<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration Statement No. 033-83740
Registration Statement No. 033-98374
Registration Statement No. 333-25193
DIAMOND CABLE COMMUNICATIONS PLC
13 1/4% SENIOR DISCOUNT NOTES DUE SEPTEMBER 30, 2004
11 3/4% SENIOR DISCOUNT NOTES DUE DECEMBER 15, 2005
10 3/4% SENIOR DISCOUNT NOTES DUE FEBRUARY 15, 2007
----------------------------------
Interest will not accrue on the 13 1/4% Senior Discount Notes due
September 30, 2004 (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. See "Description of
1994 Notes". The 1994 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
1994 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. The Company is required to offer to
repurchase all outstanding 1994 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. 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 1994 Notes at 100% of the principal amount plus accrued interest to
the date of repurchase (or, prior to December 15, 2000, at 100% of Accreted
Value on the date of repurchase). See "Description of the 1994 Notes --
Redemption". There can be no assurance that the Company will have the financial
resources necessary or otherwise be able to repurchase the 1994 Notes under
such circumstances.
Interest will not accrue on the 11 3/4% Senior Discount Notes due December
15, 2005 (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. See "Description of the 1995 Notes".
The 1995 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 herein plus accrued interest to the date of redemption. The 1995 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 1995 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 1995 Notes at 100% of the principal amount
plus accrued interest to the date of repurchase (or, prior to December 15,
2000, at 100% of Accreted Value on the date of repurchase). See "Description of
the 1995 Notes -- Redemption". There can be no assurance that the Company will
have the financial resources necessary or otherwise be able to repurchase the
1995 Notes under such circumstances.
Interest will not accrue on the 10 3/4% Senior Discount Notes due February
15, 2007 (the "1997 Notes") prior to February 15, 2002. Interest on the 1997
Notes will be payable on February 15 and August 15 of each year, commencing
August 15, 2002 at a rate of 10 3/4% per annum. See "Description of the 1997
Notes". The 1997 Notes will be redeemable, in whole or in part, at the option
of the Company at any time on or after February 15, 2002, at the redemption
prices set forth herein plus accrued and unpaid interest, if any, to the date
of redemption. The 1997 Notes will also be redeemable in whole, but not in
part, at the option of the Company at any time at 100% of the principal amount
at maturity (or, prior to February 15, 2002 at 100% of Accreted Value) plus
accrued and unpaid interest, if any, to the date of redemption in the event of
certain tax law changes requiring the payment of additional amounts as
described herein. See "Description of the 1997 Notes -- Redemption". Upon the
occurrence of a Change of Control, the Company is required to offer to
repurchase all outstanding 1997 Notes at 101% of principal amount at maturity
(or, prior to February 15, 2002, at 101% of Accreted Value on the date of
repurchase), plus accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the 1997 Notes--Certain Comments--Change of
Control". There can be no assurance that the Company would have the financial
resources necessary or otherwise be able to repurchase the 1997 Notes under
such circumstances.
The Discount Notes constitute unsecured senior indebtedness of the
Company. At December 31, 1997, the Company had approximately L.545 million of
indebtedness outstanding, including approximately L.139 million, L.231 million
and L.166 million in accreted value of 1994 Notes, the 1995 Notes and the 1997
Notes, respectively. On February 6, 1998, a wholly-owned subsidiary of the
Company, Diamond Holdings plc, issued L.135,000,000 in principal amount of its
10% Senior Notes due February 1, 2008 and $110,000,000 in principal amount of
its 9 1/8% Senior Notes due February 1, 2008 (the "1998 Notes") each
unconditionally guaranteed as to principal, interest and any other amounts due
by the Company. The Company has not issued, and does not have any current plans
to issue, any significant indebtedness that will be subordinated to the
Discount Notes. The Company is a holding company which conducts substantially
all of its business through subsidiaries, all of which are wholly-owned. The
Discount 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 1998 Notes effectively rank senior to the Discount Notes in
that funds will be available from the Company's subsidiaries, including Diamond
Holdings Plc, to the Company only through payment of dividends, if any, or
payment of principal of and interest on currently outstanding intercompany
indebtedness which will be subordinated to the 1998 Notes. The Guarantee by
the Company in respect of payments in respect of the Discount Notes (the
"Guarantee") will rank pari passu with the Company's unsecured obligations,
including its obligations under the Discount Notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE DISCOUNT NOTES.
------------------------------
Begin Cascading. The Cascading Slope of the following paragraph is .1 inch.
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.
End Cascading
This Prospectus is to be used by Goldman, Sachs & Co. in connection with offers
and sales of the Discount 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 sale. Goldman, Sachs & Co.
may act as a principal or agent in such transactions. See "Plan of
Distribution".
GOLDMAN, SACHS & CO.
------------------------------
The date of this Prospectus is March 27, 1998.
<PAGE> 2
NOTE REGARDING THIS PROSPECTUS
This Prospectus relates to three different series of Discount Notes issued
by the Company:
o The 13 1/4% SENIOR DISCOUNT NOTES DUE SEPTEMBER 30, 2004
(referred to herein as the "1994 NOTES"),
o The 11 3/4% SENIOR DISCOUNT NOTES DUE DECEMBER 15, 2005
(referred to herein as the "1995 NOTES") and
o The 10 3/4% SENIOR DISCOUNT NOTES DUE FEBRUARY 15, 2007
(referred to herein as the "1997 NOTES").
Prospective investors in the 1994 Notes should refer to "Summary -- The
1994 Notes" and "Description of the 1994 Notes" for a description of the 1994
Notes.
Prospective investors in the 1995 Notes should refer to "Summary -- The
1995 Notes" and "Description of the 1995 Notes" for a description of the 1995
Notes.
Prospective investors in the 1997 Notes should refer to "Summary -- The
1997 Notes" and "Description of the 1997 Notes" for a description of the 1997
Notes.
References herein to the "Discount Notes" apply to the 1994 Notes, the
1995 Notes and the 1997 Notes.
This Prospectus includes the Company's 1997 Annual Report on Form 10-K,
which begins after "Available Information".
____________________________
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, Diamond
Holding plc ("Diamond Holdings"). In this Prospectus, 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 30, 1995 LCL, and references to
"Diamond" refer to the Company and its subsidiaries excluding LCL. The
principal executive office of the Company is at Diamond Plaza, Daleside Road,
Nottingham NG2 3GG, England, and its telephone number at such address is
011-44-115-912-2217.
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 all of 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.
____________________________
The Discount Notes are listed on the Luxembourg Stock Exchange. For a
discussion of the trading market, if any, in the Discount Notes see "Risk
Factors -- Absence of a Public Market for the Discount Notes; Possible
Volatility of Discount Note Price".
This prospectus 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, an
explanation of important factors that could cause actual results to differ
materially from those in the forward-looking statements. Among other
statements, statements regarding the Group's operational and financial goals
and objectives, expectations regarding the construction of the Group's network
and the marketing and acceptance of its services, including those under "Risk
Factors -- Requirement for Additional Funds", " -- Ability to Manage Network
Development and Expansion", " -- Significant Competition" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and
2
<PAGE> 3
Capital Resources" are forward looking in nature. Similarly, among other
statements, statements regarding the effects of changes in the competitive
environment and government regulation, including those under "Risk Factors --
Potential Changes in Government Regulation", " -- Requirement to Meet Build
Milestones", " -- Significant Competition", "Business -- Competition" and " --
Milestones" and statements regarding the expected technological and managerial
strains of continued growth, service enhancement and year 2000 information
processing issues, including those under "Risk Factors -- Rapid Technological
Changes" and "Business -- Competition", are forward looking in nature. By their
nature, forward-looking statements and forecasts involve risk and uncertainty
because they relate to events and depend on circumstances that will occur in
the future. There are a number of factors that could cause actual results and
developments to differ materially from those expressed or implied by these
forward-looking statements and forecasts. These factors include, among other
things, changes in demand for the products and services of the Group, changes
in the cost and availability of supplies to the Group, the rate and cost of the
build out of the Group's network, technological changes, the impact of
competition and changes in economic conditions in England.
The Group operates only in the United Kingdom and, accordingly, publishes
its financial statements in pounds sterling. In this Prospectus, references 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
Prospectus contains translations of certain pounds sterling amounts into U.S.
dollars at specified rates. These translations should not be construed as
representations that the pounds 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 pounds sterling amounts into U.S. dollars have been made at
$1.6427 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, 1997. The
Noon Buying Rate on March 27, 1998 was $1.6825 per L.1.00. See "Exchange Rates"
for information regarding the Noon Buying Rate for the past five fiscal years.
3
<PAGE> 4
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
The Company has been incorporated under English law. Service of process
upon directors and officers of the Company, and certain of the experts named
herein, who reside outside the United States may be difficult to obtain within
the United States. Furthermore, since most directly owned assets of the Company
is outside the United States, any judgment obtained in the United States
against it may not be collectible within the United States. The Company has
been advised by its English counsel, Freshfields, that there is doubt as to
the enforceability of certain civil liabilities under U.S. Federal securities
laws in original actions in English courts, and that, subject to certain
exceptions and time limitations, English courts will treat a final and
conclusive judgment of a U.S. court for a liquidated amount as a debt
enforceable by fresh proceedings in the English courts. Such counsel has
expressed no opinion, however, as to whether the enforcement by an English
court of any judgment would be in pounds sterling or as of which date, if any,
the determination of the applicable exchange rate from U.S. dollars to pounds
sterling would be made. The Company has appointed CT Corporation Systems as
their authorized agent upon which process may be served in any suit or
proceeding arising out of or relating to the Discount Notes that may be
instituted in any U.S. federal or state court in the Borough of Manhattan, The
City of New York or brought under U.S. federal or state securities laws and
submit to the jurisdiction of any such court in any such suit or proceeding.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements included elsewhere in this
Prospectus. All information in this Prospectus with respect to the number of
homes in the Group's franchise areas is based either on CACI Information
Services reports (which use 1991 census data compiled by the U.K.'s Office of
Population Census and Surveys) or information published by the Independent
Television Commission ("ITC") and all information with respect to the number of
businesses is based on Company estimates. There can be no assurance that the
actual number of homes in a franchise area is not different from that reflected
in the 1991 census or the ITC data or that the estimated number of businesses
reflects the actual number of businesses in the relevant franchise areas.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THE GROUP
OVERVIEW
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, 1997, the Group's cable television and
telecommunications network had passed by civils construction approximately
536,100 homes and an estimated 26,900 businesses, of which portions of the
network passing approximately 508,800 homes and an estimated 24,900 businesses
had been activated. As of that date, the Group had approximately 157,200
residential telephone lines, 83,800 cable television subscribers and 27,100
business telephone lines. Through that date, pounds sterling 428 million had
been invested (at original cost) in the construction of the network and related
systems.
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, voicemail, call waiting, call forward, call barring and
Internet access, (ii) business telecommunications services which include most
of 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 Item 1. "Business -- Business Telecommunications and
Residential Telephone" and "Business -- Cable Television".
HISTORY
The Group began operations in 1989. In May 1994, European Cable Capital
Partners, L.P. ("ECCP") acquired a majority stake in the Company. ECCP is a
partnership in which various investment funds managed by Goldman, Sachs & Co.
or its affiliates hold an 83.3% interest. The remaining partnership interests
in ECCP are held by affiliates of the Group's Chief Executive Officer, Robert
T. Goad, and Ralph H. Booth II.
5
<PAGE> 6
SELECTED OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1995, 1996 and 1997. The
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>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995(1) 1996 1997
------- ------- -------
Homes passed by civils construction(2) . 281,311 453,496 536,110
Homes activated(3) . . . . . . . . . . . 157,906 347,246 508,801
Homes marketed(4). . . . . . . . . . . . 126,607 252,601 405,787
Student service rooms marketed(5). . . . - - 1,805
BUSINESS TELECOMMUNICATIONS
Business customers accounts. . . . . . . 2,399 3,935 5,723
Business lines connected . . . . . . . . 9,879 18,932 27,124
Private circuits(6). . . . . . . . . . . 161 226 258
Average lines per business account(7). . 4.1 4.8 4.7
Average monthly revenue per line(8)(9) . L.70.23 L.50.17 L.46.26
Pro-forma average monthly revenue
per line(9). . . . . . . . . . . . . . L.67.70 L.51.25 L.46.26
RESIDENTIAL TELEPHONE(5)
Residential lines connected. . . . . . . 52,698 104,460 157,171
Penetration rate of homes marketed(10) . 41.6% 41.4% 38.6%
Average monthly revenue per
line(9)(11). . . . . . . . . . . . . . L.19.88 L.18.40 L.18.75
Pro-forma average monthly revenue
per line(9). . . . . . . . . . . . . . L.19.22 L.18.64 L.18.75
Churn(12)(13). . . . . . . . . . . . . . 15.0% 20.6% 16.3%
CABLE TELEVISION
Basic service subscribers. . . . . . . . 30,749 59,242 83,793
Penetration rate of homes marketed(14) . 24.3% 23.5% 20.6%
Average monthly revenue per
subscriber(15) . . . . . . . . . . . . L.17.62 L.18.03 L.19.84
Churn(12)(13). . . . . . . . . . . . . . 33.8% 40.9% 32.7%
</TABLE>
(1) Information for 1995 is pro-forma combined information including both
Diamond and LCL as if LCL had been acquired on January 1, 1995.
(2) Homes passed by civils construction is the number of homes (excluding
student services rooms) that have had ducting buried outside.
(3) Homes activated is the number of homes (excluding student services rooms)
that are capable of receiving cable service without further extension of
transmission lines, apart from the final connection to the home.
(4) Homes marketed is the number of homes activated (excluding student
services rooms) for which the initial marketing phase (including
door-to-door direct marketing) has been completed.
(5) During 1997 the Group began to provide telephone services and internet
access to students at a number of large educational establishments in its
franchise area. Academic terms make this business seasonal in nature. In
order to fairly present the results, the Company has adopted the following
policy: (i) rental revenue is recognized evenly over a full twelve month
period (or the balance of the period to the start of the next academic
year if shorter), (ii) call revenue is recognised in the month in which it
is earned and is incorporated in residential telephone average monthly
revenue per line, (iii) a student services line is recognised as the
equivalent of 3/4 of a residential line, (iv) each student room at which
service is available is treated as a home marketed and incorporated in the
calculation of residential telephone penetration and, (v) any net decrease
in the number of students taking the service between one academic year and
another is ignored for the purposes of calculating residential telephone
churn.
(6) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(7) 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.
(8) The 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
twelve.
(9) 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 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.
(10) Penetration rate of homes marketed is calculated by dividing the number
of residential lines, including student services lines recognized at the
equivalent of 3/4 of a residential line, connected on the given date by
the total number of homes marketed and student services rooms marketed as
of such date, expressed as a percentage.
(11) 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 twelve. Call revenue from student services lines
is recognized in the month in which it is earned and is incorporated in
residential telephone average monthly revenue per line, with each student
services line recognized as the equivalent of 3/4 of a residential line.
(12) 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). The calculation of churn excludes student
services lines.
(13) Since the beginning of 1997, the Group's reported churn has excluded from
net disconnected accounts subscribers who disconnect from the service when
moving residence and reconnect to the service in their new residence.
Previously, these subscribers were not identified under the Group's
information system and were therefore reported in the churn calculation as
disconnected accounts. If churn for the year ended December 31, 1997 was
calculated on the basis used in periods prior to 1997, annualized churn
would have been 21.3% and 36.9% for residential telephone and cable
television, respectively. The difference between churn on the new and
prior bases is not necessarily indicative of the adjustment that would
arise if churn for prior periods were restated.
(14) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television on the given date by the total
number of homes marketed as of such date, expressed as a percentage.
(15) 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 twelve.
<PAGE> 7
THE 1994 NOTES
Notes Offered.......... 13 1/4% Senior Discount Notes due September 30, 2004
(the "1994 Notes").
Price.................. Negotiated prices related to prevailing market prices
at the time of sale.
Maturity Date.......... September 30, 2004.
Use of Proceeds........ The Company will not receive any proceeds from
secondary sales of the 1994 Notes.
Yield and Interest..... 13 1/4% per annum (computed on a semi-annual bond
equivalent basis) calculated from September 28, 1994.
Cash interest will not accrue on the 1994 Notes prior
to September 30, 1999 (the "1994 Cash Interest Date").
Thereafter, cash interest on the 1994 Notes will be
payable, at a rate of 13 1/4% per annum, semi-annually
on each March 31 and September 30, commencing March 31
, 2000. For U.S. federal income tax purposes,
purchasers of the 1994 Notes will be required to
include amounts in gross income in advance of the
receipt of the cash payments to which the income is
attributable.
Ranking................ The 1994 Notes constitute senior unsecured indebtedness
of the Company. In August 1996, certain of the
Company's subsidiaries entered into a senior syndicated
bank facility (as modified in February and April 1997)
permitting borrowing up to an aggregate amount of L.175
million (the "Senior Bank Facility").
The Company has not issued, and does not have any
current plans to issue, any significant indebtedness
that will be subordinated to the 1994 Notes. The 1994
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 1994 Notes effectively rank junior to
the 1998 Notes in that funds will be available from the
Company's subsidiaries, including Diamond Holdings, to
the Company only through payment of dividends, if any,
or payment of principal and interest on currently
outstanding intercompany indebtedness which will be
subordinated to the 1998 Notes. The 1994 Notes rank
pari passu with the 1995 Notes, the 1997 Notes and the
Guarantee. See "Risk Factors -- Holding Company
Structure; Liens on Assets".
Optional Redemption.... The 1994 Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after
the 1994 Cash Interest Date at the redemption prices
set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. See "Description of
the 1994 Notes -- Redemption -- Optional Redemption".
6
<PAGE> 8
Tax Redemption......... In the event of certain changes affecting withholding
taxes applicable to certain payments on the 1994 Notes,
the 1994 Notes are redeemable, as a whole, but not
in part, at the election of the Company, at any time at
the Accreted Value thereof, or, if such redemption is
to occur on or after the 1994 Cash Interest Date, at
100% of the principal amount at maturity thereof, plus
accrued and unpaid interest, if any, to the date
of redemption. See "Description of the 1994 Notes --
Optional Tax Redemption".
Change of Control...... Upon a Change of Control, each holder of the 1994
Notes will have the right to require the Company to
repurchase such holder's 1994 Notes at 101% of the
Accreted Value thereof in the case of any such
repurchase prior to the 1994 Cash Interest Date or
101% of the principal amount at maturity thereof plus
accrued and unpaid interest, if any, to the date of
repurchase, in the case of any such repurchase on or
after the 1994 Cash Interest Date. There can be no
assurance that the Company would have the financial
resources necessary or otherwise be able to repurchase
the 1994 Notes upon a Change of Control. Furthermore,
a Change of Control, which could occur (among other
reasons) if any Person (other than a Permitted Holder)
or Group beneficially owns at least 45% of the
aggregate voting power of all Equity Securities of the
Company or has elected a majority of the Board of
Directors of the Company, would enable holders of the
1995 Notes and the 1997 Notes to exercise a similar
right to require the Company to repurchase the 1995
Notes and the 1997 Notes, and would enable holders of
the 1998 Notes to exercise a similar right to require
Diamond Holdings to repurchase the 1998 Notes. The
simultaneous exercise of these rights would make it
less likely that the Company would be able to fulfill
its obligation to repurchase the 1994 Notes. See
"Description of 1994 Notes -- Certain Covenants --
Change of Control" and "Risk Factors -- Holding
Company Structure; Liens on Assets".
Original Issue
Discount........... The 1994 Notes were initially sold at an issue price
that represented an original issue discount for U.S.
federal income tax purposes. Thus, although cash
interest is not payable on the 1994 Notes prior to
the 1994 Cash Interest Date, original issue discount
(i.e., the difference between the principal and
interest payable on the 1994 Notes and their issue
price) will accrete from the issue date of the 1994
Notes and will be included as ordinary income
(including for periods ending prior to the 1994 Cash
Interest Date) for United States federal income tax
purposes in advance of receipt of the cash payments
to which the income is attributable. The amount
includible in income by a particular investor will
depend on the price paid by the investor for the 1994
Notes. See "Taxation -- United States -- Original
Issue Discount".
7
<PAGE> 9
Certain Covenants...... The 1994 Notes Indenture contains certain covenants
which, among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined) to
(i) incur additional Debt or issue Disqualified Equity;
(ii) pay dividends or make distributions in respect of
the Company's capital stock or make certain other
restricted payments; (iii) create certain liens or
enter into certain sale and leaseback transactions;
(iv) engage in certain transactions with Affiliates or
Related Persons; or (v) sell certain assets. In
addition, the 1994 Notes Indenture limits the ability
of the Company to consolidate, merge or sell all or
substantially all of its assets. These covenants are
subject to a number of important exceptions and
qualifications, and there can be no assurance that
these covenants will protect the holders of the 1994
Notes from developments that may adversely affect the
Company's ability to meet its obligations on the 1994
Notes. See "Description of the 1994 Notes".
Form of Notes.......... The 1994 Notes were issued initially as a global
security in bearer form without coupons, which was
issued in an aggregate principal amount at maturity
equal to 100% of the aggregate principal amount at
maturity of all 1994 Notes issued under the 1994 Notes
Indenture and is held by The Bank of New York, as
Book-Entry Depositary. Beneficial interests in the
1994 Global Note are shown on, and transfers thereof
will be effected only through, records maintained in
book-entry form by DTC (with respect to its
participants). Ownership of the Book-Entry Interests
is limited to persons that have accounts with DTC
("Participants") or persons that may hold interests
through Participants ("Indirect Participants"),
including Morgan Guaranty Trust Company of New York,
as operator of the Euroclear System ("Euroclear") and
Cedel Bank, societe anonyme ("Cedel").
Except as set forth under "Description of 1994 Notes",
Participants or Indirect Participants are not entitled
to receive physical delivery of 1994 Notes in
definitive form or to have 1994 Notes issued and
registered in their names and are not considered the
owners or holders thereof under the 1994 Notes
Indenture.
Global Clearance and
Settlement............. Book-Entry Interests trade in DTC's Same-Day Funds
Settlement System. Any secondary market trading of
Book-Entry Interests is expected to occur through
Participants and settle in same-day funds. See
"Description of the 1994 Notes -- Settlement".
For additional information concerning the 1994 Notes and the definitions
of certain capitalized terms used above, see "Description of the 1994 Notes".
8
<PAGE> 10
THE 1995 NOTES
Notes Offered.......... 11 3/4% Senior Discount Notes due December 15, 2005
(the "1995 Notes").
Price.................. Negotiated prices related to prevailing market prices
at the time of sale.
Maturity Date.......... December 15, 2005.
Use of Proceeds........ The Company will not receive any proceeds from
secondary sales of the 1995 Notes.
Yield and Interest..... 11 3/4% per annum (computed on a semi-annual bond
equivalent basis) calculated from December 15, 1995.
Cash interest will not be payable on the 1995 Notes
prior to December 15, 2000 (the "1995 Cash Interest
Date"). Thereafter, cash interest on the 1995 Notes
will be payable, at a rate of 11 3/4% per annum, semi-
annually on each June 15 and December 15, commencing
June 15, 2001. For U.S. federal income tax purposes,
purchasers of the 1995 Notes will be required to
include amounts in gross income in advance of the
receipt of the cash payments to which the
income is attributable.
Ranking................ The 1995 Notes constitute senior unsecured
indebtedness of the Company. The Company has not
issued, and does not have any current plans to issue,
any significant indebtedness that will be subordinated
to the 1995 Notes.
The 1995 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 1995 Notes
effectively rank junior to the 1998 Notes in that funds
will be available from the Company's subsidiaries,
including Diamond Holdings, to the Company only through
payment of dividends, if any, or payment of principal
and interest on currently outstanding intercompany
indebtedness which will be subordinated to the 1998
Notes. The 1995 Notes rank pari passu with the 1994
Notes, the 1997 Notes and the Guarantee. See "Risk
Factors -- Holding Company Structure; Liens on Assets".
Optional Redemption.... The 1995 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
herein, plus accrued and unpaid interest, if any, to
the date of redemption. See "Description of the 1995
Notes -- Redemption -- Optional Redemption".
Tax Redemption......... In the event of certain changes affecting withholding
taxes applicable to certain payments on the 1995 Notes,
the 1995 Notes are redeemable, as a whole, but not in
part, at the election of the Company, at any time at
the Accreted Value thereof, or, if such redemption is
to occur on or after the 1995 Cash Interest Date, at
100% of the principal amount at maturity thereof, plus
accrued and unpaid interest, if any, to the date
of redemption. See "Description of the 1995 Notes --
Redemption -- Optional Tax Redemption".
9
<PAGE> 11
Change of Control...... Upon a Change of Control, each holder of the 1995 Notes
will have the right to require the Company to
repurchase such holder's 1995 Notes at 101% of the
Accreted Value thereof in the case of any such
repurchase prior to the 1995 Cash Interest Date or 101%
of the principal amount at maturity thereof plus
accrued and unpaid interest, if any, to the date of
repurchase, in the case of any such repurchase on or
after the 1995 Cash Interest Date. There can be no
assurance that the Company would have the financial
resources necessary or otherwise be able to
repurchase the 1995 Notes upon a Change of Control.
Furthermore, a Change of Control, which could occur
(among other reasons) if any Person (other than a
Permitted Holder) or Group beneficially owns at least
45% of the aggregate voting power of all Equity
Securities of the Company or has elected a majority
of the Board of Directors of the Company, would
enable holders of the 1994 Notes and the 1997 Notes
to exercise a similar right to require the Company to
repurchase the 1994 Notes and the 1997 Notes and would
enable holders of the 1998 Notes to exercise a
similar right to require Diamond Holdings to
repurchase the 1998 Notes. The simultaneous exercise
of these rights would make it less likely that the
Company would be able to fulfill its obligation to
repurchase the 1995 Notes. See "Description of
the 1995 Notes -- Certain Covenants -- Change of
Control" and "Risk Factors -- Holding Company
Structure; Liens on Assets".
Equity Commitment...... The Indenture relating to the 1995 Notes provided that
an event of default would occur under the Indenture if
the Company did not receive an aggregate of $100
million or more in gross cash proceeds from the
issuance of new equity prior to June 30, 1996, subject
to certain exceptions. In accordance with this
provision, prior to June 30, 1996, the Company's
existing investors subscribed to new equity capital
in an amount of $100 million.
Original Issue Discount The 1995 Notes were initially sold at an issue price
that represented an original issue discount for U.S.
federal income tax purposes. Thus, although cash
interest will not be payable on the 1995 Notes prior
to the 1995 Cash Interest Date, original issue
discount (i.e., the difference between the principal
and interest payable on the 1995 Notes and their
issue price) will accrete from the issue date of the
1995 Notes and will be included as ordinary income
(including for periods ending prior to the 1995 Cash
Interest Date) for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. The amount includible in
income by a particular investor will depend on the
price paid by the investor for the 1995 Notes.
See "Taxation -- United States -- Original
Issue Discount".
10
<PAGE> 12
Certain Covenants...... The 1995 Notes Indenture contains certain covenants
which, among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined) to
(i) incur additional Debt or issue Disqualified Equity;
(ii) pay dividends or make distributions in respect of
the Company's capital stock or make certain other
restricted payments; (iii) create certain liens or
enter into certain sale and leaseback transactions;
(iv) engage in certain transactions with Affiliates or
Related Persons; or (v) sell certain assets. In
addition, the 1995 Notes Indenture limits the ability
of the Company to consolidate, merge or sell all or
substantially all of its assets. These covenants are
subject to a number of important exceptions and
qualifications, and there can be no assurance that
these covenants will protect the holders of the 1995
Notes from developments that may adversely affect the
Company's ability to meet its obligations on the 1995
Notes. See "Description of the 1995 Notes".
Form of Notes.......... The 1995 Notes were issued initially as a global
security in bearer form without coupons, which was
issued in an aggregate principal amount at maturity
equal to 100% of the aggregate principal amount at
maturity of all 1995 Notes issued under the 1995 Notes
Indenture and is held by The Bank of New York, as
Book-Entry Depositary. Beneficial interests in the 1995
Global Note are shown on, and transfers thereof will be
effected only through, records maintained in book-entry
form by DTC (with respect to its participants).
Ownership of the Book-Entry Interests is limited to
persons that have accounts with DTC ("Participants") or
persons that may hold interests through Participants
("Indirect Participants"), including Morgan Guaranty
Trust Company of New York, as operator of the Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme
("Cedel").
Except as set forth under "Description of the 1995
Notes", Participants or Indirect Participants are not
entitled to receive physical delivery of 1995 Notes in
definitive form or to have 1995 Notes issued and
registered in their names and are not considered the
owners or holders thereof under the 1995 Notes
Indenture.
Global Clearance and
Settlement............. Book-Entry Interests trade in DTC's Same-Day Funds
Settlement System. Any secondary market trading of
Book-Entry Interests is expected to occur through
Participants, including Euroclear and Cedel, and settle
in same-day funds. See "Description of the 1995 Notes
-- Settlement".
For additional information concerning the 1995 Notes
and the definitions of certain capitalized terms used
above, see "Description of the 1995 Notes".
11
<PAGE> 13
THE 1997 NOTES
Notes Offered....... 10 3/4% Senior Discount Notes due February 15, 2007
(the "1997 Notes").
Price............... Negotiated prices related to prevailing market prices at
the time of sale.
Maturity Date....... February 15, 2007.
Use of Proceeds..... The Company will not receive any proceeds from secondary
sales of 1997 Notes.
Yield and Interest.. 10 3/4% per annum (computed on a semi-annual bond
equivalent basis) calculated from February 27, 1997.
Cash interest will not be payable on the 1997 Notes
prior to February 15, 2002 (the "1997 Cash Interest
Date"). Thereafter, cash interest on the 1997 Notes will
be payable, at a rate of 10 3/4% per annum, semi-annually
on each February 15 and August 15, commencing August
15, 2002. For U.S. federal income tax purposes,
purchasers of the Discount Notes will be required to
include amounts in gross income in advance of the
receipt of the cash payments to which the income is
attributable.
Ranking............. The 1997 Notes constitute senior unsecured indebtedness of
the Company. The Company has not issued, and does not have
any current plans to issue, any significant indebtedness
that will be subordinated to the 1997 Notes.
The 1997 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 1997 Notes effectively rank junior to
the 1998 Notes in that funds will be available from the
Company's subsidiaries, including Diamond Holdings, to the
Company only through payment of dividends, if any, or
payment of principal and interest on currently outstanding
intercompany indebtedness which will be subordinated to
the 1998 Notes. The 1997 Notes rank pari passu with the
1994 Notes, the 1995 Notes and the Guarantee. See "Risk
Factors -- Holding Company Structure; Liens on Assets".
Optional Redemption The 1997 Notes are redeemable, in whole or in part,
at the option of the Company at any time on or after
February 15, 2002 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the date of redemption. See "Description of the
1997 Notes -- Redemption -- Optional Redemption".
Tax Redemption...... In the event of certain changes affecting withholding
taxes applicable to certain payments on the 1997 Notes,
the 1997 Notes are redeemable, as a whole, but not in
part, at the election of the Company, at any time at the
Accreted Value thereof, or, if such redemption is
to occur on or after the 1997 Cash Interest Date, at
100% of the principal amount at maturity thereof,
plus accrued and unpaid interest, if any, to the date of
redemption. See "Description of the 1997 Notes --
Redemption -- Optional Tax Redemption".
12
<PAGE> 14
Change of Control... Upon a Change of Control, each holder of the 1997 Notes
will have the right to require the Company to repurchase
such holder's 1997 Notes at 101% of the Accreted Value
thereof in the case of any such repurchase prior to the
1997 Cash Interest Date or 101% of the principal amount at
maturity thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. There can be no assurance
that the Company would have the financial resources
necessary or otherwise be able to repurchase the 1997
Notes upon a Change of Control. Furthermore, a Change of
Control, which could occur (among other reasons) if any
Person (other than a Permitted Holder) or Group
beneficially owns at least 45% of the aggregate voting
power of all Equity Securities of the Company or has
elected a majority of the Board of Directors of the
Company, would enable holders of the 1994 Notes and the
1995 Notes to exercise a similar right to require the
Company to repurchase the 1994 Notes and the 1995 Notes
and would enable holders of the 1998 Notes to exercise a
similar right to require Diamond Holdings to repurchase
the 1998 Notes. The simultaneous exercise of these rights
would make it less likely that the Company would be able
to fulfill its obligation to repurchase the 1997 Notes.
See "Description of the 1997 Notes -- Certain Covenants --
Change of Control" and "Risk Factors -- Holding Company
Structure; Liens on Assets".
Original Issue
Discount............ The 1997 Notes were initially sold at an issue price that
represents an original issue discount for U.S. federal
income tax purposes. Thus, although cash interest will
not be payable on the 1997 Notes prior to the 1997 Cash
Interest Date, original issue discount (i.e., the
difference between the principal and interest payable on
the 1997 Notes and their issue price) will accrete from
the issue date of the 1997 Notes and will be included as
ordinary income (including for periods ending prior to the
1997 Cash Interest Date) for U.S. federal income tax
purposes in advance of receipt of the cash payments to
which the income is attributable. See "Taxation -- United
States -- Original Issue Discount".
Certain Covenants... The 1997 Notes Indenture contains certain covenants
which, among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined) to
(i) incur additional Debt or issue Disqualified
Equity; (ii) pay dividends or make distributions in
respect of the Company's capital stock or make
certain other restricted payments; (iii) create certain
liens or enter into certain sale and leaseback
transactions; (iv) engage in certain transactions with
Affiliates or Related Persons; or (v) sell certain
assets. In addition, the 1997 Notes Indenture
limits the ability of the Company to consolidate, merge
or sell all or substantially all of its assets.
These covenants are subject to a number of important
exceptions and qualifications, and there can be no
assurance that these covenants will protect the
holders of the 1997 Notes from developments that
may adversely affect the Company's ability to meet its
obligations on the 1997 Notes. See "Description of the
1997 Notes".
13
<PAGE> 15
Form of Notes....... The 1997 Notes were issued initially as two global
securities in bearer form without coupons, which are
held by The Bank of New York, as Book-Entry Depositary.
Book-Entry Interests in the 1997 Global Notes
will be shown on; and transfers thereof will be
effected only through, records maintained in
book-entry form by DTC (with respect to its participants).
Ownership of the Book-Entry Interests is limited to
persons that have accounts with DTC ("Participants") or
persons that may hold interests through Participants
("Indirect Participants"), including Morgan Guaranty Trust
Company of New York, as operator of the Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("Cedel").
Except as set forth under "Description of the 1997 Notes",
Participants or Indirect Participants are not entitled to
receive physical delivery of 1997 Notes in definitive
form or to have Discount Notes issued and registered in
their names and are not considered the owners or holders
thereof under the 1997 Notes Indenture.
Global Clearance and
Settlement.......... Book-Entry Interests will trade in DTC's Same-Day Funds
Settlement System. Any secondary market trading of
Book-Entry Interests is expected to occur through
Participants, including Euroclear and Cedel, and
settle in same-day funds. See "Description of the
1997 Notes -- Description of Book-Entry System --
Settlement".
For additional information regarding the 1997 Notes and definitions of
certain capitalized terms used above, see "Description of the 1997 Notes" and
"Taxation -- United States".
14
<PAGE> 16
SUMMARY FINANCIAL DATA
The summary consolidated financial data for the Group at and for the years
ended December 31, 1995, 1996 and 1997 set forth below should be read in
conjunction with, and are qualified in their entirety by reference to, Item 6.
"Selected Financial Data", Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and the Consolidated Financial
Statements and related Notes which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
_________________________________________
1995(1) 1996 1997 1997(2)
________ ________ ________ _______
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business telecommunications L. 5,852 L. 9,763 L. 14,208 $23,339
Residential telephone 6,662 17,723 29,495 48,452
Cable television 3,479 10,091 16,602 27,272
Other revenues -- -- -- --
_________ _________ _________ ________
Total revenues 15,993 37,577 60,305 99,063
Operating costs and expenses:
Telephone (5,454) (9,776) (12,088) (19,857)
Programming (1,844) (6,041) (9,749) (16,015)
Selling, general and
administrative (13,020) (22,391) (27,192) (44,668)
Depreciation and amortization (8,867) (21,380) (27,620) (45,371)
_________ _________ ________ ________
Total operating costs
and expenses (29,185) (59,588) (76,649) (125,911)
_________ _________ _________ ________
Operating loss (13,192) (22,011) (16,344) (26,848)
Interest income 3,887 3,441 6,440 10,579
Interest expense, and
amortization of debt discount
and expenses (17,118) (40,334) (66,367) (109,021)
Foreign exchange gains/(losses)
net 925 31,018 (12,555) (20,624)
Unrealized gains/(losses) on
derivative financial instruments (868) (7,944) 669 1,099
Other expenses (1,241) _ _ _
Realized gains on derivative
financial instrument _ _ 11,553 18,978
_________ _________ _________ ________
Loss before income taxes (27,607) (35,830) (76,604) (125,837)
Income taxes _ _ _ _
_________ _________ _________ _________
Net loss L.(27,607) L.(35,830) L.(76,604) $(125,837)
_________ _________ _________ _________
_________ _________ _________ _________
BALANCE SHEET DATA:
Property and equipment, net L.163,721 L.277,301 L.365,636 $600,630
Total assets 374,172 416,819 556,357 913,928
Total debt(3) 319,492 325,041 545,325 895,805
Shareholders' equity(4) 25,133 54,100 (22,511) (36,978)
OTHER DATA:
EBITDA(5) L. (5,566) L. (631) L. 11,276 $18,523
Net cash (used in)/provided by
operating activities (4,113) (1,348) 20,876 34,293
Net cash used in investing
activities (155,517) (128,210) (110,086) (180,838)
Net cash provided by financing
activities 212,202 54,428 146,586 240,797
Deficiency of earnings to
fixed charges(6) (27,607) (35,830) (76,604) (125,837)
Capital expenditures 136,314 130,140 111,252 182,754
</TABLE>
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
$1.6427 = pounds sterling 1.00, the Noon Buying Rate on December 31, 1997.
(3) Total debt at December 31, 1994 consisted of the accreted value of the
1994 Notes and capital lease obligations. Total debt at December 31, 1995
and 1996 and at September 30, 1996 consisted of the accreted value of the
1994 Notes, the accreted value of the 1995 Notes and capital lease
obligations and the mortgage loan, and total debt at December 31, 1997
included in addition to such indebtedness the accreted value of the 1997
Notes.
(4) The Group raised additional equity financing of pounds sterling 40.4
million, pounds sterling 27.0 million and pounds sterling 64.6 million in
the years ended December 31, 1994, 1995 and 1996, respectively.
(5) Earnings before interest, taxes, depreciation and amortization, foreign
exchange translation gains and losses, and realized and unrealized gains
and losses on derivative financial instruments ("EBITDA") is presented
because it is a widely accepted financial indicator of a leveraged
company's ability to service and incur indebtedness. EBITDA is not,
however, a measure of financial performance under GAAP, may not be
comparable to other similarly titled measures of other companies and should
not be considered as a substitute for net income as a measure of operating
results or for cash flows as a measure of liquidity. EBITDA for 1995
includes the costs of pounds sterling 1.24 million incurred in an abandoned
equity flotation.
(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 Group 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.
15
<PAGE> 17
RISK FACTORS
An investment in the Discount Notes is subject to a number of risks, which,
together with the other information set forth in this Prospectus, should be
considered carefully by prospective investors prior to any purchase of Discount
Notes.
REQUIREMENT FOR ADDITIONAL FUNDS
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
LDLs to construct and activate a network passing an aggregate of 1,021,894
premises within prescribed time periods. Failure by the Group to meet its
milestones could potentially subject the Group to enforcement orders from the
Office of Telecommunications ("OFTEL") or the ITC, which could lead to
revocation of the relevant licenses or a shortening of an LDL period or fines.
