. The
Nottingham central network control office will control and monitor all other
locations which will be interconnected to Nottingham supertrunking fiber
network.
Five switches are currently in operation in Nottingham, which is presently
interconnected with three other switches, Mansfield, Lincoln and Grimsby.
Leicester is presently interconnected with 2mb circuits to Nottingham. Two
switches in Leicester are in service, with a third recently commissioned. The
Company expects that an additional four switches will be commissioned during
the build out.
In addition to the existing switches, six remote concentrator units
("RCUs") are being interconnected to the Nottingham headend. The Company
expects that an additional eight RCUs will be added during the build program.
There are presently three cable television headend locations. The Nottingham
location will monitor all headend locations. The interconnects are all fiber
optics with two-way capability and status monitoring.
The cable television headends consist of Scientific Atlanta and Magnavox
fiber transmitters, fiber receivers, satellite receivers, signal processors,
modulators, encoding equipment and network status monitoring and Panasonic
automated tape distribution equipment. The cable television network is being
constructed with Scientific Atlanta transmission equipment and set top
converters. The Network's downstream upper frequency capability is 750 MHz.
From the headends, fiber is deployed to each node for feeder distribution and
from the node, coaxial cable is installed to the distribution points. The upper
side of the downstream bandwidth will be 750 MHz. From the headends, fiber is
deployed to nodes for feeder distribution, and from the nodes, coaxial cable is
installed to the distribution points. The Group has begun the deployment of 750
MHz Scientific Atlanta set top converters, with capacity for 75 channels, as of
February 1997.
The telephone switches are GPT System X and Nortel DMS-100 platforms. The
telecommunications network near the switch is fed directly by copper. Outside
the copper service area, the telecommunications network uses Nortel or GPT SDH
multiplexing equipment in a fiber self-healing loop configuration operating at
155 Mb/s ("STM 1"). Four nodes of 500 homes will be served off of each 2,000
home fiber ring. GPT and ASCOM 120 line primary multiplexers are located in the
same street cabinet with the SDH multiplexers, and from there copper is fed
down to approximately 30 homes per street cabinet. As the telephone network
grows more distant from the switch, additional SDH rings operating at 622 Mb/s
("STM 4") will support four STM 1 rings. The telecommunications network has
been designed so that as penetration and traffic intensifies, ring splitting
will enable additional capacity to be carried. All network equipment, both
cable television and telephone, is powered by battery backed-up power supplies.
Telecommunications and cable television services are transmitted to the
home through the same "Siamese" drop cable. The "Siamese" cable consists of two
twisted pair telephone cables and a cable television coaxial drop cable
manufactured in the same cable housing/insulation package so that both
services are installed at the same time. From a subscriber's home, the
telephone cable is run through the street cabinet up to the 500 home hub
cabinet where calls are processed through a primary multiplexer which handles
many calls and transmits them to the telephone switching equipment. The calls
are then
- 22 -
<PAGE> 25
routed, if possible, to their final destination via the lowest cost routing, be
it BT, Mercury, Energis, Global One or the Group's own network.
The duct system is constructed with 89mm diameter duct with a 2.4mm wall
thickness. Trunk cable routes usually contain multiple fiber and coaxial cables
within four to six ducts. Distribution cable routes carry the drop cable to the
subscriber premises and usually contain one or two ducts. A subscriber drop is
placed inside either 25mm or 50mm duct which is buried in its approach to a
residence to reduce cable drop cuts and other maintenance.
The network will support 100% cable television penetration and 100%
telephone penetration based upon cabinet space but only 50% telephone
penetration based upon transmission equipment with hardware expandability to
96%.
The Company believes that the Group's network architecture design, with
respect to both telecommunications and cable television, will facilitate the
transition to greater fiber distribution. It should allow for efficient
utilization of primary multiplexers and eliminate the need for expensive
digital cross connects to maximize switch port utilization. The Company
believes that the network design has taken into account the need to be flexible
with respect to both node and hub sizes and future developments that may lead
to integration between the telecommunications and the cable television
networks.
The existing Diamond and LCL networks will be integrated in phases. The
initial objective has been to physically connect the two networks through a
fiber interconnect and this has been achieved with 2mb circuits, which are in
place. The main purpose of the interconnect is for the central network control
office (located in Nottingham) to have the ability to control the central
Nortel switch in Leicester, mainly for telephone purposes. This interconnect
will also enable Nottingham to monitor the Leicester cable television headend
and transfer data of route forwarding information between the two locations.
The physical connection point will be in Loughborough which is located
between Nottingham and Leicester and is the desired location for the third
switch for the LCL franchise areas.
Once the two networks physically have been joined and the interfacing is
complete, maintenance and monitoring of call traffic will be possible, followed
by integration of the wholesale and then the retail billing processes.
EMPLOYEES
As of December 31, 1996, the Group had 706 employees, including 581
employees in operations and 125 employees in civils construction. With effect
from February 1997, DCL has begun to directly employ residential salespeople,
which will increase the number of its employees. Previously salespeople had
been employed by independent companies engaged by the Group on a subcontracting
basis. The Group has not entered into any collective bargaining agreement with
employees and the Company currently believes that the Group's labor relations
are good.
CERTAIN REGULATORY MATTERS
GENERAL
Cable television and cable telephone service industries in the U.K. are
governed by legislation under the Telecommunications Act, the Broadcasting Act
1990, which replaced the CBA, and the Broadcasting Act 1996. The operator of a
cable television and cable telephone franchise in the U.K. covering more than
1,000 homes requires the following two principal licenses for each franchise
area:
(a) a telecommunications license, granted under the Telecommunications
Act by the Secretary of State and supervised by the DTI and OFTEL, which
authorizes the installation and operation of the telecommunications network
used to provide cable television and cable telephone services, and
- 23 -
<PAGE> 26
(b) a cable television license, which authorizes the provision of
broadcasting services within a defined geographical area and which may be
either:
(i) a Prescribed Diffusion Service License ("PDSL"), granted
under the CBA prior to 1991, which allows an operator to provide cable
television and other entertainment services by means of a cable
network, or
(ii) an LDL granted since January 1, 1991 under the Broadcasting
Act 1990, which allows an operator to deliver television and other
programming services by means of a licensed telecommunications network
including a cable network.
Each type of license described above contains various conditions, and in
the event of the breach of such conditions, the Director General or the ITC, as
appropriate, could issue an enforcement order and ultimately commence
proceedings to require compliance or to revoke such licenses.
Under the Broadcasting Act 1990, cable operators may elect to replace
certain PDSLs with LDLs with similar terms.
The regulatory environment in the U.K. has generally encouraged the
development of the cable telecommunications and the cable television industry
by, among other things, licensing only one operator for each cable franchise
area and restricting the national PTOs from using existing telecommunications
networks to carry broadcast entertainment.
The Labour Party has stated that it would review the existing regulatory
structure if it came into power. See "-- Cable Telecommunications --
Restrictions on National PTOs".
CABLE TELEVISION
The Broadcasting Act 1990
The Broadcasting Act 1990 established the ITC to license and regulate
commercial television services (terrestrial and satellite) and the Radio
Authority to regulate radio services. The ITC's functions are, among other
things, to grant licenses for television broadcasting activities and to
regulate the commercial television sector by issuing codes on programming,
advertising and sponsorship, monitoring programming content and enforcing
compliance with the Broadcasting Act and cable television license conditions.
The ITC has the power to vary cable television licenses and impose fines and
revoke such licenses in the event of a breach of the license conditions. The
ITC also enforces ownership restrictions on those who hold or may hold an
interest in licenses issued under the Broadcasting Act. See "-- Cable
Television Licenses -- Ownership Restrictions".
CABLE TELEVISION LICENSES
General. As of December 31, 1996, cable television licenses had been
granted for franchise areas covering approximately 16.5 million out of
approximately 22 million total homes in the U.K. The ITC has indicated that it
will grant only one cable television license for each geographical area for the
foreseeable future. The ITC also has indicated that certain areas, for which
cable television licenses have yet to be awarded, may be advertised at the
request of applicants. Such licenses (LDLs) are generally awarded after
competitive bids. Before awarding an LDL, the ITC must be satisfied as to
certain matters, including the technical specification of the proposed system;
that the applicant has sufficient funding to run the franchise; and that the
applicant is a fit and proper person to be awarded a license. The ITC will award
the LDL to the highest bidder unless there are exceptional circumstances,
including that the coverage proposed to be achieved by another applicant is
substantially greater than that indicated in the technical plan of the highest
bidder, such that it is appropriate to award the license to that other
applicant. In addition, all applicants must undertake to pay a percentage of
qualifying revenue ("PQR") to the ITC in each year of the license.
- 24 -
<PAGE> 27
Cable operators may carry U.K. licensed broadcast services, foreign
satellite programmes or text in their services. Cable television licenses also
require cable operators to ensure that advertising and foreign satellite
programs carried by them as part of their services conform to the restrictions
set forth in the codes on advertising, sponsorship and programming issued by
the ITC. Cable television licenses also impose an obligation on licensees to
provide any information which the ITC may require for purposes of exercising
its statutory functions.
Term, Renewal and Revocation of Cable Television Licenses. The Group
holds eight PDSLs which were issued for 15-year terms. The Group also holds
seven LDLs, four of which were granted on September 1, 1995 and three of which
were granted on September 13, 1996, all for 15-year terms.
An application may be made to the ITC to extend a PDSL for up to an
additional eight years if the cable operator holds a 23-year telecommunications
license. Fees would continue to be payable on the same basis as for the
unextended PDSLs and no PQRs or cash bids would be payable during this 8-year
term. If the Group elects to extend the PDSLs, the Group will upon expiration
of such PDSLs as so extended, be required to apply for a new LDL under the
competitive bid procedures described above. If the Group elects not to extend a
PDSL, the Group may apply to the ITC (no earlier than five years prior to the
expiration of the PDSL) for a replacement 15-year LDL, with respect to which it
must agree with the ITC on the amount of the cash bid and PQR payments that
will be payable over the term of the LDL (based on what would have been offered
if the franchise had been offered for competitive bids).
The Group's PDSLs will currently all expire in 2005. The Group has not yet
applied to extend any of its PDSLs, nor has it applied for any replacement LDLs
under the procedure outlined above, since more than five years remain before
their expiration.
The ITC may refuse an application for renewal, but only on limited
grounds, including that the ITC proposes to grant a license in an area
different from that described under the existing license or that the applicant
is not providing services through the whole of its franchise area.
The ITC may, after consultation with the DTI and the Director General,
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. The ITC must be notified of changes in control of
the licensee, of changes in directors and of certain other changes in
shareholdings in the licensee. If there is any change in either the nature or
characteristics of an operator that is a corporate entity, or any change in
persons controlling or having an interest in it, the ITC can revoke the license
if, as a result, it would not have awarded the license had the new ownership or
control existed at the time the application for the license originally was
considered. The ITC can also revoke any cable television license in order to
enforce restrictions on ownership contained in the Broadcasting Act 1990 (see
below) and can impose fines and shorten the license period of LDLs.
A cable television license is transferable only with the consent of the
ITC, and several of the Group's cable television licenses have recently been
transferred to DCL from various of the Group's wholly owned subsidiaries with
that consent.
The Group also holds two licenses to provide television program services
under the Broadcasting Act 1990. The license for the Leicester Community
Channel came into force on June 29, 1992 and the license for Diamond Vision on
August 29, 1995. Both licenses are for a period of 10 years.
Ownership Restrictions. The ITC has a general duty to ensure that cable
television licenses are held by "fit and proper" persons and may exercise
control over who may hold a license where financial assistance is provided to,
or influence is exercised over, a licenseholder which may produce results which
it considers adverse to the public interest. The Broadcasting Act 1990 also
contains specific restrictions on the types of entities which may hold cable
television licenses or significant interests therein. Cable television licenses
may not be held by a local authority, an advertising agency, a religious or
political body (or one of its officers) or any entity controlled by them.
Ownership restrictions also apply to ownership of different licensed services
- 25 -
<PAGE> 28
(including local delivery services, television, satellite and radio services and
newspapers), or associates of entities operating such services. See "-- Media
Ownership". While PDSLs in most respects continue to be regulated under the
Broadcasting Act 1990 and the Broadcasting Act 1996 as if the CBA remained in
force, the ownership restrictions for PDSLs and LDLs are substantially similar.
There is currently no restriction on the number of cable television
licenses which may be held by any person.
CABLE TELECOMMUNICATIONS
The Telecommunications Act
The Telecommunications Act provides a licensing and regulatory framework
for telecommunications activities in the U.K. and established OFTEL under the
Director General as an independent regulatory authority. Telecommunications
policy is overseen by the DTI. The DTI on behalf of the Secretary of State also
has primary licensing authority under the Telecommunications Act, although it
may delegate that authority to the Director General. The functions of the
Director General are, among other things, to monitor and enforce compliance
with telecommunications license conditions, establish and administer standards
for telecommunications equipment and contractors, and investigate complaints
and exercise certain functions concurrently with other regulators to promote or
ensure competition in telecommunications markets. The Director General may
modify telecommunications licenses either with the agreement of the licensee
following a statutory period of public consultation or following a report by
the MMC. The Director General is also empowered to issue enforcement orders
requiring compliance with telecommunication license conditions which have been
breached (see below).
Telecommunications Licenses
The Group holds eight telecommunications licenses and has applied for a
national telecommunications license to cover those areas for which it does not
presently hold a telecommunications license, including the areas for which it
has been granted LDLs. The national telecommunications license is intended to
cover the Group's LDL franchises, but the Group has the option of relying on
its original applications for individual telecommunications licenses for those
areas. However, no assurance can be given that a national telecommunications
license will be granted to the Group. In addition, the Group holds temporary
telecommunications licenses granted under section 7 of the Telecommunications
Act on September 16, 1994 and December 21, 1994 to interconnect
telecommunications systems run by Diamond Cable (Newark on Trent) Limited and
Diamond Cable (Lincoln) Limited, and to run telecommunications systems in the
Coalville area of Leicestershire, respectively. These temporary licenses may be
revoked by the Secretary of State on one month's notice. A telecommunications
license authorizes a cable operator to install and operate the physical network
used to provide cable television and cable telecommunications services. It also
authorizes the operator to connect its system to other television and
telecommunications systems, including those operated by the PTOs, the
terrestrial broadcasting authorities and satellite broadcasting systems.
Although the telecommunications license granted to a cable operator is for a
particular area, it is not exclusive and, as a result, a cable telephone
operator is subject to competition with respect to the provision of telephone
services from national PTOs such as BT and Mercury and other telephone service
providers in its franchise area. See "-- Competition -- Business
Telecommunications" and "-- Competition -- Residential Telephone". Following
the Duopoly Review, the Government has granted a telecommunications license to
any applicant provided the applicant has satisfied certain requirements,
including with respect to financial viability and, in some cases, service
commitments. See "-- Duopoly Review".
A cable operator's telecommunications license contains conditions
regulating the manner in which the licensee operates its telecommunications
system, provides telecommunications services, connects its systems to others and
generally operates its business. A cable operator's telecommunications license
also contains a number of detailed provisions relating to the technical aspects
of the licensed system (e.g., numbering, metering and the use of standard
technical interfaces) and the manner in which the licensee
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conducts its business (e.g., publication of certain prices, terms and
conditions). In addition, a cable operator's telecommunications license contains
prohibitions on undue preference and discrimination in providing service and
unfair cross-subsidy of other services. The cable operator's telecommunications
license also requires the licensee to comply with certain codes of practice and
to provide any information which the Director General may require for the
purposes of carrying out his statutory functions. Failure to comply with an
enforcement order in respect of a breach of a telecommunications license
condition might give rise to revocation, an injunction by the Director General
or to a third party's right to damages.
On July 18, 1996, the Director General issued a statement (following
public consultation) setting out OFTEL's proposals for the introduction into
BT's license of a new condition, which would prohibit any abuse of its dominant
position and any agreement or concerted practice between BT and other entities
restricting or distorting competition in the telecommunications market. The
proposed condition formed part of a package with revised price controls
proposed for BT and came into effect on December 31, 1996. BT challenged the
introduction into its license of the fair trading condition, and on December
20, 1996, the High Court entered judgment against BT.
The fees payable for the telecommunications license consist of an initial
fee payable on the grant of the license and annual fees thereafter. The annual
fees are based on a proportion of the costs of the Director General in
exercising his functions under the Telecommunications Act and in certain cases
a proportion of costs of the MMC incurred in relation to license modification
references under the Telecommunications Act.
A telecommunications license is not transferable. However, certain changes
in ownership of an entity holding a license are allowed, subject to compliance
with a notification requirement.
Network Construction and Service Obligations
Where a cable operator holds a PDSL or an LDL replacing a PDSL (see "--
Certain Regulatory Matters -- General"), the milestones are contained in the
corresponding telecommunications license and are reviewable by OFTEL.
Where, on the other hand, a cable operator holds a new LDL which is not a
conversion from a PDSL, the milestones are contained in the LDL and are
reviewable by the ITC.
Each of the Group's existing telecommunications licenses prescribes
milestones which require the Group to construct its network to pass a specified
number of premises within prescribed time periods. The milestones may be varied
by the Director General if he considers that the variation would enable the
licensee to meet the final milestone more easily. The final milestones can be
modified only following a public consultation period and with the approval of
the Director General. If the milestones prescribed by a telecommunications
license are not met, the Director General may take enforcement action which, if
not complied with, could result in the revocation of such license. Similarly,
the LDLs which the Group has acquired contain build milestones which may be
varied by the ITC. See "-- Construction" and "Business -- Milestones". The
Company understands that all milestones from now on will be contained in LDLs.
The Company also understands that the ITC will have jurisdiction to enforce
these milestones. To date, the ITC has not published any guidelines on
enforcement of milestones.
Where a cable network has been installed, a licensee must provide a cable
television service to anyone who reasonably requests it. A cable operator is
not required to provide telephony services, but where it does so, and achieves
a 25% or more share of the relevant market for such services (as determined by
the Director General) within its licensed area, the licensee may, at the
direction of the Director General, be required to ensure that telephone
services are available to anyone in the licensed area who reasonably requests
them. The Group has not received any such direction from the Director General.
Under a telecommunications license, the cable operator is subject to and
has the benefit of the Telecommunications Code promulgated under the
Telecommunications Act. The Telecommunications Code
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provides certain rights and obligations with respect to installing and
maintaining equipment such as ducts, cables and cabinets on public or private
land (including the installation of equipment on public highways). The
activities of cable operators under the Telecommunications Code are also subject
to planning legislation.
Cable operators have the benefit of, and must comply with, the Street
Works Act, which provides them with the same rights and responsibilities with
respect to construction on public highways as other public utilities. The
Street Works Act standardizes fees for inspections of construction works by
local governmental authorities and standardizes specifications for
reinstatement of property following excavation. As a result, construction
delays previously experienced by cable operators because of separate and often
lengthy negotiations with local governmental entities have been reduced.
Cable operators are required to post bonds for local authorities in
respect of their obligation to ensure reinstatement of roads and streets in the
event the operators become insolvent, cease to carry on business or have their
telecommunications license terminated. In order to install equipment on private
property cable operators must obtain legal permission from occupiers, property
owners and others.
Term, Renewal and Revocation of Telecommunications Licenses
To date, telecommunications licenses have generally been granted for
periods of 15 or 23 years. Seven of Diamond's telecommunications licenses were
granted for an initial period of 23 years, and one was granted for an initial
period of 15 years, both periods commencing on the date specified by the
Secretary of State (which, in practice, is the date on which the cable system
first becomes operative). The 15-year telecommunications license was
subsequently amended to a 23-year license. The Company expects that the Group's
anticipated national telecommunications license will be for a 23-year term.
Upon expiration, a telecommunications license cannot be extended and
application must be made for a new license.
A telecommunications license may be revoked if the licensee fails to pay
the license fees when due, fails to comply with an enforcement order, upon the
occurrence of certain insolvency-related events or if the cable television
license relating to the licensee's system is revoked. A telecommunications
license may also be revoked if, among other things, the licensee fails to give
the required notification to the DTI of changes in shareholdings and changes in
control and agreements affecting control of the licensee, or if the DTI
concludes that any such change would be against the interests of national
security or the U.K. Government's international relations.
Duopoly Review
In 1991, the U.K. Government concluded in its Duopoly Review that the
termination of the duopoly policy (which permitted only BT and Mercury to
operate local, national or international fixed-link networks in the U.K. to
provide public telephone services) might increase competition and benefit
consumers in the U.K. telecommunications market. As a result, the U.K.
Government revised its policy and determined that application for licenses
would be considered from any person seeking to operate new telecommunications
networks over fixed links within the U.K. Such licenses normally would be
granted subject to the general statutory duties of the DTI and the Director
General to ensure the provision of telecommunications services, to satisfy all
reasonable demands for them and the ability of a person providing the services
to finance their operations.