The Group met the required quarterly milestone obligations under each of its
telecommunications licenses as at December 31, 1997. Principally because of
delays by the Department of Trade and Industry in granting the Group a national
telecommunications license, and consequent delays in the commencement of
construction, the Group did not meet its current LDL milestones in six of its
seven LDL franchises. The Group has applied to the ITC to modify its milestone
obligations in all of its LDL franchise areas except Vale of Belvoir. The
Group understands that the ITC intends to grant the requested modifications.
The Group expects that its 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
Group expects the network to be substantially completed by the end of 2001. The
Group currently estimates that the additional capital expenditures from December
31, 1997 required for the Group to complete construction sufficient to satisfy
its aggregate milestone obligations of approximately 1.02 million premises
(including estimated subscriber connection expenses) will be approximately
pounds sterling 435 million, although further capital expenditures would be
required to substantially complete the network. These expenditures could vary
significantly depending on the number of customers actually connected to the
network, the availability of construction resources and a number of other
factors described below. See Item 1. "Business -- Milestones".
At December 31, 1997, the Group had constructed and activated a network
comprising approximately 52% of its aggregate milestones. The Group estimates
that the net proceeds from the sale of the 1998 Notes, existing cash resources
and future cash flows from operations will be sufficient to complete the
construction and activation of its network to almost 84% of its aggregate final
milestones, which level the Group estimates it will achieve by the end of 1999.
Thereafter, the Group will be required to obtain further debt and/or equity
financing to complete construction sufficient to satisfy its aggregate
milestones. To the extent that (i) the amounts required to construct the Group's
network to meet its milestones exceed the estimates, (ii) the Group's cash flow
does not meet expectations or (iii) the Group continues its construction of the
network beyond its milestone obligations, the amount of further debt and/or
equity financing required will increase. There can be no assurance that any such
debt or equity financing will be available to the Group on acceptable commercial
terms or at all.
The foregoing information with regard to expected completion times,
further capital expenditures and the sufficiency of funding is forward-looking
in nature. Due to a number of factors, including those identified in the
preceding paragraph and below, actual results may differ materially from
expected results. In particular, the anticipated further funding requirements
will depend upon the Group's cash flow which, in turn, will depend upon a
number of variables, including revenue generated from business
telecommunications, residential telephone and cable television services, churn,
expenses such as programming costs and interconnect charges, network
construction and development expenditures and financing costs. See
"--Historical Operating Losses". Adverse developments in any of these or other
areas could adversely affect the Group's cash flow. For example, the
reorganization of the Group's residential sales force in 1997 resulted in some
delays in the progress of marketing during the transitional phase and reduced
revenue growth in the short term as the new sales force has developed.
Moreover, there can be no assurance that (i) conditions precedent to the
availability of funds under any future 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, each of which factors would
increase the Group's funding needs.
To date, the Group has funded its capital expenditure requirements
primarily through the proceeds from the issuance of its Discount 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 "--Requirement to Meet Build Milestones" and Item 1. "Business --
Certain Regulatory Matters -- Cable Telecommunications".
16
<PAGE> 18
ABILITY TO MANAGE NETWORK DEVELOPMENT AND EXPANSION
As of December 31, 1997, the Group's cable television and
telecommunications network had passed by civils construction approximately
536,100 homes and an estimated 26,900 businesses, of which portions of the
network passing approximately 508,800 homes and an estimated 24,900 businesses
had been activated. During 1996 and 1995, over 172,000 and 173,000 homes,
respectively, were passed by civils construction by the Group's cable network,
as compared with approximately 27,000 homes passed by civils construction in
1994. During 1997, the Group intentionally slowed the pace of civils
construction to reduce the large number of homes passed by civils construction
which were yet to be activated and/or marketed. The pace of civils construction
was also impacted by the phase out of one of the Group's largest contractors,
which went into liquidation. The Group may encounter difficulty in obtaining
other qualified contractors and may encounter cost overruns or further delays
in construction. Although the Group believes it will be able to continue to
negotiate construction contracts at competitive rates, construction costs could
increase significantly over the next few years in light of the demand for cable
construction services as the industry seeks to meet milestone requirements. As
with other U.K. cable operators, the Group is generally required to use
underground construction, which is more expensive and time consuming than
aerial construction. The Group cannot broadly employ mechanized construction
methods due to existing underground utility infrastructure, and is responsible
for the expense of restoring surface area after construction is completed.
Given the current high levels of cable construction in the U.K. and the
corresponding demand for materials, the Group has from time to time experienced
(and may in the future experience) shortages or price increases for critical
components such as fiber optic cable, ducting and cabinets.
The Group has experienced and expects to continue to experience a
substantial increase in customers subscribing to its services, which has placed
significant strains on the operational resources and financial controls of the
Group. These strains have in certain cases affected the level of customer
service provided by the Group, and the time periods required between
activation, the commencement of marketing and the installation of services. The
Group's subscriber management system is in the process of being substantially
upgraded in order to handle the expected increase in customers. The Group is
also reviewing its internal procedures and subscriber management system with a
view to improving their reliability and reducing the number of transactions
required to be input into the system manually. There can be no assurance,
however, that the Group will successfully implement an improved subscriber
management system or that the Group will not continue to experience
difficulties with it. Management of the Group's growth will also require
continued development of the Group's other operating and financial controls and
may place additional stress on the Group'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.
HISTORY OF CABLE TELECOMMUNICATIONS AND CABLE TELEVISION IN THE U.K.; CUSTOMER
ACCEPTANCE
Cable telecommunications and cable television have a relatively limited
history in the U.K. To date, the U.K. cable industry (including the Group) has
experienced lower levels of penetration of television services than were
originally predicted by most industry analysts. This has been offset to some
extent by higher than forecast telephone penetration. The Group's future
profitability, however, depends in large measure on continued acceptance of the
Group's customer base, including through improved market acceptance of cable
telephone and television services.
The Group has to date experienced significant annual cable television
subscriber churn. The Group's cable television subscriber churn rate was 32.7%
for the year to December 31, 1997 (36.9% using the Group's previous methodology
described above in Note 13 to the table under Item 1. "Business -- Certain
Operating Data".) The Group continues to focus on ways it can reduce churn.
However, there can be no assurance that such efforts will successfully reduce
churn levels or that the Group will not experience higher churn levels in the
future, which could have a material adverse effect on the Group's results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview".
SIGNIFICANT COMPETITION
The Group faces significant competition from established competitors in
each of its business telecommunications, residential telephone and cable
television business areas. The Company believes that competition will continue
to intensify in each of these business areas.
BUSINESS TELECOMMUNICATIONS
The Group competes primarily with British Telecommunications plc ("BT") and
a number of other competitors, the largest of which is Cable and Wireless
Communications plc ("CWC") (which owns 100% of what was formerly Mercury
Communications Limited ("Mercury")), in providing business telecommunications
services to businesses in its franchise areas. The Group competes largely on the
basis of quality of services offered and, to a lesser extent, price. BT, the
former state-owned telephone monopoly, and CWC each have resources substantially
greater than those of the Group. In addition, each of CWC and BT has a national
presence which may permit it to offer telecommunications, data transmission and
other services on a nationwide basis to business telecommunications customers
with nationwide operations beyond those that the Group is currently able to
offer on its own. With effect from May 1997, Mercury was
17
<PAGE> 19
merged with three U.K. regional cable companies, NYNEX CableComms Group plc,
Bell Cablemedia plc and Videotron Holdings plc, to create a new group held by
CWC, which is a 52.6% owned subsidiary of Cable and Wireless plc. While the
effects of the merger cannot be predicted, the Group does not believe that the
merger has had a material effect on the Group's competitive position in the
Group's franchise areas. The Group, however, expects that competition with CWC
and BT and other service providers entering the business telecommunications
market, such as Energis plc ("Energis"), AT&T, MFS Worldcom and ACC Long
Distance, will continue to intensify. See Item 1. "Business -- Competition --
Business Telecommunications".
RESIDENTIAL TELEPHONE
The Group's principal competitor in providing telephone services to
residential customers is BT, which has an established market presence, fully
built networks and resources substantially greater than those of the Group. As
the substantial majority of U.K. residential telephone customers are currently
customers of BT, the Group's growth in residential telephone services depends
upon BT customers changing to the Group's telephone system. The Group believes
that price is currently one of the most important factors influencing the
decision of U.K. customers to switch to a cable telephone service. As a result,
the Group currently seeks to provide its telephone customers with monthly
savings on the cost of calls compared to BT. BT regularly reviews its prices,
generally resulting in price reductions. The Group has generally reacted to
previous BT price reductions by reducing its rates in order to maintain its
competitive price advantage. The Group believes that BT will be required for
regulatory and competitive reasons to continue to reduce its prices for most
residential customers in the future. See Item 1. "Business -- Competition --
Residential Telephone" and "Certain Regulatory Matters -- Cable
Telecommunications -- Price Regulation". There can be no assurance that such
price cuts will not adversely affect the residential telephone operations of
the Group or that the Group will be able to continue to offer customers cost
savings as compared to BT. The Group also competes, to a lesser extent, with
CWC and Ionica in providing residential telephone service.
In addition to BT, CWC and Ionica, the Group competes in the telephone
business with mobile telecommunications operators, international service
providers and other service providers, and competition is expected to intensify
in the future. See Item 1. "Business -- Competition -- Residential Telephone."
CABLE TELEVISION
The Group competes directly with television programming provided by
terrestrial (over-the-air) broadcast television stations and direct-to-home
("DTH") satellite services and may be subject to competition from satellite
master antenna television systems ("SMATV" systems). The Group's cable
television programming also competes to varying degrees with other
entertainment media, including home video (generally video rentals). See Item
1. "Business -- Competition -- Cable Television".
A number of recent developments are expected to increase competition in
the provision of multichannel television in the U.K. First, it has been
announced that BSkyB (as defined below) intends to introduce a digital DTH
satellite service, offering the possibility of over 200 television channels and
a range of interactive services in June 1998. Second, licenses have been
granted for six frequency ranges capable of providing a total of 30 or so new
digital terrestrial television channels which may broadcast to between 60% and
90% of the U.K. population. British Digital Broadcasting Limited ("BDB"), a
joint venture between two of the U.K.'s largest independent terrestrial
television companies, Carlton Communications plc and Granada Group plc, has a
license for three of these frequency ranges to operate digital terrestrial
television services, and is currently expected to commence digital terrestrial
television services in September 1998. BSkyB was originally a participant in
the joint venture, but withdrew at the request of the ITC. BSkyB will
nonetheless supply content to BDB. See "--Limitations on Access to
Programming". Third, BSkyB announced a joint venture with BT, Midland Bank and
Matsushita called British Interactive Broadcasting to develop and market a
digital set top decoder on a heavily subsidized basis. Fourth, on December 1,
1997, BSkyB launched a movie pay-per-view service broadcast on four of BSkyB's
satellite channels. CWC has entered into a two year contract with BSkyB to
carry this pay-per-view service. While the effect of these developments cannot
yet be determined and may not be known for some time, increases in the number
of competing television service and interactive services providers, in
particular providers with programming, financial and other resources greater
than those of the Group, or in the number of channels or the attractiveness of
the programming offered by digital terrestrial or DTH satellite services could
have an adverse effect upon the Group's ability to compete effectively. See
Item 1. "Business -- Competition -- Cable Television" and "--Certain Regulatory
Matters -- Future Developments -- Digital Broadcasting". Further, the Group may
face competition in the future from programming provided by video-on-demand
services and from other services provided using new technologies. See Part 1.
"Business -- Certain Regulatory Matters -- Cable Telecommunications --
Restrictions on National PTOs".
POTENTIAL ADVERSE CONSEQUENCES OF FINANCIAL LEVERAGE
The Group is highly leveraged. At December 31, 1997, the Group had
approximately pounds sterling 545 million of indebtedness outstanding, including
approximately pounds sterling 535 million in accreted value of the Discount
Notes. The 1998 Notes and any further indebtedness incurred by the Group to
fund its capital or operating requirements, will increase
18
<PAGE> 20
further the amount of debt outstanding at the Group. The indentures governing
the Group's outstanding Discount Notes as well as the indenture governing the
1998 Notes permit the Group to incur substantial additional indebtedness to
fund the build out and operation of the Group's telecommunications and cable
franchises. The ability of the Group to make scheduled payments under present
and future indebtedness will depend on, among other things, the ability of the
obligors on the relevant debt to complete the build out of the franchises on a
timely and cost effective basis, the Group's ability to access the earnings of
its subsidiaries (which may be subject to significant contractual and legal
limitations), the future operating performance of the Group and the Group's
ability to refinance its indebtedness, when necessary. Each of these factors is
to a large extent subject to economic, financial, competitive, regulatory and
other factors that are beyond the Group's control. In addition, any future
borrowings may contain covenants which may further limit the Group's operating
and financial flexibility.
The degree of the Group's leverage could have important consequences to
holders of the Discount Notes, including (i) increasing the Group's
vulnerability to adverse general economic and industry conditions; (ii) limiting
the Group's ability to obtain additional financing to fund future working
capital needs, capital expenditures, acquisitions or other general corporate
purposes, including the build out of the franchises; (iii) requiring a
substantial portion of the Group's cash flow from operations to be dedicated to
debt service requirements, thereby reducing the funds available for operations
and future business opportunities; (iv) increasing the Group's exposure to
increases in interest rates given that certain of the Group's future borrowings
may be at variable rates of interest; and (v) increasing the Group's exposure to
changes in currency exchange rates given that a significant portion of the
Group's current borrowings are denominated in U.S. dollars. In addition, the
Group may under certain circumstances be obligated to offer to repurchase its
outstanding debt securities prior to maturity and there can be no assurance that
the Group will have the financial resources necessary or otherwise be able to
repurchase those securities in such circumstances.
HOLDING COMPANY STRUCTURE; LIENS ON ASSETS
The Company is a holding company that conducts substantially all of its
business through subsidiaries, including Diamond Holdings, the issuer of the
1998 Notes, and DCL, its principal operating subsidiary. The ability of the
Company and its creditors, including holders of the Discount Notes, to benefit
in the distribution of any assets of any of the Company's subsidiaries upon any
liquidation of any such subsidiary will be subject to the prior claims of the
subsidiary's creditors, including trade creditors and, to the extent that such
subsidiary is not directly owned by the Company, to the prior claims of any
creditors of other subsidiaries directly or indirectly owning such subsidiary.
The ability of the Company to pay interest on the Discount Notes or to repay the
Discount Notes at maturity or otherwise, will depend upon the cash flows of its
subsidiaries and the payment of funds by those subsidiaries to the Company in
the form of repayment of loans, dividends or otherwise. The Company's
subsidiaries have no obligation, contingent or otherwise, to pay amounts due
pursuant to the Discount Notes or to make funds available therefor. In addition,
the Company's direct subsidiary, Diamond Holdings, is restricted in its ability
to pay dividends to the Company under the terms of the indenture related to the
1998 Notes, and the Company's other principal subsidiaries are prevented from
paying dividends by capital lease arrangements entered into by those
subsidiaries. Further, applicable English law limits the amount of dividends
which may be paid by the Company's subsidiaries to the extent they do not have
profits available for distribution, and other statutory and general law
obligations affect the ability of directors of the Company's subsidiaries to
declare dividends and the ability of the Company's subsidiaries to make payments
to the Company on account of intercompany loans. In addition, the ability of the
Company and its creditors, including holders of the Discount Notes, to benefit
from distributions of assets of the Company's subsidiaries may be limited to the
extent that the outstanding shares of any of its subsidiaries are pledged to
secure other debt of the Company or its subsidiaries. The indentures under which
the Discount Notes have been issued and the indenture governing the 1998 Notes
limit, but do not prohibit, the incurrence of additional indebtedness by the
Company's subsidiaries. Such subsidiaries are expected to incur substantial
additional indebtedness in the future, particularly in connection with the build
out of the Group's network infrastructure. See "-- Requirement for Additional
Funds".
A substantial portion of the Group's existing and future indebtedness
(other than the Discount Notes and the 1998 Notes) may be secured by liens over
the assets and shares of certain of the Company's subsidiaries. The principal
fixed assets of the Company's subsidiaries are cable headends, cable television
and telecommunications distribution equipment, telecommunications switches and
customer equipment. The value of a substantial portion of these fixed assets is
derived from their employment in the Group's cable television and
telecommunications businesses. These assets are highly specialized and, taken
individually, can be expected to have limited marketability. Consequently, in
the event that secured creditors seek to realize on the collateral securing debt
of the Company's subsidiaries, these creditors would be likely to seek to sell
the business as a going concern (possibly through a sale of pledged shares of
subsidiaries), either in its entirety, or by franchise or other business unit,
in order to maximize the proceeds realized. The amounts (and the timing of the
receipt of any amounts) available to satisfy the Company's obligations under the
Discount Notes after any such sale may be adversely affected by provisions of
U.K. insolvency laws favoring secured creditors.
19
<PAGE> 21
HISTORICAL OPERATING LOSSES
The Group had incurred aggregate operating and net losses, from
commencement of operations through December 31, 1997 of approximately pounds
sterling 77.1 million and pounds sterling 182.1 million, respectively, which
includes on a pro forma basis aggregate operating and net losses of pounds
sterling 13.3 million and pounds sterling 23.8 million respectively for LCL
incurred prior to its acquisition in September 1995. Although the Group believes
that the continued expansion of its network ultimately will provide the Group
with revenues that will exceed its operating expenses, the Group expects to
continue to incur additional net losses for the foreseeable future and there can
be no assurance that the Group's operations will become profitable. The Group's
ability to achieve profitability will depend in large measure on its ability to
attract a sufficient number of customers subscribing to its services, permitting
its relatively fixed costs to decline in relation to the number of customers and
as a percentage of revenues. See "-- History of Cable Telecommunications and
Cable Television in the U.K.; Customer Acceptance". Failure to become profitable
or generate sufficient positive operating cash flows would impact the Group's
ability to sustain operations and obtain required additional funds. See "--
Requirement for Additional Funds" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
POTENTIAL CHANGES IN GOVERNMENT REGULATION
The activities of cable television and telecommunications operators in the
U.K. are subject to significant regulation and supervision by various
regulatory bodies. See Item 1. "Business -- Certain Regulatory Matters".
Changes in laws, regulations or government policy (or in the interpretation of
existing laws or regulations) affecting the Group, its competitors or the
industry generally, such as licensing requirements, price regulation,
interconnection arrangements, the imposition of universal service obligations,
acceleration of the date (which is scheduled for 2001, but is subject to review
in 1998) on which BT and other public telephone operators ("PTOs") can convey
broadcast entertainment services over their existing national networks or a
change in policy allowing more than one cable television license in a franchise
area, could have a material adverse effect on the Group. On May 1, 1997, a
Labour government was elected in the U.K., following a period of Conservative
government since 1979. It has been the stated policy of the Labour Party to
review the broadcasting restrictions on national PTOs, and the government has
stated that it expects to publish proposals regarding those restrictions in the
near future. The Group is unable to predict whether any changes in policy will
result, and, if so, when they will occur or how they might affect the Group.
See Item 1. "Business -- Certain Regulatory Matters -- Cable
Telecommunications -- Restrictions on National PTOs".
As the U.K. is a member of the European Union, the Group is subject to
regulatory and legislative initiatives of the European Commission ("EC").
Changes in existing EC directives and the introduction of new directives,
particularly to the extent that they introduce provisions requiring the Group
to provide access to its cable network infrastructure to other service
providers, could have a material adverse effect on its business. See Item 1.
"Business -- Certain Regulatory Matters -- Indirect and Equal Access".
LIMITATIONS ON ACCESS TO PROGRAMMING
The Group's ability to offer competitive cable television services is
dependent on its ability to obtain suitable programming at a reasonable cost.
While various sources of programming are available to cable system operators in
the U.K., British Sky Broadcasting Group plc and its wholly-owned subsidiary
British Sky Broadcasting Limited (collectively, "BSkyB") are the leading
suppliers of cable programming and the exclusive suppliers of certain
programming, including Sky Sports and the most popular premium movie channels
available in the U.K. BSkyB also competes with the Group by operating a DTH
satellite service that provides programming, including programming that is also
offered by the Group, to approximately 4 million subscribers in the U.K.
BSkyB's programming is important to the Group in attracting and retaining cable
television subscribers and, in the absence of more alternative programming
sources, BSkyB may be able to set and raise prices for its programming without
significant competitive pricing pressure. In 1995, 1996 and 1997, BSkyB
implemented significant increases in the per subscriber price for its important
movie and sports premium channels. In February 1997, BSkyB, pursuant to a new
rate card, introduced a separate charge to the Group for Sky Sports 3, its
third premium sports channel, which it provided to its DTH sports subscribers
at no additional charge. The Group decided to pass on the separate charge for
this service to customers subscribing to the other BSkyB sports services unless
the customer subscribed to three BSkyB premium channels. In October 1997,
BSkyB introduced a separate charge for Sky Sports 2, its second premium sports
channel, previously supplied free of charge to subscribers of Sky Sports 1, and
dropped its charge to cable operators for Sky Sports 3. Consequential changes
to the rate card have been approved by the OFT and a revised rate card is now
in operation. The Group does not have a formal contract
20
<PAGE> 22
with BSkyB, and the Group is not currently in discussions with BSkyB relating
to a definitive written programming supply contract. There can be no assurance
that BSkyB will continue to supply programming to the Group on reasonable
commercial terms or at all. Further, existing or potential arrangements between
BSkyB and other cable operators may hinder the development of alternative
programming through cooperative ventures among cable operators. Moreover, the
Group has not entered into written contracts with many of its other program
suppliers. The loss of BSkyB or other programming, a deterioration of the
perceived quality of BSkyB or other programming, or further material increases
in the price that the Group is required to pay for BSkyB or other programming
could have a material adverse effect on the Group. See Item 1. "Business --
Cable Television -- Programming".
DEPENDENCE ON KEY PERSONNEL
The Group's business is managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
the Group. The Group believes that its future success will depend in large part
on its continued ability to attract and retain highly skilled and qualified
personnel. The Group has entered into service or management contracts providing
for the services of certain of its key executive officers and employees. The
Group has not obtained life insurance policies covering such key executive
officers. See Item 10. "Directors and Executive Officers of the Registrant".
REQUIREMENT TO MEET BUILD MILESTONES
The Group is obliged by the milestones in its telecommunications licenses
and its LDLs to construct and activate a network to pass an aggregate of
1,021,894 premises within prescribed time periods. At December 31, 1997, the
portion of the Group's network that had been activated was approximately
533,700 premises (homes and businesses). At December 31, 1995, the Group was
obligated to meet milestones specified in telecommunications licenses for 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 the
Office of Telecommunications ("OFTEL"). During June 1996, OFTEL informed the
Group that it did not agree with the Group's historical method for
calculating compliance with its milestone obligations. Based on OFTEL's method
of calculating premises passed, the Group failed to meet its year-end 1995
milestones for six of its eight telecommunications licenses. The Group has
renegotiated its milestone obligations with OFTEL, and at December 31, 1997,
the Group met the required quarterly milestone obligations under each of its
telecommunications licenses. Principally because of delays by the Department of
Trade and Industry in granting the Group a national telecommunications license,
and consequent delays in the commencement of construction, the Group did not
meet its current LDL milestones in six of the seven LDL franchises at the end
of 1997, although construction has commenced in five of the seven LDL
franchises. The Group has applied to the ITC to modify its milestone
obligations for all of its LDL franchise areas except Vale of Belvoir. The
Group understands that the ITC intends to grant the requested modifications.
See Item 1. "Business -- Milestones" and "Business -- Certain Regulatory
Matters -- Cable Telecommunications -- Network Construction and Service
Obligations". Failure of the Group to meet the construction milestones under
its telecommunications licenses could result in the commencement by the
Director General of Telecommunications (the "Director General") of proceedings
to require compliance. Similarly, the ITC may commence proceedings to require
compliance with the build milestones in the LDLs. If the Group were unable to
comply, its licenses 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. Failure to comply with a build milestone in the
LDLs could also result in the ITC imposing a fine or shortening the license
period of the LDL. In addition, a failure to meet certain build requirements
may in certain circumstances preclude the Group from making additional
borrowings. See "-- Requirement for Additional Funds", Item 1. "Business --
Milestones" and "Business -- Certain Regulatory Matters".
RAPID TECHNOLOGICAL CHANGES
The cable television and telecommunications industries are subject to
rapid and significant changes in technology. The Group believes that its
network has been designed with sufficient capacity to accommodate anticipated
business demands and technological changes, as well as to permit new services,
including digital television and advanced interactive telecommunications
services, which the Group may choose to provide as they become generally
available in the future. The Group's network generally employs fiber-optic
cable to the 500-home level for both cable television and telecommunications
services. There can be no assurance, however, that existing, proposed or as yet
undeveloped technologies will not become dominant in the future or otherwise
render cable television or telecommunications services less competitive, less
profitable or less viable.
INFORMATION SYSTEMS -- YEAR 2000
The Group is actively reviewing its information systems in light of year
2000 information processing requirements. The Group believes that its main
hardware and operating systems are currently compliant and expects that its key
subscriber management systems and financial systems will be compliant by the
end of 1998. The costs of investigating and correcting year 2000 information
processing problems has not been and is not expected by the Group to be
material. Although the Group intends to ensure that all of its systems will be
year 2000 compliant, it is generally reliant on third party suppliers for
delivery of appropriate system solutions. In addition, the Group may be
affected by year 2000 problems encountered by its primary suppliers or
customers. Significant year 2000 information processing
21
<PAGE> 23
problems encountered by the Group or certain of its customers or suppliers
could have a material adverse effect on the Group.
CURRENCY RISKS; FOREIGN CURRENCY TRANSACTIONS
A substantial portion of the Group's outstanding indebtedness, including
the Discount Notes and the dollar denominated 1998 Notes, is denominated in
dollars. The Group's revenues are generated in pounds sterling while the
interest and principal obligations with respect to this indebtedness will be
payable in dollars. While the Group's policy has been not to enter into hedging
contracts in respect of its foreign currency denominated assets and liabilities,
it entered into a foreign currency forward purchase contract which was settled
in the first quarter of 1997 and entered into two additional forward foreign
exchange contracts in June 1997 for settlement in June and July 1998. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Foreign Exchange." The Group may from time to time in the future
enter into similar foreign currency contracts based on its assessment of market
conditions. In addition, foreign currency translation gains and losses arising
upon translation of the U.S. dollar denominated indebtedness under the Discount
Notes and the dollar denominated 1998 Notes are reported as part of the profit
or loss of the Group. 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 Group's ability to satisfy their obligations, including
obligations under outstanding debt instruments, as they become due. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Foreign Exchange".
CONTROL OF THE GROUP; POTENTIAL CONFLICTS OF INTEREST
ECCP owns 66.7% of the outstanding shares of the Company. Certain
investment funds managed by Goldman, Sachs & Co. or its affiliates (the "Goldman
Sachs Affiliates") have an 83.3% interest in ECCP and directly own another 4.2%
of the Company's outstanding shares. As a result, ECCP (and indirectly, the
Goldman Sachs Affiliates) has the ability to exercise control over the business
and affairs of the Group by virtue of its continuing ability to control the
board of directors of the Company (which consists of the same persons as the
Board of Directors of Diamond Holdings). Pursuant to a shareholders agreement,
ECCP has the right, which it has exercised, to appoint four of the Directors of
the Company, one of whom may exercise voting control at meetings of the
Directors. See Item 12. "Security Ownership of Certain Beneficial Owners and
Management -- Shareholders Agreement". In the event that circumstances arise in
which the interests of ECCP or of the shareholders as a whole conflict with the
interests of the holders of the Discount Notes, such as if the Group were to
encounter financial difficulties or were unable to pay its debts as they mature,
the holders of the Discount Notes could be disadvantaged by the actions that
ECCP and the other shareholders may seek to pursue. In addition, the
shareholders may pursue acquisitions, divestitures, financings, currency
exchange or interest rate hedging or other transactions that could enhance the
value of their equity investment, even though such transactions might involve
risks to the holders of the Discount Notes. Holders of the Discount Notes must
rely on the covenants described under "Description of the 1994 Notes -- Certain
Covenants", "Description of the 1995 Notes -- Certain Covenants" and
"Description of the 1997 Notes -- Certain Covenants" to protect their interests
and there can be no assurance that those covenants will protect the holders of
the Discount Notes from the risks described above.
LIMITED INSURANCE COVERAGE
The Group obtains insurance of a type and in amounts that the Group
believes is customary in the U.K. for similar companies. Consistent with this
practice, the Group does not insure the underground portion of its cable
network. Accordingly, any event or circumstance damaging a significant portion
of the system's cable network could result in substantial uninsured losses. In
addition, the Group does not currently carry broadcaster's liability insurance.
TRADING MARKET FOR THE DISCOUNT NOTES; POSSIBLE VOLATILITY OF DISCOUNT
NOTE PRICE
The Discount Notes are new securities for which there is currently a
limited market. Although Goldman, Sachs & Co. have informed the Company that
they currently intend to make a market in the Discount Notes, they are not
obligated to do so and any such market-making may be interrupted or discontinued
at any time without notice. Accordingly, there can be no assurance as to the
ongoing development or liquidity of any market for the Discount Notes. The
Discount Notes could trade at prices that may depend upon many factors,
including prevailing interest rates, the Group's operating results and the
markets for similar securities. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the Discount Notes. There can
be no assurance that, if a public market for the Discount Notes were to develop,
such a market would not be subject to similar disruptions. Moreover, because
Goldman, Sachs & Co. are affiliated with the Company, they will be required to
deliver a current prospectus and otherwise comply with the registration
requirements of the Securities Act in connection with any secondary market sale
of Discount Notes, which may affect their ability to continue market-making
activities. See "Plan of Distribution".
22
<PAGE> 24
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 pounds sterling 1.00:
<TABLE>
<CAPTION>
YEAR AVERAGE(1) HIGH LOW PERIOD-END
- ----- ----------- ---- ---- ----------
<S> <C> <C> <C> <C>
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 1.48 1.71
1997......................... 1.64 1.70 1.58 1.64
1998 (through March 27, 1998) 1.64 1.69 1.61 1.68
</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 27, 1998 was $1.6825 = pounds sterling 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
Gains/(Losses), Net".
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Group as of December 31, 1997 and as adjusted to reflect the 1998 Notes. This
table should be read in conjunction with Item 6. "Selected Financial Data", the
Group's Audited Consolidated Financial Statements and related Notes, and Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
ACTUAL AS ADJUSTED AS ADJUSTED(1)
----------- ----------- --------------
<S> <C> <C> <C>
Long-term debt:
Mortgage........................ L. 2,423 L. 2,423 $ 3,980
Capital lease obligations....... 8,041 8,041 13,209
1994 Notes...................... 138,726 138,726 227,885
1995 Notes...................... 230,599 230,599 378,805
1997 Notes...................... 165,536 165,536 271,926
1998 Notes...................... -- 201,963 331,765
---------- --------- ----------
Total long-term debt............ 545,325 747,288 1,227,570
Shareholders' equity............ (22,511) (22,511) (36,979)
---------- --------- ----------
Total capitalization............ L. 522,814 L.724,777 $1,190,591
========== ========= ==========
</TABLE>
- ------------
(1) Based on the Noon Buying Rate on December 31, 1997 of $1.6427 = pounds
sterling 1.00.
23
<PAGE> 25
24
<PAGE> 26
DESCRIPTION OF THE 1994 NOTES
The 1994 Notes have been issued under an Indenture, dated as of September
28, 1994, as amended by the First Supplemental Indenture, dated as of May 31,
1996 (collectively, the "1994 Notes Indenture"), between the Company and The
Bank of New York, as trustee (the "Trustee"). A copy of the form of the 1994
Notes Indenture has been filed as an exhibit to the Registration Statement
(File No. 33-83740) of which this Prospectus is a part. The following summary
of certain provisions of the 1994 Notes Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to
all of the provisions of the 1994 Notes Indenture, including the definitions of
certain terms therein and those terms made a part of the 1994 Notes Indenture
by reference to the Trust Indenture Act, as in effect on the date of the 1994
Notes Indenture. In this section, references to the Company are to Diamond
Cable Communications PLC. The definitions of certain capitalized terms used in
the following summary are set forth below under "-- Certain Definitions".
Article and Section references are to articles and sections of the 1994 Notes
Indenture.
GENERAL
The 1994 Notes constitute general unsubordinated obligations of the
Company, limited to $285,101,000 aggregate principal amount at maturity and
will mature on September 30, 2004. The 1994 Notes have been issued in an
aggregate principal amount at maturity to generate gross proceeds of
approximately $150 million. The 1994 Notes will accrete at a rate of 13 1/4%,
compounded semi-annually, to their aggregate principal amount by September 30,
1999 (the "1994 Cash Interest Date"). Cash interest will not accrue on the 1994
Notes prior to the 1994 Cash Interest Date. Thereafter, cash interest on the
1994 Notes will be payable, at a rate of 13 1/4% per annum, semi-annually in
arrears on each March 31 and September 30 (each, an "Interest Payment Date"),
commencing March 31, 2000, to the Book-Entry Depositary (as hereinafter
defined) in the case of the 1994 Global Note (as hereinafter defined) and to
holders of 1994 Definitive Registered Notes (as hereinafter defined), if any,
on the March 15 or September 15, as the case may be, immediately preceding such
Interest Payment Date. Cash interest will accrue from the most recent Interest
Payment Date to which interest has been paid or duly provided for or, if no
interest has been paid or duly provided for, from the 1994 Cash Interest Date.
Cash interest will be computed on the basis of a 360-day year of twelve 30-day
months. For additional information concerning payments on the 1994 Notes, see
"-- Description of Book-Entry System -- Payments on the 1994 Global Note" and
"-- Form of 1994 Notes".
The 1994 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 1994 Notes effectively rank junior to the 1998 Notes in
that funds will be available from the Company's subsidiaries, including Diamond
Holdings, to the Company only through payment of dividends, if any, or payment
of principal and interest on currently outstanding intercompany indebtedness
which will be subordinated to the 1998 Notes.
Except as described below under "-- Certain Covenants -- Change of
Control" and "-- Mergers, Consolidations and Certain Sales of Assets", the 1994
Notes Indenture does not contain any provisions that permit the holders of the
1994 Notes to require that the Company repurchase or redeem the 1994 Notes or
otherwise protect the holders of 1994 Notes in the event of a takeover,
recapitalization or similar restructuring or in the event of another highly
leveraged transaction.
The 1994 Notes are listed on the Luxembourg Stock Exchange. There can be
no assurance that any trading market in the 1994 Notes will develop. See "Risk
Factors -- Trading Market for the Discount Notes".
25
<PAGE> 27
FORM OF 1994 NOTES
The 1994 Notes are represented by a global security in bearer form,
without coupons attached (the "1994 Global Note"), which was issued in a
denomination equal to the outstanding principal amount at maturity of 1994
Notes represented thereby. The 1994 Global Note was deposited with The Bank of
New York, as book-entry depositary (the "Book-Entry Depositary"), pursuant to
the terms of a Deposit Agreement, dated as of September 28, 1994 between the
Company, for the limited purposes set forth therein, the Book-Entry Depositary
and the owners from time to time of Book-Entry Interests (the "1994 Deposit
Agreement"). See "-- Description of Book-Entry System".
Under the terms of the 1994 Deposit Agreement, owners of Book-Entry
Interests will receive 1994 Definitive Registered Notes (i) if DTC notifies the
Book-Entry Depositary that it is unwilling or unable to act as depositary or
ceases to be a clearing agency registered under the Securities Exchange Act of
1934, as amended, and, in either case, a successor depositary is not appointed
by the Global Depositary at the request of the Company within 120 days, (ii) in
the event of an Event of Default under the 1994 Notes Indenture upon request of
the owner of a Book-Entry Interest, (iii) at any time if the Company in its
sole discretion determines that the 1994 Global Note (in whole but not in part)
should be exchanged for 1994 Definitive Registered Notes, (iv) if such owner of
a Book-Entry Interest requests such exchange in writing delivered to DTC and
through DTC to the Book-Entry Depositary or (v) if the Book-Entry Depositary is
at any time unwilling or unable to continue as Book-Entry Depositary and a
successor Book-Entry Depositary is not appointed by the Company within 120
days. In no event will definitive 1994 Notes in bearer form be issued.
Any 1994 Definitive Registered Notes will be issued in registered form in
denominations of $1,000 principal amount at maturity. Any 1994 Definitive
Registered Notes will be registered in such name or names as the Book-Entry
Depositary shall instruct the Trustee based on the instructions of DTC. It is
expected that such instructions will be based upon directions received by DTC
from its participants ("Participants") with respect to ownership of Book-Entry
Interests. To the extent permitted by law, the Company, the Trustee and any
paying agent shall be entitled to treat the person in whose name any 1994
Definitive Registered Note is registered as the absolute owner thereof. While
the 1994 Global Note is outstanding, holders of 1994 Definitive Registered
Notes may exchange their 1994 Definitive Registered Notes for Book-Entry
Interests by surrendering their 1994 Definitive Registered Notes to the
Book-Entry Depositary. The amount of the 1994 Global Note (and the Book-Entry
Interests) will be increased or decreased to reflect exchanges or issues of
1994 Definitive Registered Notes. The Book-Entry Depositary will request the
Trustee to make the appropriate adjustments to the 1994 Global Note underlying
the Book-Entry Interests to reflect any such issues or adjustments. The 1994
Notes Indenture governing the 1994 Notes contains provisions relating to the
maintenance by a registrar of a register reflecting ownership of 1994
Definitive Registered Notes, if any, and other provisions customary for a
registered debt security. Payment of principal and interest on each 1994
Definitive Registered Note will be made to the holder appearing on the register
at the close of business on the record date at his address shown on the
register on the record date.
HOLDERS SHOULD BE AWARE THAT, UNDER CURRENT U.K. TAX LAW, UPON THE
ISSUANCE TO A HOLDER OF DEFINITIVE REGISTERED NOTES, SUCH HOLDER WILL BECOME
SUBJECT TO U.K. INCOME TAX (CURRENTLY 20%) TO BE WITHHELD ON ANY PAYMENTS OF
INTEREST ON THE DEFINITIVE REGISTERED NOTES AS SET FORTH UNDER "TAXATION --
UNITED KINGDOM". A HOLDER OF DEFINITIVE REGISTERED NOTES WILL, TO THE EXTENT
DESCRIBED BELOW UNDER "-- PAYMENT OF ADDITIONAL AMOUNTS", BE ENTITLED TO RECEIVE
ADDITIONAL AMOUNTS WITH RESPECT TO SUCH DEFINITIVE REGISTERED NOTES. ADDITIONAL
AMOUNTS WILL NOT BE PAYABLE IF SUCH DEFINITIVE REGISTERED NOTES WERE ISSUED AT
THE REQUEST OF A HOLDER (INCLUDING FOLLOWING AN EVENT OF DEFAULT) AND AT THE
TIME OF THE PAYMENT IN QUESTION DEFINITIVE REGISTERED NOTES HAVE NOT BEEN
ISSUED IN EXCHANGE FOR THE ENTIRE PRINCIPAL AMOUNT AT MATURITY OF NOTES.
However, a U.S. holder of Definitive Registered Notes may be entitled to
receive a refund of withheld amounts from the Inland Revenue in certain
circumstances. See "Taxation -- United Kingdom -- Payments on the 1994 Notes".
Any person receiving 1994 Definitive Registered Notes other than at its
own request will not be obligated to pay or otherwise bear the cost of any tax
or governmental charge or any cost or expense of the Book-Entry Depositary,
26
<PAGE> 28
relating to insurance, postage, transportation or any similar charge, which
will be solely the responsibility of the Company.
Principal of, premium, if any, and interest on any 1994 Definitive
Registered Notes will be payable at the corporate trust office or agency of the
Trustee in The City of New York maintained for such purposes. In addition,
interest on 1994 Definitive Registered Notes may be paid by check mailed to the
person entitled thereto as shown on the register for the 1994 Definitive
Registered Notes. No service charge will be made for any registration of
transfer or exchange of any 1994 Definitive Registered Notes.
REDEMPTION
OPTIONAL REDEMPTION
The 1994 Notes are redeemable, in whole or in part, at any time on or after
the 1994 Cash Interest Date, at the option of the Company, upon not less than 30
nor more than 60 days' notice; provided that the Company may not give a notice
of redemption (i) more than four times in any year or (ii) in respect of the
redemption of less than $5 million in principal amount at maturity of the 1994
Notes. Such redemption will be at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued and
unpaid interest to the redemption date, if redeemed during the 12-month period
beginning September 30 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION
PRICE
<S> <C>
1999 107.125%
2000 105.344%
2001 103.563%
2002 101.781%
2003 100.000%
</TABLE>
PURCHASE OBLIGATION
The Company is not required to make any mandatory redemption or sinking
fund payments in respect of the 1994 Notes. However, (i) upon the occurrence of
a Change of Control (as defined below), the Company will be obligated to make an
Offer to Purchase all outstanding 1994 Notes at a price of 101% of the Accreted
Value thereof (determined at the date of purchase), if such purchase is prior to
the 1994 Cash Interest Date, or 101% of the principal amount at maturity
thereof, plus accrued interest thereon, if any, to the date of purchase, if such
purchase is on or after the 1994 Cash Interest Date, and (ii) 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 1994 Notes at a price of
100% of the Accreted Value thereof (determined at the date of purchase), if such
purchase is prior to the 1994 Cash Interest Date, or 100% of the principal
amount at maturity thereof, plus accrued and unpaid interest, if any, to the
date of purchase, if such purchase is on or after the 1994 Cash Interest Date.
See "-- Certain Covenants -- Change of Control" and "-- Certain Covenants --
Limitation on Certain Asset Dispositions", respectively.
SELECTION; EFFECT OF REDEMPTION NOTICE
In the case of a partial redemption, selection of the 1994 Notes for
redemption will be made pro rata (subject, in the case of Book-Entry Interests,
to DTC procedures). Upon the giving of a redemption notice, the principal amount
of 1994 Notes called for redemption will cease to accrete (if such redemption
occurs prior to the 1994 Cash Interest Date), interest on 1994 Notes called for
redemption will cease to accrue (if such redemption occurs on or after the 1994
Cash Interest Date) from and after the date fixed for redemption (unless the
Company defaults in providing the funds for such redemption) and such 1994 Notes
will then cease to be outstanding.
27
<PAGE> 29
OPTIONAL TAX REDEMPTION
The 1994 Notes are subject to redemption upon not less than 30 nor more
than 60 days' notice by mail, as a whole, but not in part, at the election of
the Company at any time at a redemption price equal to 100% of the Accreted
Value thereof (determined at the date of redemption) if such purchase is prior
to the 1994 Cash Interest Date, or 100% of the principal amount at maturity
thereof (together in the case of any such redemption with accrued interest to
the date of redemption if such redemption is on or after the 1994 Cash Interest
Date), if (a) the Company is required to issue 1994 Definitive Registered Notes
after using all reasonable efforts to avoid having to issue such 1994 Definitive
Registered Notes and the Company is or would be so required in the absence
of any applicable tax treaty on the next succeeding Interest Payment Date to
pay Additional Amounts with respect to the 1994 Notes as described under "--
Payment of Additional Amounts" or (b) the Company has become or would become
obligated to pay in the absence of any applicable tax treaty, on the next date
on which any amount would be payable with respect to the 1994 Notes, any
Additional Amounts as a result of any change in the laws (or any rules or
regulations thereunder) of the United Kingdom or any political subdivision or
taxing authority thereof or therein (or, in the case of Additional Amounts
payable by a successor Person to the Company, of the jurisdiction in which such
successor Person is organized or any political subdivision or taxing authority
thereof or therein) or any change in any official interpretation or application
of such laws or rules or regulations or any execution of or amendment to any
treaty affecting taxation to which the United Kingdom or such political
subdivision or taxing authority (or such other jurisdiction or political
subdivision or taxing authority) is a party, if the change becomes effective on
or after the date of the 1994 Notes Indenture (or, in the case of Additional
Amounts payable by a successor Person to the Company, the date on which such
successor Person became such pursuant to the applicable provisions of the 1994
Notes Indenture unless as of such date the relevant tax authority had publicly
announced that such amendment or change or execution was to occur after such
date) and such obligation cannot be avoided by the use of all commercially
reasonable measures available to the Company; provided, however, that (1) no
such notice of redemption may be given earlier than 90 days prior to the
earliest date on which the Company would be obligated to pay such Additional
Amounts were a payment in respect of the Securities then due, and (2) at the
time such notice of redemption is given, such obligation to pay such Additional
Amounts remains in effect.
PAYMENT OF ADDITIONAL AMOUNTS
All payments made by the Company on the 1994 Notes will be made free and
clear of and without withholding or deduction for or on account of any present
or future taxes, duties, assessments or governmental charges of whatever nature
unless the withholding or deduction is then required by law. If any withholding
or deduction for or on account of any present or future taxes, assessments or
other governmental charges of the United Kingdom or any political subdivision
or taxing authority thereof or therein ("Taxes") shall at any time be required
in respect of any amounts to be paid by the Company under the 1994 Notes, the
Company will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the Holder would have received if such Taxes had not been withheld or deducted;
provided that the foregoing obligation to pay Additional Amounts does not apply
to (a) any Taxes which would not have been so imposed but for the existence of
any present or former connection between such Holder and the United Kingdom
(other than the mere receipt of such payment or the ownership or holding
outside of the United Kingdom of such 1994 Note); (b) any estate, inheritance,
gift, sales, excise, transfer, personal property tax or similar tax, assessment
or governmental charge; or (c) any Taxes payable otherwise than by deduction or
withholding from payments of principal of (or premium, if any, on) or interest
on such 1994 Note; nor will Additional Amounts be paid (i) if the payment could
have been made by or through another paying agent without such deduction or
withholding, (ii) if the payment could have been made without such deduction or
withholding had the holder of the 1994 Note (whether in Global or Definitive
Registered form) or, if different, the beneficiary of the payment complied with
a timely request of the Company, or any other Person through whom payment may
be made, addressed or otherwise provided to such holder or beneficiary to
provide information, documents or other evidence concerning the nationality,
residence, identity or connection with the taxing jurisdiction of such holder
or beneficiary which is required or imposed by a statute, treaty, regulation or
administrative practice of the taxing jurisdiction as a precondition to
exemption from all or part of such tax, (iii) with respect to any payment of
principal of (or premium if any, on) or interest on such 1994 Note to any
holder who is a fiduciary or partnership or Person other than the sole
28
<PAGE> 30
beneficial owner of such payment, to the extent such payment would be required
by the laws of the U.K. (or any political subdivision or taxing authority
thereof or therein) to be included in the income for tax purposes of a
beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner who would not have been entitled to the
Additional Amounts had it been the holder of such a 1994 Note, or (iv) if the
payment is in respect of a 1994 Definitive Registered Note issued at the request
of the owner of a Book-Entry Interest (including following an Event of Default)
and at the time the payment is made 1994 Definitive Registered Notes have not
been issued in exchange for the entire principal amount at maturity of the 1994
Notes. The foregoing provisions shall survive any termination or discharge of
the 1994 Notes Indenture and shall apply mutatis mutandis to any withholding or
deduction for or on account of any present or future taxes, assessments or
governmental charges of whatever nature of any jurisdiction in which any
successor Person to the Company is organized, or any political subdivision or
taxing authority thereof or therein.
CERTAIN COVENANTS
The 1994 Notes Indenture contains, among others, the following additional
covenants:
LIMITATION ON CONSOLIDATED DEBT AND DISQUALIFIED EQUITY
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur any Debt or issue any Disqualified Equity unless, immediately after
giving effect to the Incurrence of such Debt or the issuance of such
Disqualified Equity and the receipt and application of the proceeds thereof,
the Annualized Consolidated Debt to Cash Flow Ratio of the Restricted Group at
the time of the Incurrence of such Debt or the issuance of such Disqualified
Equity, as the case may be, for which quarterly financial statements are
available, calculated on a pro forma basis (as if such Debt had been Incurred
or such Disqualified Equity had been issued at the beginning of such quarter)
would be less than 7.0 to 1.
Notwithstanding the foregoing paragraph, the Company may, and may permit
any Restricted Subsidiary to, Incur or issue the following: (i) Debt
outstanding from time to time under the Senior Bank Facility (up to L.160
million) less any amount permanently repaid thereunder and Debt Incurred to
finance the acquisition and construction of the Company's proposed combined
head office and headend/switch site; (ii) Debt of the Company and/or any
Restricted Subsidiary outstanding on the date of the 1994 Notes Indenture,
(iii) Debt or Disqualified Equity to the extent that the proceeds are used to
finance working capital for, or the construction or acquisition of, property or
assets in each case to be used in a Cable Business; (iv) Debt Incurred or
Disqualified Equity issued to finance a Cable Acquisition or provide working
capital for or financing for the construction of property or assets to be used
in the business so acquired; (v) Debt consisting of Interest Rate Protection
Obligations or Currency Hedging Agreements incurred in the ordinary course of
business; (vi) performance bonds or surety bonds or similar instruments
provided in the ordinary course of business; (vii) Debt owed by the Company to
any Wholly-Owned Restricted Subsidiary (so long as such Debt is held by a
Wholly-Owned Restricted Subsidiary and such Debt is subordinated in right of
payment to the 1994 Notes) or Debt owed by or Disqualified Equity issued by a
Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary of
the Company (provided that such Debt or Disqualified Equity is at all times
held by the Company or a Wholly-Owned Restricted Subsidiary); provided,
however, that upon either (a) the transfer or other disposition by such
Wholly-Owned Restricted Subsidiary or the Company of any such Debt or
Disqualified Equity to a Person other than the Company or another Wholly-Owned
Restricted Subsidiary or (b) the issuance, sale, lease, transfer or other
disposition of shares of Equity Securities (including by consolidation or
merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the
Company or another such Wholly-Owned Restricted Subsidiary, such Debt shall be
deemed to have been Incurred or such Disqualified Equity shall be deemed to
have been issued at the time of such transfer or other disposition; (viii) Debt
Incurred or Disqualified Equity issued to renew, extend, refinance or refund
any Debt or Disqualified Equity permitted in Clauses (i) through (iv) above or
the Securities in an amount not to exceed the outstanding principal amount (or,
if less, Accreted Value) of the Debt or the aggregate liquidation preference of
the Disqualified Equity so refinanced plus the amount of any premium required
to be paid in connection with such refinancing pursuant to the terms of the
Debt or Disqualified Equity refinanced plus the expenses of the Company
incurred in connection with such refinancing; provided that (a) in the case of
any refinancing or refunding of Debt which is pari passu to the Securities, the
refinancing or refunding Debt is made pari passu to the Securities or
subordinated to the Securities, and, in the case of any refinancing or refunding
29
<PAGE> 31
of Debt which is subordinated to the Securities or of Disqualified Equity, the
refinancing or refunding Debt is subordinated to the Securities to the same
extent as the Debt being refinanced or refunded or is Disqualified Equity; and
(b) in either case, the refinancing or refunding Debt or Disqualified Equity by
its terms, or by the terms of any agreement or instrument pursuant to which such
Debt or Disqualified Equity is Incurred or issued, as the case may be, does not
have a Weighted Average Life that is lower than that of the Debt or Disqualified
Equity being refinanced or refunded; and (ix) Debt or Disqualified Equity not
otherwise permitted to be Incurred or issued under Clauses (i) through (viii)
above, which, together with any other outstanding Debt Incurred or Disqualified
Equity issued pursuant to this Clause (ix), has an aggregate principal amount
(or liquidation preference) not in excess of L.10 million at any time
outstanding.
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) shall not, directly or indirectly, declare or pay any
dividend, or make any distribution, of any kind or character (whether in cash,
property or securities or otherwise) in respect of its Equity Securities or to
the holders thereof in general (including pursuant to a merger or consolidation
of the Company, but excluding any dividends or distributions payable solely in
its Equity Securities (other than Disqualified Equity) or in options, warrants
or other rights to acquire its Equity Securities (other than Disqualified
Equity)); (ii) shall not, and shall not permit any Restricted Subsidiary of the
Company to, directly or indirectly, purchase, redeem or otherwise acquire or
retire for value (a) any Equity Securities of the Company or any Related Person
of the Company or (b) any options, warrants or rights to purchase or acquire
Equity Securities of the Company or any Related Person of the Company (except
options, warrants or rights to purchase or acquire such Equity Securities held
by any current or former officer or director of the Company or ECE Management
in an aggregate amount not exceeding L.5 million); (iii) shall not make, or
permit any Restricted Subsidiary of the Company to make any Investment in, or
Incur an obligation to Guarantee any obligation of, any Affiliate or Related
Person of the Company, other than the Company or a Wholly-Owned Restricted
Subsidiary of the Company; (iv) shall not, and shall not permit any Restricted
Subsidiary of the Company to, redeem, defease, repurchase or otherwise retire
or acquire for value prior to any scheduled maturity, repayment or sinking fund
payment, Debt of the Company which explicitly by its terms is subordinate in
right of payment to the 1994 Notes (the transactions described in Clauses (i)
through (iv) being referred to herein as "Restricted Payments"), if: (1) at the
time thereof and after giving effect thereto an Event of Default, or an event
that with notice or lapse of time, or both, would constitute an Event of
Default, shall have occurred and be continuing or (2) upon giving effect to
such Restricted Payment, the aggregate of all Restricted Payments from the date
of the 1994 Notes Indenture exceeds the sum of (a) the difference between (x)
the cumulative Consolidated Operating Cash Flow from the first day of the
fiscal quarter in which the issue date of the 1994 Notes falls through the last
day of the last full fiscal quarter immediately preceding such Restricted
Payment for which quarterly financial statements are available, and (y) 200% of
cumulative Consolidated Interest Expense from the first day of the fiscal
quarter in which the issue date of the 1994 Notes falls through the last day of
the last full fiscal quarter immediately preceding such Restricted Payment for
which quarterly financial statements of the Company are available; and (b) 100%
of the aggregate cash net proceeds after the issue date of the 1994 Notes, from
the issuance of Equity Securities (other than Disqualified Equity) of the
Company and options, warrants or other rights on Equity Securities (other than
Disqualified Equity) of the Company (other than to a Restricted Subsidiary)
after the issue date of the 1994 Notes. The foregoing provision shall not be
violated by reason of (i) the payment of any dividend within 60 days after
declaration thereof if at the declaration date such payment would have complied
with the foregoing provision; (ii) any refinancing or refunding of any Debt
otherwise permitted under Clause (viii) described in the second paragraph under
the caption "Limitation on Consolidated Debt and Disqualified Equity"; (iii)
investments by the Company or any Restricted Subsidiary in an amount not to
exceed in the aggregate L.5 million in a Person which is engaged in a Cable
Business or a business incidental thereto; and (iv) investments in
Non-Restricted Subsidiaries made with the cash proceeds of a substantially
concurrent (1) capital contribution to the Company or (2) issue or sale of
Equity Securities (other than Disqualified Equity) of the Company.
LIMITATION ON LIENS
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur or suffer to exist any Lien upon any of its properties or assets, now
owned or hereafter acquired, to secure any Debt without making or causing such
Restricted Subsidiary to make effective provision for securing the 1994 Notes
equally and ratably with such Debt so long as such Debt shall be so secured or
in the event such Debt is subordinate in right of payment to the 1994 Notes,
30
<PAGE> 32
prior to such Debt and to such property and assets for so long as such Debt
shall be so secured. The foregoing restrictions do not apply to Liens existing
at the date of the 1994 Notes Indenture or to: (i) Liens securing only the 1994
Notes; (ii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary; (iii) Liens to secure the Senior Bank Facility; (iv) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company (and
not incurred in anticipation of such merger or consolidation); (v) Liens on
property existing immediately prior to the time of acquisition thereof (and not
in anticipation of the financing of such acquisition); (vi) Liens to secure Debt
Incurred under the provisions described in Clauses (iii), (iv) or (v) of the
second paragraph under the caption "-- Limitation on Consolidated Debt and
Disqualified Equity"; (viii) Liens for taxes or assessments or other
governmental charges or levies which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be required in
accordance with generally accepted accounting principles shall have been made;
(viii) Liens to secure obligations under workmen's compensation laws or similar
legislation, including Liens with respect to judgments which are not currently
dischargeable; and (ix) Liens to secure Debt Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, Debt secured by any Lien referred to in the
foregoing Clauses (i) through (viii) so long as such Lien does not extend to any
other property. In addition to the foregoing, the Company and its Restricted
Subsidiaries may incur a Lien to secure any Debt or enter into a Sale and
Leaseback Transaction, without equally and ratably securing the 1994 Notes, if
the sum of (i) the amount of Debt secured by a Lien entered into after the date
of the 1994 Notes Indenture and otherwise prohibited by the 1994 Notes Indenture
and (ii) the Attributable Value of all Sale and Leaseback Transactions entered
into after the date of the 1994 Notes Indenture and otherwise prohibited by the
1994 Notes Indenture does not exceed L.10 million.
ANTI-LAYERING
The 1994 Notes Indenture provides that the Company's Restricted
Subsidiaries will not Incur any Debt that is by its terms subordinate or junior
in right of payment to any other Debt of such Restricted Subsidiaries.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Company shall not, and shall not permit any Restricted Subsidiary of
the Company to, enter into any Sale and Leaseback Transaction unless (i) the
Company or such Restricted Subsidiary were entitled to incur a Lien to secure
Debt in an amount at least equal to the Attributable Value of such Sale and
Leaseback Transaction or (ii) all of the conditions contained in the provisions
described under "-- Limitation on Certain Asset Dispositions" (including the
provisions concerning the application of Net Available Proceeds) would be
satisfied with respect to such Sale and Leaseback Transaction if all of the
consideration received in such Sale and Leaseback Transaction were treated as
Net Available Proceeds.
LIMITATIONS CONCERNING DISTRIBUTIONS BY AND TRANSFERS TO RESTRICTED GROUP
The Company may not, and may not permit any Restricted Subsidiary to suffer
to exist any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (i) to pay, directly or indirectly, dividends or make any
other distributions in respect of its Equity Securities or pay any Debt or other
obligation owed to the Company or any other Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any other Restricted
Subsidiary of the Company; or (iii) to make any investment in, or to transfer
any of its property or assets to, the Company or any Restricted Subsidiary of
the Company. Notwithstanding the foregoing, the Company may, and may permit any
Subsidiary to, suffer to exist any such encumbrance or restriction on the
ability of any Subsidiary of the Company if and to the extent such encumbrance
or restriction exists on the date of the 1994 Notes Indenture or is (a) provided
for in the Senior Bank Facility documents; (b) existed prior to the time any
Person became a Subsidiary of the Company and such restriction or encumbrance
was not incurred in anticipation of such Person becoming a Subsidiary of the
Company; (c) exists by reason of a customary merger or acquisition agreement for
the purchase or acquisition of the stock or assets of the Company or any of its
Restricted Subsidiaries by another Person; (d) contained in an operating lease
for real property and is effective only upon the occurrence and during the
continuance of a default in the payment of rent; (e) the result of applicable
31
<PAGE> 33
corporate law or regulation relating to the payment of dividends or
distributions; (f) pursuant to an agreement pursuant to which Debt meeting the
requirements of Clauses (iii), (iv) or (v) of the second paragraph under the
caption "-- Limitation on Consolidated Debt and Disqualified Equity" is
incurred; provided, however, that the provisions contained in such agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than those contained in the terms of the Senior Bank Facility;
or (g) pursuant to an agreement effecting a renewal, extension, refinancing or
refunding of Debt Incurred pursuant to an agreement referred to in Clause (a) or
(b) above; provided, however, that the provisions contained in such agreement
relating to such encumbrance or restriction are no more restrictive than the
provisions contained in the agreement the subject thereof, as determined in good
faith by the Board of Directors and evidenced by a Board Resolution.
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
Except as permitted in the following paragraph, the Company shall not, and
shall not permit any Restricted Subsidiary to, conduct any business or enter
into any transaction with any Affiliate or Related Person of the Company,
unless such transaction is on terms which are in the Company's good faith
judgment at least as favorable as those available in a comparable arm's-length
transaction with a Person which is not an Affiliate or Related Person. Any such
transaction (or series of related transactions) in which such Affiliate or
Related Person receives in excess of L.1.0 million in any twelve month period
shall be approved by a majority of the disinterested directors of the Board of
Directors of the Company. Any such transaction involving in excess of L.5
million (or series of related transactions involving in excess of L.5 million),
or as to which there are no disinterested directors, is subject to the further
requirement that the Company obtain an opinion of an internationally recognized
expert with experience in appraising the terms and conditions of the relevant
type of transaction (or series of related transactions) stating that the
transaction or series of related transactions is fair (from a financial point
of view) to the Company or such Restricted Subsidiary.
The above requirements shall not be applicable to (i) any transaction
among the Company and its Wholly-Owned Subsidiaries; (ii) any existing
management agreement with ECE Management or any successor or assign; or (iii)
any transaction in which investment banking or other financial advisory
services are provided to the Company or any Subsidiary by Goldman, Sachs & Co.
or any of its Affiliates that is, in the Company's good faith judgment, at
rates competitive with those available from other advisers negotiated at arms
length and approved by disinterested directors.
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Disposition unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Disposition at least equal to the fair market value of the shares or
assets sold or otherwise disposed of; and (b) at least 85% of such
consideration consists of cash or cash equivalents. To the extent the Net
Available Proceeds of any Asset Disposition are not required to be applied to
repay amounts outstanding under the Senior Bank Facility or any Debt of a
Restricted Subsidiary, or are not so applied, the Company or such Restricted
Subsidiary, as the case may be, may apply such Net Available Proceeds within
365 days of the receipt thereof, to an investment in properties and assets that
will be used in a Cable Business (or in Equity Securities of any such Person
that will become a Restricted Subsidiary as a result of such investment to the
extent that such Person owns properties and assets that will be used in a Cable
Business) of the Company or any Restricted Subsidiary ("Replacement Assets").
Notwithstanding the foregoing, the Company may retain up to L.1.0 million of
Net Available Proceeds from any Asset Disposition for any purpose. Any Net
Available Proceeds from any Asset Disposition that are neither used to repay
amounts outstanding under the Senior Bank Facility or any Debt of a Restricted
Subsidiary nor invested in Replacement Assets within such 365-day period
(exclusive of the up to L.1.0 million referred to in the preceding sentence)
shall constitute "Excess Proceeds" subject to the provisions described in the
following paragraph.
When the aggregate amount of Excess Proceeds equals or exceeds L.5.0
million the Company shall make within 30 days of the determination thereof an
Offer to Purchase to all holders of the 1994 Notes, 1994 Notes with an
aggregate principal amount at maturity (or if less, an Accreted Value) equal to
such Excess Proceeds at a price in cash equal to 100% of the Accreted Value
thereof on any purchase date prior to the 1994 Cash Interest Date or 100% of the
32
<PAGE> 34
outstanding principal amount at maturity thereof plus accrued and unpaid
interest, if any, to any purchase date on or after the 1994 Cash Interest Date,
as applicable. To the extent that the aggregate principal amount at maturity or
if applicable, the Accreted Value of 1994 Notes tendered pursuant to such Offer
to Purchase is less than the Excess Proceeds, the Company may use such
deficiency for any purpose. If the aggregate principal amount at maturity or the
Accreted Value, as applicable, of 1994 Notes validly tendered and not withdrawn
by holders thereof exceeds the amount of 1994 Notes which can be purchased with
the Excess Proceeds, 1994 Notes to be purchased will be selected on a pro rata
basis.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset
Disposition without complying with such paragraphs to the extent (i) at least
85% of the consideration for such Asset Disposition constitutes Replacement
Assets (or Equity Securities of any such Person that will become a Restricted
Subsidiary as a result of such transaction to the extent that such Person owns
properties and assets that will be used in a Cable Business) and (ii) such
Asset Disposition is for fair market value; provided that any consideration not
constituting Replacement Assets or Equity Securities as described in Clause (i)
received by the Company or any Restricted Subsidiaries in connection with any
Asset Disposition permitted to be consummated under this paragraph shall
constitute Net Available Proceeds subject to the provisions of the two
preceding paragraphs.
The determination of "fair market value" for purposes of the preceding
paragraph and the third preceding paragraph will be made (a) in the case of
Asset Dispositions in which Net Available Proceeds exceed L.1 million, by the
Board of Directors of the Company and evidenced by a Board Resolution and (b)
in the case of Asset Dispositions in which Net Available Proceeds exceed L.10
million, based upon the opinion of an internationally recognized investment
banking firm.
CHANGE OF CONTROL
Within 60 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company shall commence an Offer to
Purchase all Outstanding 1994 Notes at a purchase price equal to 101% of, on or
prior to the 1994 Cash Interest Date, their Accreted Value and on and after the
1994 Cash Interest Date their principal amount at maturity plus in such case
accrued but unpaid interest to the date of purchase. The Company will cause
notice of any Change of Control to be mailed to holders of the 1994 Notes not
less than 10 days after the date on which the Company first becomes aware of
the consummation of a transaction resulting in a Change of Control. A "Change
of Control" will be deemed to have occurred in the event that, after the date
of the 1994 Notes Indenture, either (a) any Person or any Persons (other than a
Permitted Holder) acting together which would constitute a group (for purposes
of Section 13(d) of the Exchange Act, or any successor provision thereto) (a
"Group"), together with any Affiliates or Related Persons thereof shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto) at least 45% of the Equity Securities of the
Company entitled to vote generally in the election of directors of the Company;
(b) any Person or Group (other than a Permitted Holder), together with any
Affiliates or Related Persons thereof, shall succeed in having a sufficient
number of its nominees elected to the Board of Directors of the Company such
that such nominees, when added to any existing director remaining on the Board
of Directors of the Company after such election who is an Affiliate or Related
Person of such Group, will constitute a majority of the Board of Directors of
the Company; or (c) certain events of bankruptcy, insolvency or receivership
affecting the Company.
Any future credit agreements or other agreements relating to indebtedness
of the Company and its subsidiaries (including the Senior Bank Facility) may
contain provisions restricting the ability of the Company to repurchase 1994
Notes upon a Change of Control. In the event that a Change of Control occurs
when such provisions are in effect, the Company may seek the consent of the
relevant lenders to the repurchase of 1994 Notes or could attempt to repay or
refinance such indebtedness, in a manner that would permit the Company to
effect the repurchase of the 1994 Notes. In the absence of such a repayment or
refinancing, the Company may be precluded from offering to repurchase the 1994
Notes by the applicable provisions of such other agreements. The failure of the
Company to offer to repurchase the 1994 Notes upon a Change of Control would
constitute an Event of Default under the 1994 Notes Indenture. Moreover, there
can be no assurance that the Company will have the financial resources
necessary to effect any repurchase of 1994 Notes upon a Change of Control.
33
<PAGE> 35
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company shall not, in a single transaction or through a series of
related transactions, (i) consolidate with or merge into any other Person; (ii)
permit any other Person to consolidate with or merge into the Company; (iii)
directly or indirectly transfer, assign, convey, sell, lease or otherwise
dispose of all or substantially all of its properties and assets as an
entirety; or (iv) permit any of its Subsidiaries to enter into any such
transaction or transactions if such transaction or transactions, in the
aggregate, would result in a sale, assignment, transfer, lease or disposal of
all or substantially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis to any other Person or group of affiliated
Person unless: (1) immediately before and after giving effect to such
transaction and treating any Debt and Disqualified Equity which becomes an
obligation of the Company or a Subsidiary of the Company as a result of such
transaction as having been Incurred or issued, as applicable, by the Company or
such Subsidiary at the time of the transaction, no Event of Default or event
that with notice or lapse of time, or both, would constitute an Event of
Default shall have occurred and be continuing; (2) in the event the Company
shall consolidate with or merge into another Person or shall directly or
indirectly transfer, assign, convey, sell, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety, the Person
formed by such consolidation or into which the Company is merged or the Person
which acquires by transfer, assignment, conveyance, sale, lease or other
disposition all or substantially all of the properties and assets of the
Company as an entirety shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of England and Wales or of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume by an indenture supplemental hereto executed and
delivered to the Trustee, in form satisfactory to the Trustee, the due and
punctual payment of the principal of (and premium, if any), interest and
Additional Amounts on all the 1994 Notes and the performance of every covenant
of the 1994 Notes Indenture on the part of the Company to be performed or
observed; (3) the Company or the successor to the Company will have an
Annualized Consolidated Debt to Cash Flow Ratio at the time of such transaction
(determined on a pro forma basis giving effect to the proposed transaction)
equal to or less than the Annualized Consolidated Debt to Cash Flow Ratio of
the Company without giving effect to the proposed transaction and a ratio of
Consolidated Operating Cash Flow to Consolidated Interest Expense for the two
fiscal quarters next preceding such transaction (determined on a pro forma
basis giving effect to the transaction) equal to or greater than such ratio
without giving effect to such transaction; (4) if, as a result of any such
transaction, property or assets of the Company or any Subsidiary of the Company
would become subject to a Lien prohibited by the provisions of the 1994 Notes
Indenture described under "Limitation on Liens" above, and the Company or the
successor entity to the Company shall have secured the 1994 Notes as required
by that covenant; (5) such transaction would not result in the loss of a
Material License (which for this purpose will be determined on a pro forma
basis, giving effect to such transaction); and (6) the Company or the surviving
entity shall have delivered to the Trustee an officers' certificate and an
opinion of counsel each stating that such consolidation, merger, transfer,
lease or disposition and the supplemental indenture comply with the 1994 Notes
Indenture.
34
<PAGE> 36
EVENTS OF DEFAULT
The following are Events of Default under the 1994 Notes Indenture: (a)
failure by the Company to pay principal of (or premium, if any, on) any 1994
Note when due; (b) failure to pay any interest or Additional Amounts on any
1994 Note when due, continued for 30 days; (c) default in the payment of
principal and interest on 1994 Notes required to be purchased pursuant to an
Offer to Purchase as described under the captions "-- Certain Covenants --
Change of Control" and "-- Certain Covenants -- Limitation on Certain Asset
Dispositions"; (d) failure to perform or comply with the provisions described
under "-- Certain Covenants -- Mergers, Consolidations, and Certain Sales of
Assets"; (e) failure by the Company to perform any other covenant under the
1994 Notes Indenture or the 1994 Notes continued for 30 days after written
notice to the Company by the Trustee or holders of at least 25% in aggregate
principal amount of Outstanding 1994 Notes; (f) default under the terms of any
instrument evidencing or securing Debt by the Company or any Significant
Restricted Subsidiary which results in the acceleration of the payment of
principal amount in excess of L.5 million or which shall constitute the failure
to pay any portion in excess of L.5 million of principal or similar amount when
due and payable after the expiration of any applicable grace period; (g) the
rendering of a final judgment or judgments against the Company or any
Significant Restricted Subsidiary in an amount in excess of L.5 million which
remains undischarged or unstayed for a period of 60 days after the date on
which the right to appeal has expired; and (h) certain events of bankruptcy,
insolvency or reorganization affecting the Company or any Significant
Restricted Subsidiary.
Subject to the provisions of the 1994 Notes Indenture relating to the
duties of the Trustee in case an Event of Default (as defined) shall occur and
be continuing, the Trustee is under no obligation to exercise any of its rights
or powers under the 1994 Notes Indenture at the request or direction of any of
the holders, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the Outstanding 1994
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in Clause
(h)) occurs and is continuing, then either the Trustee or the holders of at
least 25% in aggregate principal amount of the Outstanding 1994 Notes may
accelerate the maturity of all 1994 Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
holders of 66 2/3% in aggregate principal amount of Outstanding 1994 Notes may,
under certain circumstances, rescind and annul such acceleration if all Events
of Default, other than the non-payment of accelerated principal, have been
cured or waived as provided in the 1994 Notes Indenture. If an Event of Default
specified in Clause (h) above occurs, the Outstanding 1994 Notes will ipso
facto become immediately due and payable without any declaration or other act
on the part of the Trustee or any holder. For information as to waiver of
defaults, see "-- Modification and Waiver".
No holder of any 1994 Note shall have any right to institute any
proceeding with respect to the 1994 Notes Indenture or for any remedy
thereunder, unless such holder shall have previously given to the Trustee
written notice of a continuing Event of Default and unless also the holders of
at least 25% in aggregate principal amount of the Outstanding 1994 Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the Outstanding
1994 Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a 1994 Note for enforcement of
payment of the principal of and premium, if any, or interest on such 1994 Note
on or after the respective due dates (or, in the case of a redemption, the
Redemption Dates or, in the case of an Offer to Purchase, the Purchase Date)
expressed in or established pursuant to the terms of such 1994 Note and 1994
Notes Indenture.
The Company is required to furnish to the Trustee annually a statement as
to the performance by them of certain of their obligations under the 1994 Notes
Indenture and as to any default in such performance.
35
<PAGE> 37
DEFEASANCE
The 1994 Notes Indenture provides that (A) if applicable, the Company will
be discharged from any and all obligations in respect of the Outstanding 1994
Notes other than certain obligations to transfer the 1994 Notes, or (B) if
applicable, the Company may omit to comply with certain restrictive covenants,
and certain events will cease to be Events of Default under the 1994 Notes
Indenture and the 1994 Notes, in either case (A) or (B), upon irrevocable
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
which will provide money in an amount sufficient to pay the principal of and
premium, if any, and each installment of interest, if any, on the Outstanding
1994 Notes. With respect to Clause (B), the obligations under the 1994 Notes
Indenture other than with respect to certain covenants and Events of Default
will remain in full force and effect. Such trust may only be established if,
among other things (i) with respect to Clause (A), the Company has received
from, or there has been published by, the Internal Revenue Service a ruling or
there has been a change in law, which in the opinion of counsel provides that
holders of the 1994 Notes will not recognize gain or loss for U.S. federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to Clause (B), the
Company has delivered to the Trustee an opinion of counsel (which may be based
on an Internal Revenue Service ruling) to the effect that the holders of the
1994 Notes will not recognize gain or loss for U.S. federal income tax purposes
as a result of such deposit and defeasance and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred; (ii)
no Event of Default or event that with the passing of time or the giving of
notice, or both, shall constitute an Event of Default shall have occurred or be
continuing; (iii) the Company has delivered to the Trustee an opinion of
counsel to the effect that such deposit shall not cause the Trustee or the
trust so created to be subject to the Investment Company Act of 1940; and (iv)
certain other customary conditions precedent are satisfied.
GOVERNING LAW
The 1994 Notes Indenture and the 1994 Notes are governed by the laws of
the State of New York.
MODIFICATION AND WAIVER
From time to time the Company, when authorized by resolutions of the
Board, and the Trustee, without the consent of the holders of the 1994 Notes,
may amend, waive or supplement the 1994 Notes Indenture or the 1994 Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, maintaining the qualification of the 1994 Notes
Indenture under the Trust Indenture Act or making any change that does not
adversely affect the rights of any holder.
Modifications and amendments of the 1994 Notes Indenture may be made by
the Company and the Trustee with the consent of the Holders of 66 2/3% in
aggregate principal amount of the Outstanding 1994 Notes; provided, however,
that no such modification or amendment may, without the consent of the holder
of each Outstanding 1994 Note affected thereby, (a) change the Stated Maturity
of the principal of or any installment of interest or Additional Amounts on,
any 1994 Note, (b) reduce the principal amount of (or the premium) or interest
or Additional Amounts on, any 1994 Note, (c) change the place, currency or
manner of payment of principal of (or premium) or interest or Additional
Amounts on, any 1994 Note, (d) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity thereof (or
Redemption Date, in the case of redemption, or Purchase Date, in the case of an
Offer to Purchase), (e) reduce the above-stated percentage of Outstanding 1994
Notes necessary to modify or amend the 1994 Notes Indenture, (f) reduce the
percentage of principal amount of Outstanding 1994 Notes necessary for waiver
of compliance with certain provisions of the 1994 Notes Indenture or for waiver
of certain defaults, (g) modify certain provisions of the 1994 Notes Indenture
relating to the modification of the 1994 Notes Indenture or the waiver of past
defaults or covenants, except as otherwise specified or (h) following the
mailing of any Offer to Purchase, modify any Offer to Purchase for the 1994
Notes required as described under the caption "-- Certain Covenants --
Limitation on Certain Asset Dispositions" and "-- Certain Covenants -- Change
of Control" in a manner materially adverse to the holders thereof.
The holders of not less than a majority in aggregate principal amount of
the Outstanding 1994 Notes, on behalf of all holders of 1994 Notes, may waive
compliance by the Company with certain restrictive provisions and covenants of
36
<PAGE> 38
the 1994 Notes Indenture. Subject to certain rights of the Trustee, as provided
in the 1994 Notes Indenture, the holders of not less than a majority in
aggregate principal amount of the Outstanding 1994 Notes, on behalf of all
holders of 1994 Notes, may waive any past default under the 1994 Notes
Indenture, except a default in the payment of principal, premium or interest or
Additional Amounts or in respect of a covenant or provision that cannot be
modified or amended without the consent of the holder of each Outstanding 1994
Note.
REPORTS
The Company shall deliver to the Trustee, within 15 days after it files
them with the Commission, copies of its annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribed) which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act within the time periods prescribed under such rules and
regulations. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act or otherwise report on an annual and quarterly basis on forms provided for
such annual and quarterly reporting pursuant to rules and regulations
promulgated by the Commission, the 1994 Notes Indenture requires the Company to
continue to file with the Commission and provide to the Trustee such annual and
interim reports on Forms 10-K and 10-Q, respectively, as the Company would be
required to file were it subject to such reporting requirements within the time
periods prescribed under such rules and regulations. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings but shall remain obligated to provide such reports to
the Trustee.
THE TRUSTEE
The duties and responsibilities of the Trustee are those provided by the
Trust Indenture Act. Notwithstanding the foregoing, the 1994 Notes Indenture
does not require the Trustee to expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its duties under the 1994
Notes Indenture, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk of liability is not reasonably assured to it.
The Trustee is permitted to engage in other transactions with the Company,
or any Affiliate, provided, however, that if it acquires any conflicting
interest (as defined in the Trust Indenture Act), it must eliminate such
conflict or resign.
NO PERSONAL LIABILITY OF DIRECTORS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the
Company, as such shall have any liability for any obligations of the Company
under the 1994 Notes, the 1994 Notes Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
the 1994 Notes by accepting a 1994 Note waives and releases all such liability;
provided that such waiver will not release any person from liability for fraud
or criminal acts. The waiver and release are part of the consideration for
issuance of the 1994 Notes. Such waiver and release may not be effective to
waive liabilities under English law or under the U.S. federal securities laws
and it is the view of the Commission that such waiver and release is against
public policy.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
1994 Notes Indenture. Reference is made to the 1994 Notes Indenture for the
full definition of all such terms, as well as any other terms used herein for
which no definition is provided. All accounting terms not otherwise defined
herein have the meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein described, the term
"generally accepted accounting principles" with respect to any computation
required or permitted under the 1994 Notes Indenture means accounting
principles as are generally accepted in the United States as consistently
applied by the Company at the date of such computation.
37
<PAGE> 39
"Accreted Value" means, as of any date of determination prior to the 1994 Cash
Interest Date, the sum of (a) the initial offering price of each 1994 Note and
(b) the portion of the excess of the principal amount of each 1994 Note over
such initial offering price which shall have been amortized by the Company
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each March 31 and September 30, at the rate of
13 1/4% per annum from the date of issuance of the 1994 Notes through the date
of determination computed on the basis of a 360-day year of twelve
30-day months.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Consolidated Debt to Cash Flow Ratio" for any Person means at
any time the ratio of (i) Total Consolidated Debt of such Person as of the end
of the most recent fiscal quarter for which financial statements are available
to (ii) Consolidated Operating Cash Flow of such Person for the two most recent
fiscal quarters multiplied by two.