The Duopoly Review also recommended specific amendments to license
conditions that are particularly important to cable operators. Until the Duopoly
Review, for a cable operator to provide telephone services it had to enter an
agreement with BT or Mercury with respect to the terms and conditions (including
price) under which the operator would provide telephone services, obtain a
determination from the Director General that services could be provided and
operate its network as agent for either BT or Mercury. Since the Duopoly Review,
cable operators have been permitted to provide all forms of wired
telecommunications
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<PAGE> 31
services in their own right, including the ability to switch their own
traffic. The Duopoly Review also recommended changes to and further study of
arrangements relating to interconnection, number portability and equal access
(discussed below).
As a result of the Duopoly Review, the Group applied for and received
modified telecommunications licenses to enable the Group to provide wired
telecommunications services in its own right.
Interconnect Arrangements
The ability of cable operators to provide viable voice and other
telecommunications services is dependent on their ability to interconnect
cost-effectively with other PTO's telecommunications networks in order to
complete calls that originate from a customer on their cable network but that
terminate off their network or that originate from a customer off their cable
network and terminate on their network. Since the Duopoly Review, cable
operators with contiguous franchises have been able to connect their networks
without regard to whether they are under common ownership without using the
services of BT or Mercury.
The DTI is able to consider applications by cable operators to join more
distant franchises, and Diamond has a license to link two of its franchises
which are not adjacent to one another. Once DCL has obtained a national
telecommunications license it will be able to link non-contiguous franchises
without the need to apply to the DTI.
PTOs are required under their telecommunications licenses to enter into
interconnection agreements with other PTOs such as the Group (if requested to
do so by such a PTO), and the Group has interconnection agreements with BT,
Mercury, Energis and Global One. The BT agreements may be terminated by either
party upon two years' notice, the Mercury agreement may be terminated by either
party upon three years' notice, the Energis Agreements may be terminated by
either party on six months' notice and the Global One agreement may be
terminated by either party upon one month's notice after an initial term of one
year. If the Group is unable to negotiate acceptable pricing terms with BT,
Mercury, Energis or Global One in connection with any continuation or extension
of these agreements or scheduled reviews of these agreements, the Group may
request that the Director General determine such terms. A recent case has
established that it is possible for a regulated company to challenge in the
U.K. courts a determination by the Director General of terms of interconnection
agreements. The Director General also has the power to make determinations in
respect of certain obligations of any party under an interconnection agreement.
OFTEL currently determines standard interconnect charges. The first
interim charge determination covered the period from April 1, 1995 to March 31,
1996. Interim charges are based on forecast financial statements (on a fully
allocated costs basis). OFTEL is currently assessing final charges based on
BT's final financial statements for that period. A draft determination was
published by OFTEL in February 1997. Final charges may involve a readjustment
of charges made under the interim determination where appropriate. At the end
of 1996, OFTEL completed another consultation process and published interim
charges for the period from April 1, 1996 to March 31, 1997. As a result of
these revised charges, the Group will receive outgoing interconnect charge
rebates, and must pay incoming termination rebates for periods from April 1,
1995. The Company has estimated that the rebate due to the Group will exceed
the rebates to be paid by the Group. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations for the Three Years Ended December 31, 1996 -- Revenue".
On March 20, 1996, the Director General published a consultation paper in
which OFTEL proposed basing interconnection charges on forward looking
incremental costs. It is proposed that this would take effect from August 1997,
subject to a network price cap. This would impose a Retail Price Index ("RPI")
minus X cap on interconnect prices. Within that cap it is proposed that OFTEL
would impose floors and ceilings for interconnection services, which would
control BT's prices for its various interconnection services.
In June 1996, the Director General published a statement in which he made
it clear he is proposing to replace the annual determination of charges with a
system of network controls for those services which are not competitive, using
baskets of interconnection services, each subject to a charge cap formula of
RPI
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<PAGE> 32
minus X. Charges for those services which are expected to become competitive
during the next price control period, i.e. from August 1997 until the middle of
2001, will not be included in the network baskets, but will be governed by
safeguard caps of RPI plus 0%. Charges for those services which are expected to
become competitive before August 1997 or which are determined by the Director
General to be competitive during the control period, will be free of network
controls. The value of "X" has not as yet been decided. Neither have the "floors
and ceilings" of prices within the baskets. Further work on these areas and on
the model by which the Director General is to base charges on incremental costs
is to be carried out in early 1997. The current proposals are subject to public
consultation, which ends on February 13, 1997. OFTEL has said it will publish a
further informal consultative document in March 1997 and its final proposals
with license modifications for formal consultation in May 1997. If BT agrees to
them, these modifications to BT's license will become effective on August 1,
1997. If BT were to fail to agree, there may be a reference to the MMC. In the
period before recommendations of the MMC were implemented, the current
interconnection regime would continue.
Price Regulation
Although to date the Group has for the most part been able to price its
cable telephone call charges below those of BT, there can be no assurance that
it will be able to continue to do so in the future. BT currently is subject to
controls over the prices it may charge customers for network services,
including a requirement that the overall basket of charges may not be changed
by more than an amount equal to the percentage change in the RPI less 7.5% (and
BT may, as a result, have to decrease prices). In particular, BT may not
increase charges for certain services by more than the amount of the percentage
change in the RPI.
OFTEL's latest proposals for control of BT's retail prices have been
incorporated in BT's license. The retail price controls will continue until
2001 and are stated to be the last such controls. The controls will only be put
in place where consumer protection is required, that is, for low to
medium-spending residential customers and small businesses. The current RPI
minus 7.5% price cap will be replaced with effect from August 1997 with a cap
of RPI minus 4.5% on the narrower basket of services described above. Safeguard
caps of RPI plus 0% will be imposed on certain services. See "-- Competition --
Residential Telephone".
BT has limited opportunity for differential pricing to the same class of
customer because it is subject to prohibitions on undue preference and undue
discrimination across the U.K. Following the Duopoly Review, BT's
telecommunications license was modified to permit it to offer discounts to high
volume users, subject to several conditions. However, BT may not offer
discounted services in local markets without offering the discounts nationally
if such discounts result in undue discrimination or unfair cross-subsidy.
Following modifications made to BT's telecommunications license in 1995, the
Director General is proposing an amendment to BT's telecommunications license
to ensure that BT's interconnect prices are sufficiently transparent to enable
a comparison between the component elements of BT's charges to the Group and
other operators with those charged by BT to itself and to ensure that BT does
not favor its own business over that of other operators. The proposals for
price controls will mean further modification of interconnect prices in 1997.
The telephone service prices charged by the Group and other service
providers other than BT currently are not regulated by the Director General,
although undue preference, undue discrimination, linked sales and cross-subsidy
regulations within each of its franchise areas do apply to the Group.
Equal Access
At present, most residential customers rent an exchange line from BT and
the only way in which a residential BT customer can choose to route calls over
the Mercury trunk network is by dialing a special access code or by purchasing a
special telephone instrument with which (by pressing a special button) it is
possible to select the Mercury network. The stated policy of the U.K. Government
in the Duopoly Review was to introduce true equal access, whereby local
telephone systems with a market share of 25% or more will have to offer access
to each available fixed link trunk system without discrimination between
systems.
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<PAGE> 33
BT's and Mercury's and cable operators' licenses have been amended to enable
the Director General 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 will outweigh the likely costs.
Many cable operators opposed the Duopoly Review in this respect because equal
access would reduce one of the current attractions of a cable operator's
telephone system. True open access might enable cable companies to offer equal
access benefits to their customers on attractive terms. Modifications made to
each of the Group's telecommunications licenses also provide that the relevant
licensee may be required by the Director General to make equal access available
once the Group first provides 25% of the available exchange lines in any local
exchange area of BT or in the relevant franchise area. The timing and terms of
the introduction of equal access are unclear. The EC is currently consulting on
proposals to introduce carrier pre-selection in the long term. There can be no
assurance that the implementation of true equal access in the future will not
adversely affect the ability of cable operators to market their telephone
services.
Number Portability
Telephone subscribers changing their telephone service to a cable operator
have historically had to change their telephone numbers. As a result certain
business customers have been reluctant to switch carriers because they would
lose their existing telephone numbers. In response to this, Diamond has
provided its business customers with the opportunity to use the Group's
telephone service for their outgoing telephone calls, which generally carry
higher revenues than incoming calls, and for their specialized
telecommunications needs, while retaining their existing service provider (and
their existing telephone number) for incoming telephone calls.
In January 1994, the Director General announced that OFTEL was working on
directives to require BT to introduce number portability for the cable
operators who had provided OFTEL with the necessary information as to where and
when they could provide portability to BT. The Director General's statement
indicated that number portability may be introduced in the geographic areas
where it is technically feasible in the foreseeable future. BT rejected a
framework proposed by OFTEL for determining the charges payable for number
portability in the event of a dispute between BT and other operators. In April
1995, the Director General referred the matter to the MMC to establish whether
the failure of BT to reach agreements with other operators on the commercial
terms and conditions for number portability was against the public interest,
and if so, whether the adverse effects could be remedied or prevented by
modifications to the conditions of BT's telecommunications license. On December
14, 1995, the Director General announced the MMC's conclusions, including that
the absence of number portability operated against the public interest, that
the absence of number portability was an obstacle to operators' (including
cable operators) ability to win customers from BT, that the introduction of
number portability will strengthen competition, and that BT's
telecommunications license should be modified (following a statutory
consultation period) to enable the allocation of BT's costs incurred in this
regard between BT and other operators (including cable operators), with BT
bearing the greater share. The MMC also noted that there is general agreement
in the industry that reciprocity should continue to be an essential element in
the introduction of number portability, and that the arrangements to be made
for allocating portability costs need to take account of the fact that BT will
not always be the exporting operator. BT's telecommunications license has been
modified accordingly, and the telecommunications licenses of the other national
PTOs are expected to be modified later in 1997, following consultation.
Restrictions on National PTOs
The Duopoly Review maintained restrictions upon BT and other national PTOs
from conveying or providing entertainment services (such as the cable television
services currently provided by the Group) over their national telecommunications
networks. The U.K. government stated that the restrictions upon the conveyance
of such services nationally (for example, on behalf of other service providers)
may be reviewed in 1998, but the restrictions regarding provision by the
national PTOs themselves were not intended to be reviewed until 2001. The
Duopoly Review policy did not prevent the national PTOs from providing cable
television services of the kind currently provided by the Group, but it did
require that such services be provided through separate systems by separate
subsidiaries of the national PTOs under separate licenses
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<PAGE> 34
similar to those held by the Group. The ITC's policy of granting one cable
television license for each geographic area has ensured that no national PTO
subsidiaries compete with the Group in the provision of cable television
services in the same area. BT currently owns and operates one broadband cable
franchise in the U.K., in Westminster, central London and was the highest
bidder for the Milton Keynes franchise, which has yet to be awarded. Since
April 1, 1994, cable television services may be provided locally by the
national PTOs without requiring separate subsidiaries, although all other
licensing requirements, including the need for the national PTO to obtain an
LDL to provide cable services within each locality, will remain applicable to
both national PTOs and to other cable operators such as the Group. In November
1994, the DTI stated that if national PTOs (including BT and Mercury)
successfully bid for a new cable television license, the DTI would be prepared
to issue a telecommunications license to enable any such national PTO to convey
entertainment services over its own systems within the relevant franchise area.
Following a consultative document issued in March 1996, the U.K.
Government announced on June 6, 1996, that it was ending the duopoly between BT
and Mercury as international carriers from the U.K. A license holder may now
provide international services from the U.K. on telecommunications facilities
owned and controlled by the company providing the service, and will be able to
offer services on any route it chooses. A large number of international
facilities licenses have been granted.
The DTI also reiterated the U.K. Government's commitment to the Duopoly
Review restrictions on national PTOs such as BT with regard to the conveyance
and provision of cable television services, while noting that national PTOs
could bid for new franchise areas and provide video-on-demand services to
individual residential customers.
On September 29, 1993, the ITC issued a statement in which it concluded
that national PTOs such as BT could provide a "video-on-demand" service
nationally over their telecommunications networks without requiring further
regulatory changes in respect of the conveyance of such services (although the
programming itself might require a license). A "video-on-demand" service was
defined by the ITC as a service in which individual programs are transmitted to
only one household at a time in response to a particular request. As such, a
"video-on-demand" service in this context does not embody cable television
services of the kind provided by the Group for simultaneous reception in
multiple residential households. The ITC noted that its conclusions were shared
by other regulatory bodies (i.e., the DTI and OFTEL), but that its conclusions,
if disputed, could only be definitively resolved in the courts.
Currently, no video-on-demand service is commercially available from any
PTO. However, BT ran a pilot program for this service to the homes of a limited
number of BT employees and is understood to have run an interactive TV,
including video-on-demand, commercial pilot program. Mercury has also announced
that it is considering a video-on-demand pilot program. The existing
restrictions on the provision of broadcast entertainment services by national
PTOs have been the subject of continued political debate. In July 1994, the
House of Commons Trade and Industry Select Committee issued a report on optical
fiber networks in which it recommended, among other things, (i) that national
PTOs be permitted to apply to provide broadcast entertainment on a franchise by
franchise basis, subject to all existing franchises being exclusive for seven
years from the grant of the original licenses, (ii) that all restrictions on
national PTOs conveying or providing entertainment be lifted by the end of
2002, provided that the PTOs permit fair and open access to their networks and
(iii) that national PTOs (amongst others) be entitled to bid for cable
television franchises in unfranchised areas by the end of 1995. The Committee's
recommendations are not binding and need not necessarily lead to a change in
government policy. The DTI, OFTEL and the ITC have stated that lifting these
restrictions would limit competition by jeopardizing the investment programs of
cable operators and the DTI has subsequently reaffirmed that the U.K.
Government would not pursue the Committee's recommendations. Should the Labour
Party be elected to Government it may review the restrictions on national PTOs,
and in a speech by the Labour Party leader on October 3, 1995, it was proposed
that a Labour government might increase BT's regulatory freedom. A general
election must be held by the end of May 1997 but may be called earlier.
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FUTURE DEVELOPMENTS
Digital Broadcasting
The Broadcasting Act 1996 introduced provisions for the licensing of
digital terrestrial broadcasting and introduced a "must carry" requirement on
cable companies where both program provider and cable operator use digital
technology to ensure the universal availability of designated public service
channels. Must carry obligations concerning public service channels already
apply to holders of PDSLs.
The Broadcasting Act 1996 permits the initial availability of six
television multiplexes, or frequency bands giving substantial national
terrestrial coverage, each with the ability to carry several television
channels. The new legislation includes provisions for the ITC's licensing of
"multiplex providers", who would initially be allocated, in aggregate, the six
multiplexes for 12-year license periods. Each multiplex provider will contract
with broadcasters for the transmission of the broadcasters' television services
via its allocated frequency. All existing terrestrial broadcasters, including
Channel 5, would be offered half a multiplex and the BBC would be awarded its
own multiplex, with competition between other operators for the remaining
capacity. The ITC announced on October 31, 1996 that it would accept
applications for licenses to provide terrestrial digital television services.
On January 31, 1997, the deadline for applications, the ITC had received two
competing applications for three of the multiplexes. One of the applicants is a
joint venture by BSkyB, Carlton Communications plc and Granada Group plc. The
ITC has indicated it will award the licenses in Spring 1997, following a six
week public consultation period.
In addition, on August 23, 1996 regulations came into force to implement
in the U.K. the European Advanced Television Services Directive. The
regulations apply in relation to conditional access to digital television
services broadcast to viewers in the EEC, irrespective of the means of
transmission, and therefore apply whether digital television services are
transmitted by cable, satellite or terrestrial means. The regulations provide
that licenses for industrial property rights for manufacturers of consumer
equipment must be granted on fair, reasonable and non-discriminatory terms.
On January 7, 1997 regulations came into force which provide that those
operators who do not only self-provide conditional access services to digital
television services will have to provide such services to all broadcasters who
require such services on a fair, reasonable and non-discriminatory basis.
The DTI has also published a class license for the provision of
conditional access services under the Telecommunications Act authorizing the
running of certain conditional access systems. Conditions in the class license
impose a requirement that technical conditional access services to digital
television services are offered on a fair, reasonable and non-discriminatory
basis enabling broadcasters to gain access to viewers through any base of
decoders which can receive their signal. In addition, conditional access
operators are required to cooperate with cable operators so that cable
operators are able to transcontrol and rebroadcast television services using
their own conditional access system without incurring unnecessary or
unreasonable expense. The class license also contains fair trading provisions.
In December 1996 OFTEL published a consultation paper and draft guidelines
on the regulation of conditional access services for digital television. The
initial consultation period expired on January 24, 1997. Final guidelines have
not yet been published.
Media Ownership
The Broadcasting Act 1996 amends the media ownership rules contained in the
Broadcasting Act 1990. It relaxes the earlier rules limiting ownership between
terrestrial television, satellite and cable broadcasters, except for those
broadcasters which are already more than 20% owned by a newspaper with more than
20% national newspaper circulation. Qualifying terrestrial broadcasters are now
allowed to have controlling interests in cable and satellite companies, provided
their total interests do not exceed 15% of the total television market (defined
by audience share including public service broadcasters) and qualifying cable
companies will be able to control terrestrial television companies, subject to
the 15% total television
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<PAGE> 36
market limit and certain restrictions on the number of terrestrial licenses
held. Newspaper groups with less than 20% national newspaper circulation are now
able to control television broadcasters constituting up to 15% of the total
television market, subject to a limit on the number of terrestrial licenses
held, unless the ITC decides that such control would be against the public
interest. Newspaper companies, the license holders of Channel 3 and Channel 5
and satellite and cable broadcasters, are to have the ability to control any
number of digital terrestrial television licenses, in addition to any analogue
licenses.
Previous U.K. Government proposals have also contemplated a more
integrated system of media ownership and control in the longer term, to take
account of the increasing number of broadcasters and technological convergence,
and involving regulation of the media-market as a whole. The Company can give
no assurance as to whether these proposals for regulation will be enacted or,
if they were enacted, as to what their content would be or what effect they
might have on the Group's business.
BSM Services
In August 1995 OFTEL issued a consultative document which addressed the
potential development of broadband switched mass-market ("BSM") services in the
U.K. and related regulatory issues. BSM services involve the delivery of
video-quality images over a switched system, at prices intended to encourage
the development of a mass market. The consultative document suggested that
dominant operators (potentially including cable operators) should be required
to provide, on transparent and non-discriminatory terms, broadband conveyance
(including switching) as a network business to service providers which could
have direct commercial relationships with individual customers. Requirements
for accounting separation and the possible need for some form of price control
were also considered. OFTEL suggested that BT is likely, at an early stage, to
be considered a dominant operator, possibly when it starts to roll out BSM
services aimed at covering a significant portion of the U.K., either nationally
or in a specific regional market. OFTEL suggested that such regulation should
only be applied 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 recognized
the importance of encouraging continuing local investment in the cable
industry's infrastructure. The document also raised the question whether
license obligations on cable operators to provide cable television 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. The stated purpose of the consultative document was to
raise issues in order to stimulate debate to assist in the development of the
kind of regulatory regime that will best promote the new services. The August
1995 consultative document was followed by a consultative document in February
1996 and by a statement by the Director General in June 1996, both of which
were concerned with promoting competition in the current market for services
such as on-line information, electronic data interchange and voice messaging.
ITEM 2. PROPERTIES
PROPERTIES
At December 31, 1996, the Group leased or rented 20 properties for
administrative and sales offices, hub, switch and head-end sites, warehouses
and equipment sites. At that date, the Group leased an aggregate of
approximately 173,000 square feet of real property, of which approximately
103,700 square feet consisted of external equipment and warehouse storage
space. The Group owns its 44,000 square foot head office and headend/switch
site in Nottingham, which was constructed in 1995 at a cost of approximately
L.3 million. The Group also owns a switch site property of 4,688 square feet
located at Shepshed.
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<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS
No member of the Group is a party to any material legal proceedings, nor
is it currently aware of any threatened material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY - HOLDERS
Not applicable.