"Asset Acquisition" means (i) any capital contribution (including without
limitation by means of transfers of cash or other property to others or
payments for property or services for the account or use of others) by the
Company or any Restricted Subsidiary in any other Person, or any acquisition or
purchase of equity interests in any other Person by the Company or any
Restricted Subsidiary, in either case pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute
substantially all of an operating unit or line of business of such Person or
which is otherwise outside of the ordinary course of business.
"Asset Disposition" means any transfer, conveyance, sale, lease or other
disposition by the Company or any of its Restricted Subsidiaries (including by
way of consolidation or merger) resulting in Net Available Proceeds in excess
of L.250,000 of (i) shares or other ownership interest of a Subsidiary of the
Company, (ii) substantially all of the assets of the Company or any Subsidiary
representing a division or line of business, or (iii) other assets or rights
outside of the ordinary course of business.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable, and at any date as of which the amount thereof is
to be determined, the total net amount of rent required to be paid by such
Person under such lease during the initial term thereof as determined in
accordance with generally accepted accounting principles, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capital Lease
Obligation with like term in accordance with generally accepted accounting
principles. The net amount of rent required to be paid under any such lease for
any such period shall be the aggregate amount of rent payable by the lessee
with respect to such period after excluding amounts required to be paid on
account of insurance, taxes, assessments, utility, operating and labor costs
and similar charges.
In the case of any lease which is terminable by the lessee upon the
payment of a penalty, such net amount shall also include the amount of such
penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Cable Acquisition" means an Asset Acquisition of properties or assets to
be used in a Cable Business or of equity interests in any Person that becomes a
Restricted Subsidiary or, subject to the covenant "-- Certain Covenants --
Limitation on Restricted Payments", a Non-Restricted Subsidiary as a result of
such Asset Acquisition, provided (i) such Person's assets and properties
consist principally of properties or assets that will be used in a Cable
Business; (ii) the Company has the ability to manage or select the management
of, and direct the day-to-day operations of, such Cable Business; and (iii)
such Cable Business, if a cable licensee, has a franchise area any border of
which is located within 50 miles of any border of a franchise area of the
Company's existing cable licenses.
38
<PAGE> 40
"Cable Business" means any business operating a cable television and/or
telephone and/or telecommunications system or any business reasonably related
thereto, including, without limitation, the production or provision of
programming as well as any business conducted by the Company or any Restricted
Subsidiary on the date on which the Securities are first issued.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property which is required to be classified
and accounted for as a capital lease or a liability on the face of a balance
sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the
last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person as charged in arriving
at Consolidated Net Income for such period.
"Consolidated Interest Expense" of any Person means for any period the
interest expense (without deducting interest income) of such Person for such
period determined on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers
acceptances or similar facilities; (iii) fees with respect to interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends (other than in respect of Preferred
Stock held by such Person a Wholly-Owned Subsidiary of such Person) declared
and payable in such period in cash; and (v) the portion of any rental
obligation allocable to interest expense under generally accepted accounting
principles.
"Consolidated Net Income" of any Person means for any period the net
income (or loss) of such Person for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided
that there shall be excluded therefrom (a) the net income (or loss) of any
Person acquired by such Person in a pooling-of-interests transaction for any
period prior to the date of such transaction, (b) the net income (but not the
net loss) of any Restricted Subsidiary of such Person which is subject to
restrictions which prevent the payment of dividends or the making of
distributions (by loans, advances, intercompany transfers or otherwise) to such
Person to the extent of such restrictions, (c) the net income (or loss) of any
Person that is not a Consolidated Subsidiary of such Person except to the
extent of the amount of dividends or other distributions actually paid to a
member of the Restricted Group by such other Person during such period, (d)
gains or losses on Asset Dispositions and (e) all extraordinary gains and
extraordinary losses.
"Consolidated Operating Cash Flow" of any Person means for any period (a)
the sum of (i) Consolidated Net Income for such period; (ii) Consolidated
Interest Expense for such period; (iii) Consolidated Income Tax Expense for
such period; (iv) the consolidated depreciation and amortization expense
included in the consolidated income statement of such Person for such period;
and (v) other non-cash charges (other than trading and operating items in the
ordinary course of business) deducted from consolidated revenues in determining
Consolidated Net Income for such period (including any foreign currency
translation losses), minus (b) non-cash items (other than trading and operating
items in the ordinary course of business) increasing consolidated revenues in
determining Consolidated Net Income for such period (including any foreign
currency translation gains).
"Consolidated Subsidiaries" of any Person means all Subsidiaries and other
equity investees of such Person that would be accounted for on a consolidated
basis in such Person's financial statements in accordance with generally
accepted accounting principles.
"Currency Hedging Agreements" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Company or any of its Restricted Subsidiaries against fluctuations
in currency values to the extent relating to (i) Debt and/or (ii) obligations
to purchase assets, properties or services incurred in the ordinary course of
business and not for speculative purposes; provided that such Currency Hedging
Agreements do not increase the Debt or other obligations of the Company and its
39
<PAGE> 41
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payments thereunder.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations Incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every Capital Lease Obligation of such Person, (vi) every net
obligation under interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements of such Person at the time of
determination and (vii) every obligation of the type referred to in Clauses (i)
through (vi) of another Person and all dividends of another Person the payment
of which, in either case, such Person has Guaranteed or is responsible or
liable for, directly or indirectly, as obligor, Guarantor or otherwise;
provided that Trade Obligations are excluded from the definition of Debt.
"Disqualified Equity" of any Person means any Equity Securities of such
Person which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final stated maturity of the 1994
Notes.
"Equity Homes" means the product of (i) the number of homes in a franchise
area, as set forth in the cable television or telecommunications licenses
relating to such franchise area, and (ii) the percentage of the entity holding
such licenses which is owned directly or indirectly by the Company.
"Equity Securities" of any Person means any shares, interests,
participations or other equivalents of corporate stock or other equity or
capital interests of such Person, including, without limitation, partnership
interests.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing any Debt of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person, (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such Debt, (ii) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the Guarantee by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business, and shall not include
guarantees in the nature of, or in respect of, Trade Obligations.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall
have meanings correlative to the foregoing); provided, however, that a change
in generally accepted accounting principles that results in an obligation of
such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate Protection Obligations" of any Person means any interest
rate swap agreement or other similar interest rate financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates and pursuant to which such Person is obligated or may become obligated to
make payments; provided that where such agreement or arrangement hedges Debt,
it is with respect to a notional principal amount that does not exceed the
principal amount of the Debt to which such Interest Rate Protection Obligations
relate.
40
<PAGE> 42
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution to (any other Person by means
of transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Equity Securities, bonds, notes, debentures or other securities
or evidence of Debt issued by any other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Material License" means a direct or indirect ownership interest in a
license to operate a cable television or a cable telephone system held by the
Company or any of its Restricted Subsidiaries which license at the time of
determination covers a number of Equity Homes which equals or exceeds 10% of
the aggregate number of Equity Homes covered by all of the licenses to operate
cable television or cable telephone systems in which the Company or its
Restricted Subsidiaries hold a direct or indirect ownership interest at such
time.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash and readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets or
received in any other noncash form) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and
expenses incurred and all federal, state, foreign and local taxes required to
be accrued as a liability as a consequence of such Asset Disposition, (ii) all
payments made by such Person or its Subsidiaries on any Debt which is secured
by a Lien on such assets or on shares of the Person owning such assets in
accordance with the terms of any Lien upon or with respect to such assets or
which must be repaid out of the proceeds from such Asset Disposition under the
terms of such Debt or Lien, in order to obtain a necessary consent to such
Asset Disposition or by applicable law, and (iii) all distributions and other
payments made to minority interest holders in Subsidiaries of such Person or
joint ventures as a result of such Asset Disposition.
"Non-Recourse Debt" means Debt or that portion of Debt (i) as to which
none of the Company, nor any of its Restricted Subsidiaries (a) provides credit
support (including any undertaking, agreement or instrument which would
constitute Debt); (b) is directly or indirectly liable; or (c) constitutes the
lender; and (ii) no default with respect to which (including any rights which
the holders thereof may have to take enforcement action against a
Non-Restricted Subsidiary) would permit (upon notice, lapse of time or both)
any holders of any other Debt of the Company or any of its Restricted
Subsidiaries to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its stated maturity.
"Non-Restricted Subsidiary" of a Person means a Subsidiary of such Person
that (i) at the time of its designation as a Non-Restricted Subsidiary has not
acquired any assets (unless the acquisition of such assets constitutes a
Restricted Payment permitted by the "-- Certain Covenants -- Limitation on
Restricted Payments" covenant), at any previous time, directly or indirectly
from such Person or any of its Subsidiaries and (ii) has no Debt other than
Debt that is, with respect to such Person, Non-Recourse Debt (unless the extent
to which such Person is the lender for, or is responsible for such Debt,
constitutes a Restricted Payment permitted by the "-- Certain Covenants --
Limitation on Restricted Payments" covenant); provided, however, that at the
time of such designation, after giving pro forma effect to such designation,
the Annualized Consolidated Debt to Cash Flow Ratio of such Person is equal to
or less than the Annualized Consolidated Debt to Cash Flow Ratio of such Person
immediately preceding such designation; provided, further, that if the
Annualized Consolidated Debt to Cash Flow Ratio of the Company immediately
preceding such designation is 7.0:1.0 or less, the Annualized Consolidated Debt
to Cash Flow Ratio of the Company after giving pro forma effect to such
designation may be up to 0.5:1.0 greater than such ratio immediately preceding
such designation. No Restricted Subsidiary may be redesignated as a
Non-Restricted Subsidiary unless at the time of such redesignation the
41
<PAGE> 43
provisions in clauses (i) and (ii) in this definition are currently met and
the Board of Directors of such Person has passed a certified resolution,
delivered to the Trustee, to such effect.
"Offer to Purchase" means a written offer (the "Offer") sent by the
Company by first class mail, postage prepaid, to each holder at his address
appearing in the Security Register on the date of the Offer or provided to the
Trustee by such holder offering to purchase up to the principal amount of 1994
Notes specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to this 1994 Notes Indenture). Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days
after the date of such Offer and a settlement date (the "Purchase Date") for
purchase of 1994 Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of
the Company's obligation to make an Offer to Purchase, and the Offer shall be
mailed by the Company or, at the Company's request, by the Trustee in the name
and at the expense of the Company. The Offer shall contain information
concerning the business of the Company and its Subsidiaries which the Company
in good faith believes will enable such holders to make an informed decision
with respect to the Offer to Purchase (which at a minimum will include (i) the
most recent annual and quarterly financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the documents required to be filed with the Trustee as described
under the caption "-- Reports" (which requirements may be satisfied by delivery
of such documents together with the Offer), (ii) a description of material
developments in the Company's business subsequent to the date of the latest of
such financial statements referred to in Clause (i) (including a description of
the events requiring the Company to make the Offer to Purchase), (iii) if
applicable, appropriate pro forma financial information concerning the Offer to
Purchase and the events requiring the Company to make the Offer to Purchase and
(iv) any other information required by applicable law to be included therein.
The Offer shall contain all instructions and materials necessary to enable such
holders to tender 1994 Notes pursuant to the Offer to Purchase. The Offer shall
also state:
(1) the Section of the 1994 Notes Indenture pursuant to which the
Offer to Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding 1994 Notes
offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such has been
determined pursuant to the Section hereof requiring the Offer to
Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of 1994 Notes accepted for payment (as
specified pursuant to this 1994 Notes Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the 1994 Notes
registered in the name of such holder and that any portion of a 1994 Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where 1994 Notes are to be surrendered for
tender pursuant to the Offer to Purchase;
(7) that interest on any 1994 Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue
to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each 1994 Note being accepted for payment pursuant to the
Offer to Purchase and that interest thereon shall cease to accrue on and
after the Purchase Date;
(9) that each holder electing to tender a 1994 Note pursuant to the
Offer to Purchase will be required to surrender such 1994 Note at the
place or places specified in the Offer prior to the close of business on
42
<PAGE> 44
the Expiration Date (such 1994 Note, if a Registered Note, being, if the
Company or the Trustee so requires, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the holder thereof or his attorney duly
authorized in writing);
(10) that holders will be entitled to withdraw all or any portion of
1994 Notes tendered if the Company (or its Paying Agent) receives, not
later than the close of business on the Expiration Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the 1994 Note the holder tendered, the
certificate number of the 1994 Note the holder tendered and a statement
that such holder is withdrawing all or a portion of his tender;
(11) that (a) if 1994 Notes in an aggregate principal amount less
than or equal to the Purchase Amount are duly tendered and not withdrawn
pursuant to the Offer to Purchase, the Company shall purchase all such
1994 Notes and (b) if 1994 Notes in an aggregate principal amount in
excess of the Purchase Amount are tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase 1994 Notes having an
aggregate principal amount equal to the Purchase Amount on a pro rata
basis (with such adjustments as may be deemed appropriate so that only
1994 Notes in denominations of $1,000 or integral multiples thereof shall
be purchased); and
(12) that in case of any holder whose 1994 Note is purchased only in
part, the Company shall execute, and the Trustee shall authenticate and
deliver to the holder of such 1994 Note without service charge, a new
1994 Note or 1994 Notes of the same type, of any authorized denomination
as requested by such holder, in an aggregate principal amount equal to
and in exchange for the unpurchased portion of the 1994 Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Holder" means European Cable Capital Partners L.P., a limited
partnership organized under the laws of Delaware, and any of its partners
existing on the date of the 1994 Notes Indenture.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Public Offering" means a firm commitment underwritten public offering
pursuant to a registration statement filed under the United States Securities
Act of 1933, as amended, or pursuant to listing particulars of the London Stock
Exchange.
"Related Person" of any Person means, without limitation, any other Person
owning (a) 5% or more of the outstanding Common Stock of such Person or (b) 5%
or more of the Voting Interest of such Person.
"Restricted Group" means the Company together with its Restricted
Subsidiaries.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than a Non-Restricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or commencement
of operation thereof to such lender or investor or to any Person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such arrangement
prior to the first date on which such arrangement may be terminated by the
lessee without payment of a penalty.
43
<PAGE> 45
"Significant" means, with respect to any Subsidiary or Restricted
Subsidiary, a Subsidiary or Restricted Subsidiary that qualifies as a
"significant subsidiary" under Rule 1-01 of the Commission's Regulation S-X.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Interest of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Total Consolidated Debt" means, at any date of determination, an amount
equal to the aggregate amount of all Debt of the Company and its Restricted
Subsidiaries outstanding as of the date of determination, determined on a
consolidated basis.
"Trade Buyer" means any Person which is (or a controlled Affiliate of any
Person which is) engaged principally in a cable or telecommunications business;
provided, however, that Trade Buyer shall not include any Subsidiary of the
Company or any Person that is on the date of the 1994 Notes Indenture an
Affiliate of the Company.
"Trade Obligation" means (i) obligations to pay the purchase price of
assets or services purchased in the ordinary course of business including,
without limitation, obligations incurred in respect of any documentary letter
of credit or bill of exchange issued in respect of any such purchase; (ii)
obligations in respect of any bill of exchange or promissory note drawn, or
accepted, issued or endorsed in the ordinary course of business, including,
without limitation, indebtedness in respect of any monies raised by way of
sale, discounting or otherwise in respect of any such bill or note; and (iii)
obligations in respect of any Guarantee of any obligation of the type specified
in Clause (i) or (ii) above, except to the extent that such obligation is
treated as indebtedness under generally accepted accounting principles.
"Trade Sale" means a sale by the Company to a Trade Buyer of all or
substantially all of the assets of the Company or the acquisition by a Trade
Buyer of 50% or more of the aggregate Voting Interest in the Company, in each
case in compliance with the requirements described under "-- Certain Covenants
- -- Limitation on Certain Asset Dispositions" and "-- Certain Covenants --
Change of Control".
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Voting Interest" of any Person means Equity Securities of such Person
which ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life" means, as of the date of determination, with
respect to any Debt or Disqualified Equity, the quotient obtained by dividing
(i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payments of
such Debt or redemption or repurchase payments on such Disqualified Equity and
the amount of such principal payments or redemption or repurchase payments, by
(ii) the sum of all such principal value or redemption or repurchase payments.
"Wholly-Owned" means with respect to any Subsidiary or Restricted
Subsidiary of any Person means a Subsidiary (or a Restricted Subsidiary) of
such Person all of the outstanding Equity Securities or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly-Owned Subsidiaries (or
Restricted Subsidiaries) of such Person or by such Person and one or more
Wholly-Owned Subsidiaries (or Restricted Subsidiaries) of such Person.
44
<PAGE> 46
DESCRIPTION OF BOOK-ENTRY SYSTEM
GENERAL
The Book-Entry Depositary holds the 1994 Global Note for the benefit of
DTC and its Participants, as hereinafter described. Pursuant to the terms of
the Deposit Agreement, the 1994 Global Note may be transferred only to a
successor of the Book-Entry Depositary. Beneficial interests in the 1994 Global
Note are shown on, and transfers thereof are effected only through, records
maintained in book-entry form by DTC (with respect to its Participants'
interests) and its Participants. Such beneficial interests are referred to
herein as "Book-Entry Interests". Ownership of the Book-Entry Interests is
limited to Participants and indirect participants ("Indirect Participants").
Procedures with respect to the ownership of Book-Entry Interests are set forth
below.
Upon receipt of the 1994 Global Note, the Book-Entry Depositary issued a
certificateless depositary interest (which represents a 100% interest in the
underlying 1994 Global Note) to DTC by recording such interest in the
Book-Entry Depositary's books and records in the name of Cede & Co., as nominee
of DTC. Upon such issuance, DTC credited, on its book-entry registration and
transfer system, the Participants' accounts with the respective interests owned
by such Participants. The accounts to be credited were designated by the
Underwriters. Ownership of Book-Entry Interests is shown on, and the transfer
of such interests is effected only through, records maintained by DTC and by
Participants (with respect to interests of Indirect Participants). The laws of
some countries and some states in the United States may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to own,
transfer or pledge the Book-Entry Interests.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
1994 Global Note, the Book-Entry Depositary or such nominee, as the case may be,
will be considered the sole holder of such 1994 Global Note for all purposes
under the 1994 Notes Indenture. Except as set forth above under "-- Form of 1994
Notes", Participants or Indirect Participants are not be entitled to have 1994
Notes or Book-Entry Interests registered in their names, will not receive or be
entitled to receive physical delivery of 1994 Notes or Book-Entry Interests in
definitive form and are not to be considered the owners or holders thereof under
the 1994 Notes Indenture. Accordingly, each person owning a Book-Entry Interest
must rely on the procedures of the Book-Entry Depositary and DTC and, if such
person is not a Participant in DTC, on the procedures of the Participant in DTC
through which such person owns its interest, to exercise any rights and remedies
of a holder under the 1994 Notes Indenture. See "-- Actions by Owners of
Book-Entry Interests" below. If any definitive 1994 Notes are issued to
Participants or Indirect Participants, they will be issued in registered form
("Definitive Registered Notes"), as described under "-- Form of 1994 Notes".
Unless and until Book-Entry Interests are exchanged for Definitive Registered
Notes (as described under "-- Form of 1994 Notes" above), the depositary
interest held by DTC may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of DTC or a nominee of such successor.
PAYMENTS ON THE 1994 GLOBAL NOTE
Payments of any amounts owing in respect of the 1994 Global Note will be
made through one or more paying agents appointed under the 1994 Notes Indenture
(which initially will include the Trustee) to the Book-Entry Depositary, as the
holder of the 1994 Global Note. All such amounts will be payable in United
States dollars. Upon receipt of any such amounts, the Book-Entry Depositary
will pay the amount so received to DTC, which will distribute such payments to
its Participants. Payments of all such amounts will be made without deduction
or withholding for or on account of any present or future taxes, duties,
assessments or governmental charges of whatever nature except as may be
required by law, and if any such deduction or withholding is required to be
made by any law or regulation of the United Kingdom then, to the extent
described under "Payment of Additional Amounts" above, such Additional Amounts
will be paid as may be necessary in order that the net amounts received by any
holder of the 1994 Global Note or owner of Book-Entry Interests after such
deduction or withholding will equal the net amounts that such holder or owner
would have otherwise received in respect of the 1994 Global Note or Book-Entry
Interest, as the case may be, absent such withholding or deduction. DTC, upon
receipt of any such payment, will immediately credit Participants' accounts
with payments in amounts proportionate to their respective ownership of
Book-Entry Interests, as shown on the records of DTC. The Company expects that
payments by Participants to owners of Book-Entry Interests held through - such
45
<PAGE> 47
Participants will be governed by standing customer instructions and customary
practices, as is now the case with the securities held for the account of
customers in bearer form or registered in "street name" and will be the
responsibility of such Participants.
Because the provisions of the 1994 Notes Indenture treat the holder of the
1994 Global Note as the owner of the 1994 Notes represented thereby for the
purpose of receiving amounts owing in respect of the 1994 Notes, the Company
has no responsibility or liability for the payment of amounts owing in respect
of the depositary interest held by DTC to owners of Book-Entry Interests
representing interests in the 1994 Global Note. Payments by DTC Participants to
owners of Book-Entry Interests held through such Participants are the
responsibility of such Participants, as is now the case with securities held
for the accounts of customers registered in "street name".
None of the Company, the Trustee, the Book-Entry Depositary or any agent
of the Company or the Trustee or the Book-Entry Depositary have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Book-Entry Interests or for maintaining,
supervising or reviewing any records relating to such Book-Entry Interests.
REDEMPTION
In the event the 1994 Global Note (or any portion thereof) is redeemed,
the Book-Entry Depositary will redeem, from the amount received by it in
respect of the redemption of the 1994 Global Note, an equal amount of the
Book-Entry Interests. The redemption price payable in connection with the
redemption of Book-Entry Interests will be equal to the amount received by the
Book-Entry Depositary in connection with the redemption of the 1994 Global Note
(or any portion thereof). The Company understands that under existing DTC
practices, if less than all of the 1994 Notes are to be redeemed at any time,
DTC will credit Participants' accounts on a proportionate basis (with
adjustments to prevent fractions) or by lot or on such other basis as DTC deems
fair and appropriate; provided that no beneficial interests of less than $1,000
principal amount at maturity may be redeemed in part.
TRANSFERS
All transfers of Book-Entry Interests are recorded in accordance with the
book-entry system maintained by DTC, pursuant to customary procedures
established by DTC and its Participants. Investors may, at their option, obtain
Definitive Registered Notes as set forth under "-- Form of 1994 Notes" above.
While the 1994 Global Note is outstanding, holders of 1994 Definitive
Registered Notes may exchange their 1994 Definitive Registered Notes for
Book-Entry Interests by surrendering their 1994 Definitive Registered Notes to
the Book-Entry Depositary. The amount of the Book-Entry Interests will be
increased or decreased to reflect such transfers or exchanges. The Book-Entry
Depositary will request the Trustee to make the appropriate adjustments to the
1994 Global Note or exchange the 1994 Global Note for a new 1994 Global Note in
an appropriate principal amount at maturity to reflect any such transfers or
exchanges.
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
As soon as practicable after receipt by the Book-Entry Depositary of
notice of any solicitation of consents or request for a waiver or other action
by the holders of 1994 Notes or of any Offer to Purchase (as defined under "--
Certain Definitions" above), the Book-Entry Depositary will mail to DTC a
notice containing (a) such information as is contained in such notice received
by the Book-Entry Depositary, (b) a statement that at the close of business on
a specified record date DTC will be entitled to instruct the Book-Entry
Depositary as to the consent, waiver or other action, if any, pertaining to the
1994 Notes and (c) a statement as to the manner in which such instructions may
be given. In addition, the Book-Entry Depositary will forward to DTC, or, based
upon instructions received from DTC, to owners of Book-Entry Interests, all
materials pertaining to any such solicitation, request, offer or other action.
Upon the written request of DTC, the Book-Entry Depositary shall endeavor
insofar as practicable to take such action regarding the requested consent,
waiver, offer or other action in respect of the 1994 Notes in accordance with
any instructions set forth in such request. DTC may grant proxies or otherwise
authorize DTC Participants (or persons owning Book-Entry Interests through such
DTC Participants) to provide such instructions to the Book-Entry Depositary so
that it may exercise any rights of a holder or take any other actions which a
holder is entitled to take under the 1994 Notes Indenture. The Book-Entry
46
<PAGE> 48
Depositary will not exercise any discretion in the granting of consents or
waivers or the taking of any other action relating to the 1994 Notes Indenture.
REPORTS
The Book-Entry Depositary will immediately send to DTC a copy of any
notices, reports and other communications received relating to the Company, the
1994 Notes or the Book-Entry Interests.
RESIGNATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
by written notice to the Company, the Trustee and DTC, such resignation to
become effective upon the appointment of a successor book-entry depositary, in
which case the 1994 Global Note shall be delivered to that successor. If no
such successor has been so appointed within 120 days, the Book-Entry Depositary
may request the Company to issue Definitive Registered Notes as described
above.
CHARGES OF BOOK-ENTRY DEPOSITARY
The Company has agreed to indemnify the Book-Entry Depositary against
certain liabilities incurred by it and pay the charges of the Book-Entry
Depositary as agreed between the Company and the Book-Entry Depositary.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The 1994 Deposit Agreement may be amended by the Company and the
Book-Entry Depositary without notice to or consent of DTC or any owner of
Book-Entry Interest: (a) to cure any ambiguity, defect or inconsistency,
provided that such amendment or supplement does not adversely affect the rights
of DTC or any holder of Book-Entry Interests, (b) to evidence the succession of
another person to the Company (when a similar amendment with respect to the
1994 Notes Indenture is being executed) and the assumption by any such
successor of the covenants of the Company herein, (c) to evidence or provide
for a successor Book-Entry Depositary, (d) to make any amendment, change or
supplement that does not adversely affect DTC or any owner of Book-Entry
Interests, (e) to add to the covenants of the Company or the Book-Entry
Depositary, or (f) to comply with the United States Federal securities laws. No
amendment that adversely affects DTC may be made to the Deposit Agreement
without the consent of DTC. Upon the issuance of 1994 Definitive Registered
Notes in exchange for Book-Entry Interests constituting the entire principal
amount at maturity of 1994 Notes, the 1994 Deposit Agreement will terminate.
The 1994 Deposit Agreement may be terminated upon the resignation of the
Book-Entry Depositary if no successor has been appointed within 120 days as set
forth under "-- Resignation of Book-Entry Depositary".
INFORMATION CONCERNING DTC
The Company understands as follows with respect to DTC:
DTC is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities of its
Participants and to facilitate the clearance and settlement of transactions
among its Participants in such securities through electronic book-entry changes
in accounts of the Participants, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. Access to the DTC book-entry system is also
available to others, such as banks, brokers dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
47
<PAGE> 49
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of an owner of a
Book-Entry Interest to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain Persons take physical
delivery of securities in definitive form. Consequently, the ability to
transfer Book-Entry Interests to such Persons may be limited. In addition,
beneficial owners of Book-Entry Interests through the DTC system will receive
distributions attributable to the 1994 Global Note only through DTC
Participants.
SETTLEMENT
The Book-Entry Interests trade in DTC's Same-Day Funds Settlement System.
Any secondary market trading activity in the Book-Entry Interests is expected
to accrue through DTC's Participants, and the securities custody accounts of
investors will be credited with their holdings against payment in same-day
funds on the settlement date.
48
<PAGE> 50
DESCRIPTION OF THE 1995 NOTES
The 1995 Notes have been issued under an Indenture dated as of December
15, 1995 (the "1995 Notes Indenture"), between the Company and The Bank of New
York, as trustee (the "Trustee"). A copy of the form of the 1995 Notes
Indenture has been filed as an exhibit to the Registration Statement (File No.
33-98374) of which this Prospectus is a part. The following summary of certain
provisions of the 1995 Notes Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to all of
the provisions of the 1995 Notes Indenture, including the definitions of
certain terms therein and those terms made a part of the 1995 Notes Indenture
by reference to the Trust Indenture Act, as in effect on the date of the 1995
Notes Indenture. In this section, references to the Company are to Diamond
Cable Communications PLC. The definitions of certain capitalized terms used in
the following summary are set forth below under "-- Certain Definitions".
Article and Section references are to articles and sections of the 1995 Notes
Indenture.
GENERAL
The 1995 Notes constitute general unsubordinated obligations of the
Company, limited to $530,955,000 aggregate principal amount at maturity and
will mature on December 15, 2005. The 1995 Notes will accrete at a rate of
11 3/4% per annum, compounded semi-annually, to their aggregate principal amount
by December 15, 2000 (the "1995 Cash Interest Date"). Cash interest will not be
payable on the 1995 Notes prior to the 1995 Cash Interest Date. Thereafter,
cash interest on the 1995 Notes will be payable, at a rate of 11 3/4% per
annum, semi-annually in arrears on each June 15 and December 15 (each, an
"Interest Payment Date"), commencing June 15, 2001, to the Book-Entry
Depositary (as hereinafter defined) in the case of the 1995 Global Note (as
hereinafter defined) and to holders of 1995 Definitive Registered Notes (as
hereinafter defined), if any, on the June 1 or December 1, as the case may be,
immediately preceding such Interest Payment Date. Cash interest will accrue
from the most recent Interest Payment Date to which interest has been paid or
duly provided for or, if no interest has been paid or duly provided for, from
the 1995 Cash Interest Date. Cash interest will be computed on the basis of a
360-day year of twelve 30-day months. For additional information concerning
payments on the 1995 Notes, see "--Description of Book-Entry System -- Payments
on the 1995 Global Note" and "-- Form of 1995 Notes".
The 1995 Notes effectively rank junior to any indebtedness of the
Company's subsidiary's 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 1995 Notes effectively rank junior to the 1998 Notes in
that funds will be available from the Company's subsidiaries, including Diamond
Holdings, to the Company only through payment of dividends, if any, or payment
of principal and interest on currently outstanding intercompany indebtedness
which will be subordinated to the 1998 Notes.
Except as described below under "-- Certain Covenants -- Change of
Control" and "-- Mergers, Consolidations and Certain Sales of Assets", the 1995
Notes Indenture does not contain any provisions that permit the holders of the
1995 Notes to require that the Company repurchase or redeem the 1995 Notes or
otherwise protect the holders of 1995 Notes in the event of a takeover,
recapitalization or similar restructuring or in the event of any other highly
leveraged transaction.
The 1995 Notes are listed on the Luxembourg Stock Exchange. There can be
no assurance that any trading market in the 1995 Notes will develop. See
"Risk Factors -- Trading Market for the Discount Notes".
49
<PAGE> 51
FORM OF THE 1995 NOTES
The 1995 Notes are represented by a global security in bearer form,
without coupons attached (the "1995 Global Note"), which was issued in a
denomination equal to the outstanding principal amount at maturity of 1995
Notes represented thereby. The 1995 Global Note has been deposited with The
Bank of New York, as book-entry depositary (the "Book-Entry Depositary"),
pursuant to the terms of a Deposit Agreement, to be dated as of December 15,
1995 between the Company, for the limited purposes set forth therein, the
Book-Entry Depositary and the owners from time to time of Book-Entry Interests
(the "Deposit Agreement"). See "-- Description of Book-Entry System".
Under the terms of the Deposit Agreement, owners of Book-Entry Interests
will receive Definitive Registered Notes (i) if DTC notifies the Book-Entry
Depositary that it is unwilling or unable to act as depositary or ceases to be
a clearing agency registered under the Securities Exchange Act of 1934, as
amended, and, in either case, a successor depositary is not appointed by the
Global Depositary at the request of the Company within 120 days, (ii) in the
event of an Event of Default under the 1995 Notes Indenture upon request of
the owner of a Book-Entry Interest, (iii) at any time if the Company in its
sole discretion determines that the 1995 Global Note (in whole but not in part)
should be exchanged for 1995 Definitive Registered Notes, (iv) if such owner of
a Book-Entry Interest requests such exchange in writing delivered to DTC and
through DTC to the Book-Entry Depositary or (v) if the Book-Entry Depositary is
at any time unwilling or unable to continue as Book-Entry Depositary and a
successor Book-Entry Depositary is not appointed by the Company within 120
days. In no event will definitive 1995 Notes in bearer form be issued.
Any 1995 Definitive Registered Notes will be issued in registered form in
denominations of $1,000 principal amount or multiples thereof at maturity. Any
1995 Definitive Registered Notes will be registered in such name or names as
the Book-Entry Depositary shall instruct the Trustee based on the instructions
of DTC. It is expected that such instructions will be based upon directions
received by DTC from its participants ("Participants") with respect to
ownership of Book-Entry Interests. To the extent permitted by law, the Company,
the Trustee and any paying agent shall be entitled to treat the person in whose
name any 1995 Definitive Registered Note is registered, as the absolute owner
thereof. While the 1995 Global Note is outstanding, holders of 1995 Definitive
Registered Notes may exchange their 1995 Definitive Registered Notes for
Book-Entry Interests by surrendering their 1995 Definitive Registered Notes to
the Book-Entry Depositary. The amount of the 1995 Global Notes (and the
Book-Entry Interests) will be increased or decreased to reflect exchanges or
issues of 1995 Definitive Registered Notes. The Book-Entry Depositary will
request the Trustee to make the appropriate adjustments to the 1995 Global Note
underlying the Book-Entry Interests to reflect any such issues or adjustments.
The 1995 Notes Indenture contains provisions relating to the maintenance by a
registrar of a register reflecting ownership of 1995 Definitive Registered
Notes, if any, and other provisions customary for a registered debt security.
Payment of principal and interest on each 1995 Definitive Registered Note will
be made to the holder appearing on the register at the close of business on the
record date at his address shown on the register on the record date.
HOLDERS SHOULD BE AWARE THAT, UNDER CURRENT U.K. TAX LAW, UPON THE
ISSUANCE TO A HOLDER OF DEFINITIVE REGISTERED NOTES, SUCH HOLDER WILL BECOME
SUBJECT TO U.K. INCOME TAX (CURRENTLY 20%) TO BE WITHHELD ON ANY PAYMENTS OF
INTEREST ON THE DEFINITIVE REGISTERED NOTES AS SET FORTH UNDER "TAXATION
- --UNITED KINGDOM". A HOLDER OF DEFINITIVE REGISTERED NOTES WILL, TO THE EXTENT
DESCRIBED BELOW UNDER "-- PAYMENT OF ADDITIONAL AMOUNTS", BE ENTITLED TO
RECEIVE ADDITIONAL AMOUNTS WITH RESPECT TO SUCH DEFINITIVE REGISTERED NOTES.
ADDITIONAL AMOUNTS WILL NOT BE PAYABLE IF SUCH DEFINITIVE REGISTERED NOTES WERE
ISSUED AT THE REQUEST OF A HOLDER (INCLUDING FOLLOWING AN EVENT OF DEFAULT) AND
AT THE TIME OF THE PAYMENT IN QUESTION DEFINITIVE REGISTERED NOTES HAVE NOT
BEEN ISSUED IN EXCHANGE FOR THE ENTIRE PRINCIPAL AMOUNT AT MATURITY OF NOTES.
However, a U.S. holder of Definitive Registered Notes may be entitled to
receive a refund of withheld amounts from the Inland Revenue in certain
circumstances. See "Taxation -- United Kingdom -- Payments on the 1995 Notes".
Any person receiving 1995 Definitive Registered Notes other than at its
own request will not be obligated to pay or otherwise bear the cost of any tax
or governmental charge or any cost or expense of the Book-Entry Depositary,
relating
50
<PAGE> 52
to insurance, postage, transportation or any similar charge, which will be
solely the responsibility of the Company.
Principal of, premium, if any, and interest on any 1995 Definitive
Registered Notes will be payable at the corporate trust office or agency of the
Trustee in The City of New York maintained for such purposes and at the
specified office of the Paying Agent in Luxembourg (against surrender of the
relevant Definitive Registered Note, in the case of payments of principal). In
addition, interest on 1995 Definitive Registered Notes may be paid by check
mailed to the person entitled thereto as shown on the register for the 1995
Definitive Registered Notes. No service charge will be made for any
registration of transfer or exchange of any 1995 Definitive Registered Notes.
The Company has undertaken to procure that while the 1995 Notes are
outstanding and listed on the Luxembourg Stock Exchange, it will maintain a
paying agent and a transfer agent in Luxembourg through which payment of
principal of, or premium or interest on, the 1995 Notes may be made and
through which the registration of transfer of 1995 Notes may be effected.
The initial paying agent and transfer agent appointed by the Company in
Luxembourg is Banque Internationale a Luxembourg S.A., 69 route d'Esch, L-1470
Luxembourg.
REDEMPTION
OPTIONAL REDEMPTION
The 1995 Notes are redeemable, in whole or in part, at any time on or
after the 1995 Cash Interest Date, at the option of the Company, upon not less
than 30 nor more than 60 days' notice; provided that the Company may not give a
notice of redemption (i) more than four times in any year or (ii) in respect of
the redemption of less than $5 million in principal amount at maturity of the
1995 Notes. Such redemption will be at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued and
unpaid interest to the redemption date, if redeemed during the 12-month period
beginning December 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000............... 104.406%
2001............... 102.938%
2002............... 101.469%
2003 and thereafter 100.000%
</TABLE>
PURCHASE OBLIGATION
The Company is not required to make any mandatory redemption or sinking
fund payments in respect of the 1995 Notes.
Upon the occurrence of a Change of Control (as defined below), the Company
will be obligated to make an Offer to Purchase all the outstanding 1995 Notes
at a price of 101% of the Accreted Value thereof (determined at the date of
purchase), if such purchase is prior to the 1995 Cash Interest Date, or 101% of
the principal amount at maturity thereof, plus accrued interest thereon, if
any, to the date of purchase, if such purchase is on or after the 1995 Cash
Interest Date. 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 1995 Notes at a price of 100% of the Accreted Value thereof
(determined at the date of purchase), if such purchase is prior to the 1995
Cash Interest Date, or 100% of the principal amount at maturity thereof, plus
accrued and unpaid interest, if any, to the date of purchase, if such purchase
is on or after the 1995 Cash Interest Date. See "-- Certain Covenants -- Change
of Control" and "-- Certain Covenants -- Limitation on Certain Asset
Dispositions", respectively.
51
<PAGE> 53
SELECTION; EFFECT OF REDEMPTION NOTICE
In the case of a partial redemption, selection of the 1995 Notes for
redemption will be made pro rata (subject, in the case of Book-Entry Interests,
to DTC procedures). Upon the giving of a redemption notice, the principal
amount of 1995 Notes called for redemption will cease to accrete (if such
redemption occurs prior to the 1995 Cash Interest Date), interest on 1995 Notes
called for redemption will cease to accrue (if such redemption occurs on or
after the 1995 Cash Interest Date) from and after the date fixed for redemption
(unless the Company defaults in providing the funds for such redemption) and
such 1995 Notes will then cease to be outstanding.