- 35 -
<PAGE> 38
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
- 36 -
<PAGE> 39
ITEM 6. SELECTED FINANCIAL DATA
The selected data set forth below have been excerpted or derived from the
audited financial statements of the Group, which as of December 31, 1995 and
1996 and for each of the years in the three-year period ended December 31, 1996
are included elsewhere herein and have been audited by KPMG, independent
auditors. The selected data have been prepared in accordance with United
States generally accepted accounting principles ("U.S. GAAP") and should be
read in conjunction with, and are qualified in their entirety by reference to,
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and the related Notes thereto, which are included elsewhere in this Annual
Report.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995(1) 1996 1996(2)
---------- ----------- ----------- ---------- ---------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
Business telecommunications....... L. 178 L. 1,237 L. 3,402 L. 5,852 L. 9,763 $16,717
Residential telephone............. 153 1,251 2,545 6,662 17,723 30,347
Cable television.................. 458 719 1,324 3,479 10,091 17,279
Other revenues.................... 11 20 35 -- -- --
Total revenues.................... 800 3,227 7,306 15,993 37,577 64,343
Operating costs and expenses:
Telephone......................... (140) (1,097) (3,067) (5,454) (9,776) (16,739)
Programming....................... (184) (324) (701) (1,844) (6,041) (10,344)
Selling, general and
administrative.................... (917) (1,632) (4,562) (13,020) (22,391) (38,340)
Depreciation and amortization..... (1,530) (2,520) (4,038) (8,867) (21,380) (36,609)
---------- ---------- ---------- ---------- --------- ---------
Total operating costs and expenses (2,771) (5,573) (12,368) (29,185) (59,588) (102,032)
---------- ---------- ---------- ---------- --------- ---------
Operating loss.................... (1,971) (2,346) (5,062) (13,192) (22,011) (37,689)
Interest income................... -- -- 1,415 3,887 3,441 5,892
Interest expense, and amortization
of debt discount and expenses..... (53) (231) (3,836) (17,118) (40,334) (69,064)
Foreign exchange gains/(losses)
net............................... (1,314) (221) (1,196) 925 31,018 53,112
Unrealized losses on derivative
financial instruments............. -- -- -- (868) (7,944) (13,603)
Other expenses.................... -- -- -- (1,241) -- --
---------- ---------- ---------- ---------- ---------- ---------
Net loss.......................... L.(3,338) L.(2,798) L.(8,679) L.(27,607) L.(35,830) $(61,352)
========== ========== ========== ========== ========== =========
BALANCE SHEET DATA:
Property and equipment, net....... L. 8,678 L. 18,021 L. 35,127 L. 163,721 L. 277,301 $474,822
Total assets...................... 9,487 19,882 138,606 374,172 416,819 713,719
Total debt (3).................... 13,779 21,889 103,068 319,492 325,041 556,567
Shareholders' equity (4).......... (6,733) (5,660) 26,092 25,133 54,100 92,636
OTHER DATA:
EBITDA (5) L. (441) L. 174 L. (1,024) L. (6,434) L. (8,575) $(14,683)
Deficiency of earnings to fixed
charges (6)....................... (3,338) (2,798) (8,679) (27,607) (35,830) (61,352)
Capital expenditures.............. 7,799 11,880 21,252 136,314 130,140 222,839
</TABLE>
(See notes to Selected Financial Data)
- 37 -
<PAGE> 40
NOTES TO SELECTED FINANCIAL DATA
(1) The 1995 Group financial data includes the financial results of LCL from
October 1, 1995.
(2) Translated, solely for the convenience of the reader, at a rate of
$1.7123 = L.1.00, the Noon Buying Rate on December 31, 1996.
(3) Total debt for periods prior to December 31, 1994 consisted of advances
from shareholders and capital lease obligations. Total debt at December
31, 1994 consisted of the 1994 Notes and capital lease obligations. Total
debt at December 31, 1995 and 1996 consisted of the 1994 Notes, the
Company's 11 3/4% Senior Discount Notes due December 15, 2005 (the "1995
Notes"), capital lease obligations and the mortgage loan.
(4) The Company raised additional equity financing of L.40.4 million, L.27.0
million and L.64.6 million in the years ended December 31, 1994, 1995 and
1996, respectively.
(5) Earnings before interest, taxes, depreciation and amortization and
foreign exchange translation gains and losses ("EBITDA") is presented
because it is a widely accepted financial indicator of a leveraged
company's ability to service and incur indebtedness. EBITDA should not,
however, be considered as a substitute for net income as a measure of
operating results or for cash flows as a measure of liquidity.
(6) Represents the amount by which loss before income taxes and fixed charges
("earnings") failed to cover fixed charges. Fixed charges consist of
interest expense (including amortization of debt issuance costs and debt
discount) plus the portion of rental expense under operating leases which
has been deemed by the Company to be representative of the interest factor
(1/3 of rental expense). Because fixed charges exceeded earnings for all
periods presented, a ratio of earnings to fixed charges is not presented.
EXCHANGE RATES
The following table sets forth, for the years, periods and dates
indicated, the average, high, low and period-end Noon Buying Rates for pounds
sterling expressed in U.S. dollars per L.1.00:
<TABLE>
<CAPTION>
YEAR AVERAGE(1) HIGH LOW PERIOD-END
- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C>
1992 1.76 2.00 1.51 1.52
1993 1.49 1.59 1.42 1.48
1994 1.54 1.64 1.46 1.57
1995 1.58 1.64 1.53 1.55
1996 1.57 1.71 1.49 1.71
</TABLE>
(1) The average of the Noon Buying Rates on the last day of each full month
during the period.
The Noon Buying Rate on March 19, 1997 was $1.5968 = L.1.00. For a
discussion of the impact of exchange rate movements on the Group's financial
condition and results of operations as well as its ability to service its U.S.
dollar-denominated obligations, see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Foreign Exchange".
- 38 -
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Group should be read in conjunction with the
consolidated financial statements of the Group and related Notes which are
included elsewhere in this Annual Report.
OVERVIEW
The Group has partially constructed, and is continuing to construct, a
fiber-optic cable telecommunications and television network in its franchise
areas. Through December 31, 1996, approximately L.317 million had been invested
(at original cost) in the construction of the Group's network and related
systems. As of December 31, 1996, approximately 477,000 of the premises (homes
and businesses) in the Group's franchise areas had been passed by civils
construction, of which 365,000 premises had been activated, representing
approximately 36% of the premises required to be activated under the Group's
aggregate final milestone obligations.
The development and the installation of the network in the Group's
franchise areas requires significant additional capital expenditure. These
expenditures, together with the associated operating expenses, will continue to
result in significant cash requirements, and during the build out period the
Company expects to continue to incur operating losses.
The Group earns substantially all of its telecommunications revenues from
monthly fees for line rental, toll usage and ancillary services (including
charges for additional services purchased at the customer's discretion). Cable
television revenues are earned primarily from monthly customer fees for basic
and premium services. The ability of the Group to generate sufficient revenues
to cover cash expenditures and become profitable will depend upon a number of
factors, including the Group's ability to attract customers, revenues per
customer, churn rates, construction costs and financing costs. These factors
are expected to be primarily influenced by the success of the Group's operating
and marketing strategies as well as market acceptance of cable telephone and
television services. In addition, the Group's profitability may be influenced
by, among other things, changes in the industry's regulatory environment. See
Item 1. "Business -- Certain Regulatory Matters".
One important measure of the success of the Group's operating and
marketing strategy is the churn rate, which is a measure of the incidence of
service terminations among customers using a given service. Service may be
terminated either by the customer or by the Group (generally when the customer
is delinquent in payment). For cable television subscribers, the Group's
experience to date has been that the likelihood of churn for a given customer
is highest in the period shortly after the customer commences subscription for
the service. In addition, cable television churn is subject to seasonal
pressures tending to be highest in the early months of each year.
- 39 -
<PAGE> 42
LIQUIDITY AND CAPITAL RESOURCES
The Group expended net cash to fund investing activities of L.71.9
million, L.155.5 million, and L.128.2 million, in 1994, 1995 and 1996,
respectively. In 1995, the Company received net sale proceeds of L.56.2 million
from marketable securities and invested net cash of L.108.8 million in the LCL
Acquisition. Net cash provided by financing activities was L.112.4 million and
L.212.2 million in 1994 and 1995, respectively, and was L.54.4 million in 1996,
of which L.64.6 million was provided by the issue of equity referred to below
and L.9.1 million was used for debt financing costs. The Group's investing
activities (other than temporary investments of the proceeds from equity and
debt financings and the LCL acquisition) consisted almost exclusively of the
ongoing construction of the network (L.19.1 million in 1994, L.102.9 million in
1995 and L.128.2 million in 1996). As noted above, during the third quarter of
1995, the Group expended net cash of L.108.8 million for the acquisition of LCL
which was funded by new equity, and a banking facility, which was repaid from
the proceeds of the 1995 Notes in December of 1995. In 1994, the Group
generated positive cash flows from operating activities of L.496,000, and in
1995 and 1996 generated negative cash flows from operating activities of L.4.1
million and L.1.3 million, respectively. The Group's cash and funding
requirements historically have been met principally through the issuance of
senior discount notes in September 1994 and December 1995 (the "1994 Notes" and
"1995 Notes", respectively), equity capital, advances from its shareholders,
and from bank and lease financing. In February 1997, the Company issued a new
series of senior discount notes (the "1997 Notes"), raising net proceeds of
approximately $240 million. See "-- Description of Company Debt -- Description
of Senior Discount Notes".
The further development and construction of the Group's cable television
and telecommunications network will require substantial capital investment. The
Group is obligated by the milestones in its telecommunications licenses and the
new LDLs to construct and activate a network passing an aggregate of 1,021,894
premises within prescribed time periods. See Item 1. "Business -- Milestones".
The Company expects that the Group's residential cable network will extend
approximately 14,300 kilometers (plus 920 kilometers to interconnect the
residential build) and pass approximately 1.2 million homes once completed. The
network will be substantially completed by the end of 2001. The Company
currently estimates that the additional capital expenditures required for the
Group to substantially complete the network (including estimated subscriber
connection expenses) will be approximately L.570 million (of which L.520
million relates to capital expenditures occurring from December 31, 1996
through January 1, 2001), although these amounts could vary significantly.
The Company believes that available cash reserves (including the proceeds
of the 1998 Notes offering), the proposed equity injection of pound sterling 25
million and cash flows from operations will be sufficient to complete the
planned construction through the first quarter of 1997, at which time the Group
estimates that approximately 61.4% of the aggregate final milestones will have
been constructed and activated. Thereafter, the Company expects that the Group
will be able to utilize amounts under a senior bank facility (the "Senior Bank
Facility") that permits DCL to borrow, subject to certain conditions, up to
L.175 million. If such amounts are not available or are insufficient, the Group
would be required to obtain further debt or equity financing.
DCL will be able to draw on the Senior Bank Facility if certain conditions
are met, including conditions related to the operating cash flow of, equity
contributions to and certain financial ratios of Jewel and its subsidiaries
(together, the "Borrower Group") which are not currently met. See "--
Description of Company Debt -- Senior Bank Facility". Indebtedness under the
Senior Bank Facility will be incurred by DCL, guaranteed by the Borrower Group
and secured by a lien on the assets of the Borrower Group and a pledge of the
issued shares of the Borrower Group other than Jewel but including DCL and LCL.
However, the Group may not be able to borrow sufficient funds under the
Senior Bank Facility to meet its remaining funding requirements. In particular,
even after the initial conditions to borrowing have been met the amount of funds
that may be borrowed will be limited to a specified multiple of the Borrower
Group's reported annualized cash flow (as defined in the Senior Bank Facility).
This reported annualized cash flow will depend on a number of variables,
including penetration of cable television and premium channels, penetration of
business telecommunications and residential telephone, average revenues in each
of these
- 40 -
<PAGE> 43
areas, churn and expenses such as programming costs and interconnect charges.
Adverse developments in any of these or other areas could adversely affect the
Borrower Group's reported annualized cash flow and reduce amounts available
under the Senior Bank Facility.
To the extent that (i) the Group is unable to utilize fully the Senior
Bank Facility, (ii) the amounts required to complete the Group's planned build
out exceed its estimates or (iii) the Borrower Group's reported annualized cash
flow (as defined in the Senior Bank Facility) does not meet expectations, the
Group will require additional debt or other financing. There can be no
assurance that any such debt financing will be permitted under the terms of the
Group's debt instruments, which limit the incurrence of additional debt by the
Group, or that any such debt or other financing will be available on acceptable
commercial terms or at all.
The foregoing information with regard to expected completion times, future
capital expenditures and the sufficiency of funding is forward looking in
nature. Due to factors identified in the preceding two paragraphs and below,
actual results may differ materially from the expected results. There can be no
assurance that (i) conditions precedent to advances or the availability of
funds under any of the Group's existing and anticipated debt instruments will
be satisfied when funds are required; (ii) the Group will be able to generate
sufficient cash from operations to meet any unfunded portion of its capital
requirements when required; (iii) the cost of constructing and activating the
network will not increase significantly; (iv) the Group will not acquire
additional franchise areas, which would require additional capital
expenditures; or (v) the Group will not incur losses from foreign currency
transactions or its exposure to foreign currency exchange rate fluctuations.
See "-- Description of Company Debt -- Senior Bank Facility".
To date, the Group has funded its capital expenditure needs primarily
through the proceeds from the issuance of the 1994 Notes, 1995 Notes and 1997
Notes as well as equity investments. The inability of the Group to secure
additional financing could result in a failure to comply with the minimum build
milestones set forth in its licenses and could ultimately lead to the
revocation of such licenses. See Item 1. "Business -- Certain Regulatory
Matters -- Cable Telecommunications".
The Group's revenues are denominated in pounds sterling, while its
obligations to pay interest and principal on the 1994 Notes, 1995 Notes and
1997 Notes are denominated in U.S. dollars. Therefore, the Company and the
Group are subject to currency exchange risks that may adversely affect their
ability to meet their obligations, including obligations under outstanding debt
instruments, as they become due.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The Group experienced significant increases in its subscribers, revenues
and expenses during the three years ended December 31, 1996. In general, such
increases were attributable to the Group's continued network construction and
marketing of new homes and businesses and the acquisition of LCL. During the
three-year period from December 31, 1993 to December 31, 1996 homes passed by
civils construction increased by 424,797 homes (1480%), homes activated
increased by 323,506 homes (1360%) and homes marketed increased by 229,637
homes (1000%). The number of homes that had been passed by civils construction
at December 31, 1996 exceeded homes activated by 106,250 compared to a
difference of 123,405 homes at December 31, 1995. The difference between homes
passed by civils construction and homes activated is a result of the fast pace
of civils construction coupled with the lead time between civils construction
and activation.
REVENUE
The Group's total revenues were L.7.3 million in 1994, L.16.0 million in
1995 and L.37.5 million in 1996. This growth is attributable to increases in
revenues in all three of the Group's primary lines of business and additional
revenues of L.2.25 million and L.10.9 million attributable to the inclusion of
LCL's results for the last quarter of 1995 and full year 1996, respectively.
- 41 -
<PAGE> 44
As a result of entering into revised interconnect agreements with BT which
will apply retroactively, the Company will receive outgoing interconnect charge
rebates relating to all periods prior to December 31, 1996 and must pay
incoming termination rebates relating to the period from April 1, 1995 to
December 31, 1996. The rebates that will be given to BT relating to the
incoming termination element amount to an estimated L.1,351,000 based on draft
final rates for the twelve month period from April 1, 1995 and interim rates
for the nine month period from April 1, 1996. This amount has been provided by
reducing residential telephone and business telecommunications revenues in 1996
by L.776,000 and L.575,000 respectively. The total amount of rebates to be
received by the Company will be determined by the parties once BT has furnished
to the Company a proposed calculation and supporting data and OFTEL has
determined the final rates applicable. The Company has estimated that the
amount of the rebate due to the Company from BT will exceed the amount of the
rebates to be provided by the Company to BT. Pending final determination of
rebates, the Company has recognized a reduction in interconnect charges in the
same period during which the related reduction in revenues is being recognized.
Accordingly, a reduction in telephone expenses of L.1,351,000 has been recorded
in 1996.
The analysis of revenue and average revenue per line is provided below on
the basis of revenues as reported as well as on a pro-forma basis adjusting for
the incoming termination rebates in the appropriate periods as if the revised
interconnect agreements and the draft final and interim rates had been in
effect since April 1995.
Business Telecommunications. Business telecommunications revenue was
L.3.4 million in 1994, L.5.9 million in 1995 and L.9.8 million in 1996.
Adjusting for rebates on the pro-forma basis described above, revenues were
L.5.7 million and L.10.0 million for 1995 and 1996, respectively, representing
an increase of 76%. The growth in reported revenues is due primarily to an
increase in the number of Diamond's business lines installed from 3,928 at
December 31, 1994 to 7,036 December 31, 1995 and 14,737 at December 31, 1996,
and the inclusion of L.0.5 million and L.2.2 million of revenue attributable to
LCL in the last quarter of 1995 and the full year 1996, respectively. There
were 4,195 business lines for the LCL operation at December 31, 1996. The
growth in the number of business lines for Diamond is partially offset by lower
monthly revenue per line. The monthly revenue per line for Diamond decreased
from L.88.68 in 1994 to L.74.60 in 1995 (L.72.02 on a pro-forma basis) and
L.49.81 (L.51.03 on a pro-forma basis) in 1996. This decline continued the
trend over the past several quarters and was due to a combination of (i)
Diamond's success in marketing Centrex services which has the effect of
increasing the average number of lines held by existing and new customers
taking those services (Diamond operated 6,011 Centrex lines at December 31,
1996 compared to 1,393 Centrex lines at December 31, 1995), (ii) a reduction in
certain tariffs in response to price reductions by the competition,
particularly BT, Diamond's principal competitor for business telecommunications
services, and (iii) the installation for existing customers of an increasing
number of lines utilized for incoming calls in addition to existing lines
dedicated solely to outgoing calls.
Residential Telephone. Residential telephone revenues were L.2.5 million
in 1994, L.6.7 million (pro-forma L.6.4 million) in 1995 and L.17.7 million
(pro-forma L.18.0 million) in 1996. The growth in residential telephone revenue
resulted from an increase in the number of Diamond's residential telephone
lines from 14,150 at December 31, 1994 to 36,122 at December 31, 1995 and
76,979 at December 31, 1996, and the inclusion of L.1.1 million and L.5.5
million of residential telephone revenue for the LCL operation for the last
quarter of 1995 and the full year 1996, respectively. There were 27,481
residential telephone lines for the LCL operation at December 31, 1996. Monthly
revenue per line for Diamond was L.18.83 in 1994, L.18.68 in 1995 and L.17.59
in 1996. On a pro-forma basis, Diamond's average monthly revenues per line
decreased slightly from L.18.11 in 1995 to L.17.84 in 1996. The Group's churn
rate (annualized) was 20.6% for 1996 as compared to pro-forma, combined 15.0%
for 1995. The increase in churn in 1996 is attributable in part to a tightening
of the disconnect policy for certain customers and certain ongoing efforts by
BT aimed at regaining former customers.
Cable Television. Cable television revenues increased from L.1.3 million
in 1994 to L.3.5 million in 1995 and L.10.1 million in 1996. This growth in
cable television revenue was primarily due to a combination of (i) an increase
in the number of Diamond's cable television subscribers which rose from 8,936 at
December 31, 1994 to 42,419 at December 31, 1996, (ii) an increase in the
average monthly revenue per
- 42 -
<PAGE> 45
subscriber from L.14.71 for 1994 to L.16.80 for 1995 and L.17.70 for 1996, and
(iii) the inclusion of cable television revenue of L.0.6 million and L.3.1
million for the LCL operation for the last quarter of 1995 and the full year
1996, respectively. The increase in average revenue per subscriber is primarily
due to increases in cable television pricing.
The Group's churn rate was 40.9% for 1996 as compared to a pro-forma
combined churn rate of 33.8% in 1995. The Company believes that the increase in
churn was due in part to the Group's announcement of increases in premium
subscription rates which led certain longer-term customers who had previously
benefitted from grandfathered rates, to disconnect service, as well as to the
application of a stricter disconnect policy relating to nonpayment implemented
in June 1996 in the LCL areas, which resulted in an increase in customer
disconnections, particularly in the third quarter of 1996. With the aim of
reducing churn among new subscribers, the Group has begun to require payment of
an installation fee in connection with the subscription for new residential
services and is evaluating other means to reduce its churn in the future.
OPERATING COSTS AND EXPENSES
Telephone expenses, consisting principally of interconnect charges payable
to BT and Mercury, increased from L.3.1 million in 1994 to L.5.5 million in
1995 and L.9.8 million in 1996. On a pro-forma basis reflecting the apportioned
reduction in interconnect charges resulting from the revised interconnect
agreements in the appropriate periods to which they relate, telephone expenses
would have been L.5.0 million and L.10.2 million during 1995 and 1996,
respectively. These increases reflect the substantially larger volume of
telephone business generated by the Group. As a percentage of combined business
telecommunications and residential telephone revenues, these direct costs
decreased from 52% in 1994 to 44% in 1995 and 36% in 1996 due in part to
reduced interconnect charges paid to other operators. Taking into account on a
pro-forma basis the rebate-related adjustments to both revenues and expenses
during the appropriate periods, telephone expenses as a percentage of combined
business telecommunications and residential telephone revenues would have been
42% and 37% for 1995 and 1996, respectively.