OPTIONAL TAX REDEMPTION
The 1995 Notes will be subject to redemption upon not less than 30 nor
more than 60 days' notice by mail, as a whole, but not in part, at the election
of the Company at any time at a redemption price equal to 100% of the Accreted
Value thereof (determined at the date of redemption) if such purchase is prior
to the 1995 Cash Interest Date, or 100% of the principal amount at maturity
thereof (together in the case of any such redemption with accrued interest to
the date of redemption if such redemption is on or after the 1995 Cash Interest
Date), if (a) the Company is required to issue 1995 Definitive Registered Notes
after using all reasonable efforts to avoid having to issue such 1995
Definitive Registered Notes and the Company is or would be so required in the
absence of any applicable tax treaty on the next succeeding Interest Payment
Date to pay Additional Amounts with respect to the 1995 Notes as described
under "-- Payment of Additional Amounts" or (b) the Company has become or would
become obligated to pay in the absence of any applicable tax treaty, on the
next date on which any amount would be payable with respect to the 1995 Notes,
any Additional Amount as a result of any amendment to or change in the laws (or
any rules or regulations thereunder) of the United Kingdom or any political
subdivision or taxing authority thereof or therein (or, in the case of
Additional Amounts payable by a successor Person to the Company, of the
jurisdiction in which such successor Person is organized or any political
subdivision or taxing authority thereof or therein) or any amendment or change
in any official interpretation or application of such laws or rules or
regulations or any execution of or amendment to any treaty affecting taxation
to which the United Kingdom or such political subdivision or taxing authority
(or such other jurisdiction or political subdivision or taxing authority) is a
party, if the amendment or change becomes effective on or after the date of the
1995 Notes Indenture (or, in the case of Additional Amounts payable by a
successor Person to the Company, the date on which such successor Person became
such pursuant to the applicable provisions of the 1995 Notes Indenture unless
as of such date the relevant tax authority had publicly announced that such
amendment or change or execution was to occur after such date) and such
obligation cannot be avoided by the use of all commercially reasonable measures
available to the Company; provided, however, that (1) no such notice of
redemption may be given earlier than 90 days prior to the earliest date on
which the Company would be obligated to pay such Additional Amounts were a
payment in respect of the Securities then due, and (2) at the time such notice
of redemption is given, such obligation to pay such Additional Amounts remains
in effect.
PAYMENT OF ADDITIONAL AMOUNTS
All payments made by the Company on the 1995 Notes will be made free and
clear of and without withholding or deduction for or on account of any present
or future taxes, duties, assessments or governmental charges of whatever nature
unless the withholding or deduction is then required by law. If any withholding
or deduction for or on account of any present or future taxes, assessments or
other governmental charges of the United Kingdom or any political subdivision
or taxing authority thereof or therein ("Taxes") shall at any time be required
in respect of any amounts to be paid by the Company under the 1995 Notes, the
Company will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the Holder would have received if such Taxes had not been withheld or deducted;
provided that the foregoing obligation to pay Additional Amounts does not apply
to (a) any Taxes which would not have been so imposed but for the existence of
any present or former connection between such Holder and the United Kingdom
(other than the mere receipt of such payment or the ownership or holding
outside of the United Kingdom of such New 1995 Note); (b) any estate,
inheritance, gift, sales, excise, transfer, personal property tax or similar
tax, assessment or governmental charge; or (c) any Taxes payable otherwise than
by deduction or withholding from payments of principal of (or premium, if any,
52
<PAGE> 54
on) or interest on such New 1995 Note; nor will Additional Amounts be paid (i)
if the payment could have been made by or through another paying agent without
such deduction or withholding, (ii) if the payment could have been made without
such deduction or withholding had the holder of the New 1995 Note or, if
different, the beneficiary of the payment complied with a request of the Company
made upon reasonable notice prior to such payment, or any other Person through
whom payment may be made, addressed or otherwise provided to such holder or
beneficiary to provide information, documents or other evidence concerning the
nationality, residence, identity or connection with the taxing jurisdiction of
such holder or beneficiary which is required or imposed by a statute, treaty,
regulation or administrative practice of the taxing jurisdiction as a
precondition to exemption from all or part of such tax, (iii) with respect to
any payment of principal of (or premium if any, on) or interest on such New 1995
Note to any holder who is a fiduciary or partnership or Person other than the
sole beneficial owner of such payment, to the extent such payment would be
required by the laws of the U.K. (or any political subdivision or taxing
authority thereof or therein) to be included in the income for tax purposes of a
beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner who would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the holder of such a New 1995 Note, or (iv) if the payment is in respect of
a 1995 Definitive Registered Note issued at the request of a holder of a
Book-Entry Interest (including following an Event of Default) and at the time
the payment is made 1995 Definitive Registered Notes have not been issued in
exchange for the entire principal amount at maturity of the 1995 Notes. The
foregoing provisions shall survive any termination or discharge of the 1995
Notes Indenture and shall apply mutatis mutandis to any withholding or
deduction for or on account of any present or future taxes, assessments or
governmental charges of whatever nature of any jurisdiction in which any
successor Person to the Company is organized, or any political subdivision or
taxing authority thereof or therein. The Company has agreed to use commercially
reasonable efforts to facilitate administrative actions necessary to assist
Holders to obtain any refund of or credit against withholding taxes for which
Additional Amounts are not paid as a result of the proviso in the second
preceding sentence.
CERTAIN COVENANTS
The 1995 Notes Indenture contains, among others, the following additional
covenants:
LIMITATION ON CONSOLIDATED DEBT AND DISQUALIFIED EQUITY
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur any Debt or issue any Disqualified Equity unless, immediately after
giving effect to the Incurrence of such Debt or the issuance of such
Disqualified Equity and the receipt and application of the proceeds thereof,
the Annualized Consolidated Debt to Cash Flow Ratio of the Restricted Group for
the quarter next preceding the Incurrence of such Debt or the issuance of such
Disqualified Equity, as the case may be, for which quarterly financial
statements are available, calculated on a pro forma basis (as if such Debt had
been Incurred or such Disqualified Equity had been issued at the beginning of
such quarter) would be less than 7.0 to 1.
Notwithstanding the foregoing paragraph, the Company may, and may permit
any Restricted Subsidiary to, Incur or issue the following: (i) Debt up to the
maximum amount available under the Senior Bank Facility; (ii) Debt of the
Company and/or any Restricted Subsidiary outstanding on the date of the 1995
Notes Indenture; (iii) Debt or Disqualified Equity to the extent that the
proceeds are used to finance working capital, or the construction of, or the
acquisition of, property or assets to be used in a Cable Business; (iv) Debt
Incurred or Disqualified Equity issued to finance a Cable Acquisition or
provide working capital for or financing for the construction of property or
assets to be used in the business so acquired; (v) Debt consisting of Interest
Rate Protection Obligations or Currency Hedging Agreements; (vi) performance
bonds or surety bonds or similar instruments provided in the ordinary course of
business; (vii) Debt owed by the Company to any Wholly-Owned Restricted
Subsidiary (so long as such Debt is held by a Wholly-Owned Restricted
Subsidiary) or Debt owed by or Disqualified Equity issued by a Restricted
Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary of the
Company (provided that such Debt or Disqualified Equity is at all times held by
the Company or a Wholly-Owned Restricted Subsidiary); provided, however, that
upon either (a) the transfer or other disposition by such Wholly-Owned
Restricted Subsidiary or the Company of any such Debt or Disqualified Equity to
a Person other than the Company or another Wholly-Owned Restricted Subsidiary
or (b) the issuance, sale, lease, transfer or other disposition of shares of
53
<PAGE> 55
Equity Securities (including by consolidation or merger) of such Wholly-Owned
Restricted Subsidiary to a Person other than the Company or another such
Wholly-Owned Restricted Subsidiary, such Debt shall be deemed to have been
Incurred or such Disqualified Equity shall be deemed to have been issued at the
time of such transfer or other disposition; (viii) Debt Incurred or Disqualified
Equity issued to renew, extend, refinance or refund any Debt or Disqualified
Equity permitted in Clauses (i) through (iv) above, or the 1995 Notes (in the
event that the 1995 Notes are redeemed in part pursuant to the provisions
described under "-- Redemption" above) in an amount not to exceed the
outstanding principal amount (or, if less, Accreted Value) of the Debt or the
aggregate liquidation preference of the Disqualified Equity so refinanced plus
the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt or Disqualified Equity refinanced,
or the amount of any premium reasonably determined by the Company to be
necessary to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase plus the expenses of the Company Incurred in connection
with such refinancing; provided that (a) in the case of any refinancing or
refunding of Debt which is pari passu to the 1995 Notes, the refinancing or
refunding Debt is made pari passu to the 1995 Notes or subordinated to the 1995
Notes, and, in the case of any refinancing or refunding of Debt which is
subordinated to the 1995 Notes or of Disqualified Equity, the refinancing or
refunding Debt is subordinated to the 1995 Notes to the same extent as the Debt
being refinanced or refunded or is Disqualified Equity; and (b) in either case,
the refinancing or refunding Debt or Disqualified Equity by its terms, or by the
terms of any agreement or instrument pursuant to which such Debt or Disqualified
Equity is Incurred or issued, does not have a Weighted Average Life that is
lower than that of the Debt or Disqualified Equity being refinanced or refunded;
and (ix) Debt or Disqualified Equity not otherwise permitted to be Incurred or
issued under Clauses (i) through (viii) above, which, together with any other
outstanding Debt Incurred or Disqualified Equity issued pursuant to this Clause
(ix), has an aggregate principal amount (or liquidation preference) not in
excess of L.20 million at any time outstanding.
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) shall not, directly or indirectly, declare or pay any
dividend, or make any distribution, of any kind or character (whether in cash,
property or securities or otherwise) in respect of any class of its Equity
Securities or to the holders of any class of its Equity Securities (including
pursuant to a merger or consolidation of the Company, but excluding any
dividends or distributions payable solely in its Equity Securities (other than
Disqualified Equity) or in options, warrants or other rights to acquire its
Equity Securities (other than Disqualified Equity)), (ii) shall not, and shall
not permit any Restricted Subsidiary of the Company to, directly or indirectly,
purchase, redeem or otherwise acquire or retire for value (a) any Equity
Securities of the Company or any Related Person of the Company or (b) any
options, warrants or rights to purchase or acquire Equity Securities of the
Company or any Related Person of the Company (except options, warrants or rights
to purchase or acquire such Equity Securities held by any current or former
officer or director of the Company or ECE Management in an aggregate amount not
exceeding L.5 million), (iii) shall not make, or permit any Restricted
Subsidiary of the Company to make any Investment in, or Incur an obligation to
Guarantee any obligation of, any Affiliate or Related Person of the Company,
other than the Company or a Wholly-Owned Restricted Subsidiary of the Company,
and (iv) shall not, and shall not permit any Restricted Subsidiary to, redeem,
defease, repurchase or otherwise retire or acquire for value prior to any
scheduled maturity, repayment or sinking fund payment, Debt of the Company which
explicitly by its terms is subordinate in right of payment to the 1995 Notes
(the transactions described in Clauses (i) through (iv) being referred to herein
as "Restricted Payments"), if: (1) at the time thereof and after giving effect
thereto an Event of Default, or an event that with notice or lapse of time, or
both, would constitute an Event of Default, shall have occurred and be
continuing or (2) upon giving effect to such Restricted Payment, the aggregate
of all Restricted Payments from the date of the 1995 Notes Indenture exceeds
the sum of (a) the difference between (x) the cumulative Consolidated Operating
Cash Flow from the first day of the fiscal quarter in which the issue date of
the 1995 Notes falls through the last day of the last full fiscal quarter
immediately preceding such Restricted Payment for which quarterly financial
statements are available, and (y) 200% of cumulative Consolidated Interest
Expense from the first day of the fiscal quarter in which the issue date of the
1995 Notes falls through the last day of the last full fiscal quarter
immediately preceding such Restricted Payment for which quarterly financial
statements of the Company are available; and (b) 100% of the aggregate net cash
proceeds after the issue date of the 1995 Notes, from the issuance of Equity
Securities (other than Disqualified Equity and the equity referred to in
54
<PAGE> 56
clause (f) under "-- Events of Default" below) of the Company and options,
warrants or other rights on Equity Securities (other than Disqualified Equity)
of the Company (other than to a Restricted Subsidiary) after the issue date of
the 1995 Notes. The foregoing provision shall not be violated by reason of (i)
the payment of any dividend within 60 days after declaration thereof if at the
declaration date such payment would have complied with the foregoing provision;
(ii) any refinancing or refunding of any Debt otherwise permitted under clause
(viii) described in the second paragraph under the caption "-- Limitation on
Consolidated Debt and Disqualified Equity"; (iii) investments by the Company or
any Restricted Subsidiary in an amount not to exceed in the aggregate L.10
million in a Person which is engaged in a Cable Business or a business
incidental thereto; and (iv) investments in Non-Restricted Subsidiaries made
with the proceeds of a substantially concurrent (1) capital contribution to the
Company or (2) issue or sale of Equity Securities (other than Disqualified
Equity) of the Company.
LIMITATION ON LIENS
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur or suffer to exist any Lien upon any of its properties or assets, now
owned or hereafter acquired, to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the 1995 Notes
equally and ratably with such Debt so long as such Debt shall be so secured or
in the event such Debt is subordinate in right of payment to the 1995 Notes,
prior to such Debt as to such property and assets for so long as such Debt
shall be so secured. The foregoing restrictions do not apply to Liens existing
at the date of the 1995 Notes Indenture or to: (i) Liens securing only the
1995 Notes; (ii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company (and not incurred in anticipation of such merger or
consolidation) which Liens shall not extend to any other property of the
Company or any Restricted Subsidiary; (iv) Liens on property existing
immediately prior to the time of acquisition thereof (and not in anticipation
of the financing of such acquisition); (v) Liens to secure Debt Incurred under
the provisions described in clauses (i), (iii), (iv), (v) or (ix) of the second
paragraph under the caption "-- Limitation on Consolidated Debt and
Disqualified Equity"; (vi) Liens for taxes or assessments or other governmental
charges or levies which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
accordance with generally accepted accounting principles shall have been made;
(vii) Liens to secure obligations under workmen's compensation laws or similar
legislation, including Liens with respect to judgments which are not currently
dischargeable; and (viii) Liens to secure Debt Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, Debt secured by any Lien referred to in the
foregoing Clauses (i) through (viii) so long as such Lien does not extend to
any other property. In addition to the foregoing, the Company and its
Restricted Subsidiaries may incur a Lien to secure any Debt or enter into a
Sale and Leaseback Transaction, without equally and ratably securing the 1995
Notes, if the sum of (i) the amount of Debt secured by a Lien entered into
after the date of the 1995 Notes Indenture and otherwise prohibited by the
1995 Notes Indenture and (ii) the Attributable Value of all Sale and Leaseback
Transactions entered into after the date of the 1995 Notes Indenture and
otherwise prohibited by the 1995 Notes Indenture does not exceed 5% of the
Company's Consolidated Tangible Assets.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Company shall not, and shall not permit any Restricted Subsidiary of
the Company to, enter into any Sale and Leaseback Transaction unless (i) the
Company or such Restricted Subsidiary were entitled to incur a Lien to secure
Debt in an amount at least equal to the Attributable Value of such Sale and
Leaseback Transaction and the terms of such transaction have been approved by
the Board of Directors of the Company or (ii) all of the conditions contained
in the provisions described under "-- Limitation on Certain Asset Dispositions"
(including the provisions concerning the application of Net Available Proceeds)
would be satisfied with respect to such Sale and Leaseback Transaction if all
of the consideration received in such Sale and Leaseback Transaction were
treated as Net Available Proceeds.
LIMITATIONS CONCERNING DISTRIBUTIONS BY AND TRANSFERS TO RESTRICTED GROUP
The Company may not, and may not permit any Restricted Subsidiary to,
suffer to exist any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (i) to pay, directly or indirectly, dividends or make any
55
<PAGE> 57
other distributions in respect of its Equity Securities or pay any Debt or other
obligation owed to the Company or any other Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any other Restricted
Subsidiary of the Company; or (iii) to transfer any of its property or assets
to, the Company or any Restricted Subsidiary of the Company. Notwithstanding the
foregoing, the Company may, and may permit any Subsidiary to, suffer to exist
any such encumbrance or restriction on the ability of any Subsidiary of the
Company if and to the extent such encumbrance or restriction exists on the date
of the 1995 Notes Indenture or is (a) provided for in the Senior Bank Facility
documents; (b) existed prior to the time any Person became a Subsidiary of the
Company and such restriction or encumbrance was not incurred in anticipation of
such Person becoming a Subsidiary of the Company; (c) exists by reason of a
customary merger or acquisition agreement for the purchase or acquisition of the
stock or assets of the Company or any of its Restricted Subsidiaries by another
Person; (d) contained in an operating lease for real property and is effective
only upon the occurrence and during the continuance of a default in the payment
of rent; (e) the result of applicable corporate law or regulation relating to
the payment of dividends or distributions; (f) pursuant to an agreement pursuant
to which Debt meeting the requirements of clauses (iii), (iv), (v) or (ix) of
the second paragraph under the caption "-- Limitation on Consolidated Debt and
Disqualified Equity" is Incurred; provided, however, that the provisions
contained in such agreement relating to such encumbrance or restriction are no
more restrictive than those contained in the terms of the Senior Bank Facility;
or (g) pursuant to an agreement effecting a renewal, extension, refinancing or
refunding of Debt Incurred pursuant to an agreement referred to in clause (a) or
(b) above; provided, however, that the provisions contained in such agreement
relating to such encumbrance or restriction are no more restrictive than the
provisions contained in the agreement the subject thereof, as determined in good
faith by the Board of Directors and evidenced by a Board Resolution.
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
Except as permitted in the following paragraph, the Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any transaction or
conduct any business with any Affiliate or Related Person of the Company,
unless such transaction is effected or such business is conducted on terms
which are in the Company's good faith judgment at least as favorable as those
that could be obtained in a comparable arm's-length transaction with a Person
that is not an Affiliate or Related Person. Any such transaction (or series of
related transactions) in which such Affiliate or Related Person receives in
excess of L.1.0 million in any twelve-month period shall be approved as being
in the Company's best interests by a majority of the disinterested directors of
the Board of Directors of the Company. Any such transaction involving in excess
of L.5.0 million (or series of related transactions involving in excess of
L.5.0 million), or as to which there are no disinterested directors, is subject
to the further requirement that the Company obtain an opinion of an
internationally recognized expert with experience in appraising the terms and
conditions of the relevant type of transaction (or series of related
transactions) stating that the transaction or series of related transactions is
fair (from a financial point of view) to the Company or such Restricted
Subsidiary.
The above requirements shall not be applicable to (i) any transaction
among the Company and its Wholly-Owned Subsidiaries; (ii) any existing
management agreement with ECE Management or any successor or assign; or (iii)
any transaction in which investment banking or other financial advisory
services are provided to the Company or any Subsidiary by Goldman, Sachs & Co.
or any of its Affiliates that is, in the Company's good faith judgment, on
arm's-length terms.
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Disposition unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Disposition at least equal to the fair market value of the shares or
assets sold or otherwise disposed of; and (b) at least 90% of such
consideration consists of cash or Cash Equivalents. To the extent the Net
Available Proceeds of any Asset Disposition are not required to be applied to
repay amounts outstanding under the Senior Bank Facility or any Debt of a
Restricted Subsidiary, or are not so applied, the Company or such Restricted
Subsidiary, as the case may be, may apply such Net Available Proceeds within
365 days of the receipt thereof, to an investment in properties and assets that
will be used in a Cable Business (or in Equity Securities of any such Person
that will become a Restricted Subsidiary as a result of such investment to the
extent that such Person owns properties and assets that will be used in a Cable
56
<PAGE> 58
Business) of the Company or any Restricted Subsidiary ("Replacement Assets").
Notwithstanding the foregoing, the Company may retain the Net Available Proceeds
from any Asset Disposition, the Net Available Proceeds of which do not exceed
L.1.0 million for any purpose. Any Net Available Proceeds from any Asset
Disposition that are neither used to repay amounts outstanding under the Senior
Bank Facility or any Debt of a Restricted Subsidiary nor invested in Replacement
Assets within such 365-day period (exclusive of the up to L.1.0 million referred
to in the preceding sentence) shall constitute "Excess Proceeds" subject to the
provisions described in the following paragraph.
When the aggregate amount of Excess Proceeds equals or exceeds L.10.0
million the Company shall make to all holders of the 1995 Notes within 30 days
of the determination thereof an Offer to Purchase 1995 Notes with an aggregate
principal amount at maturity (or if less, an Accreted Value) equal to such
Excess Proceeds at a price in cash equal to 100% of the Accreted Value thereof
on any purchase date prior to the 1995 Cash Interest Date or 100% of the
outstanding principal amount at maturity thereof plus accrued and unpaid
interest, if any, to any purchase date on or after the 1995 Cash Interest Date,
as applicable. To the extent that the aggregate principal amount at maturity or
if applicable, the Accreted Value of 1995 Notes tendered pursuant to such
Offer to Purchase is less than the Excess Proceeds, the Company may use such
deficiency for any purpose. If the aggregate principal amount at maturity or
the Accreted Value, as applicable, of 1995 Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of 1995 Notes which can be
purchased with the Excess Proceeds, 1995 Notes to be purchased will be
selected on a pro rata basis.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset
Disposition without complying with such paragraphs to the extent (i) at least
90% of the consideration for such Asset Disposition constitutes Replacement
Assets (or Equity Securities of any such Person that will become a Restricted
Subsidiary as a result of such transaction to the extent that such Person owns
properties and assets that will be used in a Cable Business) and (ii) such
Asset Disposition is for fair market value; provided that any consideration not
constituting Replacement Assets or Equity Securities as described in Clause (i)
received by the Company or any Restricted Subsidiaries in connection with any
Asset Disposition permitted to be consummated under this paragraph shall
constitute Net Available Proceeds subject to the provisions of the two
preceding paragraphs.
CHANGE OF CONTROL
Within 60 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company shall commence an Offer to
Purchase all Outstanding 1995 Notes at a purchase price equal to 101% of,
prior to the 1995 Cash Interest Date, their Accreted Value and on and after the
1995 Cash Interest Date their principal amount at maturity plus in such case
accrued but unpaid interest to the date of purchase. The Company will, not less
than 10 days after the date on which the Company first becomes aware of the
consummation of a transaction resulting in a Change of Control, cause notice of
such Change of Control to be mailed to holders of the 1995 Notes. A "Change of
Control" will be deemed to have occurred in the event that, after the date of
the 1995 Notes Indenture, either (a) any Person or any Persons (other than a
Permitted Holder) acting together which would constitute a group (for purposes
of Section 13(d) of the Exchange Act, or any successor provision thereto) (a
"Group"), together with any Affiliates or Related Persons thereof shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto) at least 45% of the aggregate voting power of all
Equity Securities of the Company entitled to vote generally in the election of
directors of the Company; or (b) any Person or Group (other than a Permitted
Holder), together with any Affiliates or Related Persons thereof, shall succeed
in having a sufficient number of its nominees elected to the Board of Directors
of the Company such that such nominees, when added to any existing director
remaining on the Board of Directors of the Company after such election who is
an Affiliate or Related Person of such Group, will constitute a majority of the
Board of Directors of the Company or (c) certain events of bankruptcy,
insolvency or receivership affecting the Company.
Any future credit agreements or other agreements relating to indebtedness
of the Company and its subsidiaries (including the Senior Bank Facility) may
contain provisions restricting the ability of the Company to repurchase 1995
Notes upon a Change of Control. In the event that a Change of Control occurs
when such provisions are in effect, the Company may seek the consent of the
relevant lenders to the repurchase of 1995 Notes or could attempt to repay
57
<PAGE> 59
or refinance such indebtedness, in a manner that would permit the Company to
effect the repurchase of the 1995 Notes. In the absence of such a repayment or
refinancing, the Company may be precluded from offering to repurchase the 1995
Notes by the applicable provisions of such other agreements. The failure of the
Company to offer to repurchase the 1995 Notes upon a Change of Control would
constitute an Event of Default under the 1995 Notes Indenture. Moreover, there
can be no assurance that the Company will have the financial resources necessary
to effect any repurchase of 1995 Notes upon a Change of Control.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company shall not, in a single transaction or through a series of
related transactions, (i) consolidate with or merge into any other Person; (ii)
permit any other Person to consolidate with or merge into the Company; (iii)
directly or indirectly transfer, assign, convey, sell, lease or otherwise
dispose of all or substantially all of its properties and assets as an
entirety; or (iv) permit any of its Subsidiaries to enter into any such
transaction or transactions if such transaction or transactions, in the
aggregate, would result in a sale, assignment, transfer, lease or disposal of
all or substantially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis to any other Person or group of affiliated
Person unless: (1) immediately before and after giving effect to such
transaction and treating any Debt and Disqualified Equity which becomes an
obligation of the Company or a Subsidiary of the Company as a result of such
transaction as having been Incurred or issued, as applicable, by the Company or
such Subsidiary at the time of the transaction, no Event of Default or event
that with notice or lapse of time, or both, would constitute an Event of
Default shall have occurred and be continuing; (2) in the event the Company
shall consolidate with or merge into another Person or shall directly or
indirectly transfer, assign, convey, sell, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety, the Person
formed by such consolidation or into which the Company is merged or the Person
which acquires by transfer, assignment, conveyance, sale, lease or other
disposition all or substantially all of the properties and assets of the
Company as an entirety shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of England and Wales or of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume by an indenture supplemental to the 1995 Notes Indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, the
due and punctual payment of the principal of (and premium, if any), interest
and Additional Amounts, if any, on all the 1995 Notes and the performance of
every covenant of the 1995 Notes Indenture on the part of the Company to be
performed or observed; (3) the Company or the successor to the Company will
have an Annualized Consolidated Debt to Cash Flow Ratio for the quarter next
preceding such transaction for which quarterly financial statements are
available (determined on a pro forma basis giving effect to the proposed
transaction as if it had taken place at the beginning of such quarter) equal to
or less than the Annualized Consolidated Debt to Cash Flow Ratio of the Company
without giving effect to the proposed transaction; provided further that if the
Annualized Consolidated Debt to Cash Flow Ratio of the Company immediately
preceding such transaction is 7.0:1 or less, then the Annualized Consolidated
Debt to Cash Flow Ratio of the Company or its successor after giving pro forma
effect to such transaction may be up to 0.5:1 greater than such ratio
immediately prior to such transaction; (4) if, as a result of any such
transaction, property or assets of the Company or any Subsidiary of the Company
would become subject to a Lien prohibited by the provisions of the 1995 Notes
Indenture described under "-- Limitation on Liens" above, and the Company or
the successor entity to the Company shall have secured the 1995 Notes as
required by that covenant; (5) such transaction would not result in the loss of
a Material License (which for this purpose will be determined on a pro forma
basis, giving effect to such transaction); and (6) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that such consolidation, merger, transfer, lease or disposition
and the supplemental indenture comply with the 1995 Notes Indenture.
EVENTS OF DEFAULT
The following are Events of Default under the 1995 Notes Indenture: (a)
failure by the Company to pay principal of (or premium, if any, on) any New
1995 Note at its Maturity; (b) failure to pay any interest or Additional
Amounts on any New 1995 Note when due, continued for 30 days; (c) default in
the payment of principal and interest on 1995 Notes required to be purchased
pursuant to an Offer to Purchase as described under the captions "-- Change of
Control" and "-- Limitation on Certain Asset Dispositions"; (d) failure to
perform or comply with the provisions described under "-- Mergers,
58
<PAGE> 60
Consolidations and Certain Sales of Assets"; (e) failure by the Company to
perform any other covenant under the 1995 Notes Indenture or the 1995 Notes
continued for 30 days after written notice to the Company by the Trustee or
holders of at least 25% in aggregate principal amount of Outstanding 1995
Notes; (f) failure by the Company to have received after the date of the 1995
Notes Indenture but prior to June 30, 1996 an aggregate of $100 million or more
in gross cash proceeds from the issuance of new equity, provided however that
if the Company has at June 30, 1996 an effective registration statement under
the Securities Act for the issuance and sale of such equity, no Event of
Default shall occur unless the Company does not receive such proceeds within 20
business days thereafter; (g) default under the terms of any instrument
evidencing or securing Debt by the Company or any Significant Restricted
Subsidiary which results in the acceleration of the payment of principal amount
in excess of L.5 million or which shall constitute the failure to pay any
portion in excess of L.5 million of principal or similar amount when due and
payable after the expiration of any applicable grace period; (h) the rendering
of a final judgment or judgments against the Company or any Significant
Restricted Subsidiary in an amount in excess of L.5 million which remains
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired; and (i) certain events of bankruptcy, insolvency
or reorganization affecting the Company or any Significant Restricted
Subsidiary.
Subject to the provisions of the 1995 Notes Indenture relating to the
duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee is under no obligation to exercise any of its rights or
powers under the 1995 Notes Indenture at the request or direction of any of the
holders, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the Outstanding 1995
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in Clause
(i) above) occurs and is continuing, then either the Trustee or the holders of
at least 25% in aggregate principal amount of the Outstanding 1995 Notes may
accelerate the maturity of all 1995 Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of Outstanding 1995 Notes
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal, have
been cured or waived as provided in the 1995 Notes Indenture. If an Event of
Default specified in Clause (i) above occurs, the Outstanding 1995 Notes will
ipso facto become immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. For information as to waiver of
defaults, see "-- Modification and Waiver".
No holder of any New 1995 Note shall have any right to institute any
proceeding with respect to the 1995 Notes Indenture or for any remedy
thereunder, unless such holder shall have previously given to the Trustee
written notice of a continuing Event of Default and unless also the holders of
at least 25% in aggregate principal amount of the Outstanding 1995 Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the Outstanding
1995 Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a New 1995 Note for enforcement of
payment of the principal of and premium, if any, or interest on such New 1995
Note on or after the respective due dates (or, in the case of a redemption, the
Redemption Dates or, in the case of an Offer to Purchase, the Purchase Date)
expressed in or established pursuant to the terms of such New 1995 Note and
1995 Notes Indenture.
The Company is required to furnish to the Trustee annually a statement as
to the performance by it of certain of its obligations under the 1995 Notes
Indenture and as to any default in such performance.
DEFEASANCE
The 1995 Notes Indenture provides that (A) if applicable, the Company will
be discharged from any and all obligations in respect of the Outstanding 1995
Notes other than certain obligations to transfer the 1995 Notes, or (B) if
applicable, the Company may omit to comply with certain restrictive covenants,
59
<PAGE> 61
and certain events will cease to be Events of Default under the 1995 Notes
Indenture and the 1995 Notes, in either case (A) or (B), upon irrevocable
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
which will provide money in an amount sufficient to pay the principal of and
premium, if any, and each installment of interest, if any, on the Outstanding
1995 Notes. With respect to Clause (B), the obligations under the 1995 Notes
Indenture other than with respect to certain covenants and Event of Default
will remain in full force and effect. Such trust may only be established if,
among other things (i) with respect to Clause (A), (1) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling or
there has been a change in law, which in the opinion of counsel provides that
holders of the 1995 Notes will not recognize gain or loss for U.S. federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred and (2) the Company has delivered to
the Trustee an opinion of counsel to the effect that, under the law in effect
at the time of such deposit, payments made from the defeasance trust would not
require the payment of Additional Amounts if the provisions of the 1995 Notes
Indenture described under "-- Payment of Additional Amounts" above were
applicable to such payments; or, with respect to Clause (B), the Company has
delivered to the Trustee (1) an opinion of counsel (which may be based on an
Internal Revenue Service ruling) to the effect that the holders of the 1995
Notes will not recognize gain or loss for U.S. federal income tax purposes as
a result of such deposit and defeasance and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred and
(2) an opinion of counsel to the effect that, under the law in effect at the
time of such deposit, payments made from the defeasance trust would not require
the payment of Additional Amounts if the provisions of the 1995 Notes Indenture
described under "-- Payment of Additional Amounts" above were applicable to
such payments; (ii) no Event of Default or event that with the passing of time
or the giving of notice, or both, shall constitute an Event of Default shall
have occurred or be continuing on the date of such deposit or, insofar as an
Event of Default described in clause (i) under "-- Events of Default," at any
time during the period ending on the 121st day after the date of such deposit;
(iii) the Company has delivered to the Trustee an opinion of counsel to the
effect that such deposit shall not cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940; and (iv) certain other
customary conditions precedent are satisfied.
GOVERNING LAW
The 1995 Notes Indenture and the 1995 Notes are governed by the laws of
the State of New York.
MODIFICATION AND WAIVER
From time to time the Company, when authorized by resolutions of the Board
of Directors, and the Trustee, without the consent of the holders of the 1995
Notes, may amend, waive or supplement the 1995 Notes Indenture or the 1995
Notes for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, maintaining the qualification of the
1995 Notes Indenture under the Trust 1995 Notes Indenture Act or making any
change that does not adversely affect the rights of any holder.
Modifications and amendments of the 1995 Notes Indenture may be made by
the Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding 1995 Notes; provided, however,
that no such modification or amendment may, without the consent of the holder
of each Outstanding New 1995 Note affected thereby, (a) change the Stated
Maturity of the principal of or any installment of interest or Additional
Amounts on, any New 1995 Note, (b) reduce the principal amount of, (or the
premium) or interest or Additional Amounts on, any New 1995 Note, (c) change
the place or currency of payment of principal of (or premium) or interest or
Additional Amounts on, any New 1995 Note, (d) impair the right to institute
suit for the enforcement of any payment on or after the Stated Maturity thereof
(or Redemption Date, in the case of redemption, or Purchase Date, in the case
of an Offer to Purchase), (e) reduce the above-stated percentage of Outstanding
1995 Notes necessary to modify or amend the 1995 Notes Indenture, (f) reduce
the percentage of principal amount of Outstanding 1995 Notes necessary for
waiver of compliance with certain provisions of the 1995 Notes Indenture or for
waiver of certain defaults, (g) modify certain provisions of the 1995 Notes
Indenture relating to the modification of the 1995 Notes Indenture or the
waiver of past defaults or covenants, except as otherwise specified or (h)
60
<PAGE> 62
following the mailing of any Offer to Purchase, modify any Offer to Purchase for
the 1995 Notes required as described under the caption "-- Limitation on Certain
Asset Dispositions" and "-- Change of Control" in a manner materially adverse to
the holders thereof.
The holders of not less than a majority in aggregate principal amount of
the Outstanding 1995 Notes, on behalf of all holders of 1995 Notes, may waive
compliance by the Company with certain restrictive provisions and covenants of
the 1995 Notes Indenture. Subject to certain rights of the Trustee, as provided
in the 1995 Notes Indenture, the holders of not less than a majority in
aggregate principal amount of the Outstanding 1995 Notes, on behalf of all
holders of 1995 Notes, may waive any past default under the 1995 Notes
Indenture, except a default in the payment of principal, premium or interest or
in respect of a covenant or provision that cannot be modified or amended
without the consent of the holder of each Outstanding New 1995 Note.
REPORTS
The Company shall deliver to the Trustee, within 15 days after it files
them with the Commission, copies of its annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribed) which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act within the time periods prescribed under such rules and
regulations. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act or otherwise report on an annual and quarterly basis on forms provided for
such annual and quarterly reporting pursuant to rules and regulations
promulgated by the Commission, the 1995 Notes Indenture requires the Company to
continue to file with the Commission and provide to the Trustee such annual and
interim reports on Forms 10-K and 10-Q, respectively, as the Company would be
required to file were it subject to such reporting requirements within the time
periods prescribed under such rules and regulations. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings but shall remain obligated to provide such reports to
the Trustee.
THE TRUSTEE
The duties and responsibilities of the Trustee are those provided by the
Trust Indenture Act. Notwithstanding the foregoing, the 1995 Notes Indenture
does not require the Trustee to expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its duties under the 1995
Notes Indenture, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk of liability is not reasonably assured to it.
The Trustee is permitted to engage in other transactions with the Company,
or any Affiliate, provided, however, that if it acquires any conflicting
interest (as defined in the Trust Indenture Act), it must eliminate such
conflict or resign.
NO PERSONAL LIABILITY OF DIRECTORS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the
Company, as such shall have any liability for any obligations of the Company
under the 1995 Notes, the 1995 Notes Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
the 1995 Notes by accepting a New 1995 Note waives and releases all such
liability; provided that such waiver will not release any person from liability
for fraud or criminal acts. The waiver and release are part of the
consideration for issuance of the 1995 Notes. Such waiver and release may not
be effective to waive liabilities under English law or under the U.S. federal
securities laws and it is the view of the Commission that such waiver and
release is against public policy.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms which are
used in the 1995 Notes Indenture. Reference is made to the 1995 Notes
Indenture for the full definition of all such terms, as well as any other terms
61
<PAGE> 63
used herein for which no definition is provided. All accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles, and, except as otherwise herein
described, the term "generally accepted accounting principles" with respect to
any computation required or permitted under the 1995 Notes Indenture means
accounting principles as are generally accepted in the United States as
consistently applied by the Company at the date of the 1995 Notes Indenture.
"Accreted Value" means, as of any date of determination prior to the 1995
Cash Interest Date, the sum of (a) the initial offering price of each New 1995
Note and (b) the portion of the excess of the principal amount of each New 1995
Note over such initial offering price which shall have been amortized by the
Company through such date, such amount to be so amortized on a daily basis and
compounded semiannually on each June 15 and December 15, at the rate of 11 3/4%
per annum from the date of issuance of the 1995 Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Consolidated Debt to Cash Flow Ratio" for any Person means for
any fiscal quarter the ratio of (i) Total Consolidated Debt of such Person as
of the end of such fiscal quarter to (ii) Consolidated Operating Cash Flow of
such Person for such fiscal quarter multiplied by four.
"Asset Acquisition" means (i) any capital contribution (including without
limitation by means of transfers of cash or other property to others or
payments for property or services for the account or use of others) by the
Company or any Restricted Subsidiary in any other Person (including, for the
avoidance of doubt, a prospective licensee that subsequently acquires a license
to operate a cable television and/or telephone and/or telecommunications
system), or any acquisition or purchase of equity interests in any other Person
by the Company or any Restricted Subsidiary, in either case pursuant to which
such Person shall become a Restricted Subsidiary or shall be merged with or
into the Company or any Restricted Subsidiary or (ii) any acquisition by the
Company or any Restricted Subsidiary of the assets of any Person which
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside of the ordinary course of business.
"Asset Disposition" means any transfer, conveyance, sale, lease or other
disposition by the Company or any of its Restricted Subsidiaries (including by
way of consolidation or merger) resulting in Net Available Proceeds in excess
of L.250,000 of (i) shares or other ownership interest of a Subsidiary of the
Company, (ii) substantially all of the assets of the Company or any Subsidiary
representing a division or line of business, or (iii) other assets or rights
outside of the ordinary course of business.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable, and at any date as of which the amount thereof is
to be determined, the total net amount of rent required to be paid by such
Person under such lease during the initial term thereof as determined in
accordance with generally accepted accounting principles, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capital Lease
Obligation with like term in accordance with generally accepted accounting
principles. The net amount of rent required to be paid under any such lease for
any such period shall be the aggregate amount of rent payable by the lessee
with respect to such period after excluding amounts required to be paid on
account of insurance, taxes, assessments, utility, operating and labor costs
and similar charges. In the case of any lease which is terminable by the lessee
upon the payment of a penalty, such net amount shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Cable Acquisition" means an Asset Acquisition of properties or assets to
be used in a Cable Business or of equity interests in any Person that becomes a
Restricted Subsidiary or, subject to the covenant described under "--Certain
Covenants -- Limitation on Restricted Payments" above, a Non-Restricted
62
<PAGE> 64
Subsidiary as a result of such Asset Acquisition, provided that such Person's
assets and properties consist principally of properties or assets that will be
used in a Cable Business.
"Cable Business" means any business operating a cable television and/or
telephone and/or telecommunications system or any business reasonably related
thereto, including, without limitation, the production or provision of
programming as well as any business conducted by the Company or any Restricted
Subsidiary on the date on which the 1995 Notes are first issued.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property which is required to be classified
and accounted for as a capital lease or a liability on the face of a balance
sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the
last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Cash Equivalent" means, at any time, (i) any evidence of Debt issued or
directly and fully guaranteed or insured by the government of an Approved
Jurisdiction or any agency or instrumentality thereof (provided that the full
faith and credit of the relevant Approved Jurisdiction is pledged in support
thereof); (ii) certificates of deposit or acceptances of any financial
institution that has combined capital and surplus and undivided profits of not
less than $50,000,000 (or the equivalent thereof in another currency) and has a
long term debt rating of at least "AA" by Standard & Poor's Corporation or at
least "Aa3" by Moody's Investor Service or if not rated by either of those
rating agencies the equivalent rating from another Approved Rating Agency;
(iii) commercial paper issued by a corporation organized under the laws of any
Approved Jurisdiction and rated at least A-1 by Standard & Poor's Corporation
or at least P-1 by Moody's Investor Service or if not rated by either of those
rating agencies the equivalent rating from another Approved Rating Agency; (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the government of an
Approved Jurisdiction; and (v) any other investment, instrument or cash
balance, provided, that in each of clauses (i) through (v) above such
instrument shall be considered a Cash Equivalent within the meaning of this
definition only to the extent that such instrument would have been classified
as a "cash equivalent" in accordance with the accounting principles applied to
the Company's audited consolidated balance sheet as of December 31, 1994.