Direct costs for cable television programming, which generally depend on
the number of subscribers and per-subscriber rates charged by programming
suppliers, increased from L.0.7 million in 1994 to L.1.8 million in 1995 and
L.6.0 million in 1996. As a percentage of cable television revenues, these
direct costs were 53% in 1994, 53% in 1995 and 60% for 1996. The percentage
increase in 1996 compared to 1995 stemmed from an increase in rates charged by
programming suppliers, and increases in the number of channels provided as part
of program packages which were not fully offset by increases in the subscriber
rates charged to existing subscribers by Diamond. Significant price increases
made by BSkyB, the largest supplier of programming to the Group, took effect on
January 1, 1996. As from October 1996, the Company increased its prices for
premium programming, and it increased the price of its basic subscriber package
in November 1996. The Company also introduced two lower-priced basic subscriber
packages during November 1996 available to subscribers in two of the Company's
franchise areas only.
Selling, general and administrative expenses increased by 185% from 1994
to 1995 and by 72% from 1995 to 1996. The increases were due to a combination
of increased sales commissions and higher administration costs associated with
the expansion of the Group's business and the inclusion of expenses related to
LCL during the last quarter of 1995 and the full year 1996. In February 1997,
the Group began employing residential salespeople directly and paying them on
the basis of a salary plus sales commissions.
Depreciation and amortization expenses increased by 120% from 1994 to 1995
and by 141% from 1995 to 1996. This increase was attributable to the increasing
size of the Company's network as well as the LCL acquisition.
- 43 -
<PAGE> 46
INTEREST INCOME/EXPENSES
Interest expense was L.3.8 million, L.17.1 million and L.40.3 million for
1994, 1995 and 1996, respectively. The 1996 increase is due primarily to the
accretion of the discount on the 1994 Notes and 1995 Notes of L.38.2 million
during 1996 (compared to L.14.3 million during 1995 and L.3.2 million in 1994),
as well as other interest expense of L.1.2 million in 1996. In addition,
amortization of debt financing costs was L.0.9 million in 1996 (compared to
L.0.3 million in 1995 and L.0.1 million in 1994 ). Interest received was L.3.4
million in 1996, through temporary investment of the proceeds of the 1995
Notes.
FOREIGN EXCHANGE
A substantial portion of the Group's existing debt obligations are
denominated in U.S. dollars, while the Group's revenues and accounts are
generated and stated in pounds sterling. Foreign currency translation gains and
losses, except for unrealized gains and losses on available-for-sale
securities, are reported as part of the profit or loss of the Group. In the
year ended December 31, 1994, the Company recognized an unrealized foreign
exchange loss of L.0.7 million on the translation of its dollar-denominated
indebtedness, a realized loss of L.0.9 million relating to the conversion of
dollars to pound sterling, offset by an unrealized gain of L.0.4 million on the
translation of dollar-denominated securities. In the year ended December 31,
1995, the Company recognized an unrealized foreign exchange gain on the
translation of its dollar-denominated indebtedness of L.0.6 million, an
unrealized loss on its short-term securities of L.0.3 million and a net
realized foreign exchange gain of L.0.3 million relating to its operations and
the sale of dollar denominated available-for-sale securities. In the year ended
December 31, 1996, the Group recognized an unrealized foreign exchange gain on
the translation of its liability on the 1994 Notes and the 1995 Notes of L.31.5
million, an unrealized gain on its short-term securities of L.0.1 million and a
net realized foreign exchange loss of L.0.4 million relating to its operations.
UNREALIZED LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
Losses on derivative financial instruments include an unrealized loss of
L.0.9 million in 1995, and an unrealized profit of L.0.2 million in 1996 on the
mark-to-market valuation of an interest rate swap commitment.
The Company entered into a foreign exchange forward contract on November
1, 1996 for settlement on May 6, 1997 to sell L.200 million at a rate of
$1.6289 to L.1. On January 31, 1997 an offsetting agreement was entered into at
a rate of $1.6014 to L.1. The offsetting contracts were settled on February 6,
1997 with a payment of approximately L.3.4 million to the Company. Because of
changes in prevailing rates, the Company recorded for the year ended December
31, 1996, an unrealized loss of approximately L.8.1 million on the pounds
sterling sell forward contract which partially offset the gain that was
recorded on the translation of the U.S. dollar denominated obligations on the
1994 Notes and 1995 Notes during the same period. During the first quarter of
1997, the Company has recorded a gain of approximately L.11.5 million on the
two offsetting forward contracts, reflecting the reversal of the L.8.1 million
loss referred to above and the approximately L.3.4 million cash payment on
settlement of the contracts. Gain or loss on the translation of other foreign
currency denominated obligations for that period will depend upon the
prevailing rates at the end of the first quarter. The Company may from time to
time in the future enter into similar foreign currency contracts based on its
assessment of foreign currency market conditions and their effect on the
Group's operations and financial condition. Therefore, changes in currency
exchange rates may continue to have a material effect on the results of
operations of the Group and may materially affect the Company and the Group's
ability to satisfy their obligations, including obligations under outstanding
debt instruments, as they become due.
NET LOSS
As a result of the foregoing factors, the Group had net losses of L.8.7
million, L.27.6 million and L.35.8 million in 1994, 1995 and 1996,
respectively.
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<PAGE> 47
DESCRIPTION OF COMPANY DEBT
Senior Bank Facility
In August 1996 certain of the Company's subsidiaries entered into a L.340
million senior bank loan and guarantee facility. In February 1997, the Senior
Bank Facility was amended to reduce the aggregate amount available for
borrowing to L.220 million or less and to revise certain covenants and
borrowing conditions. To date, no funds have been drawn under the facility.
Indebtedness under the Senior Bank Facility will be incurred by DCL,
guaranteed by certain of the Company's other subsidiaries and secured by a lien
on the assets of the Borrower Group and a pledge of the issued shares of
certain of the Company's subsidiaries other than Jewel but including DCL and
LCL.
DCL will be able to draw on the amended facility provided certain
conditions are met, including (i) that the Borrower Group is in compliance with
its obligations in respect of the aggregate build milestones for all franchise
areas as set forth in its telecommunications licenses and/or LDLs, as described
herein under Item 1. "Business -- Milestones", and that each member of the
Borrower Group is in compliance with all of its other license obligations, (ii)
the receipt by the Company of additional equity of L.25 million, (iii) the
existence of L.381.5 million and approximately $30 million of aggregate cash
equity, defined to equal the sum of all called up share capital and share
premium balances of the Borrower Group and intra-Group indebtedness of the
Borrower Group to the Company which has been or will be used to fund qualifying
expenditure (as defined) and (iv) reported annualized cash flow (as defined) of
the Borrower Group of at least L.15 million. DCL will be able to draw on the
amended facility in amounts up to specified multiples of the Borrower Group's
reported annualized cash flow. The Group has not currently met all of the
conditions to borrowing under the amended facility.
In addition, the Senior Bank Facility contains various covenants,
including (i) financial covenants relating to leverage, bank debt loan charges
coverage ratios, cash interest coverage ratios and annualized EBITDA levels;
(ii) requirements that the Borrower Group maintain interest rate protection
agreements in relation to a portion of the loans expected to be outstanding for
the period January 1, 1998 to June 30, 2001; and(iii) restrictions on the
payment of dividends and intra-Group debt.
Because the proceeds to the Company from the issuance of the 1997 Notes
exceeded $175 million, the Company has, under the terms of the Senior Bank
Facility, entered into good faith negotiations with a view to agreeing to
certain amendments to the Senior Bank Facility, including among other things a
reduction in the amount available for borrowing under the facility to L.175
million, adjustments to the repayment schedule, adjustments in financial
covenant levels, modifications to restrictions on permitted dividends and
distributions, and certain borrowing conditions including reported annualized
cash flow (as defined) of the Borrower Group of at least L.18.5 million and an
increase of approximately $72 million in the amount of aggregate cash equity to
fund qualifying expenditure.
In addition to certain customary events of default, the following events
constitute events of default which may trigger acceleration under the Senior
Bank Facility: (i) failure of the Borrower Group to comply with aggregate build
milestones set forth in the terms of its telecommunications licenses and/or
LDLs, (ii) failure of a Borrower Group member to comply with (A) its build
milestones for individual franchise areas if OFTEL or the ITC has served a
notice on such Borrower Group member of its intent to make an order under
Section 17 of the Telecommunications Act (a "Notice Event") or equivalent in
relation to the ITC with respect to such failure to comply, or (B) any other
obligation in respect of such license, the breach of which (x) results in a
Notice Event or (y) is reasonably likely to have a material adverse effect on
the financial condition of the Borrower Group taken as a whole or on the
Group's telecommunication systems; and (iii) certain change of control events,
including certain persons or entities ceasing to control specified percentages
of the total voting and economic power of the Borrower Group.
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<PAGE> 48
Borrowings will bear interest at adjusted sterling LIBOR plus a margin of
0.75%. Quarterly repayment of outstanding principal amounts is required
beginning in the fourth quarter of 2000, with final payment in 2003.
The Senior Bank Facility will restrict the amount of funds that the
Borrower Group can transfer to the Company in order for the Company to service
its debt obligations. This amount is set in pounds sterling based on a
specified exchange rate. Therefore, a weakening of the pound sterling against
the dollar below this specified rate would reduce the dollar-equivalent amount
of funds that could be transferred to the Company to service its obligations
under the 1994 Notes, the 1995 Notes and the 1997 Notes.
Description of Senior Discount Notes
To help fund the Group's operations, in September 1994 the Company issued
$285,101,000 in principal amount at maturity of its 13 1/4% Senior Discount
Notes due September 30, 2004 (the "1994 Notes") at an issue price of $526.13
per $1,000 principal amount at maturity. Net proceeds received by the Company
amounted to L.91 million after issuance costs of L.4 million. Cash interest is
not payable on the 1994 Notes prior to September 30, 1999. Thereafter, cash
interest on the 1994 Notes is payable at a rate of 13 1/4% per annum.
On December 15, 1995, the Company issued $530,955,000 in principal amount
at maturity of its 11 3/4% Senior Discount Notes due December 15, 2005 (the
"1995 Notes") at an issue price of $565.02 per $1,000 principal amount at
maturity. Net proceeds received by the Company amounted to L.187 million after
issuance costs of L.8 million. Cash interest is not payable on the 1995 Notes
prior to December 15, 2000. Thereafter, cash interest on the 1995 Notes is
payable at a rate of 11 3/4% per annum.
On February 27, 1997, the Company issued $420,500,000 in principal amount
at maturity of its 10 3/4% Senior Discount Notes due February 15, 2007 (the
"1997 Notes") at an issue price of $594.48 per $1,000 principal amount at
maturity. Net proceeds received by the Company amounted to approximately L.149
million after issuance costs of approximately L.5 million. Cash interest is not
payable on the 1997 Notes prior to August 15, 2002. Thereafter, cash interest
on the 1997 Notes is payable at a rate of 10 3/4% per annum.
See Note 10 of Notes to the Consolidated Financial Statements contained
elsewhere herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-25 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the directors and senior management of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Director and
Lord Francis Pym 75 Non-Executive Chairman
Director, Chief
Robert T. Goad 42 Executive Officer
Gary L. Davis 52 Director
Richard A. Friedman 39 Director
John L. McDonald 22 Director
Thomas Nilsson 48 Director
Muneer A. Satter 36 Director
John L. Thornton 43 Director
Nicholas R. Millard 46 Chief Financial Officer
J.A. Duncan Craig 41 Chief Accounting Officer
</TABLE>
(All of Diamond Plaza, Daleside Road, Nottingham NG2 3GG England)
Lord Pym has been a Director and Non-Executive Chairman since February
1995. He is a Member of the House of Lords and a former Member of Parliament
and served, among other things, as Secretary of State for Defence from 1979 to
1981 and Foreign and Commonwealth Secretary from 1982 to 1983. He was President
of the Atlantic Treaty Association from 1985 to 1988. Lord Pym is also a
director of Christie Brockbank Shipton Ltd., St. Andrews (Ecumenical Trust)
Ltd. and The Landscape Foundation.
Mr. Goad has been a Director and Chief Executive Officer since May 1994
and served as Chief Financial Officer from May 1994 until July 1995. Mr. Goad
is a founder of and principal in ECE Management International, LLC ("ECE
Management International") and has been President of Columbia Management since
1984.
Mr. Davis has been a Director and, until March 12, 1997, was Managing
Director since he co-founded the Company in 1989. From 1970 to 1989, Mr. Davis
practiced law in the United States, specializing from 1979 to 1989 in the cable
television industry and governmental regulations. Mr. Davis is also a director
of Nottingham Development Enterprise Limited and a director of the Cable
Communications Association.
Mr. Friedman has been a Director since May 1994. Mr. Friedman is a
managing director of Goldman, Sachs & Co. and head of that firm's Principal
Investment Area. Mr. Friedman joined Goldman Sachs in 1981. From 1987 to 1991,
Mr. Friedman was head of the firm's Media Group. Mr. Friedman is a
member of the firm's Partnership Committee, Risk Committee, Investment
Committee and Real Estate Principal Investment Committee. Mr. Friedman is
Chairman of AMF Group, Inc. and on the Advisory Committees or Boards of
Directors of Globe Manufacturing Co., Marcus Cable Company, L.P., and Polo
Ralph Lauren Enterprises, L.P.
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<PAGE> 50
Mr. McDonald has been a Director since October 1996. He is the McDonald
Interests' appointee under the Shareholders Agreement, dated September 1, 1994,
among ECCP, AmSouth, as trustee for the McDonald Interests, CGT, GS Capital
Partners, William W. McDonald and the Company (the "Shareholders Agreement")
and holds a number of other directorships in connection with other McDonald
investments.
Mr. Nilsson has been a Director since February 1995. Mr. Nilsson is
Managing Director of Investor U.K. Limited, London and was Managing Director of
AB Export Invest from 1985 to 1994. He is also a Board Member of European
Acquisition Capital, TV4 AB, WM Data, Svenska Dagbladet, Compagnie Immobel de
Belgique, STORA Finance, Tufton Oceanic Investments Ltd., Industri Kapital
Limited and Memex I&C AB.
Mr. Satter has been a Director since May 1994. Mr. Satter is a managing
director of Goldman Sachs International and co-head of that firm's European
Principal Investment Area. Mr. Satter joined Goldman Sachs in 1988. Mr. Satter
is also on the Advisory Committee or Board of Directors of Bran + Luebbe GmbH
and Empe Holdings GmbH.
Mr. Thornton has been a Director since May 1994. Mr. Thornton is a
managing director of Goldman, Sachs & Co. Mr. Thornton joined Goldman Sachs in
1980, is a member of the Executive Committee of The Goldman Sachs Group, L.P.,
and is responsible for Goldman, Sachs & Co.'s business in Asia. Mr. Thornton is
also chairman of Laura Ashley plc and a director of Ford Motor Company, British
Sky Broadcasting Group plc and Pacific Century Group.
Mr. Millard has been Chief Financial Officer since July 1995. Prior to
joining the Company, Mr. Millard was Group Financial Controller and a Director
of the Industrial Division of Brent International Plc. Mr. Millard is a
Chartered Accountant with experience at Arthur Andersen.
Mr. Craig has been Chief Accounting Officer since August 1990. Prior to
joining the Company, Mr. Craig was Finance Director of Video Magic Leisure
Group plc, a retail video distribution company which became a publicly quoted
company in 1989. Mr. Craig is a Chartered Accountant with experience at KPMG
and Price Waterhouse.
Certain information concerning certain other key employees of the Company
is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Mark L. Harris 42 Technical Services Director
John W. McAuley 49 Marketing Director
Susan L. Milner 40 Customer Services Director
Stephen D. Rowles 43 Executive Director
Human Resources and
Peter C. Savage 38 Administration Director
Katherine B. Wolfsohn 35 Legal Director
</TABLE>
Mr. Harris joined the Company in August 1994 as Technical Services
Director. Prior to joining the Company, Mr. Harris held various senior
management positions in the United States at Communications Services Inc.,
Tele-Communications Inc., Vista Cable Vision and Intercontinental Cable
Services. Mr. Harris is a member of the National Society of Professional
Engineers (U.S.) with over 20 years experience in communications engineering
management.
Mr. McAuley joined the Company in August 1995 as Marketing Director. Prior
to joining the Company, Mr. McAuley had six years experience at IBM where he
held various marketing management positions. Mr.
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<PAGE> 51
McAuley has previous experience in Cadware Incorporated, a PC software
development company where he held the post of Vice President of Marketing,
Hudson Technologies, a PC software publisher where he held a similar position
and at Philip Morris where he held a number of senior management/director level
appointments in the marketing field over a 12-year period.
Ms. Milner joined the Company in November 1992 and became Customer
Services Manager in 1993 and Customer Services Director in 1996. Ms. Milner had
six years experience with BT where she held positions in telephone operations.
Mr. Rowles has been Telecommunications Director since January 1992. Prior
to joining the Company, Mr. Rowles was a founder of RPL Telecommunications plc,
a PABX equipment and systems vendor, and served there as a Director from 1982
through 1991.
Mr. Savage joined the Company in June 1993 as Human Resources Director.
Prior to joining the Company Mr. Savage held positions in British Coal as
Personnel Manager for the Southern Region and as Deputy to the Head of
Employment Policy Branch. Mr. Savage is a member of the Institute of Personnel
and Development.
Ms. Wolfsohn joined the Company in November 1996 as Legal Director. Prior
to joining the Company, Ms. Wolfsohn was Legal Director and Company Secretary
at Bell Cablemedia plc for two years. Ms. Wolfsohn had seven years previous
experience in the corporate department of Linklaters & Paines in London and
qualified as a solicitor in Melbourne, Australia in 1986.
BOARD OF DIRECTORS
The Company's Articles of Association (the "Articles") provide that unless
otherwise determined by ordinary resolution, the number of directors (other
than alternate directors) shall be not less than two but shall not be subject
to any limit. Presently, the Board of Directors comprises eight members.
The Shareholders Agreement grants ECCP the right pursuant to the Articles
to appoint up to four members of the Company's board of directors, one of whom
may exercise voting control at meetings of the directors. The McDonald
Interests are given the right to appoint one director. Under the Relationship
Agreements between ECCP and Investor Investments and ECCP and DCI Capital
Partners ("DCI") dated October 12, 1994 and June 21, 1996, respectively (the
"Relationship Agreements"), Investor Investments and DCI each have the right to
require ECCP to procure (so far as it is legally able) that the Company
appoints one director designated by each of them. Presently Messrs. Goad,
Friedman, Thornton and Satter are the ECCP appointees, Mr. McDonald is the
McDonald Interests appointee and Mr. Nilsson is the Investor Investments
appointee. DCI has not yet made an appointment. Prior to obtaining a listing of
or making trading arrangements in respect of the Company's ordinary shares of
2.5 pence each ("Shares"), the parties to the Shareholders Agreement have
agreed to discuss the practicality of continuing such rights (insofar as they
arise out of the Shareholders Agreement) in force after the listing becomes
effective.
MANAGEMENT AGREEMENT
DCL entered into a 10-year management agreement with effect from June 1,
1994 (the "Management Agreement") with ECE Management Company ("ECE
Management"), a company controlled by Ralph H. Booth II and Robert T. Goad. As
of April 4, 1996, ECE Management assigned its rights and obligations under the
Management Agreement to ECE Management International, also controlled by Ralph
H. Booth II and Robert T. Goad. As of July 1, 1996 DCL assigned its rights and
obligations under the Management Agreement to the Company. Pursuant to the
Management Agreement, ECE Management International will manage and act as agent
(under the supervision and control of the Company's board of directors) in
connection with the strategic activities of the Company, including preparation
of strategic business plans and capital budgets, identification of investment
opportunities and strategic issues relating to the construction of the Company's
cable network, the operation and administration of the Company's business and
the retention of consultants. The Management Agreement provides for an annual
management fee of $200,000 and reimbursement of ECE Management International's
expenses. Under a separate agreement between, among others, the Company
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<PAGE> 52
and DCL, the Company is entitled to recharge to DCL fees and expenses incurred
under the Management Agreement up to a maximum amount agreed with the lenders
under the Senior Bank Facility.
Principals and affiliates of ECE Management International have been
involved in the U.K. cable industry since 1989 when affiliates of Mr. Goad and
his company, Columbia Management, acquired a controlling interest in the
100,000 home franchise for South Bedfordshire. In 1990, Mr. Goad and his
affiliates were joined by Mr. Booth through Booth American Company ("Booth
American"), a family-owned U.S. media company with cable systems and interests
in radio stations in several major markets. Together, the group applied for
four additional contiguous franchises in Hertfordshire and Bedfordshire. The
group was successful in winning three of the four franchises bringing the total
homes under franchise to approximately 400,000. In October 1993, Columbia
Management and Booth American signed a joint venture agreement with
International CableTel Inc. ("ICTL") whereby the parties established English
Cable Enterprises, Inc. ("English Cable") in which ICTL acquired a 70% interest
with Booth American and Columbia Management retaining the remaining 30%. This
has subsequently been exchanged for a direct interest in ICTL.