"Approved Jurisdiction" means the United States of America, Canada, the United
Kingdom and any other member nation of the Organization for Economic
Cooperation and Development. "Approved Rating Agency" means Standard & Poor's
Corporation, Moody's Investor Service and any other recognized rating agency
that provides or assigns credit rating for debt securities similar to the 1995
Notes and that shall have been approved by the Trustee upon the written request
of the Company from time to time.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person as charged in arriving
at Consolidated Net Income for such period.
"Consolidated Interest Expense" of any Person means for any period the
interest expense (without deducting interest income) of such Person for such
period determined on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers
acceptances or similar facilities; (iii) fees with respect to interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends (other than in respect of Preferred
Stock held by such Person or a Wholly-Owned Subsidiary of such Person) declared
and payable in such period in cash; and (v) the portion of any rental
obligation allocable to interest expense under generally accepted accounting
principles.
"Consolidated Net Income" of any Person means for any period the net
income (or loss) of such Person for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided
that there shall be excluded therefrom (a) the net income (or loss) of any
Person acquired by such Person or a subsidiary of such Person in a transaction
accounted for under the pooling-of-interests method for any period prior to the
date of such transaction, (b) the net income (but not the net loss) of any
63
<PAGE> 65
Restricted Subsidiary of such Person which is subject to restrictions which
prevent the payment of dividends or the making of distributions (by loans,
advances, intercompany transfers or otherwise) to such Person to the extent of
such restrictions, (c) the net income (or loss) of any Person that is not a
Consolidated Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to a member of the Restricted
Group by such other Person during such period, (d) gains or losses on Asset
Dispositions and (e) all extraordinary gains and extraordinary losses.
"Consolidated Operating Cash Flow" of any Person means for any period (a)
the sum of (i) Consolidated Net Income for such period; (ii) Consolidated
Interest Expense for such period; (iii) Consolidated Income Tax Expense for
such period; (iv) the depreciation and amortization expense included in the
consolidated income statement of such Person for such period; and (v) other
non-cash charges (other than trading and operating items in the ordinary course
of business) deducted from consolidated revenues in determining Consolidated
Net Income for such period (including any foreign currency translation losses),
minus (b) non-cash items (other than trading and operating items in the
ordinary course of business) increasing consolidated revenues in determining
Consolidated Net Income for such period (including any foreign currency
translation gains).
"Consolidated Subsidiaries" of any Person means all Subsidiaries and other
equity investees of such Person that would be accounted for on a consolidated
basis in such Person's financial statements in accordance with generally
accepted accounting principles.
"Consolidated Tangible Assets" of any Person means the total assets of
such Person and its Restricted Subsidiaries consolidated, as determined in
accordance with generally accepted accounting principles, less (i) the net book
value of all its licenses, patents, patent applications, copyrights,
trademarks, trade names, goodwill, non-compete agreements or organizational
expenses and other like intangibles, (ii) unamortized Debt discount and
expense, (iii) all reserves for depreciation, obsolescence, depletion and
amortization of its properties and (iv) all other proper reserves which in
accordance with generally accepted accounting principles should be provided in
connection with the business conducted by such Person; provided that with
respect to the Company and its Consolidated Subsidiaries, adjustments following
the date of the 1995 Notes Indenture to the accounting books and records of the
Company and its Consolidated Subsidiaries in accordance with Accounting
Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto), or
otherwise resulting from the acquisition of control of the Company by another
Person shall not be given effect to.
"Currency Hedging Agreements" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Company or any of its Restricted Subsidiaries against fluctuations
in currency values to the extent relating to (i) Debt and/or (ii) obligations
to purchase assets, properties or services incurred in the ordinary course of
business and not for speculative purposes; provided that such Currency Hedging
Agreements do not increase the Debt or other obligations of the Company and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payments thereunder.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations Incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every Capital Lease Obligation of such Person, (vi) every net
obligation under interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements of such Person at the time of
determination and (vii) every obligation of the type referred to in Clauses (i)
through (vi) of another Person and all dividends of another Person the payment
of which, in either case, such Person has Guaranteed or is responsible or
liable for, directly or indirectly, as obligor, Guarantor or otherwise;
provided that Trade Obligations are excluded from the definition of Debt.
64
<PAGE> 66
"Disqualified Equity" of any Person means any Equity Security of such
Person which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final stated maturity of the 1995
Notes.
"Equity Homes" means the product of (i) the number of homes in a franchise
area, as set forth in the cable television or telecommunications licenses
relating to such franchise area, and (ii) the percentage of the entity holding
such licenses which is owned directly or indirectly by the Company.
"Equity Securities" of any Person means any shares, interests,
participations or other equivalents of corporate stock or other equity or
capital interests of such Person, including, without limitation, partnership
interests.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing any Debt of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person, (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such Debt, (ii) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the Guarantee by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business, and shall not include
guarantees in the nature of, or in respect of, Trade Obligations.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall
have meanings correlative to the foregoing); provided, however, that a change
in generally accepted accounting principles that results in an obligation of
such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate Protection Obligation" of any Person means any interest
rate swap agreement or other similar interest rate financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates and pursuant to which such Person is obligated or may become obligated to
make payments; provided that where such agreement or arrangement hedges Debt,
it is with respect to a notional principal amount that does not exceed the
principal amount of the Debt to which such Interest Rate Protection Obligation
relates.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution to any other Person (by means
of transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Equity Securities, bonds, notes, debentures or other securities
or evidence of Debt issued by any other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Material License" means a direct or indirect ownership interest in a
license to operate a cable television or a cable telephone system held by the
Company or any of its Restricted Subsidiaries which license at the time of
determination covers a number of Equity Homes which equals or exceeds 10% of
the aggregate number of Equity Homes covered by all of the licenses to operate
cable television or cable telephone systems in which the Company or its
65
<PAGE> 67
Restricted Subsidiaries hold a direct or indirect ownership interest at such
time.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash and readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets or
received in any other noncash form) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and
expenses incurred and all federal, state, provincial, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition, (ii) all payments made by such Person or its Subsidiaries on any
Debt which is secured by a Lien on such assets or on shares of the Person
owning such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must be repaid out of the proceeds from such
Asset Disposition under the terms of such Debt or Lien, in order to obtain a
necessary consent to such Asset Disposition or by applicable law, and (iii) all
distributions and other payments made to minority interest holders in
Subsidiaries of such Person or joint ventures as a result of such Asset
Disposition provided that minority holders receive distributions and payments
that are in the Company's good faith judgment comparable in kind to that
received by the Company or a Restricted Subsidiary.
"Non-Recourse Debt" means Debt or that portion of Debt (i) as to which
none of the Company, nor any of its Restricted Subsidiaries (a) provides credit
support (including any undertaking, agreement or instrument which would
constitute Debt); (b) is directly or indirectly liable; or (c) constitutes the
lender; and (ii) no default with respect to which (including any rights which
the holders thereof may have to take enforcement action against a
Non-Restricted Subsidiary) would permit (upon notice, lapse of time or both)
any holders of any other Debt of the Company or any of its Restricted
Subsidiaries to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its stated maturity.
"Non-Restricted Subsidiary" of a Person means a Subsidiary of such Person
that (i) at the time of its designation as a Non-Restricted Subsidiary has not
acquired any assets (unless the acquisition of such assets constitutes a
Restricted Payment permitted by the "-- Certain Covenants -- Limitation on
Restricted Payments" covenant), at any previous time, directly or indirectly
from such Person or any of its Subsidiaries and (ii) has no Debt other than
Debt that is, with respect to such Person, Non-Recourse Debt (unless the extent
to which such Person is the lender for, or is responsible for such Debt,
constitutes a Restricted Payment permitted by the "-- Certain Covenants --
Limitation on Restricted Payments" covenant); provided, however, that at the
time of such designation, after giving pro forma effect to such designation,
the Annualized Consolidated Debt to Cash Flow Ratio of such Person is equal to
or less than the Annualized Consolidated Debt to Cash Flow Ratio of such Person
immediately preceding such designation; provided, further, that if the
Annualized Consolidated Debt to Cash Flow Ratio of the Company immediately
preceding such designation is 7.0:1 or less, the Annualized Consolidated Debt
to Cash Flow Ratio of the Company after giving pro forma effect to such
designation may be up to 0.5:1 greater than such ratio immediately preceding
such designation. No Restricted Subsidiary may be redesignated as a
Non-Restricted Subsidiary unless at the time of such redesignation the
provisions in clauses (i) and (ii) in this definition are currently met and the
Board of Directors of such Person has passed a certified resolution, delivered
to the Trustee, to such effect.
"Offer to Purchase" means a written offer (the "Offer") sent by the
Company by first class mail, postage prepaid, to each holder at his address
appearing in the Security Register on the date of the Offer or provided to the
Trustee by such holder offering to purchase up to the principal amount of 1995
Notes specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to this 1995 Notes Indenture). Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days
after the date of such Offer and a settlement date (the "Purchase Date") for
purchase of 1995 Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of
the Company's obligation to make an Offer to Purchase, and the Offer shall be
mailed by the Company or, at the Company's request, by the Trustee in the name
and at the expense of the Company. The Offer shall contain information
concerning the business of the Company and its Subsidiaries which the Company
in good faith believes will enable such holders to make an informed decision
66
<PAGE> 68
with respect to the Offer to Purchase (which at a minimum will include (i) the
most recent annual and quarterly financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the documents required to be filed with the Trustee as described
under the caption "-- Reports" (which requirements may be satisfied by delivery
of such documents together with the Offer), (ii) a description of material
developments in the Company's business subsequent to the date of the latest of
such financial statements referred to in Clause (i) (including a description of
the events requiring the Company to make the Offer to Purchase), (iii) if
applicable, appropriate pro forma financial information concerning the Offer to
Purchase and the events requiring the Company to make the Offer to Purchase and
(iv) any other information required by applicable law to be included therein.
The Offer shall contain all instructions and materials necessary to enable such
holders to tender 1995 Notes pursuant to the Offer to Purchase. The Offer shall
also state:
(1) the Section of the 1995 Notes Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding 1995 Notes offered
to be purchased by the Company pursuant to the Offer to Purchase (including, if
less than all Outstanding 1995 Notes, the manner by which such has been
determined pursuant to the Section hereof requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of 1995 Notes accepted for payment (as specified
pursuant to the 1995 Notes Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the 1995 Notes
registered in the name of such holder and that any portion of a New 1995 Note
tendered must be tendered in an integral multiple of $1,000 principal amount at
maturity;
(6) the place or places where 1995 Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any New 1995 Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each New 1995 Note being accepted for payment pursuant to the
Offer to Purchase and that interest thereon shall cease to accrue on and after
the Purchase Date;
(9) that each holder electing to tender a New 1995 Note pursuant to the
Offer to Purchase will be required to surrender such New 1995 Note at the place
or places specified in the Offer prior to the close of business on the
Expiration Date (such New 1995 Note, if a Registered New 1995 Note, being, if
the Company or the Trustee so requires, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of 1995
Notes tendered if the Company (or its Paying Agent) receives, not later than
the close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of the New 1995 Note the holder tendered, the certificate number of the
New 1995 Note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
(11) that (a) if 1995 Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such 1995 Notes and (b)
if 1995 Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase 1995 Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
67
<PAGE> 69
appropriate so that only 1995 Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in case of any holder whose New 1995 Note is purchased only in
part, the Company shall execute, and the Trustee shall authenticate and deliver
to the holder of such New 1995 Note without service charge, a new New 1995 Note
or 1995 Notes of the same type, of any authorized denomination as requested by
such holder, in an aggregate principal amount equal to and in exchange for the
unpurchased portion of the New 1995 Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Holder" means European Cable Capital Partners L.P., a limited
partnership organized under the laws of Delaware, and any of its partners
existing on the date of the 1995 Notes Indenture.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Related Person" of any Person means, without limitation, any other Person
owning (a) 5% or more of the outstanding Common Equity of such Person or (b) 5%
or more of the Voting Interest of such Person.
"Restricted Group" means the Company together with its Restricted
Subsidiaries.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than a Non-Restricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or commencement
of operation thereof to such lender or investor or to any Person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such arrangement
prior to the first date on which such arrangement may be terminated by the
lessee without payment of a penalty.
"Significant" means, with respect to any Subsidiary or Restricted
Subsidiary, a Subsidiary or Restricted Subsidiary that qualifies as a
"significant subsidiary" under Rule 1-01 of the Commission's Regulation S-X.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Interest of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Total Consolidated Debt" means, at any date of determination, an amount
equal to the aggregate amount of all Debt of the Company and its Restricted
Subsidiaries outstanding as of the date of determination, determined on a
consolidated basis.
"Trade Obligation" means (i) obligations to pay the purchase price of
assets or services purchased in the ordinary course of business including,
without limitation, obligations incurred in respect of any documentary letter
of credit or bill of exchange issued in respect of any such purchase; (ii)
obligations in respect of any bill of exchange or promissory note drawn, or
accepted, issued or endorsed in the ordinary course of business, including,
without limitation, indebtedness in respect of any monies raised by way of
sale, discounting or otherwise in respect of any such bill or note; and (iii)
obligations in respect of any Guarantee or any obligation of the type
68
<PAGE> 70
specified in Clause (i) or (ii) above, except to the extent that such obligation
is treated as indebtedness under generally accepted accounting principles.
"Voting Interest" of any Person means Equity Securities of such Person
which ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life" means, as of the date of determination, with
respect to any Debt or Disqualified Equity, the quotient obtained by dividing
(i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payments of
such Debt or redemption or repurchase payments on such Disqualified Equity and
the amount of such principal payments or redemption or repurchase payments, by
(ii) the sum of all such principal value or redemption or repurchase payments.
"Wholly-Owned" means with respect to any Subsidiary or Restricted
Subsidiary of any Person means a Subsidiary (or a Restricted Subsidiary) of
such Person all of the outstanding Equity Securities or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly-Owned Subsidiaries (or
Restricted Subsidiaries) of such Person or by such Person and one or more
Wholly-Owned Subsidiaries (or Restricted Subsidiaries) of such Person.
DESCRIPTION OF BOOK-ENTRY SYSTEM
GENERAL
The Book-Entry Depositary holds the 1995 Global Note for the benefit of
DTC and its Participants, as hereinafter described. Pursuant to the terms of
the Deposit Agreement, the 1995 Global Note may be transferred only to a
successor of the Book-Entry Depositary. Beneficial interests in the 1995 Global
Note are be shown on, and transfers thereof are effected only through, records
maintained in book-entry form by DTC (with respect to its Participants'
interests) and its Participants. Such beneficial interests are referred to
herein as "Book-Entry Interests." Ownership of the Book-Entry Interests will be
limited to Participants and indirect participants ("Indirect Participants"),
including Euroclear and Cedel. Procedures with respect to the ownership of
Book-Entry Interests are set forth below.
Upon receipt of the 1995 Global Note, the Book-Entry Depositary issued a
certificateless depositary interest (which represents a 100% interest in the
underlying 1995 Global Note) to DTC by recording such interest in the
Book-Entry Depositary's books and records in the name of Cede & Co., as nominee
of DTC. Upon such issuance, DTC credited, on its book-entry registration and
transfer system, the Participants' accounts with the respective interests owned
by such Participants. Ownership of Book-Entry Interests is shown on, and the
transfer of such interests will be effected only through, records maintained by
DTC and by Participants (with respect to interests of Indirect Participants,
including Euroclear and Cedel). The laws of some countries and some states in
the United States may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to own, transfer or pledge the Book-Entry
Interests.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
1995 Global Note, the Book-Entry Depositary or such nominee, as the case may
be, will be considered the sole holder of such 1995 Global Note for all
purposes under the 1995 Notes Indenture. Except as set forth above under "--
Form of 1995 Notes," Participants or Indirect Participants are not entitled to
have 1995 Notes or Book-Entry Interests registered in their names, will not
receive or be entitled to receive physical delivery of 1995 Notes or Book-Entry
Interests in definitive form and will not be considered the owners or holders
thereof under the 1995 Notes Indenture. Accordingly, each person owning a
Book-Entry Interest must rely on the procedures of the Book-Entry Depositary
and DTC and, if such person is not a Participant in DTC, on the procedures of
the Participant in DTC (being, in the case of participants in Euroclear and
Cedel, the procedures of Euroclear and Cedel) through which such person owns
its interest, to exercise any rights and remedies of a holder under the 1995
Notes Indenture. See "-- Actions by Owners of Book-Entry Interests" below. If
any definitive 1995 Notes are issued to Participants or Indirect Participants,
they will be issued in registered form ("Definitive Registered Notes"), as
described under "-- Form of the 1995 Notes." Unless and until Book-Entry
69
<PAGE> 71
Interests are exchanged for 1995 Definitive Registered Notes (as described under
"-- Form of the 1995 Notes" above), the depositary interest held by DTC may not
be transferred except as a whole by DTC to a nominee of DTC or by a nominee of
DTC to DTC or another nominee of DTC or by DTC or any such nominee to a
successor of DTC or a nominee of such successor.
PAYMENTS ON THE 1995 GLOBAL NOTE
Payments of any amounts owing in respect of the 1995 Global Note will be
made through one or more paying agents appointed under the 1995 Notes Indenture
(which initially will include the Trustee) to the Book-Entry Depositary, as the
holder of the 1995 Global Note. All such amounts will be payable in United
States dollars. Upon receipt of any such amounts, the Book-Entry Depositary
will pay the amount so received to DTC, which will distribute such payments to
its Participants. Payments of all such amounts will be made without deduction
or withholding for or on account of any present or future taxes, duties,
assessments or governmental charges of whatever nature except as may be
required by law, and if any such deduction or withholding is required to be
made by any law or regulation of the United Kingdom then, to the extent
described under "-- Payment of Additional Amounts" above, such Additional
Amounts will be paid as may be necessary in order that the net amounts received
by any holder of the 1995 Global Note or owner of Book-Entry Interests after
such deduction or withholding will equal the net amounts that such holder or
owner would have otherwise received in respect of the 1995 Global Note or
Book-Entry Interest, as the case may be, absent such withholding or deduction.
DTC, upon receipt of any such payment, will immediately credit Participants'
accounts with payments in amounts proportionate to their respective ownership
of Book-Entry Interests, as shown on the records of DTC. The Company expects
that payments by Participants to owners of Book-Entry Interests held through
such Participants will be governed by standing customer instructions and
customary practices, as is now the case with the securities held for the
account of customers in bearer form or registered in "street name" and will be
the responsibility of such Participants. In the event that DTC no longer
immediately credits participants' accounts with payments, the Company will
endeavor to cause payments of interest and principal to be made by wire
transfer to any owners of Book-Entry Interests whose aggregate ownership
exceeds $20 million in principal amount at maturity who so request.
Because the provisions of the 1995 Notes Indenture treat the holder of the
1995 Global Note as the owner of the 1995 Notes represented thereby for the
purpose of receiving amounts owing in respect of the 1995 Notes, the Company
has no responsibility or liability for the payment of amounts owing in respect
of the depositary interest held by DTC to owners of Book-Entry Interests
representing interests in the 1995 Global Note. Payments by DTC Participants to
owners of Book-Entry Interests held through such Participants are the
responsibility of such Participants, as is now the case with securities held
for the accounts of customers registered in "street name".
None of the Company, the Trustee, the Book-Entry Depositary or any agent of
the Company or the Trustee or the Book-Entry Depositary have any responsibility
or liability for any aspect of the records relating to or payments made on
account of Book-Entry Interests or for maintaining, supervising or reviewing any
records relating to such Book-Entry Interests.
REDEMPTION
In the event the 1995 Global Note (or any portion thereof) is redeemed,
the Book-Entry Depositary will redeem, from the amount received by it in
respect of the redemption of the 1995 Global Note, an equal amount of the
Book-Entry Interests. The redemption price payable in connection with the
redemption of Book-Entry Interests will be equal to the amount received by the
Book-Entry Depositary in connection with the redemption of the 1995 Global Note
(or any portion thereof). The Company understands that under existing DTC
practices, if less than all of the 1995 Notes are to be redeemed at any time,
DTC will credit Participants' accounts on a proportionate basis (with
adjustments to prevent fractions) or by lot or on such other basis as DTC deems
fair and appropriate; provided that no beneficial interests of less than $1,000
principal amount at maturity may be redeemed in part.
70
<PAGE> 72
TRANSFERS
All transfers of Book-Entry Interests are recorded in accordance with the
book-entry system maintained by DTC, pursuant to customary procedures
established by DTC and its Participants. Investors may, at their option, obtain
Definitive Registered Notes as set forth under "-- Form of the 1995 Notes".
While the 1995 Global Note is outstanding, holders of 1995 Definitive
Registered Notes may exchange their 1995 Definitive Registered Notes for
Book-Entry Interests by surrendering their 1995 Definitive Registered Notes to
the Book-Entry Depositary. The amount of the Book-Entry Interests will be
increased or decreased to reflect such transfers or exchanges. The Book-Entry
Depositary will request the Trustee to make the appropriate adjustments to the
1995 Global Note or exchange the 1995 Global Note for a new 1995 Global Note in
an appropriate principal amount at maturity to reflect any such transfers or
exchanges.
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
As soon as practicable after receipt by the Book-Entry Depositary of
notice of any solicitation of consents or request for a waiver or other action
by the holders of 1995 Notes or of any Offer to Purchase (as defined under "--
Certain Definitions" above), the Book-Entry Depositary will mail to DTC a
notice containing (a) such information as is contained in such notice received
by the Book-Entry Depositary, (b) a statement that at the close of business on
a specified record date DTC will be entitled to instruct the Book-Entry
Depositary as to the consent, waiver or other action, if any, pertaining to the
1995 Notes and (c) a statement as to the manner in which such instructions may
be given. In addition, the Book-Entry Depositary will forward to DTC, or, based
upon instructions received from DTC, to owners of Book-Entry Interests, all
materials pertaining to any such solicitation, request, offer or other action.
Upon the written request of DTC, the Book-Entry Depositary shall endeavor
insofar as practicable to take such action regarding the requested consent,
waiver, offer or other action in respect of the 1995 Notes in accordance with
any instructions set forth in such request. DTC may grant proxies or otherwise
authorize DTC Participants (or persons owning Book-Entry Interests through such
DTC Participants) to provide such instructions to the Book-Entry Depositary so
that it may exercise any rights of a holder or take any other actions which a
holder is entitled to take under the 1995 Notes Indenture. The Book-Entry
Depositary will not exercise any discretion in the granting of consents or
waivers or the taking of any other action relating to the 1995 Notes Indenture.
REPORTS
The Book-Entry Depositary will immediately send to DTC a copy of any
notices, reports and other communications received relating to the Company, the
1995 Notes or the Book-Entry Interests. All notices regarding the 1995 Notes
will, so long as the rules of the Luxembourg Stock Exchange require, be
published in a daily newspaper of general circulation in Luxembourg, which is
expected to be the Luxemburger Wort.
RESIGNATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
by written notice to the Company, the Trustee and DTC, such resignation to
become effective upon the appointment of a successor book-entry depositary, in
which case the 1995 Global Note shall be delivered to that successor. If no
such successor has been so appointed within 120 days, the Book-Entry Depositary
may request the Company to issue 1995 Definitive Registered Notes as described
above.
CHARGES OF BOOK-ENTRY DEPOSITARY
The Company will agree to indemnify the Book-Entry Depositary against
certain liabilities incurred by it and pay the charges of the Book-Entry
Depositary as agreed between the Company and the Book-Entry Depositary.
71
<PAGE> 73
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The 1995 Deposit Agreement may be amended by the Company and the
Book-Entry Depositary without notice to or consent of DTC or any owner of
Book-Entry Interest: (a) to cure any ambiguity, defect or inconsistency,
provided that such amendment or supplement does not adversely affect the rights
of DTC or any holder of Book-Entry Interests, (b) to evidence the succession of
another person to the Company (when a similar amendment with respect to the
1995 Notes Indenture is being executed) and the assumption by any such
successor of the covenants of the Company herein, (c) to evidence or provide
for a successor Book-Entry Depositary, (d) to make any amendment, change or
supplement that does not adversely affect DTC or any owner of Book-Entry
Interests, (e) to add to the covenants of the Company or the Book-Entry
Depositary, or (f) to comply with the United States Federal securities laws. No
amendment that adversely affects DTC may be made to the 1995 Deposit Agreement
without the consent of DTC. Upon the issuance of 1995 Definitive Registered
Notes in exchange for Book-Entry Interests constituting the entire principal
amount at maturity of 1995 Notes, the 1995 Deposit Agreement will terminate.
The 1995 Deposit Agreement may be terminated upon the resignation of the
Book-Entry Depositary if no successor has been appointed within 120 days as set
forth under "-- Resignation of Book-Entry Depositary."
INFORMATION CONCERNING DTC
The Company understands as follows with respect to DTC:
DTC is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities of its
Participants and to facilitate the clearance and settlement of transactions
among its Participants in such securities through electronic book-entry changes
in accounts of the Participants, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. Access to the DTC book-entry system is also
available to others, such as banks, brokers dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of an owner of a
Book-Entry Interest to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain Persons take physical
delivery of securities in definitive form. Consequently, the ability to
transfer Book-Entry Interests to such Persons may be limited. In addition,
beneficial owners of Book-Entry Interests through the DTC system will receive
distributions attributable to the 1995 Global Note only through DTC
Participants.
SETTLEMENT
The Book-Entry Interests will trade in DTC's Next-Day Funds Settlement
System. Any secondary market trading activity in the Book-Entry Interests is
expected to accrue through DTC's Participants, and the securities custody
accounts of investors will be credited with their holdings against payment in
next-day funds on the settlement date.
CLEARANCE THROUGH CEDEL AND EUROCLEAR
The 1995 Notes have been accepted for clearance by Cedel and Euroclear
under the common code 6217478. The ISIN is US252567AB82.
72
<PAGE> 74
DESCRIPTION OF THE 1997 NOTES
The 1997 Notes were issued under an Indenture dated as of February 27,
1997 (the "1997 Notes Indenture"), between the Company and The Bank of New
York, as trustee (the "Trustee"). A copy of the form of the 1997 Note Indenture
has been filed as an exhibit to the Registration Statement (File No. 333-25913)
of which this prospectus is a part. The following summary of certain
provisions of the 1997 Notes Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to all of the
provisions of the 1997 Notes Indenture, including the definitions of certain
terms therein and those terms made a part of the 1997 Notes Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), as in effect on the date of the 1997 Notes Indenture. In this section,
references to the Company are to Diamond Cable Communications Plc. The
definitions of certain capitalized terms used in the following summary are set
forth below under "-- Certain Definitions." Article and Section references are
to articles and sections of the 1997 Notes Indenture.
GENERAL
The 1997 Notes constitute general unsubordinated obligations of the
Company, limited to $420,500,000 aggregate principal amount at maturity and
will mature on February 15, 2007. The 1997 Notes will accrete at a rate of 10
3/4% per annum, compounded semiannually, to their aggregate principal amount at
maturity by February 15, 2002 (the "1997 Cash Interest Date"). Cash interest
will not be payable on the 1997 Notes prior to the 1997 Cash Interest Date.
Thereafter, cash interest on the 1997 Notes will accrue at a rate of 10 3/4%
per annum and be payable semi-annually in arrears on each February 15 and
August 15 (each, an "Interest Payment Date"), commencing August 15, 2002, to
the Book-Entry Depositary (as hereinafter defined) in the case of the 1997
Global Notes (as hereinafter defined) and to holders of 1997 Definitive
Registered Notes (as hereinafter defined), if any, on the August 1 or February
1, as the case may be, immediately preceding such Interest Payment Date. Cash
interest will accrue from the most recent Interest Payment Date to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for, from the 1997 Cash Interest Date. Cash interest will be
computed on the basis of a 360-day year of twelve 30-day months. For additional
information concerning payments on the 1997 Notes, see "-- Description of
Book-Entry System -- Payments on the 1997 Global Notes" and "-- Form of 1997
Notes."
The 1997 Notes effectively rank junior to any indebtedness of the
Company's subsidiary's 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 1997 Notes effectively rank junior to the 1998 Notes in
that funds will be available from the Company's subsidiaries, including Diamond
Holdings, to the Company only through payment of dividends, if any, or payment
of principal and interest on currently outstanding intercompany indebtedness
which will be subordinated to the 1998 Notes.
Except as described below under "-- Certain Covenants -- Change of
Control" and "-- Mergers, Consolidations and Certain Sales of Assets", the 1997
Notes Indenture does not contain any provisions that permit the holders of the
1997 Notes to require that the Company repurchase or redeem the 1997 Notes or
otherwise protect the holders of 1997 Notes in the event of a takeover,
recapitalization or similar restructuring or in the event of any other highly
leveraged transaction.
The 1997 Notes are listed on the Luxembourg Stock Exchange. There can be
no assurance that any trading market in the 1997 Notes will develop. See "Risk
Factors -- Trading Market for the Discount Notes".
FORM OF THE 1997 NOTES
The 1997 Notes are represented by one or more global securities in bearer
form, without coupons attached (the "1997 Global Notes"), which have been
issued in a denomination equal to the outstanding principal amount at maturity
of 1997 Notes represented thereby. The 1997 Global Notes have been deposited
with The Bank of New York, as book-entry depositary (the "Book-Entry
Depositary"), pursuant to the terms of a 1997 Notes Depositary Agreement, dated
as of February 27, 1997 between the Company, for the limited purposes set forth
therein, the Book-Entry Depositary and the owners from time to time of
Book-Entry Interests (the "1997 Deposit Agreement"). See "-- Description of
Book-Entry System".
73
<PAGE> 75
Under the terms of the 1997 Deposit Agreement, owners of Book-Entry
Interests will receive 1997 Definitive Registered Notes (i) if DTC notifies the
Book-Entry Depositary that it is unwilling or unable to act as depositary or
ceases to be a clearing agency registered under the Securities Exchange Act of
1934, as amended, and, in either case, a successor depositary is not appointed
by the Book-Entry Depositary at the request of the Company within 120 days,
(ii) in the event of an Event of Default under the 1997 Notes Indenture upon
request of the owner of a Book-Entry Interest, (iii) at any time if the Company
in its sole discretion determines that the 1997 Global Notes (in whole but not
in part) should be exchanged for 1997 Definitive Registered Notes, (iv) if such
owner of a Book-Entry Interest requests such exchange in writing delivered to
DTC and through DTC to the Book-Entry Depositary or (v) if the Book-Entry
Depositary is at any time unwilling or unable to continue as Book-Entry
Depositary and a successor Book-Entry Depositary is not appointed by the
Company within 120 days of its giving notification thereof to the Company. In
no event will definitive 1997 Notes in bearer form be issued.
Any 1997 Definitive Registered Notes will be issued in registered form in
denominations of $1,000 principal amount at maturity or multiple thereof. Any
1997 Definitive Registered Notes will be registered in such name or names as
the Book-Entry Depositary shall instruct the Trustee based on the instructions
of DTC. It is expected that such instructions will be based upon directions
received by DTC from its participants ("Participants") with respect to
ownership of Book-Entry Interests. To the extent permitted by law, the Company,
the Trustee and any paying agent shall be entitled to treat the person in whose
name any 1997 Definitive Registered Note is registered as the absolute owner
thereof. While the 1997 Global Notes are outstanding, holders of 1997
Definitive Registered Notes may exchange their 1997 Definitive Registered Notes
for Book-Entry Interests by surrendering their 1997 Definitive Registered Notes
to the Book-Entry Depositary. The amount of the 1997 Global Notes (and the
Book-Entry Interests) will be increased or decreased to reflect exchanges or
issues of 1997 Definitive Registered Notes. The Book-Entry Depositary will
request the Trustee to make the appropriate adjustments to the 1997 Global Note
or Notes underlying the Book-Entry Interests to reflect any such issues or
adjustments. The 1997 Notes Indenture contains provisions relating to the
maintenance by a registrar of a register reflecting ownership of 1997
Definitive Registered Notes, if any, and other provisions customary for a
registered debt security. Payment of principal and interest, including Special
Interest, if any, on each 1997 Definitive Registered Note will be made to the
holder appearing on the register at the close of business on the record date at
his address shown on the register on the record date.
HOLDERS SHOULD BE AWARE THAT, UNDER CURRENT U.K. TAX LAW, UPON THE
ISSUANCE TO A HOLDER OF DEFINITIVE REGISTERED NOTES, SUCH HOLDER WILL BECOME
SUBJECT TO U.K. INCOME TAX (CURRENTLY 20%) TO BE WITHHELD ON ANY PAYMENTS OF
INTEREST ON THE DEFINITIVE REGISTERED NOTES AS SET FORTH UNDER "TAXATION --
UNITED KINGDOM". A HOLDER OF DEFINITIVE REGISTERED NOTES WILL, TO THE EXTENT
DESCRIBED BELOW UNDER "-- PAYMENT OF ADDITIONAL AMOUNTS", BE ENTITLED TO
RECEIVE ADDITIONAL AMOUNTS WITH RESPECT TO SUCH DEFINITIVE REGISTERED NOTES.
ADDITIONAL AMOUNTS WILL NOT BE PAYABLE IF SUCH DEFINITIVE REGISTERED NOTES WERE
ISSUED AT THE REQUEST OF A HOLDER (INCLUDING FOLLOWING AN EVENT OF DEFAULT) AND
AT THE TIME OF THE PAYMENT IN QUESTION DEFINITIVE REGISTERED NOTES HAVE NOT
BEEN ISSUED IN EXCHANGE FOR THE ENTIRE PRINCIPAL AMOUNT AT MATURITY OF NOTES.
. However, a U.S. holder of 1997 Definitive Registered Notes may be entitled to
receive a refund of withheld amounts from the Inland Revenue in certain
circumstances. See "Taxation -- United Kingdom -- Payments on the 1997 Notes".
Any person receiving 1997 Definitive Registered Notes other than at its
own request will not be obligated to pay or otherwise bear the cost of any tax
or governmental charge or any cost or expense of the Book-Entry Depositary
relating to insurance, postage, transportation or any similar charge, all of
which will be solely the responsibility of the Company.
Principal of, premium, if any, and interest, including Special Interest,
if any, on any 1997 Definitive Registered Notes will be payable at the
corporate trust office or agency of the Trustee in The City of New York
maintained for such purposes and at the specified office of the Paying Agent in
Luxembourg (against surrender of the relevant 1997 Definitive Registered Note,
in the case of payments of principal). In addition, interest, including Special
74
<PAGE> 76
Interest, if any, on 1997 Definitive Registered Notes may be paid by check
mailed to the person entitled thereto as shown on the register for the 1997
Definitive Registered Notes. No service charge will be made for any registration
of transfer or exchange of any 1997 Definitive Registered Notes.
The Company has undertaken to procure that while the 1997 Notes are
outstanding and listed on the Luxembourg Stock Exchange, it will maintain a
paying agent and a transfer agent in Luxembourg through which payment of
principal of, or premium or interest, including Special Interest, if any, on,
the 1997 Notes may be made and through which the registration of transfer of
1997 Notes may be effected.
The initial paying agent and transfer agent appointed by the Company in
Luxembourg is Banque Internationale a Luxembourg S.A., 69 route d'Esch, L-1470
Luxembourg.
REDEMPTION
OPTIONAL REDEMPTION
The 1997 Notes are redeemable, in whole or in part, at any time on or
after the 1997 Cash Interest Date, at the option of the Company, upon not less
than 30 nor more than 60 days' notice; provided that the Company may not give a
notice of redemption (i) more than four times in any year or (ii) in respect of
the redemption of less than $5 million in principal amount at maturity of the
1997 Notes. Such redemption will be at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued and
unpaid interest, including Special Interest, if any, to the redemption date, if
redeemed during the 12-month period beginning February 15 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- -----
<S> <C>
2002............... 105.375%
2003............... 103.583%
2004............... 101.782%
2005 and thereafter 100.000%
</TABLE>
PURCHASE OBLIGATION
The Company is not required to make any mandatory redemption or sinking
fund payments in respect of the 1997 Notes.
Upon the occurrence of a Change of Control (as defined below), the Company
will be obligated to make an Offer to Purchase all the outstanding 1997 Notes
at a price of 101% of the Accreted Value thereof (determined at the date of
purchase), if such purchase is prior to the 1997 Cash Interest Date, or 101% of
the principal amount at maturity thereof, plus accrued and unpaid interest,
including Special Interest, if any, thereon, if any, to the date of purchase.
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 1997
Notes at a price of 100% of the Accreted Value thereof (determined at the date
of purchase), if such purchase is prior to the 1997 Cash Interest Date, or 100%
of the principal amount at maturity thereof, plus accrued and unpaid interest
(including Special Interest), if any, to the date of purchase. See "-- Certain
Covenants -- Change of Control" and "-- Certain Covenants -- Limitation on
Certain Asset Dispositions", respectively.
SELECTION; EFFECT OF REDEMPTION NOTICE
In the case of a partial redemption, selection of the 1997 Notes for
redemption will be made pro rata (subject, in the case of Book-Entry Interests,
to DTC procedures). Upon giving of a redemption notice, the principal amount of
1997 Notes called for redemption will cease to accrete (if such redemption
occurs prior to the 1997 Cash Interest Date), interest on 1997 Notes called for
redemption will cease to accrue from and after the date fixed for redemption
(unless the Company defaults in providing the funds for such redemption) and
such 1997 Notes will then cease to be outstanding.
75
<PAGE> 77
OPTIONAL TAX REDEMPTION
The 1997 Notes will be subject to redemption upon not less than 30 nor
more than 60 days' notice by mail, as a whole, but not in part, at the election
of the Company at any time at a redemption price equal to 100% of the Accreted
Value thereof (determined at the date of redemption) if such purchase is prior
to the 1997 Cash Interest Date, or 100% of the principal amount at maturity
thereof (together in the case of any such redemption with accrued and unpaid
interest, including Special Interest, if any, to the date of redemption, if (a)
the Company is required to issue 1997 Definitive Registered Notes after using
all reasonable efforts to avoid having to issue such 1997 Definitive Registered
Notes and the Company is required, or would be so required in the absence of
any applicable tax treaty, on the next succeeding Interest Payment Date to pay
Additional Amounts with respect to the 1997 Notes as described under "--
Payment of Additional Amounts" or (b) the Company has become, or would become
obligated to pay in the absence of any applicable tax treaty, on the next date
on which any amount would be payable with respect to the 1997 Notes, any
Additional Amount as a result of any amendment to or change in the laws (or any
rules or regulations thereunder) of the United Kingdom or any political
subdivision or taxing authority thereof or therein (or, in the case of
Additional Amounts payable by a successor Person to the Company, of the
jurisdiction in which such successor Person is organized or any political
subdivision or taxing authority thereof or therein) or any amendment or change
in any official interpretation or application of such laws or rules or
regulations or any execution of or amendment to any treaty affecting taxation
to which the United Kingdom or such political subdivision or taxing authority
(or such other jurisdiction or political subdivision or taxing authority) is a
party, if the amendment or change becomes effective on or after the date of the
1997 Notes Indenture (or, in the case of Additional Amounts payable by a
successor Person to the Company, the date on which such successor Person became
such pursuant to the applicable provisions of the 1997 Notes Indenture unless
as of such date the relevant tax authority had publicly announced that such
amendment or change or execution was to occur after such date) and such
obligation cannot be avoided by the use of all commercially reasonable measures
available to the Company; provided, however, that (1) no such notice of
redemption may be given earlier than 90 days prior to the earliest date on
which the Company would be obligated to pay such Additional Amounts were a
payment in respect of the Securities then due, and (2) at the time such notice
of redemption is given, such obligation to pay such Additional Amounts remains
in effect.