In addition to Mr. Goad and Mr. Booth, the management team at ECE
Management International includes Gary Cox and Mark S. Simonian. Gary Cox is a
principal in ECE Management International with primary responsibility for the
Group's network design construction and operation and its technology. Mr. Cox
has over twenty years experience in the cable television industry including
serving as Chief Operating Officer of Communications Services, Inc. ("CSI")
upon the management buyout of that company in 1984. CSI was subsequently sold
to Tele-Communications, Inc. in 1989 at which time it had approximately 275,000
subscribers. Mr. Cox also participated in the development of the network
architecture for the English Cable system. Mr. Simonian joined ECE Management
as a principal in June 1994 and prior to that served as a Director in the Media
and Telecommunications Group at CS First Boston Corporation. Mr. Simonian
oversees the Group's operations and is involved in its finances and corporate
development. See Item 13. "Certain Relationships and Related Transactions --
Management Agreement". Options over a total of 220,000 Shares and 440,000
Shares were granted to certain principals of ECE Management on February 23,
1995 and October 24, 1995 under the Senior Management Options Scheme (described
below) with an exercise price of L.3.44 per Share and L.4.11 per Share,
respectively.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Group during
the years ended December 31, 1994, 1995 and 1996 for Gary L. Davis (the
Managing Director of the Group during these years) and during the years ended
December 31, 1995 and 1996 for Nicholas R. Millard and during the year ended
December 31, 1996 for J.A. Duncan Craig. No other executive officer of the
Group received compensation in excess of $100,000 for 1994, 1995 or 1996. See
"-- Employment Agreements and Other Arrangements" below for a description of
certain other transactions involving Mr. Davis. In addition, the following
table sets forth the compensation by the Group during the years ended December
31, 1994, 1995 and 1996 for Stephen D. Rowles and for Mark Harris for the years
ended December 31, 1995 and 1996, who, while not executive officers of the
Group, would have been among the most highly compensated executive officers
during 1995 and 1996 had they been such.
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<PAGE> 53
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-----------------------------------------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL UNDERLYING
COMPENSATIONS(2) OPTIONS (#)
<S> <C> <C> <C> <C> <C>
1996 $256,845 $111,300 $37,715 --
Gary L. Davis, 1995 $233,025 $77,675 $31,547 --
Managing Director(3)........ 1994 $164,691 $39,162 $49,297 872,000
Nicholas R. Millard, 1996 $162,669 $95,889 $36,076 --
Chief Financial Officer..... 1995 $69,908 $34,954 $16,223 60,000
J.A. Duncan Craig
Chief Accounting Officer.... 1996 $77,054 $15,411 $15,776 --
Stephen D. Rowles, 1996 $153,900 $17,230 $17,760 --
Executive Director.......... 1995 $76,620 $46,605 $14,281 --
Mark Harris, 1994 $98,341 $29,764 $11,027 60,000
Technical Director.......... 1996 $145,544 $85,615 $35,912 --
1995 $125,663 $40,391 $23,025 30,000
</TABLE>
(1) Payments made in 1994, 1995 and 1996 in pounds sterling are presented in
U.S. dollars based on an exchange rate of $1.5665 to L.1.00, $1.5535 to
L.1.00 and $1.7123 to L.1.00, the Noon Buying Rates on December 30, 1994,
December 29, 1995 and December 31, 1996 respectively.
(2) Mr. Davis' "Other Annual Compensation" for 1996 includes $15,410 for
house rental, $15,962 for the lease of a car, $1,087 for health insurance
and $5,256 for other living expenses, for 1995 includes $18,642 for house
rental, $8,543 for the lease of a car, $926 for health insurance and
$3,436 other living expenses and for 1994 includes $17,073 for house
rental, $8,489 for the lease of a car, $847 for health insurance and
$10,538 for other living expenses. The remaining $12,350 of this amount
represents a loan to Mr. Davis from McDonald Management Inc. ("MMI"). See
"-- Employment Agreements and Other Arrangements". Mr. Millard's "Other
Annual Compensation" for 1996 includes $13,356 for home rental, $11,972
for the provision of a car, $908 for health insurance, $9,246 in pension
contributions and $594 for other living expenses, and for 1995 includes
$6,059 for home rental, $6,181 for the provision of a car, $343 for health
insurance, $3,495 in pension contributions and $145 for other living
expenses. Mr. Craig's "Other Annual Compensation" for 1996 includes
$10,430 for the provision of a car, $809 for health insurance and $4,537
in pension contributions. Mr. Rowles' "Other Annual Compensation" for
1996 includes $10,606 for the provision of a car, $647 for health
insurance, $343 for other living expenses and $6,164 in pension
contributions, for 1995 includes $9,427 for the provision of a car, $660
for health insurance and $4,194 in pension contributions, and for 1994
includes $6,192 for the provision of a car, $605 for health insurance and
$4,230 in pension contributions Mr. Harris' "Other Annual
Compensation" for 1996 includes $20,385 for the provision of two cars,
$4,101 for school fees, $810 for health insurance, $10,274 for home rental
and $342 for other living expenses and for 1995 includes $19,747 for the
provision of two cars, $2,455 for school fees and $823 for health
insurance.
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<PAGE> 54
(3) Mr. Davis retired from his day-to-day responsibilities as Managing
Director of the Company effective March 12, 1997 but remains a Director.
SENIOR MANAGEMENT OPTION SCHEME
The Company adopted a Senior Management Option Scheme on October 27, 1994
which has not been approved by the U.K. Inland Revenue. Under the scheme, the
Board of Directors may, for a period of 10 years, grant options over Shares
with an exercise price of L.3.44 or such other price as the Board of Directors
may determine, to executives or other individuals associated with the Group
selected by the Board of Directors. Options granted on or before April 30, 1995
can be exercised as to 50% of the shares subject to the option on or after June
30, 1998 and as to the other 50% on or after June 30, 1999, in each case, until
the seventh anniversary of the date of grant of the option. Options granted
after April 30, 1995 can only be exercised as to 50% on or after the fourth
anniversary of the date of grant, and as to the remaining 50%, on or after the
fifth anniversary of the date of grant, in each case, until the seventh
anniversary of the date of grant of the option. Options may be exercised early
in certain circumstances if the option holder ceases to be a director or
employee of the Group or if there is a change in control of the Group.
Options over a total of 728,000 Shares were granted to directors, senior
management and certain principals of ECE Management on February 23, 1995 and
July 19, 1995 under the Senior Management Option Scheme with an exercise price
of L.3.44. Of these 218,000 were granted to Gary Davis and 10,000 to Lord Pym.
On October 24, 1995, options over a total of 490,000 shares were granted
to directors, senior management and certain principals of ECE Management under
the Senior Management Option Scheme with an exercise price of L.4.11 per share.
Options were granted on January 5, 1995 to CGT, in which Mr. Davis and his
family are shareholders, over 654,000 Shares with an exercise price of L.3.44
and are exercisable at any time up to January 5, 2002. These options were not
granted under the Senior Management Option Scheme but are subject to some of
the provisions of the Senior Management Option Scheme.
According to the rules of the Senior Management Option Scheme, the
aggregate number of shares which have been or may be issued pursuant to options
granted under the Senior Management Option Scheme and options granted under any
other option scheme of the Company may not exceed 10% of the Company's then
current issued share capital.
COMPENSATION OF DIRECTORS
The Articles of Association of the Company provide that the ordinary
remuneration to directors who are not executive officers shall not exceed in
aggregate L.300,000 per year (excluding amounts payable under any other
provision of the Articles of Association) or such higher amount as the
shareholders may determine by an ordinary resolution. Such directors may be
paid extra remuneration by way of salary, commission or otherwise as the Board
may determine. The aggregate remuneration paid to Directors of the Company
during 1995 and 1996 was L.250,307 and L.267,026, respectively (excluding loans
to Mr. Davis by MMI described below).
The Board may appoint one or more directors to executive offices on such
terms as it may determine. All Directors are also entitled to reimbursement for
all reasonable traveling, hotel and other expenses properly incurred in the
performance of their duties as directors, including any expenses incurred in
attending meetings of the Board or of committees of the Board or general
meetings or separate meetings of the holders of any class of shares or
debentures of the Company.
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<PAGE> 55
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
DCL entered into a Service Agreement with Mr. Davis, on May 17, 1994 (the
"Service Agreement"), which provided that Mr. Davis would act as Managing
Director of the Company for a period of two years from May 6, 1994 and
thereafter unless and until terminated by six months' notice. The Service
Agreement further provided that in carrying out his duties, Mr. Davis would act
under the direction of DCL's board of directors. The Service Agreement provided
that Mr. Davis' initial salary was L.150,000 a year plus a bonus of up to half
his salary calculated by performance criteria determined annually by the board
of directors of DCL.
From 1990 through May 1994, Mr. Davis received advances totaling
approximately $640,000 from MMI. At the time of the acquisition by ECCP, the
McDonald Interests made a capital contribution of $1.3 million to DCL for the
purpose of having DCL repay Mr. Davis' outstanding loan, inclusive of estimated
tax liabilities. The Company declared a bonus to Mr. Davis in December 1995 in
an amount sufficient to repay the loan and meet any related tax liabilities
(together amounting to approximately $1.2 million) and such amount has been
charged against income in the Company's Consolidated Statement of Operations in
applicable years. The related tax liabilities have been agreed upon with the
Inland Revenue and were paid by the Company on March 8, 1996. The loan from MMI
to Mr. Davis remains outstanding.
The Group has entered into a service contract which commenced as of July
1, 1995 with Mr. Millard, which can be terminated by Mr. Millard on six months
notice and by the Company on 24 months notice, and a service contract with Mr.
Rowles for a minimum period of 39 months commencing April 1, 1996.
With respect to Mr. Goad, the ECCP partnership agreement provides that
while the Management Agreement is in force, ECCP shall maintain Mr. Goad as
Chief Executive Officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation committee.
During 1995, Mr. Goad and Mr. Davis were the only officers and employees of the
Company who participated in deliberations of the Board of Directors concerning
executive officer compensation.
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<PAGE> 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1997, certain information
regarding beneficial ownership of the Company's ordinary shares of 2.5 pence
each ("Shares") held by (i) each person known by the Company to beneficially
own more than 5% of any class of the Company's outstanding voting securities
and (ii) all directors and executive officers of the Company individually and
as a group.
<TABLE>
<CAPTION>
SHARES
------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1)
- ------------------------------------ ---------- ----------
<S> <C> <C>
European Cable Capital Partners, L.P.(2)............................ 39,447,443 66.7%
85 Broad Street, New York, NY 10004
AmSouthBank of Alabama, as Trustee (3).............................. 8,750,238 14.8%
1901 Sixth Avenue North, Third Floor,
Harbert Plaza, Birmingham, AL 35203
DCI Capital Partners................................................ 3,909,754 6.6%
9830 Wilshire Boulevard,
Beverly Hills, California CA 90212
Investor Investments AB............................................. 3,909,754 6.6%
Arsenalsgatan 8c, P.O. Box 161574, S-103 24
Stockholm, Sweden
Booth English Cable Inc.(4)......................................... 4,118,601 6.9%
33 West Fort St., Suite 1230 Detroit, MI 48226
Robert T. Goad(5)................................................... 2,991,099 5.1%
c/o Columbia Management, Inc. P.O. Box 499,
Carmel, IN 46032
Gary L. Davis(6).................................................... 689,000 1.2%
All directors and executive officers of the Company as a group(7)... 3,680,099 6.2%
</TABLE>
(1) The percentage of Shares owned has been calculated based on the
59,138,791 Shares which are outstanding, plus, in the case of Mr. Davis,
654,000 Shares issuable upon the exercise of currently exercisable Share
options. See Item 11. "Executive Compensation". Except as specified with
regard to Mr. Davis, the number of Shares outstanding does not include
1,827,000 Shares issuable upon the exercise of options which are in issue.
(2) A Delaware limited partnership in which various investment funds managed
by Goldman, Sachs & Co. or its affiliates hold an aggregate 83.3%
interest. The other limited partners are Booth English Cable, Inc., 9.1%,
and Columbia Management, Inc., 7.6%, which are affiliates of Booth
American Company and Robert T. Goad, respectively. In addition, other
investment funds managed by Goldman, Sachs & Co. or its affiliates
directly own 4.2% of the outstanding Shares, and, as a result, the Goldman
Sachs Affiliates effectively control 70.9% of the currently outstanding
Shares.
- 54 -
<PAGE> 57
(3) AmSouth Bank of Alabama holds Shares as trustee for the Kathryn A.
McDonald Grantor Trust, the John L. McDonald Grantor Trust, the Jennifer
C. McDonald Grantor Trust and the Allan J. McDonald, Jr. Grantor Trust.
Pursuant to the Shareholders Agreement (discussed below), the McDonald
Interests have the right to appoint one member of the board of directors
of the Company. Otherwise, the McDonald Interests maintain no active role
in the management or operation of the Company.
(4) Booth English Cable, Inc. indirectly maintains an interest in Shares
through the 9.1% interest maintained by Booth English Cable, Inc. in ECCP
and directly maintains a 0.9% interest in Shares held by Booth English
Cable, Inc.
(5) Mr. Goad indirectly maintains an interest in Shares through the 7.6%
interest maintained by Columbia Management, Inc. in ECCP.
(6) The number of Shares in the table consists of 35,000 Shares held by CGT
and 654,000 Shares issuable pursuant to options granted to CGT. See Item
11. "Executive Compensation".
(7) Includes the interests held by Mr. Goad and Mr. Davis, but does not
include 2,187,556 Shares of the John L. McDonald Grantor Trust of which
John L. McDonald is the beneficiary.
The authorized share capital of the Company consists of L.1,750,001.50
divided into 70,000,000 Shares with voting rights, of which 59,138,791 Shares
are outstanding, and six non-voting deferred shares of 25 pence each, all of
which are outstanding. Five of the non-voting deferred shares are held by
AmSouth Bank of Alabama, as trustee for the McDonald Interests ("AmSouth"), and
one is beneficially owned by CGT, a company in which Mr. Davis and his family
are interested. The non-voting deferred shares entitle the holders thereof only
to the repayment of the amounts paid up on such shares after payment to the
holders of Shares of L.100,000 for each Share. The holders of non-voting
deferred shares will not be entitled to the payment of any dividend or other
distribution.
SHAREHOLDERS AGREEMENT
The Shareholders Agreement, dated September 1, 1994, among ECCP, AmSouth,
as trustee for the McDonald Interests, CGT, GS Capital Partners, William W.
McDonald and the Company, regulates the relationship between certain of the
shareholders. Pursuant to provisions of the Company's Articles of Association,
the Shareholders Agreement grants ECCP the right to appoint up to four
directors, one of whom may exercise voting control at meetings of the
directors, and the McDonald Interests the right to appoint one director. See
Item 13. "Certain Relationships and Related Transactions -- Shareholders
Agreement" for additional information relating to the Shareholders Agreement.
ECCP and CGT have agreed to support the election of one director nominated from
time to time by the McDonald Interests, and the McDonald Interests and CGT have
agreed to support the election of up to four directors nominated from time to
time by ECCP. The Shareholders Agreement may be varied or terminated at any
time by the parties and may be terminated in whole or in part by ECCP and the
McDonald Interests.
Pursuant to the Shareholders Agreement, certain matters may not be
determined without prior written approval of the McDonald Interests and the
holders of a majority of the Shares. These matters include: (i) any issue of
shares in the Company at a price less than the lower of the price paid by ECCP
for ordinary shares in the acquisition by ECCP (taking account of the price at
which ECCP has subscribed for further equity) and the fair value at the time of
such share issue determined by an independent expert, (ii) any capital
reconstruction or reorganization or amendment to the Company's Articles of
Association, if unfairly prejudicial to the McDonald Interests, (iii) the sale
of certain franchises, (iv) any transaction by the Company with any party or
affiliate of a party on any basis other than on commercial arm's length terms,
(v) any material amendment to the Company's business plan that would likely
frustrate in a materially adverse manner the achievement of the construction
milestones set out in the business plan, (vi) (save in restricted
circumstances) the service by the Board of a notice to compel a shareholder to
dispose of
interests in the Company's shares
- 55 -
<PAGE> 58
that may jeopardize a material license of the Company and (viii) the
winding up of the Company or any equity repayment by the Company.
As to other provisions see Item 13. "Certain Relationships and Related
Transactions -- Shareholders Agreement".
RELATIONSHIP AGREEMENTS
Investor Investments and DCI entered into Relationship Agreements with
ECCP dated October 12, 1994 and June 21, 1996, respectively. Under the
Relationship Agreements, Investor Investments and DCI each have the right to
appoint one director to the board of the Company. Pursuant to each of the
Relationship Agreements (as well as its obligations under the Shareholders
Agreement), prior to an admission of ordinary shares to listing or similar
arrangements (an "IPO"), ECCP has agreed to procure (so far as it is legally
able) that the Company will invite Investor Investments and DCI to subscribe
for a proportion of any further shares which the Company may issue wholly for
cash, such proportion to be equivalent to Investor Investments' or DCI's (as
the case may be) percentage interest in the Shares.
Pursuant to the Relationship Agreements, ECCP has agreed to procure (so
far as it is legally able) that the Company will not, prior to an IPO, take
certain actions without the prior written approval of Investor Investments and
DCI. These actions are: (i) any capital reconstruction or reorganization, if
unfairly prejudicial to Investor Investments or DCI, as the case may be, (ii)
any transaction by the Company with ECCP or its affiliates on any basis other
than on commercial arm's length terms, and (iii) the winding up of the Company
or any equity repayment by the Company.
For a discussion of certain provisions of the Relationship Agreements, see
Item 13. "Certain Relationships and Related Transactions -- Relationship
Agreements".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement, ECE Management International has
agreed to manage and act as agent (under the supervision and control of the
Company's board of directors) in connection with the strategic activities of
the Company, including preparation of strategic business plans and capital
budgets, identification of investment opportunities and strategic issues
relating to the construction of the Group's cable network, the operation and
administration of the Group's business and the retention of consultants. The
contract provides for an annual management fee of $200,000 per year. In
addition, the Company has agreed to reimburse ECE Management International for
expenses incurred in the performance of its duties, and to indemnify ECE
Management International from any liability incurred in connection with the
performance of its duties, except in the case of ECE Management International's
willful misconduct, gross negligence or bad faith. See Item 10. "Directors and
Executive Officers of the Registrant -- Management Agreement". ECE Management
International is directly or indirectly owned by Robert T. Goad (55% beneficial
interest) and Ralph H. Booth II (45% beneficial interest). The Company believes
that the terms of the Management Agreement are, taken as a whole, as favorable
to the Company as those which could have been obtained from an unaffiliated
third party through arm's length negotiation. During 1995 and 1996, the Group
recorded expenses of L.1,085,000 and L.1,610,000, respectively, as amounts paid
or payable to ECE Management and/or ECE Management International in connection
with management services provided to the Company and all related expenses
incurred. The Company may terminate the Management Agreement if ECE Management
International ceases to be an Affiliate (as defined therein) of both Mr. Booth
and Mr. Goad. In addition, the Company may terminate the Management Agreement
(after consultation with ECE Management International) if Diamond materially
underperforms compared to ECE Management
- 56 -
<PAGE> 59
International's business plan, provided such underperformance is not
caused by events which are beyond ECE Management International's control.
SHAREHOLDERS AGREEMENT
Pursuant to the Shareholders Agreement, certain matters may not be
determined without prior written approval by the McDonald Interests and the
holders of a majority of the ordinary shares. See Item 12. "Security Ownership
of Certain Beneficial Owners and Management -- Shareholders Agreement".
The Shareholders Agreement also provides that each party thereto will (so
far as it is able) procure that any contract between the Company and that party
or any of its affiliates is made on an arm's length commercial basis. Unless
ECCP agrees otherwise on any particular occasion, the Company is required to
retain Goldman, Sachs & Co. or an affiliate of Goldman, Sachs & Co. exclusively
to perform all investment banking services for customary compensation and on
other terms consistent with an arm's length transaction.
The Shareholders Agreement also places certain restrictions on the
transfer of shares held by the parties and grants certain registration rights.
RELATIONSHIP AGREEMENTS
Pursuant to the Relationship Agreements, ECCP is required to procure (so
far as it is legally able) that certain actions by the Company are not taken
without the prior written approval of Investor Investments and DCI. See Item
12. "Security Ownership of Certain Beneficial Owners and Management --
Relationship Agreements".