PAYMENT OF ADDITIONAL AMOUNTS
All payments made by the Company on the 1997 Notes will be made free and
clear of and without withholding or deduction for or on account of any present
or future taxes, duties, assessments or governmental charges of whatever nature
unless the withholding or deduction is then required by law. If any withholding
or deduction for or on account of any present or future taxes, assessments or
other governmental charges of the United Kingdom or any political subdivision or
taxing authority thereof or therein ("Taxes") shall at any time be required in
respect of any amounts to be paid by the Company under the 1997 Notes, the
Company will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the Holder would have received if such Taxes had not been withheld or deducted;
provided that the foregoing obligation to pay Additional Amounts does not apply
to (a) any Taxes which would not have been so imposed but for the existence of
any present or former connection between such Holder and the United Kingdom
(other than the mere receipt of such payment or the ownership or holding outside
of the United Kingdom of such 1997 Note); (b) any estate, inheritance, gift,
sales, excise, transfer, personal property tax or similar tax, assessment or
governmental charge; or (c) any Taxes payable otherwise than by deduction or
withholding from payments of principal of (or premium, if any, on) or interest
on such 1997 Note; nor will Additional Amounts be paid (i) if the payment could
have been made by or through another paying agent without such deduction or
withholding, (ii) if the payment could have been made without such deduction or
withholding had the holder of the 1997 Note or, if different, the beneficiary of
the payment complied with a request of the Company or any other person through
whom payment may be made, made upon reasonable notice prior to such payment,
addressed or otherwise provided to such holder or beneficiary to provide
information, documents or other evidence concerning the nationality, residence,
identity or connection with the taxing jurisdiction of such holder or
beneficiary which is required or imposed by a statute, treaty, regulation or
administrative practice of the taxing jurisdiction as a precondition to
exemption from all or part of such tax, (iii) with respect to any payment of
principal of (or premium if any, on) or interest on such 1997 Note to any holder
76
<PAGE> 78
who is a fiduciary or partnership or Person other than the sole beneficial
owner of such payment, to the extent such payment would be required by the laws
of the U.K. (or any political subdivision or taxing authority thereof or
therein) to be included in the income for tax purposes of a beneficiary or
settlor with respect to such fiduciary or a member of such partnership or a
beneficial owner who would not have been entitled to the Additional Amounts had
such beneficiary, settlor, member or beneficial owner been the holder of such a
1997 Note, or (iv) if the payment is in respect of a 1997 Definitive Registered
Note issued at the request of a holder of a Book-Entry Interest (including
following an Event of Default) and at the time the payment is made 1997
Definitive Registered Notes have not been issued in exchange for the entire
principal amount at maturity of the 1997 Notes. The foregoing provisions shall
survive any termination or discharge of the 1997 Notes Indenture and shall apply
mutatis mutandis to any withholding or deduction for or on account of any
present or future taxes, assessments or governmental charges of whatever nature
of any jurisdiction in which any successor Person to the Company is organized,
or any political subdivision or taxing authority thereof or therein. The Company
has agreed to use commercially reasonable efforts to facilitate administrative
actions necessary to assist Holders to obtain any refund of or credit against
withholding taxes for which Additional Amounts are not paid as a result of the
proviso in the second preceding sentence.
CERTAIN COVENANTS
The 1997 Notes Indenture contains, among others, the following additional
covenants:
LIMITATION ON CONSOLIDATED DEBT AND DISQUALIFIED EQUITY
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur any Debt or issue any Disqualified Equity unless, immediately after
giving effect to the Incurrence of such Debt or the issuance of such
Disqualified Equity and the receipt and application of the proceeds thereof,
the Annualized Consolidated Debt to Cash Flow Ratio of the Restricted Group for
the quarter next preceding the Incurrence of such Debt or the issuance of such
Disqualified Equity, as the case may be, for which quarterly financial
statements are available, calculated on a pro forma basis (as if such Debt had
been Incurred or such Disqualified Equity had been issued at the beginning of
such quarter) would be less than 7.0 to 1.
Notwithstanding the foregoing paragraph, the Company may, and may permit
any Restricted Subsidiary to, Incur or issue the following: (i) Debt up to the
maximum amount available under the Senior Bank Facility; (ii) Debt of the
Company and/or any Restricted Subsidiary outstanding on the date of the 1997
Notes Indenture; (iii) Debt or Disqualified Equity to the extent that the
proceeds are used to finance working capital, or the construction of, or the
acquisition of, property or assets to be used in a Cable Business; (iv) Debt
Incurred or Disqualified Equity issued to finance a Cable Acquisition or
provide working capital for or financing for the construction of property or
assets to be used in the business so acquired; (v) Debt consisting of Interest
Rate Protection Obligations or Currency Hedging Agreements; (vi) performance
bonds or surety bonds or similar instruments provided in the ordinary course of
business; (vii) Debt owed by the Company to any Wholly Owned Restricted
Subsidiary (so long as such Debt is held by a Wholly Owned Restricted
Subsidiary) or Debt owed by or Disqualified Equity issued by a Restricted
Subsidiary to the Company or a Wholly Owned Restricted Subsidiary of the
Company (provided that such Debt or Disqualified Equity is at all times held by
the Company or a Wholly Owned Restricted Subsidiary); provided, however, that
upon either (a) the transfer or other disposition by such Wholly Owned
Restricted Subsidiary or the Company of any such Debt or Disqualified Equity to
a Person other than the Company or another Wholly Owned Restricted Subsidiary
or (b) the issuance, sale, lease, transfer or other disposition of shares of
Equity Securities (including by consolidation or merger) of such Wholly Owned
Restricted Subsidiary to a Person other than the Company or another such Wholly
Owned Restricted Subsidiary, such Debt shall be deemed to have been Incurred or
such Disqualified Equity shall be deemed to have been issued at the time of
such transfer or other disposition; (viii) Debt Incurred or Disqualified Equity
issued to renew, extend, refinance or refund any Debt or Disqualified Equity
permitted in Clauses (i) through (iv) above, or the 1997 Notes (in the event
that the 1997 Notes are redeemed in part pursuant to the provisions described
under "-- Redemption" above), the 1994 Notes or 1995 Notes in an amount not to
exceed the outstanding principal amount (or, if less, Accreted Value) of the
Debt or the aggregate liquidation preference of the Disqualified Equity so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Debt or Disqualified Equity
refinanced, or the amount of any premium reasonably determined by the Company
77
<PAGE> 79
to be necessary to accomplish such refinancing by means of a tender offer or
privately negotiated repurchase plus the expenses of the Company Incurred in
connection with such refinancing; provided that (a) in the case of any
refinancing or refunding of Debt which is pari passu to the 1997 Notes, the
refinancing or refunding Debt is made pari passu to the 1997 Notes or
subordinated to the 1997 Notes, and, in the case of any refinancing or refunding
of Debt which is subordinated to the 1997 Notes or of Disqualified Equity, the
refinancing or refunding Debt is subordinated to the 1997 Notes to the same
extent as the Debt being refinanced or refunded or is Disqualified Equity; and
(b) in either case, the refinancing or refunding Debt or Disqualified Equity by
its terms, or by the terms of any agreement or instrument pursuant to which such
Debt or Disqualified Equity is Incurred or issued, does not have a Weighted
Average Life that is lower than that of the Debt or Disqualified Equity being
refinanced or refunded; and (ix) Debt or Disqualified Equity not otherwise
permitted to be Incurred or issued under Clauses (i) through (viii) above,
which, together with any other outstanding Debt Incurred or Disqualified Equity
issued pursuant to this Clause (ix), has an aggregate principal amount (or
liquidation preference) not in excess of L.20 million at any time outstanding.
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) shall not, directly or indirectly, declare or pay any
dividend, or make any distribution, of any kind or character (whether in cash,
property or securities or otherwise) in respect of any class of its Equity
Securities or to the holders of any class of its Equity Securities (including
pursuant to a merger or consolidation of the Company, but excluding any
dividends or distributions payable solely in its Equity Securities (other than
Disqualified Equity) or in options, warrants or other rights to acquire its
Equity Securities (other than Disqualified Equity)), (ii) shall not, and shall
not permit any Restricted Subsidiary of the Company to, directly or indirectly,
purchase, redeem or otherwise acquire or retire for value (a) any Equity
Securities of the Company or any Related Person of the Company or (b) any
options, warrants or rights to purchase or acquire Equity Securities of the
Company or any Related Person of the Company (except options, warrants or
rights to purchase or acquire such Equity Securities held by any current or
former officer or director of the Company or ECE Management International (or
any of its predecessors) in an aggregate amount not exceeding L.5 million),
(iii) shall not make, or permit any Restricted Subsidiary of the Company to
make any Investment in, or Incur an obligation to Guarantee any obligation of,
any Affiliate or Related Person of the Company, other than the Company or a
Wholly Owned Restricted Subsidiary of the Company; and (iv) shall not, and
shall not permit any Restricted Subsidiary to, redeem, defease, repurchase or
otherwise retire or acquire for value prior to any scheduled maturity,
repayment or sinking fund payment, Debt of the Company which explicitly by its
terms is subordinate in right of payment to the 1997 Notes (the transactions
described in Clauses (i) through (iv) being referred to herein as "Restricted
Payments"), if: (1) at the time thereof and after giving effect thereto an
Event of Default, or an event that with notice or lapse of time, or both, would
constitute an Event of Default, shall have occurred and be continuing or (2)
upon giving effect to such Restricted Payment, the aggregate of all Restricted
Payments from the date of the 1997 Notes Indenture exceeds the sum of (a) the
difference between (x) the cumulative Consolidated Operating Cash Flow from the
first day of the fiscal quarter in which the issue date of the 1997 Notes falls
through the last day of the last full fiscal quarter immediately preceding such
Restricted Payment for which quarterly financial statements are available, and
(y) 200% of cumulative Consolidated Interest Expense from the first day of the
fiscal quarter in which the issue date of the 1997 Notes falls through the last
day of the last full fiscal quarter immediately preceding such Restricted
Payment for which quarterly financial statements of the Company are available;
and (b) 100% of the aggregate net cash proceeds after the issue date of the
1997 Notes, from the issuance of Equity Securities (other than Disqualified
Equity) of the Company and options, warrants or other rights on Equity
Securities (other than Disqualified Equity) of the Company (other than to a
Restricted Subsidiary) after the issue date of the 1997 Notes. The foregoing
provision shall not be violated by reason of (i) the payment of any dividend
within 60 days after declaration thereof if at the declaration date such
payment would have complied with the foregoing provision; (ii) any refinancing
or refunding of any Debt otherwise permitted under clause (viii) described in
the second paragraph under the caption "-- Limitation on Consolidated Debt and
Disqualified Equity"; (iii) investments by the Company or any Restricted
Subsidiary in an amount not to exceed in the aggregate L.10 million in a Person
which is engaged in a Cable Business or a business incidental thereto; and (iv)
investments in Non-Restricted Subsidiaries made with the proceeds of a
substantially concurrent (1) capital contribution to the Company or (2) issue
or sale of Equity Securities (other than Disqualified Equity) of the Company.
78
<PAGE> 80
LIMITATION ON LIENS
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur or suffer to exist any Lien upon any of its properties or assets, now
owned or hereafter acquired, to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the 1997 Notes
equally and ratably with such Debt so long as such Debt shall be so secured or
in the event such Debt is subordinate in right of payment to the 1997 Notes,
prior to such Debt as to such property and assets for so long as such Debt
shall be so secured. The foregoing restrictions do not apply to Liens existing
at the date of the 1997 Notes Indenture or to: (i) Liens securing only the 1997
Notes; (ii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company (and not incurred in anticipation of such merger or
consolidation) which Liens shall not extend to any other property of the
Company or any Restricted Subsidiary; (iv) Liens on property existing
immediately prior to the time of acquisition thereof (and not in anticipation
of the financing of such acquisition); (v) Liens to secure Debt Incurred under
the provisions described in clauses (i), (iii), (iv), (v) or (ix) of the second
paragraph under the caption "-- Limitation on Consolidated Debt and
Disqualified Equity"; (vi) Liens for taxes or assessments or other governmental
charges or levies which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
accordance with generally accepted accounting principles shall have been made;
(vii) Liens to secure obligations under workmen's compensation laws or similar
legislation, including Liens with respect to judgments which are not currently
dischargeable; and (viii) Liens to secure Debt Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, Debt secured by any Lien referred to in the
foregoing Clauses (i) through (viii) so long as such Lien does not extend to
any other property. In addition to the foregoing, the Company and its
Restricted Subsidiaries may incur a Lien to secure any Debt or enter into a
Sale and Leaseback Transaction, without equally and ratably securing the 1997
Notes, if the sum of (i) the amount of Debt secured by a Lien entered into
after the date of the 1997 Notes Indenture and otherwise prohibited by the 1997
Notes Indenture and (ii) the Attributable Value of all Sale and Leaseback
Transactions entered into after the date of the 1997 Notes Indenture and
otherwise prohibited by the 1997 Notes Indenture does not exceed 5% of the
Company's Consolidated Tangible Assets.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Company shall not, and shall not permit any Restricted Subsidiary of
the Company to, enter into any Sale and Leaseback Transaction unless (i) the
Company or such Restricted Subsidiary were entitled to incur a Lien to secure
Debt in an amount at least equal to the Attributable Value of such Sale and
Leaseback Transaction and the terms of such transaction have been approved by
the Board of Directors of the Company or (ii) all of the conditions contained
in the provisions described under "-- Limitation on Certain Asset Dispositions"
(including the provisions concerning the application of Net Available Proceeds)
would be satisfied with respect to such Sale and Leaseback Transaction if all
of the consideration received in such Sale and Leaseback Transaction were
treated as Net Available Proceeds.
LIMITATIONS CONCERNING DISTRIBUTIONS BY AND TRANSFERS TO RESTRICTED GROUP
The Company may not, and may not permit any Restricted Subsidiary to,
suffer to exist any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (i) to pay, directly or indirectly, dividends or make any
other distributions in respect of its Equity Securities or pay any Debt or
other obligation owed to the Company or any other Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any other Restricted
Subsidiary of the Company; or (iii) to transfer any of its property or assets
to, the Company or any Restricted Subsidiary of the Company. Notwithstanding
the foregoing, the Company may, and may permit any Subsidiary to, suffer to
exist any such encumbrance or restriction on the ability of any Subsidiary of
the Company if and to the extent such encumbrance or restriction exists on the
date of the 1997 Notes Indenture or is (a) provided for in the Senior Bank
Facility documents; (b) existed prior to the time any Person became a
Subsidiary of the Company and such restriction or encumbrance was not incurred
in anticipation of such Person becoming a Subsidiary of the Company; (c) exists
by reason of a customary merger or acquisition agreement for the purchase or
acquisition of the stock or assets of the Company or any of its Restricted
79
<PAGE> 81
Subsidiaries by another Person; (d) contained in an operating lease
for real property and is effective only upon the occurrence and during the
continuance of a default in the payment of rent; (e) the result of applicable
corporate law or regulation relating to the payment of dividends or
distributions; (f) pursuant to an agreement pursuant to which Debt meeting the
requirements of clauses (iii), (iv), (v) or (ix) of the second paragraph under
the caption "-- Limitation on Consolidated Debt and Disqualified Equity" is
Incurred; provided, however, that the provisions contained in such agreement
relating to such encumbrance or restriction are no more restrictive than those
contained in the terms of the Senior Bank Facility; or (g) pursuant to an
agreement effecting a renewal, extension, refinancing or refunding of Debt
Incurred pursuant to an agreement referred to in clause (a), (b) or (f) above;
provided, however, that the provisions contained in such agreement relating to
such encumbrance or restriction are no more restrictive than the provisions
contained in the agreement the subject thereof, as determined in good faith by
the Board of Directors and evidenced by a Board Resolution.
Transactions with Affiliates and Related Persons
Except as permitted in the following paragraph, the Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any transaction or
conduct any business with any Affiliate or Related Person of the Company,
unless such transaction is effected or such business is conducted on terms
which are in the Company's good faith judgment at least as favorable as those
that could be obtained in a comparable arm's length transaction with a Person
that is not an Affiliate or Related Person. Any such transaction (or series of
related transactions) in which such Affiliate or Related Person receives in
excess of L.1.0 million in any twelve-month period shall be approved as being
in the Company's best interests by a majority of the disinterested directors of
the Board of Directors of the Company. Any such transaction involving in excess
of L.5.0 million (or series of related transactions involving in excess of
L.5.0 million), or as to which there are no disinterested directors, is subject
to the further requirement that the Company obtain an opinion of an
internationally recognized expert with experience in appraising the terms and
conditions of the relevant type of transaction (or series of related
transactions) stating that the transaction or series of related transactions is
fair (from a financial point of view) to the Company or such Restricted
Subsidiary.
The above requirements shall not be applicable to (i) any transaction
among the Company and its Wholly Owned Subsidiaries; (ii) any existing
management agreement with ECE Management International or any successor or
assign, or any other management agreement which has substantially similar
terms; or (iii) any transaction in which investment banking or other financial
advisory services are provided to the Company or any Subsidiary by Goldman,
Sachs & Co. or any of its Affiliates that is, in the Company's good faith
judgment, on arm's length terms.
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Disposition unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Asset Disposition at least equal to the fair market value of the shares or
assets sold or otherwise disposed of; and (b) at least 90% of such
consideration consists of cash or Cash Equivalents. To the extent the Net
Available Proceeds of any Asset Disposition are not required to be applied to
repay amounts outstanding under the Senior Bank Facility or any Debt of a
Restricted Subsidiary, or are not so applied, the Company or such Restricted
Subsidiary, as the case may be, may apply such Net Available Proceeds within
365 days of the receipt thereof, to an investment in properties and assets that
will be used in a Cable Business (or in Equity Securities of any such Person
that will become a Restricted Subsidiary as a result of such investment to the
extent that such Person owns properties and assets that will be used in a Cable
Business) of the Company or any Restricted Subsidiary ("Replacement Assets").
Notwithstanding the foregoing, the Company may retain the Net Available
Proceeds from any Asset Disposition, the Net Available Proceeds of which do not
exceed L.1.0 million for any purpose. Any Net Available Proceeds from any Asset
Disposition that are neither used to repay amounts outstanding under the Senior
Bank Facility or any Debt of a Restricted Subsidiary nor invested in
Replacement Assets within such 365-day period (exclusive of the up to L.1.0
million referred to in the preceding sentence) shall constitute "Excess
Proceeds" subject to the provisions described in the following paragraph.
80
<PAGE> 82
When the aggregate amount of Excess Proceeds equals or exceeds L.10.0
million the Company shall make to all holders of the 1997 Notes within 30 days
of the determination thereof an Offer to Purchase 1997 Notes with an aggregate
principal amount at maturity (or if less, an Accreted Value) equal to such
Excess Proceeds at a price in cash equal to 100% of the Accreted Value thereof
on any purchase date prior to the 1997 Cash Interest Date or 100% of the
outstanding principal amount at maturity thereof plus accrued and unpaid
interest, if any, to any purchase date on or after the 1997 Cash Interest Date,
as applicable. To the extent that the aggregate principal amount at maturity or
if applicable, the Accreted Value of 1997 Notes tendered pursuant to such Offer
to Purchase is less than the Excess Proceeds, the Company may use such
deficiency for any purpose. If the aggregate principal amount at maturity or
the Accreted Value, as applicable, of 1997 Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of 1997 Notes which can be
purchased with the Excess Proceeds, 1997 Notes to be purchased will be selected
on a pro rata basis.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset
Disposition without complying with such paragraphs to the extent (i) at least
90% of the consideration for such Asset Disposition constitutes Replacement
Assets (or Equity Securities of any such Person that will become a Restricted
Subsidiary as a result of such transaction to the extent that such Person owns
properties and assets that will be used in a Cable Business) and (ii) such
Asset Disposition is for fair market value; provided that any consideration not
constituting Replacement Assets or Equity Securities as described in Clause (i)
received by the Company or any Restricted Subsidiaries in connection with any
Asset Disposition permitted to be consummated under this paragraph shall
constitute Net Available Proceeds subject to the provisions of the two
preceding paragraphs.
CHANGE OF CONTROL
Within 60 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company shall commence an Offer to
Purchase all Outstanding 1997 Notes at a purchase price equal to 101% of, prior
to the 1997 Cash Interest Date, their Accreted Value and on and after the 1997
Cash Interest Date their principal amount at maturity plus in such case accrued
but unpaid interest to the date of purchase. The Company will, not less than 10
days after the date on which the Company first becomes aware of the
consummation of a transaction resulting in a Change of Control, cause notice of
such Change of Control to be mailed to holders of the 1997 Notes. A "Change of
Control" will be deemed to have occurred in the event that, after the date of
the 1997 Notes Indenture, either (a) any Person or any Persons (other than a
Permitted Holder) acting together which would constitute a group (for purposes
of Section 13(d) of the Exchange Act, or any successor provision thereto) (a
"Group"), together with any Affiliates or Related Persons thereof shall
beneficially own (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto) at least 45% of the aggregate voting power of all
Equity Securities of the Company entitled to vote generally in the election of
directors of the Company; or (b) any Person or Group (other than a Permitted
Holder), together with any Affiliates or Related Persons thereof, shall succeed
in having a sufficient number of its nominees elected to the Board of Directors
of the Company such that such nominees, when added to any existing director
remaining on the Board of Directors of the Company after such election who is
an Affiliate or Related Person of such Group, will constitute a majority of the
Board of Directors of the Company or (c) certain events of bankruptcy,
insolvency or receivership affecting the Company.
Any future credit agreements or other agreements relating to indebtedness
of the Company and its subsidiaries (including the Senior Bank Facility) may
contain provisions restricting the ability of the Company to repurchase 1997
Notes upon a Change of Control. In the event that a Change of Control occurs
when such provisions are in effect, the Company may seek the consent of the
relevant lenders to the repurchase of 1997 Notes or could attempt to repay or
refinance such indebtedness, in a manner that would permit the Company to
effect the repurchase of the 1997 Notes. In the absence of such a repayment or
refinancing, the Company may be precluded from offering to repurchase the 1997
Notes by the applicable provisions of such other agreements. The failure of the
Company to offer to repurchase the 1997 Notes upon a Change of Control would
constitute an Event of Default under the 1997 Notes Indenture. Moreover, there
can be no assurance that the Company will have the financial resources
necessary to effect any repurchase of 1997 Notes upon a Change of Control.
81
<PAGE> 83
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company shall not, in a single transaction or through a series of
related transactions, (i) consolidate with or merge into any other Person; (ii)
permit any other Person to consolidate with or merge into the Company; (iii)
directly or indirectly transfer, assign, convey, sell, lease or otherwise
dispose of all or substantially all of its properties and assets as an
entirety; or (iv) permit any of its Subsidiaries to enter into any such
transaction or transactions if such transaction or transactions, in the
aggregate, would result in a sale, assignment, transfer, lease or disposal of
all or substantially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis to any other Person or group of affiliated
Person unless: (1) immediately before and after giving effect to such
transaction and treating any Debt and Disqualified Equity which becomes an
obligation of the Company or a Subsidiary of the Company as a result of such
transaction as having been Incurred or issued, as applicable, by the Company or
such Subsidiary at the time of the transaction, no Event of Default or event
that with notice or lapse of time, or both, would constitute an Event of
Default shall have occurred and be continuing; (2) in the event the Company
shall consolidate with or merge into another Person or shall directly or
indirectly transfer, assign, convey, sell, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety, the Person
formed by such consolidation or into which the Company is merged or the Person
which acquires by transfer, assignment, conveyance, sale, lease or other
disposition all or substantially all of the properties and assets of the
Company as an entirety shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of England and Wales or of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume by an indenture supplemental to the 1997 Notes Indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, the
due and punctual payment of the principal of (and premium, if any), interest
and Additional Amounts, if any, on all the 1997 Notes and the performance of
every covenant of the 1997 Notes Indenture on the part of the Company to be
performed or observed; (3) the Company or the successor to the Company will
have an Annualized Consolidated Debt to Cash Flow Ratio for the quarter next
preceding such transaction for which quarterly financial statements are
available (determined on a pro forma basis giving effect to the proposed
transaction as if it had taken place at the beginning of such quarter) equal to
or less than the Annualized Consolidated Debt to Cash Flow Ratio of the Company
without giving effect to the proposed transaction; provided further that if the
Annualized Consolidated Debt to Cash Flow Ratio of the Company immediately
preceding such transaction is 7.0:1 or less, then the Annualized Consolidated
Debt to Cash Flow Ratio of the Company or its successor after giving pro forma
effect to such transaction may be up to 0.5:1 greater than such ratio
immediately prior to such transaction; (4) if, as a result of any such
transaction, property or assets of the Company or any Subsidiary of the Company
would become subject to a Lien prohibited by the provisions of the 1997 Notes
Indenture described under "Limitation on Liens" above, and the Company or the
successor entity to the Company shall have secured the 1997 Notes as required
by that covenant; (5) such transaction would not result in the loss of a
Material License (which for this purpose will be determined on a pro forma
basis, giving effect to such transaction); and (6) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that such consolidation, merger, transfer, lease or disposition
and the supplemental indenture comply with the 1997 Notes Indenture.
EVENTS OF DEFAULT
The following will be Events of Default under the 1997 Notes Indenture: (a)
failure by the Company to pay principal of (or premium, if any, on) any 1997
Note at its Maturity; (b) failure to pay any interest or Additional Amounts on
any 1997 Note when due, continued for 30 days; (c) default in the payment of
principal and interest on 1997 Notes required to be purchased pursuant to an
Offer to Purchase as described under the captions "-- Change of Control" and "--
Limitation on Certain Asset Dispositions"; (d) failure to perform or comply with
the provisions described under "-- Mergers, Consolidations and Certain Sales of
Assets"; (e) failure by the Company to perform any other covenant under the 1997
Notes Indenture or the 1997 Notes continued for 30 days after written notice to
the Company by the Trustee or holders of at least 25% in aggregate principal
amount of Outstanding 1997 Notes; (f) default under the terms of any instrument
evidencing or securing Debt by the Company or any Significant Restricted
Subsidiary which results in the acceleration of the payment of principal amount
in excess of L.5 million or which shall constitute the failure to pay any
portion in excess of L.5 million of principal or similar amount when due and
payable after the expiration of any applicable grace period; (g) the rendering
of a final judgment or judgments against the Company or any Significant
Restricted Subsidiary in an amount in excess of L.5 million which remains
82
<PAGE> 84
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired; and (h) certain events of bankruptcy, insolvency or
reorganization affecting the Company or any Significant Restricted Subsidiary.
Subject to the provisions of the 1997 Notes Indenture relating to the
duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee is under no obligation to exercise any of its rights or
powers under the 1997 Notes Indenture at the request or direction of any of the
holders, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the Outstanding 1997
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in Clause
(h) above) occurs and is continuing, then either the Trustee or the holders of
at least 25% in aggregate principal amount of the Outstanding 1997 Notes may
accelerate the maturity of all 1997 Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of Outstanding 1997 Notes
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal, have
been cured or waived as provided in the 1997 Notes Indenture. If an Event of
Default specified in Clause (h) above occurs, the Outstanding 1997 Notes will
ipso facto become immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. For information as to waiver of
defaults, see "-- Modification and Waiver".
No holder of any 1997 Note shall have any right to institute any
proceeding with respect to the 1997 Notes Indenture or for any remedy
thereunder, unless such holder shall have previously given to the Trustee
written notice of a continuing Event of Default and unless also the holders of
at least 25% in aggregate principal amount of the Outstanding 1997 Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the Outstanding
1997 Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a 1997 Note for enforcement of
payment of the principal of and premium, if any, or interest on such 1997 Note
on or after the respective due dates (or, in the case of a redemption, the
Redemption Dates or, in the case of an Offer to Purchase, the Purchase Date)
expressed in or established pursuant to the terms of such 1997 Note and 1997
Notes Indenture.
The Company is required to furnish to the Trustee annually a statement as
to the performance by it of certain of its obligations under the 1997 Notes
Indenture and as to any default in such performance.
DEFEASANCE
The 1997 Notes Indenture provides that (A) if applicable, the Company will
be discharged from any and all obligations in respect of the Outstanding 1997
Notes other than certain obligations to transfer the 1997 Notes, or (B) if
applicable, the Company may omit to comply with certain restrictive covenants,
and certain events will cease to be Events of Default under the 1997 Notes
Indenture and the 1997 Notes, in either case (A) or (B), upon irrevocable
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
which will provide money in an amount sufficient to pay the principal of and
premium, if any, and each installment of interest, if any, on the Outstanding
1997 Notes. With respect to Clause (B), the obligations under the 1997 Notes
Indenture other than with respect to certain covenants and Event of Default
will remain in full force and effect. Such trust may only be established if,
among other things (i) with respect to Clause (A), (1) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling or
there has been a change in law, which in the opinion of counsel provides that
holders of the 1997 Notes will not recognize gain or loss for U.S. federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred and (2) the Company has delivered to
the Trustee an opinion of counsel to the effect that, under the law in effect
at the time of such deposit, payment made from the defeasance trust world not
83
<PAGE> 85
require the payment of Additional Amounts if the provisions of the 1997 Notes
Indenture described under "-- Payment of Additional Amounts" above were
applicable to such payments; or, with respect to Clause (B), the Company has
delivered to the Trustee (1) an opinion of counsel (which may be based on an
Internal Revenue Service ruling) to the effect that the holders of the 1997
Notes will not recognize gain or loss for U.S. federal income tax purposes
as a result of such deposit and defeasance and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred and
(2) an opinion of counsel to the effect that, under the law in effect at the
time of such deposit, payments made from the defeasance trust would not
require the payment of Additional Amounts if the provisions of the 1997 Notes
Indenture described under "-- Payment of Additional Amounts" above were
applicable to such payments; (ii) no Event of Default or event that with the
passing of time or the giving of notice, or both, shall constitute an Event of
Default shall have occurred or be continuing on the date of such deposit or,
insofar as an Event of Default described in Clause (h) under "-- Events of
Default," at any time during the period ending on the 121st day after the date
of such deposit; (iii) the Company has delivered to the Trustee an opinion of
counsel to the effect that such deposit shall not cause the Trustee or the
trust so created to be subject to the Investment Company Act of 1940; and (iv)
certain other customary conditions precedent are satisfied.
GOVERNING LAW
The 1997 Notes Indenture and the 1997 Notes will be governed by the laws
of the State of New York.
MODIFICATION AND WAIVER
From time to time the Company, when authorized by resolutions of the Board
of Directors, and the Trustee, without the consent of the holders of the 1997
Notes, may amend, waive or supplement the 1997 Notes Indenture or the 1997
Notes for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, maintaining the qualification of the
1997 Notes Indenture under the Trust Notes Indenture Act or making any change
that does not adversely affect the rights of any holder.
Modifications and amendments of the 1997 Notes Indenture may be made by
the Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding 1997 Notes; provided, however,
that no such modification or amendment may, without the consent of the holder
of each Outstanding 1997 Note affected thereby, (a) change the Stated Maturity
of the principal of or any installment of interest or Additional Amounts on,
any 1997 Note, (b) reduce the principal amount of, (or the premium) or interest
or Additional Amounts on, any 1997 Note, (c) change the place or currency of
payment of principal of (or premium) or interest or Additional Amounts on, any
1997 Note, (d) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity thereof (or Redemption Date, in the
case of redemption, or Purchase Date, in the case of an Offer to Purchase), (e)
reduce the above-stated percentage of Outstanding 1997 Notes necessary to
modify or amend the 1997 Notes Indenture, (f) reduce the percentage of
principal amount of Outstanding 1997 Notes necessary for waiver of compliance
with certain provisions of the 1997 Notes Indenture or for waiver of certain
defaults, (g) modify certain provisions of the 1997 Notes Indenture relating to
the modification of the 1997 Notes Indenture or the waiver of past defaults or
covenants, except as otherwise specified or (h) following the mailing of any
Offer to Purchase, modify any Offer to Purchase for the 1997 Notes required as
described under the caption "-- Limitation on Certain Asset Dispositions" and
"-- Change of Control" in a manner materially adverse to the holders thereof.
The holders of not less than a majority in aggregate principal amount of
the Outstanding 1997 Notes, on behalf of all holders of 1997 Notes, may waive
compliance by the Company with certain restrictive provisions and covenants of
the 1997 Notes Indenture. Subject to certain rights of the Trustee, as provided
in the 1997 Notes Indenture, the holders of not less than a majority in
aggregate principal amount of the Outstanding 1997 Notes, on behalf of all
holders of 1997 Notes, may waive any past default under the 1997 Notes
Indenture, except a default in the payment of principal, premium or interest or
in respect of a covenant or provision that cannot be modified or amended
without the consent of the holder of each Outstanding 1997 Note.
84
<PAGE> 86
REPORTS
The Company shall deliver to the Trustee, within 15 days after it files
them with the Commission, copies of its annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act within the time periods prescribed under such rules and
regulations. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act or otherwise report on an annual and quarterly basis on forms provided for
such annual and quarterly reporting pursuant to rules and regulations
promulgated by the Commission, the 1997 Notes Indenture requires the Company to
continue to file with the Commission and provide to the Trustee such annual and
interim reports on Forms 10-K and 10-Q, respectively, as the Company would be
required to file were it subject to such reporting requirements within the time
periods prescribed under such rules and regulations. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings but shall remain obligated to provide such reports to
the Trustee.
THE TRUSTEE
The duties and responsibilities of the Trustee are those provided by the
Trust Indenture Act. Notwithstanding the foregoing, the 1997 Notes Indenture
does not require the Trustee to expend or risk its own funds or otherwise incur
any financial liability in the performance of any of its duties under the 1997
Notes Indenture, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk of liability is not reasonably assured to it.
The Trustee is permitted to engage in other transactions with the Company,
or any Affiliate, provided, however, that if it acquires any conflicting
interest (as defined in the Trust Indenture Act), it must eliminate such
conflict or resign.
NO PERSONAL LIABILITY OF DIRECTORS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the
Company, as such shall have any liability for any obligations of the Company
under the 1997 Notes, the 1997 Notes Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
the 1997 Notes by accepting a 1997 Note waives and releases all such liability;
provided that such waiver will not release any person from liability for fraud
or criminal acts. The waiver and release are part of the consideration for
issuance of the 1997 Notes. Such waiver and release may not be effective to
waive liabilities under English law or under the U.S. federal securities laws
and it is the view of the Commission that such waiver and release is against
public policy.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the 1997
Notes Indenture. Reference is made to the 1997 Notes Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided. All accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein described, the term
"generally accepted accounting principles" with respect to any computation
required or permitted under the 1997 Notes Indenture means accounting
principles as are generally accepted in the United States as consistently
applied by the Company at the date of the 1997 Notes Indenture.
"Accreted Value" means, as of any date of determination prior to the 1997
Cash Interest Date, the sum of (a) the initial offering price of each 1997 Note
and (b) the portion of the excess of the principal amount of each 1997 Note
over such initial offering price which shall have been amortized by the Company
through such date, such amount to be so amortized on a daily basis and
compounded semiannually on each August 15 and February 15, at the rate of 10
3/4% per annum from the date of issuance of the 1997 Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months.
85
<PAGE> 87
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Consolidated Debt to Cash Flow Ratio" for any Person means for
any fiscal quarter the ratio of (i) Total Consolidated Debt of such Person as
of the end of such fiscal quarter to (ii) Consolidated Operating Cash Flow of
such Person for such fiscal quarter multiplied by four.
"Asset Acquisition" means (i) any capital contribution (including without
limitation by means of transfers of cash or other property to others or
payments for property or services for the account or use of others) by the
Company or any Restricted Subsidiary in any other Person (including, for the
avoidance of doubt, a prospective licensee that subsequently acquires a license
to operate a cable television and/or telephone and/or telecommunications
system), or any acquisition or purchase of equity interests in any other Person
by the Company or any Restricted Subsidiary, in either case pursuant to which
such Person shall become a Restricted Subsidiary or shall be merged with or
into the Company or any Restricted Subsidiary or (ii) any acquisition by the
Company or any Restricted Subsidiary of the assets of any Person which
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside of the ordinary course of business.
"Asset Disposition" means any transfer, conveyance, sale, lease or other
disposition by the Company or any of its Restricted Subsidiaries (including by
way of consolidation or merger) resulting in Net Available Proceeds in excess
of L.250,000 of (i) shares or other ownership interest of a Subsidiary of the
Company, (ii) substantially all of the assets of the Company or any Subsidiary
representing a division or line of business, or (iii) other assets or rights
outside of the ordinary course of business.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable, and at any date as of which the amount thereof is
to be determined, the total net amount of rent required to be paid by such
Person under such lease during the initial term thereof as determined in
accordance with generally accepted accounting principles, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capital Lease
Obligation with like term in accordance with generally accepted accounting
principles. The net amount of rent required to be paid under any such lease for
any such period shall be the aggregate amount of rent payable by the lessee
with respect to such period after excluding amounts required to be paid on
account of insurance, taxes, assessments, utility, operating and labor costs
and similar charges. In the case of any lease which is terminable by the lessee
upon the payment of a penalty, such net amount shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Cable Acquisition" means an Asset Acquisition of properties or assets to
be used in a Cable Business or of equity interests in any Person that becomes a
Restricted Subsidiary or, subject to the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments" above, a Non-Restricted
Subsidiary as a result of such Asset Acquisition, provided that such Person's
assets and properties consist principally of properties or assets that will be
used in a Cable Business.
"Cable Business" means any business operating a cable television and/or
telephone and/or telecommunications system or any business reasonably related
thereto, including, without limitation, the production or provision of
programming as well as any business conducted by the Company or any Restricted
Subsidiary on the date on which the 1997 Notes are first issued.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property which is required to be classified
and accounted for as a capital lease or a liability on the face of a balance
sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the
last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
86
<PAGE> 88
"Cash Equivalent" means, at any time, (i) any evidence of Debt issued or
directly and fully guaranteed or insured by the government of an Approved
Jurisdiction or any agency or instrumentality thereof (provided that the full
faith and credit of the relevant Approved Jurisdiction is pledged in support
thereof); (ii) certificates of deposit or acceptances of any financial
institution that has combined capital and surplus and undivided profits of not
less than $50,000,000 (or the equivalent thereof in another currency) and has a
long term debt rating of at least "AA" by Standard & Poor's Corporation or at
least "Aa3" by Moody's Investor Service or if not rated by either of those
rating agencies the equivalent rating from another Approved Rating Agency;
(iii) commercial paper issued by a corporation organized under the laws of any
Approved Jurisdiction and rated at least A-1 by Standard & Poor's Corporation
or at least P-1 by Moody's Investor Service or if not rated by either of those
rating agencies the equivalent rating from another Approved Rating Agency; (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the government of an
Approved Jurisdiction; and (v) any other investment, instrument or cash
balance, provided, that in each of clauses (i) through (v) above such
instrument shall be considered a Cash Equivalent within the meaning of this
definition only to the extent that such instrument would have been classified
as a "cash equivalent" in accordance with the accounting principles applied to
the Company's audited consolidated balance sheet as of December 31, 1995.
"Approved Jurisdiction" means the United States of America, Canada, the United
Kingdom and any other member nation of the Organization for Economic
Cooperation and Development. "Approved Rating Agency" means Standard & Poor's
Corporation, Moody's Investor Service and any other recognized rating agency
that provides or assigns credit rating for debt securities similar to the 1997
Notes and that shall have been approved by the Trustee upon the written request
of the Company from time to time.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person as charged in arriving
at Consolidated Net Income for such period.