The Relationship Agreements also provide that each party thereto will (so
far as it is able) procure that any contract between the Company (or any of its
affiliates) and that party (or any of its affiliates) is made on an arm's length
commercial basis. Unless ECCP agrees otherwise on any particular occasion, the
parties are required to procure (so far as they are legally able) that the
Company retains Goldman, Sachs & Co. or an affiliate of Goldman, Sachs & Co.
exclusively to perform all investment banking services for customary
compensation and on other terms consistent with an arm's length transaction.
The Relationship Agreements also place certain restrictions on the
transfer of shares held by the parties and grant certain registration rights.
OTHER RELATIONSHIPS
Goldman, Sachs & Co. acted as purchaser in connection with the 1997 Notes
offering and received underwriting commissions of approximately $6,750,000.
Goldman, Sachs & Co. acted as underwriter in connection with the 1995 Notes
offering and received underwriting commissions of approximately $6,750,000. In
connection with the offering of the 1994 Notes, Goldman, Sachs & Co. received
underwriting commissions of approximately $4,875,000. Goldman, Sachs & Co.
acted as advisor in connection with Diamond's acquisition of LCL and received
an advisory fee for their services amounting to L.1,091,000. Goldman Sachs
International acted as agent and financial advisor in connection with the
negotiation of Senior Bank Facility for which it has charged fees of
approximately L.400,000 in 1996. In 1995, Goldman, Sachs & Co. charged a fee of
$750,000 for financial advisory services that Goldman, Sachs & Co. rendered to
the Company. Goldman, Sachs & Co. was the counterparty to foreign exchange
contracts entered into by the Company in 1996 and 1997. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Foreign Exchange".
John Thornton, who is a managing director of Goldman, Sachs & Co. and a
Director of the Company, is also a director of BSkyB, a principal supplier of
programming to the Group and a principal competitor of
- 57 -
<PAGE> 60
the Group. See Item 1. "Business -- Cable Television" and Item 1.
"Business -- Competition -- Cable Television".
Robert T. Goad, a Director and the Chief Executive Officer of the Company
is also a shareholder in ICTL, which has significant cable interests in the U.K.
- 58 -
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) 1. The following Consolidated Financial Statements of Diamond Cable
Communications Plc are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.................. F-2
Consolidated Statements of Operations for
each of the years in the three year period
ended December 31, 1996....................... F-3
Consolidated Balance Sheets at December 31,
1995 and 1996................................. F-4
Consolidated Statements of Shareholders'
Equity for each of the years in the three
year period ended December 31, 1996........... F-5
Consolidated Statements of Cash Flows for
each of the years in the three year period
ended December 31, 1996....................... F-6
Notes to the Consolidated Financial Statements F-7
</TABLE>
2. Not applicable.
3. Exhibits:
10.1 Loan Facility Agreement, dated February 13, 1997, among Diamond Cable
Communications (UK) Ltd, Jewel Holdings Limited, Natwest Markets and
National Westminster Bank plc.
10.2 Service Contract, dated as of April 1, 1996, between Diamond Cable
(Nottingham) Ltd. and Stephen Rowles.
10.3 Service Agreement, dated July 1, 1995, between Diamond Cable
Communications Plc and Nicholas Millard.
(b) The Company filed no Reports on Form 8-K during the three month period
ended December 31, 1996.
<PAGE> 62
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.
Diamond Cable Communications Plc
(Registrant)
By
Robert T. Goad
Chief Executive Officer
March 21, 1997
- 60 -
<PAGE> 63
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ------------------------------------ --------------
<S> <C> <C>
/s/ Robert T. Goad Director and Chief Executive Officer March 21, 1997
Richard A. Friedman Director March 21, 1997
/s/ Gary L. Davis Director March 21, 1997
John L. McDonald Director March 21, 1997
/s/ Muneer A. Satter Director March 21, 1997
/s/ John L. Thornton Director March 21, 1997
Thomas Nilsson Director March 21, 1997
/s/ Lord Francis Pym Director March 21, 1997
/s/ Nicholas R. Millard Chief Financial Officer March 21, 1997
/s/ J.A. Duncan Craig Chief Accounting Officer March 21, 1997
</TABLE>
- 61 -
<PAGE> 64
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Diamond Cable Communications Plc:
Independent Auditors' Report ........................................ F-2
Consolidated Statements of Operations for each of the years
in the three year period ended December 31, 1996 .................... F-3
Consolidated Balance Sheets at December 31, 1995 and 1996 ........... F-4
Consolidated Statements of Shareholders' Equity for each of the years
in the three year period ended December 31, 1996 .................... F-5
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1996 ........................... F-6
Notes to the Consolidated Financial Statements ...................... F-7
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Diamond Cable Communications Plc
We have audited the accompanying consolidated balance sheets of Diamond
Cable Communications Plc and subsidiaries ("the Group") as of December 31, 1995
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Group
as of December 31, 1995 and 1996 and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
1996 in conformity with generally accepted accounting principles in the United
States of America.
KPMG
Chartered Accountants
Registered Auditors
Nottingham, England
[March 21, 1997.]
F-2
<PAGE> 66
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996 1996
---- ---- ---- ----
(note 1)
pound pound pound
sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C>
REVENUE
Business telecommunications..................... 3,402 5,852 9,763 $ 16,717
Residential telephone .......................... 2,545 6,662 17,723 30,347
Cable television ............................... 1,324 3,479 10,091 17,279
Other revenues ................................. 35 -- -- --
------- ------- ------- --------
7,306 15,993 37,577 64,343
------- ------- ------- --------
OPERATING COSTS AND EXPENSES
Telephone ...................................... (3,067) (5,454) (9,776) (16,739)
Programming .................................... (701) (1,844) (6,041) (10,344)
Selling, general and administrative ............ (4,562) (13,020) (22,391) (38,340)
Depreciation and amortization .................. (4,038) (8,867) (21,380) (36,609)
------- ------- ------- --------
(12,368) (29,185) (59,588) (102,032)
------- ------- ------- --------
OPERATING LOSS .................................. (5,062) (13,192) (22,011) (37,689)
Interest income ................................. 1,415 3,887 3,441 5,892
Interest expense and amortization of
debt discount and expenses ..................... (3,836) (17,118) (40,334) (69,064)
Foreign exchange (losses)/gains, net (note 17) .. (1,196) 925 31,018 53,112
Unrealized losses on derivative financial
instruments (note 3) ........................... -- (868) (7,944) (13,603)
Other expenses (note 4) ......................... -- (1,241) -- --
------- ------- ------- --------
Loss before income taxes ........................ (8,679) (27,607) (35,830) (61,352)
Income taxes (note 5) ........................... -- -- -- --
------- ------- ------- --------
NET LOSS......................................... (8,679) (27,607) (35,830) $(61,352)
======= ======= ======= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-3
<PAGE> 67
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1995 1996 1996
---- ---- ----
(note 1)
pound pound
sterling sterling
(in thousands except share data)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents (note 6)............. 93,308 18,311 $31,354
Trade receivables (net of allowance for
doubtful accounts of pound sterling 773 and
pound sterling 1,691 at December 31, 1995
and 1996 respectively (note 7)) .............. 3,583 6,389 10,940
Other assets .................................. 5,358 3,904 6,685
Deferred financing costs (less accumulated
amortization of pound sterling 382 and
pound sterling 1,325 at December 31, 1995
and 1996 respectively)........................ 12,016 19,573 33,515
Property and equipment, net (note 8)........... 163,721 277,301 474,822
Goodwill (less accumulated amortization of
pound sterling 1,212 and pound sterling
6,064 at December 31, 1995 and 1996
respectively) (note 9)....................... 95,748 90,896 155,641
Franchise costs (less accumulated amortization
of pound sterling 69 and pound sterling 91
at December 31, 1995 and 1996 respectively).. 438 445 762
------- ------- --------
TOTAL ASSETS.................................. 374,172 416,819 $713,719
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................. 18,627 18,528 $31,726
Other liabilities ........................... 10,920 19,150 32,790
Senior discount notes (note 10) ............. 307,729 314,418 538,378
Capital lease obligations (note 11) ......... 9,263 8,146 13,948
Mortgage loan (note 12) ..................... 2,500 2,477 4,241
Shareholders' equity (note 13)
Ordinary shares: 70,000,000 authorized;
43,754,175 shares issued at December 31,
1995, 59,138,791 shares issued at
December 31, 1996 .......................... 1,094 1,478 2,531
Non-voting deferred shares: (i)
6 shares authorized and issued at
December 31, 1995 and 1996.................. -- -- --
Additional paid-in-capital ................. 70,186 134,466 230,246
Unrealized loss on securities .............. (330) (197) (337)
Accumulated deficit ........................ (45,817) (81,647) (139,804)
------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY... 374,172 416,819 $713,719
======= ======= ========
</TABLE>
(i) On September 4, 1995, the six A shares were automatically converted into
six non-voting deferred shares in accordance with the Articles of the
Company.
See accompanying Notes to the Consolidated Financial Statements
F-4
<PAGE> 68
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Non-voting
Ordinary shares deferred shares(i) Additional Unrealized Accum- Total
pound pound Paid-in- loss on ulated Shareholders'
Number sterling Number sterling capital securities Deficit Equity
(pound sterling in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994...... 400 -- -- -- 3,871 -- (9,531) (5,660)
Shares issued and capital
contributions (net of
expenses) ..................... 576,462 144 6 -- 33,787 -- -- 33,931
Bonus shares issued ............ 2,324,801 581 -- -- (581) -- -- --
Share split 10:1 ............... 26,114,967 -- -- -- -- -- -- --
Shares issued and capital
contributions (net of
expenses) ..................... 2,298,728 57 -- -- 6,443 -- -- 6,500
Bonus shares issued ............ 587,874 15 -- -- (15) -- -- --
Net loss ....................... -- -- -- -- -- -- (8,679) (8,679)
----------- ----- ---- --- ------ ----- ------- -------
BALANCE AT DECEMBER 31, 1994.... 31,903,232 797 6 -- 43,505 -- (18,210) 26,092
=========== ===== ==== === ====== ===== ======= =======
BALANCE AT JANUARY 1, 1995...... 31,903,232 797 6 -- 43,505 -- (18,210) 26,092
Shares issued and capital
contributions (net of expenses) 9,437,428 236 -- -- 26,742 -- -- 26,978
Bonus shares issued............. 2,413,515 61 -- -- (61) -- -- --
Unrealized loss on securities... -- -- -- -- -- (330) -- (330)
Net loss........................ -- -- -- -- -- -- (27,607) (27,607)
----------- ----- ---- --- ------ ----- ------- -------
BALANCE AT DECEMBER 31, 1995.... 43,754,175 1,094 6 -- 70,186 (330) (45,817) 25,133
=========== ===== ==== === ====== ===== ======= =======
BALANCE AT JANUARY 1, 1996...... 43,754,175 1,094 6 -- 70,186 (330) (45,817) 25,133
Shares issued and capital
contributions (net of expenses) 15,384,616 384 -- -- 64,280 -- -- 64,664
Unrealized gain on securities... -- -- -- -- -- 133 -- 133
Net loss........................ -- -- -- -- -- -- (35,830) (35,830)
----------- ----- ---- --- ------ ----- ------- -------
BALANCE AT DECEMBER 31, 1996.... 59,138,791 1,478 6 -- 134,466 (197) (81,647) 54,100
=========== ===== ==== === ====== ===== ======= =======
</TABLE>
(i) On September 4, 1995, the six A shares were automatically converted into
six non-voting deferred shares in accordance with the Articles of the
Company.
F-5
<PAGE> 69
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996 1996
---- ---- ---- ----
(note 1)
pound pound pound
sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... (8,679) (27,607) (35,830) $(61,352)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation and amortization .................... 4,038 8,867 21,380 36,609
Foreign exchange (gains)/losses .................. 306 (613) (31,468) (53,883)
Profit on disposition of assets .................. (11) (11) (11) (19)
Provision for losses on accounts receivable ...... 121 407 918 1,572
Amortization of deferred financing costs ......... 70 312 943 1,615
Accretion of senior note discount ................ 3,248 14,335 38,157 65,336
Accretion of investment income ................... (525) 524 -- --
Profit on disposition of investments ............. -- (2,733) -- --
Change in operating assets and liabilities:
Change in trade receivables ..................... (869) (1,577) (3,724) (6,376)
Change in other assets .......................... (1,479) (2,175) 1,300 2,226
Change in accounts payable ...................... 1,960 4,532 (1,680) (2,877)
Change in other liabilities ..................... 2,316 1,626 8,667 14,841
------- ------- ------- --------
Net cash provided by/(used in) operating activities 496 (4,113) (1,348) (2,308)
------- ------- ------- --------
Cash flows from investing activities:
Cash invested in property and equipment .......... (19,061) (102,899) (128,246) (219,595)
Cash invested in marketable securities ........... (53,042) (17,445) -- --
Proceeds from disposition of assets .............. 162 72 65 111
Proceeds from disposition of investments ......... -- 73,644 -- --
Cash paid for franchises ......................... -- (45) (29) (50)
Payment for purchases of LCL (net of cash acquired) -- (108,844) -- --
------- ------- ------- --------
Net cash used in investing activities ............. (71,941) (155,517) (128,210) (219,534)
------- ------- ------- --------
Cash flows from financing activities:
Proceeds of issue of debt ........................ 95,117 194,881 -- --
Debt financing costs (note 14) ................... (4,474) (7,924) (9,096) (15,575)
New loans ........................................ -- 94,000 -- --
Repayment of loans ............................... -- (94,119) (23) (39)
Cash repaid to shareholders ...................... (18,713) -- -- --
Capital element of capital lease obligations ..... (878) (841) (1,117) (1,913)
Issue of shares and capital
contributions (net of expenses) ................. 40,431 26,978 64,664 110,724
Net increase/(decrease) in short-term borrowings 1,002 (773) -- --
------- ------- ------- --------
Net cash provided by financing activities ......... 112,485 212,202 54,428 93,197
------- ------- ------- --------
Net increase/(decrease) in cash ................... 41,040 52,572 (75,130) (128,645)
Cash and cash equivalents at beginning of year .... 26 41,066 93,308 159,771
Effect of exchange rate changes on cash and
cash equivalents ................................. -- (330) 133 228
------- ------- ------- --------
Cash and cash equivalents at end of year (note 6).. 41,066 93,308 18,311 $ 31,354
======= ======= ======= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-8
<PAGE> 70
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Diamond Cable Communications Plc ("the Company"), has exclusive licences
to operate a cable television and telecommunications business through its
subsidiaries focused on certain franchise areas centered around Nottingham,
England.
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.
All amounts herein are shown in Pounds Sterling ("pound sterling") and
for the year 1996 also are presented in US dollars, the latter being unaudited
and presented solely for the convenience of the reader, at the rate of pound
sterling 1 = $1.7123, the Noon Buying Rate of the Federal Reserve Bank of New
York on December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Diamond Cable Communications Plc and those of all majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated on consolidation. Until September 1, 1994 the business of the Group
was conducted by Diamond Cable (Nottingham) Limited which was subsequently
renamed Diamond Cable Communications (UK) Limited ("DCL") and its subsidiary
undertakings. On September 1, 1994 the shareholders of DCL transferred all of
their ordinary shares of 2.5p each and A shares of 25p each to the Company in
exchange for ordinary shares of 2.5p each and A shares of 25p each in the
Company. The transaction was accounted for at book value. During 1995, the
Company through Jewel Holdings Limited ("Jewel") acquired the entire share
capital of three undertakings, referred to collectively as "LCL". The
transaction has been recorded using the purchase method of accounting.
CABLE SYSTEM COSTS AND EXPENSES - The Group accounts for costs and
expenses applicable to the construction and operation of its cable system under
Statement of Financial Accounting Standards ("SFAS") No. 51, "Financial
Reporting by Cable Television Companies". In accordance with the standard the
cable infrastructure is being depreciated over 40 years weighted by factors
influenced by the growth in the number of subscribers.
REVENUE RECOGNITION - Revenue is recognized as services are delivered.
Initial connection fees are recognized in the period of connection to the
extent that the fee is offset by direct selling costs. The remainder is
recognized over the estimated average period that subscribers are expected to
remain connected to the system.
INTEREST RATE SWAP - Interest rate swaps, which are not designated to an
asset or liability, are recorded on the balance sheet in other assets or other
liabilities at their market value. Any gains or losses are recognized in the
statement of operations. Interest rate swaps which are designated to assets
and liabilities are accounted for on an accruals basis.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. A valuation allowance is
raised against a deferred tax asset where it is more likely than not that some
portion of the deferred tax asset will not be realized.
GOODWILL - Goodwill arising on the acquisition of subsidiaries is
amortized on a straight line basis over twenty years.
F-7
<PAGE> 71
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOODWILL IMPAIRMENT - The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
projected future operating cash flows are not achieved.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost.
Depreciation on equipment other than cable infrastructure is computed on a
straight line basis using estimated useful lives of 5 to 10 years. Motor
vehicles are depreciated on a reducing balance basis over 3 years. Leasehold
improvements are depreciated on a straight line basis over the period of the
lease.
FRANCHISE COSTS - Costs relating to an unsuccessful application are
charged to operations while costs relating to successful applications are
amortized over the franchise term, generally 23 years.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly
liquid investments with original maturity of three months or less that are
readily convertible to cash.
FOREIGN CURRENCIES - The primary economic environment in which the Group
operates is the United Kingdom and hence its reporting currency is the United
Kingdom Pound Sterling (pound sterling). Transactions in foreign currencies
are recorded using the rate of exchange in effect on the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
are translated using the rate of exchange in effect on the balance sheet date
and gains or losses on translation are included in the statement of operations.
Foreign exchange forward contracts which do not hedge firm commitments are
accounted at market value with reported gains and losses recorded in the
statement of operations.
PENSION COSTS - The Group does not have a defined benefit pension plan but
contributes up to specified limits to the third party plan of the employee's
choice. Pension costs of pound sterling 40,000, pound sterling 55,000 and
pound sterling 125,000 in 1994, 1995 and 1996, respectively, represent the
contributions payable to the selected plans.
SENIOR DISCOUNT NOTES - The debt discount is amortized to the statement of
operations on a constant yield to maturity basis.
DEFERRED FINANCING COSTS - Costs incurred relating to the issue of debt
are shown as an asset on the balance sheet and are amortized over the term of
the debt as an adjustment of yield.
SHARE OPTIONS - The Group accounts for stock-based compensation using the
recognition provisions of APB No. 25, Accounting for Stock Issued to Employees.
The disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation are set out in note 18.
NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP - SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, was issued in June 1996 and establishes, among other things,
new criteria for determining whether a transfer of financial assets in exchange
for cash or other consideration should be accounted for as a sale or as a
pledge of collateral in a secured borrowing. Statement 125 also establishes
new accounting requirements for pledged collateral. As issued Statement 125 is
effective for all transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. In December
1996, SFAS No. 127, Deferral of Effective Date of Certain Provisions of FASB
Statement No. 125, was issued. Statement 127 defers for one year the effective
date of certain requirements of Statement 125. Statement 125 is not expected
to have a material impact on the financial position or results of operations of
the Group.
F-8
<PAGE> 72
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Statement of Position (SOP) No. 96-1, Environmental Remediation
Liabilities, was issued in October 1996. This statement provides authoritative
guidance on specific accounting issues that are present in the recognition,
measurement, display, and disclosure of environmental remediation liabilities.
The provisions of this statement are effective for fiscal years beginning after
December 15, 1996. SOP 96-1 is not expected to have a material impact on the
financial position or results of operations of the Group.
3. UNREALIZED LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
pound pound pound
sterling sterling sterling
(in thousands)
Unrealized (loss)/gain on interest rate swap (note 17)............... - (868) 174
Unrealized loss on foreign exchange forward contract (note 17)....... - - (8,118)
------ ---- ------
- (868) (7,944)
====== ==== ======
</TABLE>
4. OTHER EXPENSES
Other expenses in 1995 represent costs incurred in an aborted flotation of
equity.
5. INCOME TAXES
No provision for taxation has been made due to operating losses incurred
to date. The Group has tax net operating losses carried forward of
approximately pound sterling 139 million and approximately pound sterling 3
million of capital losses carried forward at December 31, 1996. In previous
years the Group has not claimed tax allowances on capital assets as it was not
deemed beneficial to do so. As a result of changes to UK taxation legislation
this option is being re-examined. At the option of the Group elections can be
made to increase the operating losses carried forward to pound sterling 175
million. An evaluation of this option has not yet been concluded. For the
purpose of these financial statements the operating losses carried forward are
assumed to be pound sterling 139 million.
The operating losses have an unlimited carry forward period under United
Kingdom tax law (subject to restrictions on a loss carried forward where there
is a change in Group ownership and a major change in the nature or conduct of
the business), but are limited in their use to the type of business which
generated the loss. Capital losses carried forward are limited to their offset
against future capital gains.
Differences between the tax benefit recognized in the financial statements
and the expected tax benefit at the United Kingdom statutory rate of 33% are
summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
pound pound pound
sterling sterling sterling
(in thousands)
Tax benefit of net losses at statutory rate........................ (2,864) (9,110) (11,824)
Non-deductible expenses ........................................... 26 367 1,695
Valuation allowance ............................................... 2,838 8,743 10,129
------ ------ -------
Net tax benefit.................................................... - - -
====== ====== =======
</TABLE>
F-9
<PAGE> 73
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (continued)
<TABLE>
<CAPTION>
December 31
-------------------
1995 1996
-------- --------
pound pound
sterling sterling
(in thousands)
<S> <C> <C>
Deferred tax assets relating to:
Net losses ............................................ 20,155 45,736
Property and equipment ................................ 3,616 -
Accretion of discount on debt ......................... 1,584 -
Unrealized loss on interest rate swap ................. 443 -
Other ................................................. 109 447
------- -------
Deferred tax asset .................................... 25,907 46,183
Valuation allowance ................................... (20,762) (27,299)
------- -------
5,145 18,884
------- -------
Deferred tax liabilities relating to:
Property and equipment ................................ - (18,087)
Financing costs ....................................... (3,650) (155)
Other ................................................. (1,495) (642)
------- -------
Deferred tax liability ................................ (5,145) (18,884)
------- -------
Deferred tax per balance sheet ........................ - -
======= =======
</TABLE>
During 1995 the Company acquired LCL which had tax net operating losses
carried forward of pound sterling 17.2 million. The resulting deferred tax
asset was reduced by a 100% valuation allowance in the purchase accounting
entries.
Within the deferred tax balance in 1995 is an asset of pound
sterling 109,000 with a 100% valuation allowance in respect of the unrealized
loss on securities which is recognized as a separate component of equity.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, the level of
historical taxable losses, and tax planning strategies in making its assessment
as to the appropriateness of the reported valuation allowance.
6. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
December 31
-------------------
1995 1996
-------- --------
pound pound
sterling sterling
(in thousands)
<S> <C> <C>
Cash at bank and in hand .............................. 9,965 1,241
Short term securities ................................. 83,343 17,070
------- -------
93,308 18,311
======= =======
</TABLE>
The short term securities represent short term deposits placed in a cash
based unit fund. The deposits are denominated in both US dollars and pounds
sterling.
F-10
<PAGE> 74
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
charged to
Balance at Arising on costs and Amounts Balance at
January 1 acquisition expenses written off December 31
---------- ----------- ----------- ----------- -----------
pound pound pound pound pound
sterling sterling sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C> <C>
1994
Allowance for doubtful accounts ...................... 112 - 121 - 233
=== === ===== ==== =====
1995
Allowance for doubtful accounts ...................... 233 133 439 (32) 773
=== === ===== ==== =====
1996
Allowance for doubtful accounts ...................... 773 - 1,143 (225) 1,691
=== === ===== ==== =====
</TABLE>
8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Land and Cable Office Motor
buildings network equipment vehicles Total
---------- ----------- ----------- ----------- -----------
pound pound pound pound pound
sterling sterling sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1995 ........................... 1,934 39,964 1,336 476 43,710
Additions ............................................ 1,929 130,727 3,365 293 136,314
Dispositions ......................................... - (31) - (125) (156)
----- ------- ----- ---- -------
Balance at December 31, 1995 ......................... 3,863 170,660 4,701 644 179,868
----- ------- ----- ---- -------
ACCUMULATED DEPRECIATION
Balance at January 1, 1995 ........................... 15 7,794 507 267 8,583
Charge for year ...................................... 59 6,509 943 127 7,638
Dispositions ......................................... - (8) - (66) (74)
----- ------- ----- ---- -------
Balance at December 31, 1995 ......................... 74 14,295 1,450 328 16,147
----- ------- ----- ---- -------
1995 NET BOOK VALUE .................................. 3,789 156,365 3,251 316 163,721
===== ======= ===== ==== =======
ACQUISITION COSTS
Balance at January 1, 1996 ........................... 3,863 170,660 4,701 644 179,868
Additions ............................................ 688 127,454 1,979 19 130,140
Dispositions ......................................... - (42) (154) (228) (424)
Reclassification ..................................... 467 (10) (457) - -
----- ------- ----- ---- -------
Balance at December 31, 1996 ......................... 5,018 298,062 6,069 435 309,584
----- ------- ----- ---- -------
ACCUMULATED DEPRECIATION
Balance at January 1, 1996 ........................... 74 14,295 1,450 328 16,147
Charge for year ...................................... 150 14,737 1,524 95 16,506
Dispositions ......................................... - (41) (154) (175) (370)
Reclassification ..................................... 90 (50) (40) - -
----- ------- ----- ---- -------
Balance at December 31, 1996 ......................... 314 28,941 2,780 248 32,283
----- ------- ----- ---- -------
1996 NET BOOK VALUE .................................. 4,704 269,121 3,289 187 277,301
===== ======= ===== ==== =======
</TABLE>
The reclassification to land and buildings more appropriately allocates
expenditure on leasehold properties.
The Group leases certain cable network equipment and motor vehicles under
arrangements accounted for as capital leases. The original cost of assets held
under these arrangements was pound sterling 11,919,000 and pound
sterling 11,543,000 at December 31, 1995 and 1996, respectively. Accumulated
depreciation charged against these assets was pound sterling 2,817,000 and
pound sterling 3,882,000 at December 31, 1995 and 1996, respectively. During
the year certain of the assets held under capital lease arrangements were
purchased by the Group.
F-11
<PAGE> 75
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT (continued)
Depreciation on assets held under capital lease arrangements charged to
the consolidated statement of operations during the year was pound
sterling 490,000, pound sterling 863,000 and pound sterling 1,375,000 in 1994,
1995 and 1996, respectively.
9. ACQUISITION
Effective September 30, 1995 for financial accounting purposes a
subsidiary of the Company acquired East Midlands Cable Group Limited ("EMCG"),
East Midlands Cable Communications Limited ("EMCC"), (formerly Fundy Cable
Communications Limited) and East Midlands Cable Holdings Limited ("EMCH")
referred to collectively as "LCL", which together owned a group of three
franchises contiguous to Diamond's existing franchise areas. The consideration
of pound sterling 109.1 million in cash was financed by way of existing cash
reserves, an equity issue and a pound sterling 61.5 million short term loan.
An additional pound sterling 30 million short term capital expenditure facility
was also drawn down to fund construction.
EMCG and subsidiaries represent the trading activities and substantially
all the assets of LCL. The acquisition was accounted for as a purchase and,
accordingly, the cost of the acquisition was allocated to the net assets
acquired based on their fair values. The excess of the purchase price over the
fair value of the net assets acquired, amounting to pound sterling 97 million,
is being amortized over twenty years.
The following represents the allocation of the excess of purchase price
over the estimated fair values of the acquired net assets of LCL. The fair
value of the acquired net assets is not materially different from the
historical net book value, except as noted in the table below.
<TABLE>
<CAPTION>
(in thousands)
pound
sterling
<S> <C>
Acquired net assets/(liabilities) at book value (September 30, 1995)
EMCG ................................................................. (5,413)
EMCC ................................................................. 55
EMCH ................................................................. --
Acquired zero coupon bonds ............................................... 23,296
Less certain fair value adjustments ...................................... (5,761)
Goodwill ................................................................. 96,960
-------
109,137
=======
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
pound
sterling
<S> <C>
Fair value adjustments represent:
-- remeasurement of fixed assets .................................... (1,667)
-- accruals for direct acquisition costs ............................ (4,094)
-------
(5,761)
=======
</TABLE>
EMCG's primary business is the provision of cable television and
telecommunications services focused on a regional market centered around
Leicester, England, an area which is contiguous to the Company's existing
franchise areas.
The following unaudited pro forma summary presents information as if the
acquisition had occurred at January 1, 1994 for the year ended December 31, 1994
and at January 1, 1995 for the year ended December 31, 1995. The pro forma
information, which contains adjustments for interest on additional financing and
amortization of goodwill, is provided for information only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of
operations of the combined companies.
F-12
<PAGE> 76
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITION (continued)
<TABLE>
<CAPTION>
Year ended
December 31
---------------------
1994 1995
-------- --------
pound pound
sterling sterling
(in thousands)
<S> <C> <C>
Total revenues ............................ 9,883 21,001
Net loss ................................. (41,280) (52,566)
</TABLE>
10. DEBT
On September 28, 1994 the Company issued $285,101,000 of 13 1/4% Senior
Discount Notes due September 30, 2004 (the "1994 Notes") at an issue price of
$526.13 per $1,000 principal. Total proceeds received by the Company after
issuance costs amounted to pound sterling 91 million. Interest will not accrue
on the 1994 Notes prior to September 30, 1999. Interest on the 1994 Notes will
be payable on March 31 and September 30 of each year commencing March 31, 2000
at a rate of 13 1/4% per annum.
The 1994 Notes may be redeemed at the option of the Company, at any time
as a whole but not in part at the accreted value thereof or if such redemption
is to occur on or after September 30, 1999 at 100% of the principal amount at
maturity thereof, plus accrued and unpaid interest, if any, to the date of
redemption in the event of certain tax law changes requiring the Company to pay
additional amounts. In addition, the 1994 Notes may be redeemed in whole or in
part at the option of the Company, at any time after September 30, 1999, at
specified redemption prices.
On December 15, 1995, The Company issued $530,955,000 of 11 3/4% Senior
Discount Notes due December 15, 2005 (the "1995 Notes") at an issue price of
$565.02 per $1,000 principal. Total proceeds received by the Company amounted
to pound sterling 187 million after issuance costs of pound sterling 8 million.
Interest will not accrue on the 1995 Notes prior to December 15, 2000.
Interest on the 1995 Notes will be payable on June 15 and December 15 of each
year, commencing June 15, 2001 at a rate of 11 3/4% per annum.
The 1995 Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after December 15, 2000 at specified redemption
prices.
The 1995 Notes may be redeemed at the option of the Company in whole, but
not in part, at any time at the accreted value thereof or if such redemption is
to occur on or after December 15, 2000 at 100% of the principal amount plus
accrued interest to the date of redemption, in the event of certain tax law
changes requiring the payment of additional amounts.
The 1994 Notes and the 1995 Notes are unsecured indebtedness of the
Company and rank junior to any indebtedness of its subsidiaries to the extent
of the assets of such subsidiaries and to any secured indebtedness of the
Company to the extent of the assets securing such indebtedness.
The 1994 Notes and the 1995 Notes are stated net of unamortized discount
of approximately pound sterling 49 million ($84.7 million) and pound
sterling 113 million ($193.0 million), respectively at December 31, 1996. The
discount is being accreted through the statement of operations such that the
Company recognizes a fixed rate of interest, the total accretion for the period
being pound sterling 38 million ($65.3 million).
The costs relating to the issue of the 1994 Notes and the 1995 Notes have
been deferred and are shown as deferred finance costs in the balance sheet.
These costs are being amortized over the term of the 1994 Notes or 1995 Notes,
where appropriate, as an adjustment of yield.
The Senior Notes contain certain covenants generally restricting the
raising of certain types of additional financing, payment of dividends,
creation of liens, sale and leaseback transactions, sale of certain assets and
engaging in certain transactions with Affiliates of Related Persons.
F-13
<PAGE> 77
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEBT (continued)
On February 21, 1997 the Company issued $420,500,000 of 10 3/4% Senior
Discount Notes due February 15, 2007 (the "1997 Notes") at an issue price of
$594.48 per $1,000 principal. Total proceeds received by the Company amounted
to approximately pound sterling 149 million after issuance costs of
approximately pound sterling 5 million. Interest on the 1997 Notes will be
payable on February 15 and August 15 of each year commencing August 15, 2002.
11. COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Group leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expenses under
such arrangements amounted to pound sterling 78,000, pound sterling 733,000 and
pound sterling 1,158,000 in 1994, 1995 and 1996, respectively.
Future minimum lease payments under capital and operating leases are
summarized as follows as of December 31, 1996.
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
pound pound
sterling sterling
(in thousands)
<S> <C> <C>
1997 ........................................... 2,286 1,089
1998 ........................................... 2,434 716
1999 ........................................... 2,155 502
2000 ........................................... 1,834 313
2001 ........................................... 934 179
2002 and thereafter ............................ 159 1,741
Imputed interest ............................... (1,656) --
----- -----
8,146 4,540
===== =====
</TABLE>
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties.
MILESTONES
The Group is obligated under the terms of its existing licenses, and under
the milestone requirements of Local Delivery Licenses ("LDL's"), to construct
cable systems passing a predefined number of premises. Should the Group fail
to achieve these milestones, without license modifications, the Director
General could commence proceedings to require compliance. Similarly the
Independent Television Commission ("ITC") may commence proceedings to require
compliance with the build milestones in the LDL's.
If the Group is unable to comply, its license in respect of which
milestones have not been met could be revoked, and awarded to other cable
operators, which could have a material adverse effect on the Group.
LIQUIDITY
To the extent that the Group is unable to utilize fully the Senior Bank
Facility, the amount required to complete the Group's planned build out exceeds
its estimates or the annualized cash flow of certain subsidiaries does not meet
expectations, the Group will require additional debt or other financing in
order to meet its funding requirements.
F-14
<PAGE> 78
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MORTGAGE LOAN
The Group entered into a mortgage loan agreement of pound sterling 2.5
million to fund the construction of the Company's headquarters in Nottingham.
The mortgage is repayable over a period of 20 years from July 31, 1995, the
date of drawdown, subject to a capital repayment moratorium which expired in
September 1996. Interest is paid monthly at a rate of LIBOR + 1 1/2%.
13. SHAREHOLDERS' EQUITY
The authorized and issued share capital of DCL during 1992 consisted of
two pound sterling 1 par value ordinary shares. On July 3, 1993 the
shareholders agreed to a four-for-one share split such that the share capital
consisted of eight 25 pence ordinary shares. In addition on such date DCL
issued an additional 392 shares in consideration of a reduction in the amount
of advances from shareholders of pound sterling 3.87 million.
On February 18, 1994, a further 1,780 DCL ordinary shares at 25 pence each
were issued for a total consideration of pound sterling 17.59 million. The
proceeds of the issue were used to repay the advance from shareholders.
On May 6, 1994 the authorized share capital of DCL was increased to pound
sterling 1,000,001 divided into 4,000,000 ordinary shares of 25 pence each and
six 'A' class shares of 25 pence each. The six 'A' shares have now been
converted into non-voting deferred shares in accordance with the Articles of
Association of DCL. The deferred shares entitle holders thereof only to the
repayment of the amounts paid up on such shares after payment in respect of
each Ordinary Share of pound sterling 100,000. The holders of deferred shares
are not entitled to the payment of any dividend or other distribution.
On May 13, 1994 DCL's principal shareholder made a capital contribution
to DCL in the amount of $1.3 million (pound sterling 863,000).
On May 17, 1994 DCL issued six A shares for cash at par and, for nil
consideration an additional 999 ordinary shares of 25 pence each to each of its
shareholders for each of the 2,180 ordinary shares held at that time.
On July 6, 1994 DCL issued a further 574,682 ordinary shares of 25 pence
each to European Cable Capital Partners LP ("ECCP") for a consideration of
pound sterling 15.44 million (net of pound sterling 1 million financing fees)
which had been advanced to DCL at various dates in May and June 1994 pending
formal issue of these ordinary shares. At such date a bonus allotment of
146,981 ordinary shares of 25 pence each was made to the holders of A shares in
accordance with the rights attaching to the A shares.
On September 1, 1994 DCL effected a ten for one share split such that the
authorized ordinary shares consisted of 40,000,000 shares of 2.5 pence each, of
which 29,016,630 were outstanding. In addition, on such date the shareholders
exchanged their shares in DCL for 29,016,630 ordinary shares of 2.5 pence each
and six A shares of 25 pence each in Diamond Cable Communications Plc ("the
Company"), a newly formed public limited company in proportion to their
shareholding in DCL.
At September 1, 1994 the authorized share capital of the Company was
70,000,000 ordinary shares and six A shares of 2.5 pence each of which
29,016,630 ordinary shares and six A shares of 25 pence each were outstanding.
The six A shares conferred certain anti-dilution rights and have now been
converted into non-voting deferred shares in accordance with the Articles of
Association.
On October 11, 1994, the Company issued 2,298,728 ordinary shares of 2.5
pence each to a wholly owned subsidiary of Investor Investments AB, a company
incorporated in Sweden, for gross proceeds of pound sterling 6.57 million. A
total of 587,874 ordinary shares of 2.5 pence each were allotted by way of
bonus to the holders of the A shares in accordance with the terms of such
shares.
On February 7, 1995 the Company issued 2,298,728 ordinary shares of 2.5
pence each to Creative Artists Agency Inc. for gross proceeds of pounds sterling
6.57 million. A further 587,873 ordinary shares of 2.5 pence each were allotted
by way of a bonus to the holders of the A shares in accordance with the terms of
such shares.
F-15
<PAGE> 79
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 31, 1995, a total of 7,138,700 ordinary shares of 2.5 pence each
of the Company were issued to ECCP, Investor Investments AB, Creative Artists
Agency, Inc. and William McDonald for gross proceeds of approximately pound
sterling 20.4 million. A further 1,825,642 ordinary shares of 2.5 pence each
were allotted on August 31, 1995 and September 4, 1995 by way of a bonus to the
holders of the A shares of 25 pence each, in accordance with the terms of such
shares. The conditions in the Articles relating to the conversion of the A
shares of 25 pence each into non-voting deferred shares of 25 pence each were
thereby satisfied and the six A shares of 25 pence each converted automatically
into six non-voting deferred shares of 25 pence each on September 4, 1995.
The deferred shares entitle holders thereof only to the repayment of the
amounts paid up on such shares after payment in respect of each ordinary share
of pound sterling 100,000. The holders of deferred shares will not be entitled
to the payment of any ordinary dividend or other distributions.
On August 16, 1995, the Company exchanged all its ordinary shares in DCL
for ordinary shares of a newly incorporated company, Jewel Holdings Limited
("Jewel"). As a result, DCL became a wholly owned subsidiary of Jewel and
Jewel became a wholly owned subsidiary of the Company.
On June 27, 1996, a total of 15,384,616 ordinary shares of 2.5 pence each
of the Company were issued to ECCP, Goldman Sachs, DCI Partners, Investor
Investments AB, English Cable Enterprises Inc and Sanford R Climan for gross
proceeds of approximately pound sterling 64.7 million (net of expenses).
14. DEBT FINANCING COSTS
Cash expended for debt financing costs in 1996 consists of payments of
pound sterling 1.15 million to holders of the 1994 Notes in connection with
their consent to certain amendments to the 1994 Notes indenture which were made
to conform certain provisions thereof to provisions of the 1995 Notes
indenture, and payments of pound sterling 7.94 million relating to the
arrangement costs of the Senior Bank Facility (described herein).
15. SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid for interest was pound sterling 518,000, pounds sterling
2,376,000 and pound sterling 1,060,000 for the years ended December 31, 1994,
1995 and 1996.
16. RELATED PARTY TRANSACTIONS
In 1995 the Group declared a bonus to Mr Davis, Managing Director, in an
amount sufficient to repay his loan from the former majority shareholder, and
to meet any related tax liabilities (together amounting to approximately $1.2
million).
DCL entered into a 10-year Management Agreement with effect from June 1,
1994 (the "Management Agreement") with ECE Management Company ("ECE
Management"), a company controlled by Ralph H. Booth II and Robert T. Goad,
shareholders in the Company. As of April 4, 1996, ECE Management assigned its
rights and obligations under the Management Agreement to ECE Management
International, also controlled by Ralph H. Booth II and Robert T. Goad. As of
July 1, 1996 DCL assigned its rights and obligations under the Management
Agreement to the Company. Pursuant to the Management Agreement, ECE
Management International has agreed to manage and act as agent (under the
supervision and control of the Company's board of directors) in connection with
the strategic activities of the Company, including preparation of strategic
business plans and capital budgets, identification of investment opportunities
and strategic issues relating to the construction of the Group's cable network,
the operation and administration of the Company's business and the retention of
consultants. The contract provides for an annual management fee of $200,000.
In addition, the Group has agreed to reimburse ECE Management International for
the costs of all expenses incurred in the performance of its duties, and to
indemnify ECE Management International from any liability incurred in
connection with the performance of its duties, except in the case of ECE
Management International's wilful misconduct, gross negligence or bad faith.
During 1995 and 1996, the Group recorded expenses of pound sterling 1,085,000
and pound sterling 1,610,000, respectively, as amounts paid or payable to
F-16
<PAGE> 80
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (continued)
ECE Management and/or ECE Management International in connection with
management services provided to the Group and all related expenses incurred.
ECCP is a Delaware limited partnership of which European Cable Capital
Partners Holding Inc is the general partner and certain Goldman Sachs
affiliates, Booth English Cable Inc and Columbia Management Inc are the limited
partners. Under the partnership agreement governing ECCP, the Goldman Sachs
affiliates effectively control ECCP, which effectively controls 66.7% of the
outstanding shares of the Company at December 31, 1996. In addition, other
investment funds managed by Goldman, Sachs & Co or its affiliates directly own
4.2% of the outstanding shares of the Company at December 31, 1996.
OTHER RELATIONSHIPS
Goldman, Sachs & Co acted as purchaser in connection with the 1997 Notes
offering and received underwriting commissions of approximately $6,750,000.
Goldman, Sachs & Co acted as underwriter in connection with the 1995 Notes
offering and received underwriting commissions of approximately $6,750,000. In
connection with the offering of the 1994 Notes, Goldman, Sachs & Co received
underwriting commissions of approximately $4,875,000. Goldman, Sachs & Co
acted as advisor in connection with Diamond's acquisition of LCL and received
an advisory fee for their services amounting to pound sterling 1,091,000.
Goldman Sachs International acted as agent and financial advisor in connection
with the negotiation of the Senior Bank Facility for which it has charged fees
of approximately pound sterling 400,000 in 1996. In 1995, Goldman, Sachs & Co
charged a fee of $750,000 for financial advisory services that Goldman, Sachs &
Co rendered the Company. Goldman, Sachs & Co was the counterparty to foreign
exchange contracts entered into by the Company in 1996 and 1997.
John Thornton, who is a managing director of Goldman Sachs International
and a Director of the Company, is also a director of BSkyB, a principal
supplier of programming to the Group and a principal competitor of the Group.
Robert T Goad, a Director and the Chief Executive Officer of the Company
also has an indirect minority interest in ICTL, which has significant cable
interests in the UK.
17. FINANCIAL INSTRUMENTS
INTEREST RATE SWAP - On July 3, 1995, a subsidiary of EMCG entered into a
five year agreement to swap a floating interest rate calculated at sterling
LIBOR for a fixed rate of 8.79%. The swap has a maximum nominal value of
pound sterling 33.6 million and its nominal value at December 31, 1996 was
pound sterling 13.3 million. Following acquisition by Diamond Cable
Communications Plc, the interest rate swap has been retained and has been
recorded on the balance sheet in other liabilities at its market value at
December 31, 1996 of pound sterling 1.2 million. Profits or losses on the mark
to market of the interest rate swap are recognized in the consolidated
statement of operations. The Directors may decide to terminate the agreement
or they may retain the swap to alter the interest rate on its loan facility.
The net cash outflow in respect of the swap in 1996 was pound sterling 118,000.
FOREIGN EXCHANGE FORWARD CONTRACT - The Company entered into a foreign
exchange forward contract on November 1, 1996 for settlement on May 6, 1997 to
sell pound sterling 200 million at a rate of $1.6289 to pound sterling 1. On
January 31, 1997 an offsetting agreement was entered into at a rate of $1.6014
to pound sterling 1. The offsetting contracts were settled on February 6, 1997
with a payment of approximately pound sterling 3.4 million to the Company.
Because of changes in prevailing rates, the Company has recorded for the year
ended December 31, 1996, an unrealized loss of approximately pound sterling 8.1
million on the pounds sterling sell forward contract. During the first quarter
of 1997, the Company has recorded a gain of approximately pound sterling 11.5
million on the two offsetting forward contracts, reflecting the reversal of the
pound sterling 8.1 million loss referred to above and the approximately pound
sterling 3.4 million cash payment on settlement of the contracts.
F-17
<PAGE> 81
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FINANCIAL INSTRUMENTS (continued)
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, TRADE RECEIVABLES, TRADE ACCOUNTS PAYABLE AND
ACCRUED EXPENSES - The carrying amount approximates fair value because of the
short maturity of these instruments.
INTEREST RATE SWAP - The interest rate swap has been marked to market and
the resulting carrying amount approximates its fair value. The fair value of
the instrument has been calculated based on quotations received from
independent, third party financial institutions and represents discounted
future cash flows based on the industry norm derivatives formula.
SENIOR DISCOUNT NOTES - The fair value of the senior notes has been
calculated based on quotations from Goldman, Sachs & Co and are based on
discounting the future cash flows to net present values using appropriate
market interest rates prevailing at the year end. The following table compares
the carrying value with the fair value of the debt:
<TABLE>
<CAPTION>
Year ended 31 December
----------------------------------------------
1995 1996 1995 1996
Carrying Carrying Fair Fair
value value value value
-------- -------- ------- -------
pound pound pound pound
sterling sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C>
1994 Notes.................................. 113,559 117,062 127,841 136,740
1995 Notes.................................. 194,170 197,356 203,359 220,726
------- ------- ------- -------
307,729 314,418 331,200 357,466
======= ======= ======= =======
</TABLE>
FOREIGN EXCHANGE FORWARD CONTRACT - The foreign exchange forward contract
has been marked to market and the resulting carrying amount approximates its
fair value. The fair value of the instrument has been calculated based on the
difference between the forward rate available at December 31, 1996 for the
remaining maturity of the contract and the contracted forward rate.
CONCENTRATION OF CREDIT RISK AND MARKET RISK - The Group operates
predominantly in one industry segment, the provision of cable television and
telecommunications services in certain areas of England. No single customer
accounts for 10% or more of consolidated net sales.
Financial instruments which potentially subject the Group to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Group places its temporary cash investments with
high credit quality financial institutions. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base. At December 31, 1996, the Group had no
significant concentrations of credit risk.
The Group is exposed to market risk on the interest rate swap to the
extent that the variable rate receivable is lower than the fixed rate payable.
The Group's revenues are generated in pounds sterling while the interest
and principal obligations with respect to the Senior discount notes will be
payable in US dollars. While the Company's policy has previously been not to
enter in hedging contracts it did enter into a foreign exchange forward
contract during 1996 (discussed herein). Changes in currency exchange rates
may continue to have a material effect on the results of operations of the
Group.
F-18
<PAGE> 82
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHARE OPTIONS
The Group adopted a Senior Management Option Scheme on October 27, 1994.
Under the scheme, the Board of Directors may, for a period of 10 years, grant
options over Shares with an exercise price of pound sterling 3.44 or such other
price as the Board of Directors may determine, to executives or other
individuals associated with the Group selected by the Board of Directors.
Options granted on or before April 30, 1995 can be exercised as to 50% of the
shares subject to the option on or after June 30, 1998 and as to the other 50%
on or after June 30, 1999, in each case, until the seventh anniversary of the
date of grant of the option. Options granted after April 30, 1995 can only be
exercised as to 50% on or after the fourth anniversary of the date of grant, and
as to the remaining 50%, on or after the fifth anniversary of the date of grant,
in each case, until the seventh anniversary of the date of grant of the option.
Options may be exercised early in certain circumstances if the option holder
ceases to be a director or employee of the Group or if there is a change in
control of the Group.
According to the rules of the Senior Management Option Scheme, the
aggregate number of shares which have been or may be issued pursuant to options
granted under the Senior Management Option Scheme and options granted under any
other option scheme of the Group may not exceed 10% of the Company's then
current issued share capital.
Options over a total of 728,000 shares were granted to directors, senior
management and certain principals of ECE Management on February 23, 1995 and
July 19, 1995 under the Senior Management Option Scheme with an exercise price
of pound sterling 3.44. Of these 218,000 were granted to Gary Davis and 10,000
to Lord Pym.
On October 24, 1995, options over a total of 490,000 shares were granted
to directors, senior management and certain principals of ECE Management under
the Senior Management Option Scheme with an exercise price of pound
sterling 4.11 per share.
Options were granted on January 5, 1995 to CGT, in which Mr Davis and his
family are shareholders, over 654,000 shares with an exercise price of pound
sterling 3.44 and are exercisable at any time up to January 5, 2002. These
options were not granted under the Senior Management Option Scheme but are
subject to some of the provisions of the Senior Management Options Scheme.
The following table sets forth the number of options in issue:
<TABLE>
<CAPTION>
At 1 Granted At 31 Forfeited At 31
Jan 95 in 1995 Dec 95 in 1996 Dec 96
------ ------- ------ --------- ------
(number in thousands)
<S> <C> <C> <C> <C> <C>
- 1,872 1,872 (45) 1,827
=== ===== ===== ==== =====
</TABLE>
Options over 654,000 Shares were exercisable at December 31, 1995 and 1996.
No compensation expense has been recorded for these options under the
recognition provisions of APB 25 as they were all granted at a price which
approximated the market value at the date of grant.
The following pro-forma summary shows the reported net loss as if the fair
value based accounting method prescribed by SFAS No. 123 had been used to
account for stock-based compensation cost. In the absence of a reported share
price and restrictions on dividend payments, the fair value of the options has
been estimated using a risk-free interest rate based on prevailing interest
rates at the date of the grant of 6.25% and assuming options are exercised on
the seventh anniversary of the date of the grant. The pro-forma compensation
cost for 1995 and 1996 is pound sterling 0.20 million and pound sterling 0.33
million, respectively. The effects of applying SFAS No. 123 may not be
representative of the effects on reported net income/loss for future years.
F-19
<PAGE> 83
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHARE OPTIONS (continued)
<TABLE>
<CAPTION>
Year ended
December 31
--------------------------
1995 1996
-------- --------
pound pound
sterling sterling
(in thousands)
<S> <C> <C>
Pro-forma net loss........................ (27,812) (36,164)
======= =======
</TABLE>
19. SENIOR BANK FACILITY AND RESTRICTION OF NET ASSETS
In August 1996 certain of the Company's subsidiaries entered into a pound
sterling 340 million senior bank loan and guarantee facility. Subsequent to the
year end, the terms of the Senior Bank Facility have been amended to reduce the
aggregate amount available for borrowing to pound sterling 220 million and to
revise certain covenants and borrowing conditions. Because the proceeds to the
Company from the issuance of the 1997 Notes exceeded $175 million the Company
has entered into negotiations under the terms of the Senior Bank Facility to,
among other things, reduce the amount available for borrowing under the
facility to pound sterling 175 million. To date, no funds have been drawn
under the facility.
Indebtedness under the Senior Bank Facility will be incurred and
guaranteed by certain of the Company's subsidiaries and secured by a lien on
their assets. The Senior Bank Facility contains various covenants, including
(i) financial covenants relating to leverage, bank debt loan charges coverage
ratios, cash interest coverage ratios and annualized EBITDA levels; (ii)
requirements that the Group maintain interest rate protection agreements in
relation of a portion of the loans expected to be outstanding for the period
January 1, 1998 to June 30, 2001; and (iii) restrictions on the payment of
dividends and intra-Group debt.
As a result of the above restrictions, certain subsidiaries are subject to
restrictions on their ability to make dividend payments, loans or other
transfers of cash to the Company. Such restrictions, unless amended or waived,
limit the use of any cash generated by these subsidiaries to pay obligations of
the Company. As of December 31, 1996 the conditions which would allow the
subsidiaries to make distributions to the Company were not satisfied and hence
the restrictions applied to the entire net assets of the subsidiaries.
The following condensed financial statements of the Company are provided
in compliance with the requirements of Rule 5-04 and 12-04 of Regulation S-X.
F-20
<PAGE> 84
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------------------------------
1994 1995 1996 1996
------- ------- -------- --------
(note A)
pound pound pound
sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C>
OPERATING COSTS AND EXPENSES
Selling, general and administrative...... - - (1,468) $(2,514)
------ ------- ------- --------
OPERATING LOSS........................... - - (1,468) (2,514)
Interest income.......................... 1,258 3,543 40,119 68,695
Interest expense and amortization of
debt discount and expenses............. (3,319) (14,646) (39,100) (66,951)
Foreign exchange (losses)/gains, net..... (1,195) 909 (1,542) (2,640)
Unrealized loss on derivative financial
instruments............................ - - (8,118) (13,900)
Other expenses........................... - (911) - -
------ ------- ------- --------
Loss before income taxes................. (3,256) (11,105) (10,109) (17,310)
Income taxes............................. - - - -
------ ------- ------- --------
NET LOSS................................. (3,256) (11,105) (10,109) $(17,310)
====== ======= ======= ========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-21
<PAGE> 85
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------
1995 1996 1996
------- ------- -------
(note A)
pound pound
sterling sterling
(in thousands except share data)
<S> <C> <C> <C>
ASSETS
Investments in and advances to subsidiaries........... 317,239 369,838 $633,273
Cash and cash equivalents............................. - 16,032 27,452
Other assets.......................................... 13 115 197
Deferred financing costs (less accumulated
amortization of pound sterling 382 and
pound sterling 1,325 at December 31,
1995 and 1996 respectively)......................... 12,016 11,960 20,479
------- ------- --------
TOTAL ASSETS.......................................... 329,268 397,945 $681,401
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities..................................... 1,635 9,265 15,864
Senior discount notes................................. 307,729 314,418 538,378
Shareholders' equity
Ordinary shares: 70,000,000 authorized;
43,754,175 shares issued at December 31, 1995,
59,138,791 shares issued at December 31, 1996..... 1,094 1,478 2,531
Non-voting deferred shares:
6 shares authorized and issued at December 31,
1995 and 1996..................................... - - -
Additional paid-in-capital.......................... 33,171 97,451 166,865
Unrealized loss on securities....................... - (197) (337)
Accumulated deficit ................................ (14,361) (24,470) (41,900)
------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ 329,268 397,945 $681,401
======= ======= ========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-22
<PAGE> 86
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Non-voting
Ordinary shares deferred shares Additional Unrealized Accum- Total
pound pound Paid-in- loss on ulated Shareholders'
Number sterling Number sterling capital securities Deficit Equity
(pound sterling in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1994...... - - - - - - - -
Shares issued and capital
contributions (net of
expenses)...................... 31,315,358 782 6 - 6,505 - - 7,287
Bonus shares issued............. 587,874 15 - - (15) - - -
Net loss........................ - - - - - - (3,256) (3,256)
---------- ----- --- --- ------ ---- ------- -------
BALANCE AT DECEMBER 31, 1994.... 31,903,232 797 6 - 6,490 - (3,256) 4,031
========== ===== === === ====== ==== ======= =======
BALANCE AT JANUARY 1, 1995...... 31,903,232 797 6 - 6,490 - (3,256) 4,031
Shares issued and capital
contributions (net of
expenses)..................... 9,437,428 236 - - 26,742 - - 26,978
Bonus shares issued............. 2,413,515 61 - - (61) - - -
Net loss........................ - - - - - - (11,105) (11,105)
---------- ----- --- --- ------ ---- ------- -------
BALANCE AT DECEMBER 31, 1995.... 43,754,175 1,094 6 - 33,171 - (14,361) 19,904
========== ===== === === ====== ==== ======= =======
BALANCE AT JANUARY 1, 1996..... 43,754,175 1,094 6 - 33,171 - (14,361) 19,904
Shares issued and capital
contributions (net of
expenses).................... 15,384,616 384 - - 64,280 - - 64,664
Unrealized loss on
securities................... - - - - - (197) - (197)
Net loss....................... - - - - - - (10,109) (10,109)
---------- ----- --- --- ------ ---- ------- -------
BALANCE AT DECEMBER 31, 1996... 59,138,791 1,478 6 - 97,451 (197) (24,470) 74,262
========== ===== === === ====== ==== ======= =======
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-23
<PAGE> 87
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
---------------------------------------------
1994 1995 1996 1996
------- -------- ------- -------
(note A)
pound pound pound
sterling sterling sterling
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... (3,256) (11,105) (10,109) $(17,310)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Foreign exchange losses/(gains).................. 338 (613) 820 1,404
Accrued interest on advances to subsidiaries..... - (318) (39,581) (67,774)
Amortization of deferred financing costs......... 70 312 943 1,615
Accretion of senior note discount................ 3,248 14,335 38,157 65,336
Accretion of investment income................... (525) 524 - -
Profit on disposition of investments............. - (2,733) - -
Change in operating assets and liabilities:
Change in other assets......................... - (13) (102) (175)
Change in other liabilities.................... 22 1,613 8,380 14,349
------- -------- ------- -------
Net cash (used in)/provided by operating activities (103) 2,002 (1,492) (2,555)
------- -------- ------- -------
Cash flows from investing activities:
Cash invested in marketable securities........... (53,042) (17,445) - -
Proceeds from disposition of investments......... - 73,644 - -
Advances to subsidiaries......................... (5,585) (310,611) (45,306) (77,577)
------- -------- ------- -------
Net cash used in investing activities.............. (58,627) (254,412) (45,306) (77,577)
Cash flows from financing activities:
Proceeds of issue of debt........................ 95,117 194,881 - -
Debt financing costs............................. (4,474) (7,924) (1,637) (2,803)
Issue of shares and capital
contributions (net of expenses)................ 6,562 26,978 64,664 110,724
------- -------- ------- -------
Net cash provided by financing activities.......... 97,205 213,935 63,027 107,921
------- -------- ------- -------
Net increase/(decrease) in cash.................... 38,475 (38,475) 16,229 27,789
Cash and cash equivalents at beginning of year..... - 38,475 - -
Effect of exchange rate changes on cash and
cash equivalents................................. - - (197) (337)
------- ------- ------- -------
Cash and cash equivalents at end of year........... 38,475 - 16,032 $27,452
======= ======== ======= =======
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-24
<PAGE> 88
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
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.
All amounts herein are shown in Pounds Sterling ("pound sterling") and
for the year 1996 also are presented in US dollars, the latter being unaudited
and presented solely for the convenience of the reader, at the rate of pound
sterling 1 = $1.7123, the Noon Buying Rate of the Federal Reserve Bank of New
York on December 31, 1996.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. A valuation allowance is
raised against a deferred tax asset where it is more likely than not that some
portion of the deferred tax asset will not be realized.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly
liquid investments with original maturity of three months or less that are
readily convertible to cash.
FOREIGN CURRENCIES - The primary economic environment in which the Group
operates is the United Kingdom and hence its reporting currency is the United
Kingdom Pound Sterling (pound sterling). Transactions in foreign currencies
are recorded using the rate of exchange in effect on the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
are translated using the rate of exchange in effect on the balance sheet date
and gains or losses on translation are included in the statement of operations.
Foreign exchange forward contracts which do not hedge firm commitments are
accounted at market value with reported gains and losses recorded in the
statement of operations.
SENIOR DISCOUNT NOTES - The debt discount is amortized to the statement of
operations on a constant yield to maturity basis.
DEFERRED FINANCING COSTS - Costs incurred relating to the issue of debt
are shown as an asset on the balance sheet and are amortized over the term of
the debt as an adjustment of yield.
B. ADVANCES TO SUBSIDIARIES
The advances to subsidiaries consist of a dollar denominated loan of
approximately $491.7 million plus accrued interest and sterling denominated
loans.
The dollar denominated loan bears interest at a rate of 12.25% per annum.
The sterling denominated loans bear interest at a rate of LIBOR plus 2% per
annum.
The interest income on these loans in 1995 and 1996 was pound
sterling 318,000 and pound sterling 39.6 million respectively.
C. COMMITMENTS AND CONTINGENCIES
LIQUIDITY
To the extent that the Group is unable to utilize fully the Senior Bank
Facility, the amount required to complete the Group's planned build out exceeds
its estimates or the annualized cash flow of certain subsidiaries does not meet
expectations, the Group will require additional debt or other financing in
order to meet its funding requirements.
F-25
<PAGE> 89
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Robert T. Goad
- ------------------------- Director and Chief Executive Officer March 21, 1997
Robert T. Goad
- ------------------------- Director March , 1997
Richard A. Friedman
/s/ Gary L. Davis
- ------------------------- Director March 21, 1997
Gary L. Davis
- ------------------------- Director March , 1997
John L. McDonald
/s/ Muneer A. Setter
- ------------------------- Director March 21, 1997
Muneer A. Setter
/s/ John L. Thornton
- ------------------------- Director March 21, 1997
John L. Thornton
- ------------------------- Director March , 1997
Thomas Nilsson
/s/ Lord Francis Pym
- ------------------------- Director March 21, 1997
Lord Francis Pym
/s/ Nicholas R. Millard
- ------------------------- Chief Financial Officer March 21, 1997
Nicholas R. Millard
/s/ J.A. Duncan Craig
- ------------------------- Chief Accounting Officer March 21, 1997
J.A. Duncan Craig
</TABLE>