"Consolidated Interest Expense" of any Person means for any period the
interest expense (without deducting interest income) of such Person for such
period determined on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers
acceptances or similar facilities; (iii) fees with respect to interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends (other than in respect of Preferred
Stock held by such Person or a Wholly Owned Subsidiary of such Person) declared
and payable in such period in cash; and (v) the portion of any rental
obligation allocable to interest expense under generally accepted accounting
principles.
"Consolidated Net Income" of any Person means for any period the net
income (or loss) of such Person for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided
that there shall be excluded therefrom (a) the net income (or loss) of any
Person acquired by such Person or a subsidiary of such Person in a transaction
accounted for under the pooling-of-interests method for any period prior to the
date of such transaction, (b) the net income (but not the net loss) of any
Restricted Subsidiary of such Person which is subject to restrictions which
prevent the payment of dividends or the making of distributions (by loans,
advances, intercompany transfers or otherwise) to such Person to the extent of
such restrictions, (c) the net income (or loss) of any Person that is not a
Consolidated Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to a member of the Restricted
Group by such other Person during such period, (d) gains or losses on Asset
Dispositions and (e) all extraordinary gains and extraordinary losses.
"Consolidated Operating Cash Flow" of any Person means for any period (a)
the sum of (i) Consolidated Net Income for such period; (ii) Consolidated
Interest Expense for such period; (iii) Consolidated Income Tax Expense for
such period; (iv) the depreciation and amortization expense included in the
consolidated income statement of such Person for such period; and (v) other
non-cash charges (other than trading and operating items in the ordinary course
of business) deducted from consolidated revenues in determining Consolidated
Net Income for such period (including any foreign currency translation losses),
minus (b) non-cash items (other than trading and operating items in the
87
<PAGE> 89
ordinary course of business) increasing consolidated revenues in determining
Consolidated Net Income for such period (including any foreign currency
translation gains).
"Consolidated Subsidiaries" of any Person means all Subsidiaries and other
equity investees of such Person that would be accounted for on a consolidated
basis in such Person's financial statements in accordance with generally
accepted accounting principles.
"Consolidated Tangible Assets" of any Person, means the total assets of
such Person and its Restricted Subsidiaries consolidated, as determined in
accordance with generally accepted accounting principles, less (i) the net book
value of all its licenses, patents, patent applications, copyrights,
trademarks, trade names, goodwill, non-compete agreements or organizational
expenses and other like intangibles, (ii) unamortized Debt discount and
expense, (iii) all reserves for depreciation, obsolescence, depletion and
amortization of its properties and (iv) all other proper reserves which in
accordance with generally accepted accounting principles should be provided in
connection with the business conducted by such Person; provided that with
respect to the Company and its Consolidated Subsidiaries, adjustments following
the date of the 1997 Notes Indenture to the accounting books and records of the
Company and its Consolidated Subsidiaries in accordance with Accounting
Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto), or
otherwise resulting from the acquisition of control of the Company by another
Person shall not be given effect to.
"Currency Hedging Agreements" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect the Company or any of its Restricted Subsidiaries against fluctuations
in currency values to the extent relating to (i) Debt and/or (ii) obligations
to purchase assets, properties or services incurred in the ordinary course of
business and not for speculative purposes; provided that such Currency Hedging
Agreements do not increase the Debt or other obligations of the Company and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payments thereunder.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations Incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every Capital Lease Obligation of such Person, (vi) every net
obligation under interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements of such Person at the time of
determination and (vii) every obligation of the type referred to in Clauses (i)
through (vi) of another Person and all dividends of another Person the payment
of which, in either case, such Person has Guaranteed or is responsible or
liable for, directly or indirectly, as obligor, Guarantor or otherwise;
provided that Trade Obligations are excluded from the definition of Debt.
"Disqualified Equity" of any Person means any Equity Security of such
Person which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final stated maturity of the 1997
Notes.
"Equity Homes" means the product of (i) the number of homes in a franchise
area, as set forth in the cable television or telecommunications licenses
relating to such franchise area, and (ii) the percentage of the entity holding
such licenses which is owned directly or indirectly by the Company.
"Equity Securities" of any Person means any shares, interests,
participations or other equivalents of corporate stock or other equity or
capital interests of such Person, including, without limitation, partnership
interests.
88
<PAGE> 90
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing any Debt of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person, (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such Debt, (ii) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the Guarantee by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business, and shall not include
guarantees in the nature of, or in respect of, Trade Obligations.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall
have meanings correlative to the foregoing); provided, however, that a change
in generally accepted accounting principles that results in an obligation of
such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate Protection Obligation" of any Person means any interest
rate swap agreement or other similar interest rate financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates and pursuant to which such Person is obligated or may become obligated to
make payments; provided that where such agreement or arrangement hedges Debt,
it is with respect to a notional principal amount that does not exceed the
principal amount of the Debt to which such Interest Rate Protection Obligation
relates.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution to any other Person (by means
of transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Equity Securities, bonds, notes, debentures or other securities
or evidence of Debt issued by any other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Material License" means a direct or indirect ownership interest in a
license to operate a cable television or a cable telephone system held by the
Company or any of its Restricted Subsidiaries which license at the time of
determination covers a number of Equity Homes which equals or exceeds 10% of
the aggregate number of Equity Homes covered by all of the licenses to operate
cable television or cable telephone systems in which the Company or its
Restricted Subsidiaries hold a direct or indirect ownership interest at such
time.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash and readily marketable cash equivalents received (including by way of sale
or discounting of a note, instalment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets or
received in any other noncash form) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and
expenses incurred and all federal, state, provincial, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition, (ii) all payments made by such Person or its Subsidiaries on any
Debt which is secured by a Lien on such assets or on shares of the Person
owning such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must be repaid out of the proceeds from such
Asset Disposition under the terms of such Debt or Lien, in order to obtain a
necessary consent to such Asset Disposition or by applicable law, and (iii) all
distributions and other payments made to minority interest holders in
Subsidiaries of such Person or joint ventures as a result of such Asset
89
<PAGE> 91
Disposition provided that minority holders receive distributions and payments
that are in the Company's good faith judgment comparable in kind to that
received by the Company or a Restricted Subsidiary.
"Non-Recourse Debt" means Debt or that portion of Debt (i) as to which
none of the Company, nor any of its Restricted Subsidiaries (a) provides credit
support (including any undertaking, agreement or instrument which would
constitute Debt); (b) is directly or indirectly liable; or (c) constitutes the
lender; and (ii) no default with respect to which (including any rights which
the holders thereof may have to take enforcement action against a
Non-Restricted Subsidiary) would permit (upon notice, lapse of time or both)
any holders of any other Debt of the Company or any of its Restricted
Subsidiaries to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its stated maturity.
"Non-Restricted Subsidiary" of a Person means a Subsidiary of such Person
that (i) at the time of its designation as a Non-Restricted Subsidiary has not
acquired any assets (unless the acquisition of such assets constitutes a
Restricted Payment permitted by the "-- Certain Covenants -- Limitation on
Restricted Payments" covenant), at any previous time, directly or indirectly
from such Person or any of its Subsidiaries and (ii) has no Debt other than
Debt that is, with respect to such Person, Non-Recourse Debt (unless the extent
to which such Person is the lender for, or is responsible for such Debt,
constitutes a Restricted Payment permitted by the "-- Certain Covenants --
Limitation on Restricted Payments" covenant); provided, however, that at the
time of such designation, after giving pro forma effect to such designation,
the Annualized Consolidated Debt to Cash Flow Ratio of such Person is equal to
or less than the Annualized Consolidated Debt to Cash Flow Ratio of such Person
immediately preceding such designation; provided, further, that if the
Annualized Consolidated Debt to Cash Flow Ratio of the Company immediately
preceding such designation is 7.0:1 or less, the Annualized Consolidated Debt
to Cash Flow Ratio of the Company after giving pro forma effect to such
designation may be up to 0.5:1 greater than such ratio immediately preceding
such designation. No Restricted Subsidiary may be redesignated as a
Non-Restricted Subsidiary unless at the time of such redesignation the
provisions in clauses (i) and (ii) in this definition are currently met and the
Board of Directors of such Person has passed a certified resolution, delivered
to the Trustee, to such effect.
"Offer to Purchase" means a written offer (the "Offer") sent by the
Company by first class mail, postage prepaid, to each holder at his address
appearing in the Security Register on the date of the Offer or provided to the
Trustee by such holder offering to purchase up to the principal amount of 1997
Notes specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to this 1997 Notes Indenture). Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days
after the date of such Offer and a settlement date (the "Purchase Date") for
purchase of 1997 Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of
the Company's obligation to make an Offer to Purchase, and the Offer shall be
mailed by the Company or, at the Company's request, by the Trustee in the name
and at the expense of the Company. The Offer shall contain information
concerning the business of the Company and its Subsidiaries which the Company
in good faith believes will enable such holders to make an informed decision
with respect to the Offer to Purchase (which at a minimum will include (i) the
most recent annual and quarterly financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the documents required to be filed with the Trustee as described
under the caption "-- Reports" (which requirements may be satisfied by delivery
of such documents together with the Offer), (ii) a description of material
developments in the Company's business subsequent to the date of the latest of
such financial statements referred to in Clause (i) (including a description of
the events requiring the Company to make the Offer to Purchase), (iii) if
applicable, appropriate pro forma financial information concerning the Offer to
Purchase and the events requiring the Company to make the Offer to Purchase and
(iv) any other information required by applicable law to be included therein.
The Offer shall contain all instructions and materials necessary to enable such
holders to tender 1997 Notes pursuant to the Offer to Purchase. The Offer shall
also state:
(1) the Section of the 1997 Notes Indenture pursuant to which the Offer to
Purchase is being made;
90
<PAGE> 92
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding 1997 Notes offered
to be purchased by the Company pursuant to the Offer to Purchase (including, if
less than all Outstanding 1997 Notes, the manner by which such has been
determined pursuant to the Section hereof requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of 1997 Notes accepted for payment (as specified pursuant to
the 1997 Notes Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the 1997 Notes
registered in the name of such holder and that any portion of a 1997 Note
tendered must be tendered in an integral multiple of $1,000 principal amount at
maturity;
(6) the place or places where 1997 Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any 1997 Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each 1997 Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender a 1997 Note pursuant to the Offer
to Purchase will be required to surrender such 1997 Note at the place or places
specified in the Offer prior to the close of business on the Expiration Date
(such 1997 Note, if a Registered 1997 Note, being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the holder thereof or his attorney duly authorized in writing);
(10) that holders will be entitled to withdraw all or any portion of 1997
Notes tendered if the Company (or its Paying Agent) receives, not later than
the close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of the 1997 Note the holder tendered, the certificate number of the 1997
Note the holder tendered and a statement that such holder is withdrawing all or
a portion of his tender;
(11) that (a) if 1997 Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such 1997 Notes and (b)
if 1997 Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase 1997 Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only 1997 Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in case of any holder whose 1997 Note is purchased only in part,
the Company shall execute, and the Trustee shall authenticate and deliver to
the holder of such 1997 Note without service charge, a new 1997 Note or 1997
Notes of the same type, of any authorized denomination as requested by such
holder, in an aggregate principal amount equal to and in exchange for the
unpurchased portion of the 1997 Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Holder" means European Cable Capital Partners L.P., a limited
partnership organized under the laws of Delaware, and any of its partners
existing on the date of the 1997 Notes Indenture.
91
<PAGE> 93
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Registration Rights Agreement" means the Exchange and Registration Rights
Agreement, dated February 27, 1997, between the Company and the Purchasers.
"Related Person" of any Person means, without limitation, any other Person
owning (a) 5% or more of the outstanding Common Equity of such Person or (b) 5%
or more of the Voting Interest of such Person.
"Restricted Group" means the Company together with its Restricted
Subsidiaries.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than a Non-Restricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or commencement
of operation thereof to such lender or investor or to any Person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such arrangement
prior to the first date on which such arrangement may be terminated by the
lessee without payment of a penalty.
"Significant" means, with respect to any Subsidiary or Restricted
Subsidiary, a Subsidiary or Restricted Subsidiary that qualifies as a
"significant subsidiary" under Rule 1-02 of the Commission's Regulation S-X.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Interest of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Total Consolidated Debt" means, at any date of determination, an amount
equal to the aggregate amount of all Debt of the Company and its Restricted
Subsidiaries outstanding as of the date of determination, determined on a
consolidated basis.
"Trade Obligation" means (i) obligations to pay the purchase price of
assets or services purchased in the ordinary course of business including,
without limitation, obligations incurred in respect of any documentary letter
of credit or bill of exchange issued in respect of any such purchase; (ii)
obligations in respect of any bill of exchange or promissory note drawn, or
accepted, issued or endorsed in the ordinary course of business, including,
without limitation, indebtedness in respect of any monies raised by way of
sale, discounting or otherwise in respect of any such bill or note; and (iii)
obligations in respect of any Guarantee of any obligation of the type specified
in Clause (i) or (ii) above, except to the extent that such obligation is
treated as indebtedness under generally accepted accounting principles.
"Voting Interest" of any Person means Equity Securities of such Person
which ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life" means, as of the date of determination, with
respect to any Debt or Disqualified Equity, the quotient obtained by dividing
(i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payments of
such Debt or redemption or repurchase payments on such Disqualified Equity and
the amount of such principal payments or redemption or repurchase payments,
92
<PAGE> 94
by (ii) the sum of all such principal value or redemption or repurchase
payments.
"Wholly Owned" means with respect to any Subsidiary or Restricted
Subsidiary of any Person means a Subsidiary (or a Restricted Subsidiary) of
such Person all of the outstanding Equity Securities or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly Owned Subsidiaries (or
Restricted Subsidiaries) of such Person or by such Person and one or more
Wholly Owned Subsidiaries (or Restricted Subsidiaries) of such Person.
DESCRIPTION OF BOOK-ENTRY SYSTEM
GENERAL
The Book-Entry Depositary holds the 1997 Global Notes for the benefit of
DTC and its Participants, as hereinafter described. Pursuant to the terms of
the 1997 Deposit Agreement, the 1997 Global Notes may be transferred only to a
successor of the Book-Entry Depositary. Beneficial interests in the 1997 Global
Notes are shown on, and transfers thereof are effected only through, records
maintained in book-entry form by DTC (with respect to its Participants'
interests) and its Participants. Such beneficial interests are referred to
herein as "Book-Entry Interests." Ownership of the Book-Entry Interests will be
limited to Participants and indirect participants ("Indirect Participants"),
including Euroclear and Cedel. Procedures with respect to the ownership of
Book-Entry Interests are set forth below.
Upon receipt of each 1997 Global Note, the Book-Entry Depositary will
issue a certificateless depositary interest (which represents a 100% interest
in the underlying 1997 Global Note) to DTC by recording such interest in the
Book-Entry Depositary's books and records in the name of Cede & Co., as nominee
of DTC. Upon such issuance, DTC will credit on its book-entry registration and
transfer system the Participants' accounts with the respective interests owned
by such Participants. Ownership of Book-Entry Interests is shown on, and the
transfer of such interests will be effected only through, records maintained by
DTC and by Participants (with respect to interests of Indirect Participants,
including Euroclear and Cedel). The laws of some countries and some states in
the United States may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to own, transfer or pledge the Book-Entry
Interests.
Investors may hold their Book-Entry Interests through Cedel or Euroclear,
if they are account holders in such systems, or indirectly through
organizations which are account holders in such systems. Cedel and Euroclear
will hold such interests on behalf of their account holders through securities
accounts in their respective names on the books of their respective
depositaries, which, in turn, will hold such interests in securities accounts
in the depositaries' names on the books of DTC. Investors may also hold their
Book-Entry Interests directly through DTC, if they are Participants in such
system, or indirectly through organizations which are Participants in such
system. All interests in the 1997 Global Notes, including those held through
Euroclear or Cedel, may be subject to the procedures and requirements of DTC.
Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of such system.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
1997 Global Notes, the Book-Entry Depositary or such nominee, as the case may
be, will be considered the sole holder of such 1997 Global Notes for all
purposes under the 1997 Notes Indenture. Except as set forth above under "--
Form of 1997 Notes", Participants or Indirect Participants are not entitled to
have 1997 Notes or Book-Entry Interests registered in their names, will not
receive or be entitled to receive physical delivery of 1997 Notes or Book-Entry
Interests in definitive form and will not be considered the owners or holders
thereof under the 1997 Notes Indenture. Accordingly, each person owning a
Book-Entry Interest must rely on the procedures of the Book-Entry Depositary
and DTC and, if such person is not a Participant in DTC, on the procedures of
the Participant in DTC through which such person owns its interest (being, in
the case of Euroclear and Cedel, the procedures of Euroclear and Cedel), to
exercise any rights and remedies of a holder under the 1997 Notes Indenture.
See "-- Actions by Owners of Book-Entry Interests" below. If any definitive
1997 Notes are issued to Participants or Indirect Participants, they will be
issued in registered form ("1997 Definitive Registered Notes"), as described
93
<PAGE> 95
under "-- Form of the 1997 Notes." Unless and until Book-Entry Interests are
exchanged for 1997 Definitive Registered Notes (as described under "-- Form of
the 1997 Notes" above), the depositary interest held by DTC may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or by DTC or any such nominee to a successor
of DTC or a nominee of such successor.
PAYMENTS ON THE 1997 GLOBAL NOTES
Payments of any amounts owing in respect of the 1997 Global Notes will be
made through one or more paying agents appointed under the 1997 Notes Indenture
(which initially will include the Trustee) to the Book-Entry Depositary, as the
holder of the 1997 Global Notes. All such amounts will be payable in United
States dollars. Upon receipt of any such amounts, the Book-Entry Depositary
will pay the amount so received to DTC, which will distribute such payments to
its Participants. Payments of all such amounts will be made without deduction
or withholding for or on account of any present or future taxes, duties,
assessments or governmental charges of whatever nature except as may be
required by law, and if any such deduction or withholding is required to be
made by any law or regulation of the United Kingdom then, to the extent
described under "-- Payment of Additional Amounts" above, such Additional
Amounts will be paid as may be necessary in order that the net amounts received
by any holder of the 1997 Global Notes or owner of Book-Entry Interests after
such deduction or withholding will equal the net amounts that such holder or
owner would have otherwise received in respect of such 1997 Global Note or
Book-Entry Interest, as the case may be, absent such withholding or deduction.
DTC, upon receipt of any such payment, will immediately credit Participants'
accounts with payments in amounts proportionate to their respective ownership
of Book-Entry Interests, as shown on the records of DTC. The Company expects
that payments by Participants to owners of Book-Entry Interests held through
such Participants will be governed by standing customer instructions and
customary practices, as is now the case with the securities held for the
account of customers in bearer form or registered in "street name" and will be
the responsibility of such Participants. In the event that DTC no longer
immediately credits Participants' accounts with payments, the Company will
endeavor to cause payments of interest and principal to be made by wire
transfer to any owners of Book-Entry Interests who so request whose aggregate
ownership exceeds $20 million in principal amount at maturity.
Because the provisions of the 1997 Notes Indenture treat the holder of the
1997 Global Notes as the owner of the 1997 Notes represented thereby for the
purpose of receiving amounts owing in respect of the 1997 Notes, the Company
has no responsibility or liability for the payment of amounts owing in respect
of the depositary interest held by DTC to owners of Book-Entry Interests
representing interests in the 1997 Global Notes. Payments by DTC Participants
to owners of Book-Entry Interests held through such Participants are the
responsibility of such Participants, as is now the case with securities held
for the accounts of customers registered in "street name".
None of the Company, the Trustee, the Book-Entry Depositary or any agent
of the Company or the Trustee or the Book-Entry Depositary have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Book-Entry Interests or for maintaining,
supervising or reviewing any records relating to such Book-Entry Interests.
REDEMPTION
In the event any 1997 Global Note (or any portion thereof) is redeemed,
the Book-Entry Depositary will redeem, from the amount received by it in
respect of the redemption of any 1997 Global Note, an equal amount of the
Book-Entry Interests. The redemption price payable in connection with the
redemption of Book-Entry Interests will be equal to the amount received by the
Book-Entry Depositary in connection with the redemption of the 1997 Global Note
(or any portion thereof). The Company understands that under existing DTC
practices, if less than all of the 1997 Notes are to be redeemed at any time,
DTC will credit Participants' accounts on a proportionate basis (with
adjustments to prevent fractions) or by lot or on such other basis as DTC deems
fair and appropriate; provided that no beneficial interests of less than $1,000
principal amount at maturity may be redeemed in part.
94
<PAGE> 96
TRANSFERS
All transfers of Book-Entry Interests are recorded in accordance with the
book-entry system maintained by DTC, pursuant to customary procedures
established by DTC and its Participants.
ISSUANCE OF DEFINITIVE REGISTERED NOTES
Investors may, at their option, obtain 1997 Definitive Registered Notes as
set forth under "-- Form of the 1997 Notes". While a 1997 Global Note is
outstanding, holders of 1997 Definitive Registered Notes may exchange their
1997 Definitive Registered Notes for Book-Entry Interests by surrendering their
1997 Definitive Registered Notes to the Book-Entry Depositary. The amount of
the Book-Entry Interests will be increased or decreased to reflect such
transfers or exchanges. The Book-Entry Depositary will request the Trustee to
make the appropriate adjustments to the applicable 1997 Global Note or exchange
such 1997 Global Note for a new 1997 Global Note in an appropriate principal
amount at maturity to reflect any such transfers or exchanges.
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
As soon as practicable after receipt by the Book-Entry Depositary of
notice of any solicitation of consents or request for a waiver or other action
by the holders of 1997 Notes or of any Offer to Purchase (as defined under "--
Certain Definitions" above), the Book-Entry Depositary will mail to DTC a
notice containing (a) such information as is contained in such notice received
by the Book-Entry Depositary, (b) a statement that at the close of business on
a specified record date DTC will be entitled to instruct the Book-Entry
Depositary as to the consent, waiver or other action, if any, pertaining to the
1997 Notes and (c) a statement as to the manner in which such instructions may
be given. In addition, the Book-Entry Depositary will forward to DTC, or, based
upon instructions received from DTC, to owners of Book-Entry Interests, all
materials pertaining to any such solicitation, request, offer or other action.
Upon the written request of DTC, the Book-Entry Depositary shall endeavor
insofar as practicable to take such action regarding the requested consent,
waiver, offer or other action in respect of the 1997 Notes in accordance with
any instructions set forth in such request. DTC may grant proxies or otherwise
authorize DTC Participants (or persons owning Book-Entry Interests through such
DTC Participants) to provide such instructions to the Book-Entry Depositary so
that it may exercise any rights of a holder or take any other actions which a
holder is entitled to take under the 1997 Notes Indenture. The Book-Entry
Depositary will not exercise any discretion in the granting of consents or
waivers or the taking of any other action relating to the 1997 Notes Indenture.
REPORTS
The Book-Entry Depositary will immediately send to DTC a copy of any
notices, reports and other communications received relating to the Company, the
1997 Notes or the Book-Entry Interests. All notices regarding the 1997 Notes
will, so long as the rules of the Luxembourg Stock Exchange require, be
published in a daily newspaper of general circulation in Luxembourg, which is
expected to be the Luxemburger Wort.
RESIGNATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
by written notice to the Company, the Trustee and DTC, such resignation to
become effective upon the appointment of a successor book-entry depositary, in
which case the 1997 Global Notes shall be delivered to that successor. If no
such successor has been so appointed within 120 days of such notification, the
Book-Entry Depositary may request the Company to issue 1997 Definitive
Registered Notes as described above.
CHARGES OF BOOK-ENTRY DEPOSITARY
The Company has agreed to indemnify the Book-Entry Depositary against
certain liabilities incurred by it and pay the charges of the Book-Entry
Depositary as agreed between the Company and the Book-Entry Depositary.
95
<PAGE> 97
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The Deposit Agreement may be amended by the Company and the Book-Entry
Depositary without notice to or consent of DTC or any owner of Book-Entry
Interest: (a) to cure any ambiguity, defect or inconsistency, provided that
such amendment or supplement does not adversely affect the rights of DTC or any
holder of Book-Entry Interests, (b) to evidence the succession of another
person to the Company (when a similar amendment with respect to the 1997 Notes
Indenture is being executed) and the assumption by any such successor of the
covenants of the Company herein, (c) to evidence or provide for a successor
Book-Entry Depositary, (d) to make any amendment, change or supplement that
does not adversely affect DTC or the owners of Book-Entry Interests, (e) to add
to the covenants of the Company or the Book-Entry Depositary, or (f) to comply
with the United States Federal securities laws. No amendment that adversely
affects DTC may be made to the 1997 Deposit Agreement without the consent of
DTC. Upon the issuance of 1997 Definitive Registered Notes in exchange for
Book-Entry Interests constituting the entire principal amount at maturity of
1997 Notes, the 1997 Deposit Agreement will terminate. The 1997 Deposit
Agreement may be terminated upon the resignation of the Book-Entry Depositary
if no successor has been appointed within 120 days as set forth under "--
Resignation of Book-Entry Depositary."
INFORMATION CONCERNING DTC
The Company understands as follows with respect to DTC: DTC is a limited
purpose trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities of its Participants and to
facilitate the clearance and settlement of transactions among its Participants
in such securities through electronic book-entry changes in accounts of the
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers
(including the Purchasers), banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of an owner of a
Book-Entry Interest to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain Persons take physical
delivery of securities in definitive form. Consequently, the ability to
transfer Book-Entry Interests to such Persons may be limited. In addition,
beneficial owners of Book-Entry Interests through the DTC system will receive
distributions attributable to the 1997 Global Note only through DTC
Participants.
SETTLEMENT
The Book-Entry Interests will trade in DTC's Same-Day Funds Settlement
System. Any secondary market trading activity in the Book-Entry Interests is
expected to accrue through DTC's Participants, and the securities custody
accounts of investors will be credited with their holdings against payment in
same-day funds on the settlement date.
CLEARANCE THROUGH CEDEL AND EUROCLEAR
The 1997 Notes have been accepted for clearance by Cedel and Euroclear
under the common code 7855630. The ISIN is US252567AD49.
96
<PAGE> 98
TAXATION
The following summary of material U.K. and U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Discount
Notes by a "U.S. Holder", as defined below, is the opinion of Sullivan &
Cromwell with respect to U.S. federal income taxes and is based upon the
opinion of Freshfields with respect to U.K. taxes.
The statements regarding U.S. and U.K. tax laws and practices set forth
below, including the statements regarding the U.S./U.K. double taxation
convention relating to income and capital gains (the "Treaty") assume that the
Discount Notes will be issued, and transfers thereof and payments thereon will
be made, in accordance with the applicable Indenture and the Deposit Agreement.
For purposes of the Treaty, and the U.S. Internal Revenue Code of 1986, as
amended to the date hereof (the "Code"), U.S. Holders of Book-Entry Interests
will be treated as owners of the Discount Notes underlying such Book-Entry
Interests and, except as noted below, the tax consequences of owning Book-Entry
Interests will be the same as those applicable to ownership of Discount Notes.
As Used herein, the term "U.S. Holder" means a beneficial owner of a
Discount Note that is, for U.S. federal income tax purposes: (i) a citizen or
resident of the U.S., (ii) a domestic corporation, (iii) an estate the income
of which is subject to United States federal income tax without regard to its
source or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust.
PROSPECTIVE PURCHASERS OF DISCOUNT NOTES ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE U.S., U.K. OR OTHER TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF DISCOUNT NOTES, INCLUDING THE EFFECT OF ANY STATE
OR LOCAL TAX LAWS.
UNITED KINGDOM
The following summary describes the material U.K. tax matters with respect
to ownership of the Discount Notes and is based on the laws as in force and as
applied in practice on the date of this Prospectus, and, where relevant, takes
account of prospective changes in these laws as announced as part of the UK
Budget on March 17, 1998, assuming that these changes become law and is subject
to changes to those laws and practices, and any relevant judicial decision,
subsequent to the date of this Prospectus.
PAYMENTS ON THE DISCOUNT NOTES
The Company will not be required to deduct or withhold on account of U.K.
income tax from payments of principal or, for so long as the Discount Notes are
represented by a Global Discount Note and are listed on the Luxembourg Stock
Exchange or some other stock exchange recognized by the U.K. Inland Revenue,
from payments of interest where:
(a) the payment of interest is made by a paying agent outside the
U.K.; or
(b) the payment of interest is made by or through a person who is in
the U.K. but the person beneficially entitled to the interest is not
resident in the U.K. and beneficially owns the Discount Notes from which
the interest derives and either the person by or through whom the payment
is made has received a declaration in a form prescribed by regulations)
confirming that these requirements are satisfied or the Inland Revenue has
issued a notice to that person stating that they consider them satisfied.
In other cases, and in particular where paid in respect of Definitive
Registered Notes, interest will (subject to what is said below) be paid after
deduction of income tax at the lower rate (for the tax year 1996/7, 20%). A
U.S. Holder of a Discount Note who is entitled to the protection of the Treaty
will normally be eligible to recover in full any U.K. tax withheld from
payments of interest to which such Holder is beneficially entitled by making a
claim under the Treaty on the appropriate form. Alternatively, a claim may be
made by a U.S. Holder in advance of a payment of interest. If the claim
97
<PAGE> 99
is accepted by the Inland Revenue, they will authorize subsequent payments to
that U.S. Holder to be made without withholding for U.K. tax.
For so long as the Discount Notes are represented by a Global Discount
Note and are listed on a recognized stock exchange, where any person in the
United Kingdom, in the course of a trade or profession:
(i) acts as custodian of a Discount Note in respect of which he receives
any interest or interest is paid at his direction or with his consent, or
(ii) collects or secures payment of or receives interest on a Discount
Note for another person.
(except in any case by means only of clearing a check or arranging for the
clearing of a check) that person is liable to account for United Kingdom income
tax at the lower rate (20 per cent. for the tax year 1996/7) on such interest
and is entitled to deduct an amount in respect thereof unless an exemption from
such liability is applicable including, for example, where the Discount Note
and the interest is beneficially owned by a person not resident in the United
Kingdom and applicable administrative and procedural requirements are
satisfied, including the making of declarations as to status and eligibility.
Except for any income tax deducted as described above (and except in the
case of non-United Kingdom resident trustees of a trust having an ordinarily
resident or resident beneficiary) a U.S. Holder will not be liable to United
Kingdom tax on interest on a Discount Note unless it is chargeable to income
tax or corporation tax on a branch or agency in the United Kingdom through
which it carries on a trade, profession or vocation and in connection with
which the interest is received or to which the Discount Notes are attributable.
There are certain exemptions for interest received by certain specified
categories of agent (such as some brokers and investment managers).
SALE OR DISPOSITION (INCLUDING REDEMPTION)
For U.K. tax purposes, a disposal (including redemption) of a Discount Note
will generally not be subject to U.K. tax unless the holder is resident or, if
an individual, ordinarily resident or, in certain circumstances and with effect
from March 17, 1998, has been resident in recent years for tax purposes in the
U.K. or carries on a trade, profession or vocation in the U.K. through a branch
or agency to which the Discount Note is attributable.
ANNUAL TAX CHARGES
Provisions of the Finance Act 1993 which could impose an annual charge on
corporate holders of Discount Notes by reference to exchange rate fluctuations,
and provisions of the Finance Act 1996 which could apply so as to charge
corporate holders to corporation tax on income on any profits (and give relief
for permitted losses) by reference to accounting periods on either an
authorized accruals or mark to market basis, will not apply to corporate U.S.
Holders without a branch or agency in the U.K.
UNITED KINGDOM STAMP DUTY AND STAMP DUTY RESERVE TAX
No U.K. stamp duty or stamp duty reserve tax is payable on the issue of
the applicable Global Discount Note or on the issue or transfer of a Discount
Note in definitive form or on its redemption. No U.K. stamp duty will be
payable in respect of any instrument of transfer of Book-Entry Interests,
provided that any instrument relating to such a transfer is not executed in the
U.K., and remains at all times outside the U.K. An agreement to transfer
Discount Notes should not give rise to stamp duty reserve tax in any event.
98
<PAGE> 100
UNITED KINGDOM INHERITANCE TAX
Discount Notes represented by the applicable Global Discount Note that are
not treated as situated in the U.K. and are beneficially owned by an individual
domiciled outside the U.K. for U.K. inheritance tax purposes will not be
subject to U.K. inheritance tax. The status of Discount Notes held in the form
of Book-Entry Interests is, however, not free from doubt. If a Discount Note is
subject to U.K. inheritance tax and U.S. federal estate tax, the U.S./U.K.
double taxation convention relating to estate and gift taxes may entitle a U.S.
Holder to credit or relief in respect of the U.K. tax.
UNITED STATES
The following summary of the principal U.S. federal income tax
consequences of ownership and disposition of the Discount Notes deals only with
Discount Notes held as capital assets. It does not discuss all of the tax
consequences that may be relevant to a holder in light of its particular
circumstances or to special classes of holders, such as securities dealers,
banks, tax-exempt organizations, life insurance companies, persons that hold
Discount Notes that are part of a straddle or conversion transaction, persons
that are not U.S. Holders, or persons whose functional currency is not the U.S.
dollar. The summary is based on the Code, its legislative history, existing and
proposed regulations thereunder, published rulings and court decisions, all as
currently in effect and all subject to change at any time, perhaps with
retroactive effect.
ORIGINAL ISSUE DISCOUNT
The Discount Notes were issued with original issue discount ("OID")
because the "issue price" of the Discount Notes was less than their "stated
redemption price at maturity" by more than a de minimis amount. The "issue
price" of the Discount Notes equals the first price at which a substantial
amount of the Discount Notes were sold to persons other than bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The "stated redemption price at
maturity" equals the sum of all payments provided under the Discount Notes
other than payments of "qualified stated interest." A "qualified stated
interest" payment is generally any one of a series of stated interest payments
that, among other requirements, are unconditionally payable at least annually.
Because the Discount Notes will not pay interest prior to the Cash Interest
Date, none of the interest on the Discount Notes will be "qualified stated
interest." Therefore, all payments made under the Discount Notes will be
included in the "stated redemption price at maturity" and the total OID on a
Discount Note equals the difference between the sum of all payments provided
under the Discount Note and its issue price.
A U.S. Holder of a Discount Note must include OID in income calculated in
accordance with a constant-yield method before the receipt of cash attributable
to such income. Under the constant-yield method, interest is accrued at a
constant rate based on the Discount Notes' yield to maturity, which is the
discount rate that, when used in computing the present value of all payments to
be made under the Discount Notes, produces an amount equal to their issue
price. The amount of OID includible in income by a U.S. Holder of a Discount
Note is the sum of the daily portions of OID with respect to the Discount Note
for each day during the taxable year or portion of the taxable year on which
the U.S. Holder holds such Discount Note ("accrued OID"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the OID allocable to that accrual period. Accrual periods with respect to a
Discount Note may be of any length selected by the U.S. Holder and may vary in
length over the term of the Discount Note as long as (i) no accrual period is
longer than one year and (ii) each scheduled payment of interest or principal
on the Discount Note occurs on either the final or first day of an accrual
period. The amount of OID allocable to an accrual period will equal the product
of the Discount Note's "adjusted issue price" at the beginning of the accrual
period and such Discount Note's yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the particular accrual period). The amount of OID allocable to the
final accrual period is the difference between the amount payable at the
maturity of the Discount Note and the Discount Note's adjusted issue price as
of the beginning of the final accrual period.
99
<PAGE> 101
The "adjusted issue price" of a Discount Note at the beginning of any
accrual period will be the issue price of the Discount Note increased by the
amount of accrued OID for each prior accrual period and decreased by the amount
of any payments made on the Discount Note. Because OID will accrue and be
includible in income at least annually and no payments will be made under the
Discount Notes until the Cash Interest Date, the adjusted issue price will
increase until the Cash Interest Date. The amount of OID includible in income
will therefore increase during each accrual period until the Cash Interest
Date. In taxable years of a U.S. Holder beginning after the Cash Interest
Date, the amount of OID includible in the U.S. Holder's income should be
approximately equal to the expected interest payments on the Discount Note.
OID accrued with respect to the Discount Notes constitutes income from
sources outside the United States, but generally will be "passive" or, in the
case of certain U.S. Holders, "financial services" income, which is treated
separately from other types of income for purposes of computing the foreign tax
credit allowable to a U.S. Holder.
ACQUISITION PREMIUM
A U.S. Holder that purchases a Discount Note for an amount less than or
equal to the sum of all amounts payable on the Discount Note after the purchase
date but in excess of its "adjusted issue price" (any such excess being
"acquisition premium") is permitted to reduce the daily portions of OID by a
fraction, the numerator of which is the excess of the U.S. Holder's adjusted
basis in the Discount Note immediately after its purchase over the "adjusted
issue price" of the Discount Note, and the denominator of which is the excess
of the sum of all amounts payable on the Discount Note after the purchase date
over the Discount Note's adjusted issue price.
MARKET DISCOUNT
A Discount Note will be treated as purchased at a market discount (a
"Market Discount Note") if the Discount Note's "revised issue price", exceeds
the amount for which the U.S. Holder purchased the Discount Note by at least
1/4 of 1 percent of such Discount Note's "revised issue price" multiplied by
the number of complete years to the Discount Note's maturity. If such excess
is not sufficient to cause the Discount Note to be a Market Discount Note, then
such excess constitutes "de minimis market discount". The Code provides that,
for these purposes, the "revised issue price" of a Discount Note generally
equals its issue price, increased by the amount of any OID that has accrued on
the Discount Note.
Any gain recognized on the maturity or disposition of a Market Discount
Note will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on such Discount Note. Alternatively, a
U.S. Holder of a Market Discount Note may elect to include market discount in
income currently over the life of the Discount Note. Such an election shall
apply to all debt instruments with market discount acquired by the electing
U.S. Holder on or after the first day of the first taxable year to which the
election applies. This election may not be revoked without the consent of the
Internal Revenue Service.
Market discount on a Market Discount Note will accrue on a straight-line
basis unless the U.S. Holder elects to accrue such market discount on a
constant-yield method. Such an election shall apply only to the Discount Note
with respect to which it is made and may not be revoked. A U.S. Holder of a
Market Discount Note that does not elect to include market discount in income
currently generally will be required to defer deductions for interest on
borrowings allocable to such Discount Note in an amount not exceeding the
accrued market discount on such Discount Note until the maturity or disposition
of such Discount Note.
SALE, EXCHANGE OR RETIREMENT OF THE DISCOUNT NOTES
Upon the sale, exchange or retirement of a Discount Note, a U.S. Holder
will generally recognize taxable gain or loss equal to the difference between
the amount realized on the sale,
100
<PAGE> 102
exchange or retirement and such Holder's adjusted tax basis in the Discount
Note. A U.S. Holder's adjusted tax basis in a Discount Note will generally
equal the cost of the Discount Note to such Holder, increased by the amounts of
any OID, market discount or de minimis market discount previously included in
income by the Holder with respect to such Discount Note and reduced by any
payments on the Discount Notes received by the Holder.
Except to the extent described above under "-- Market Discount", gain or
loss realized on the sale, exchange or retirement of a Discount Note will be
capital gain or loss. Long-term capital gain of a non-corporate U.S. Holder is
generally subject to a maximum tax rate of 28% in respect of property held for
more than one year and to a maximum rate of 20% in respect of property held in
excess of 18 months. Gain, if any, will generally be U.S. source gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium and interest on a Discount Note and on the proceeds of the
sale of a Discount Note before maturity to, and the accrual of OID with respect
to, a non-corporate U.S. Holder, and "backup withholding" at a rate of 31% will
apply to such payments and to payments of OID if the U.S. Holder fails to
provide an accurate taxpayer identification number or to report all interest
and dividends required to be shown on its federal income tax returns.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such Holder's U.S. federal income tax liability
and may entitle such Holder to a refund, provided that the required information
is furnished to the Internal Revenue Service.
101
<PAGE> 103
PLAN OF DISTRIBUTION
This Prospectus is to be used by Goldman, Sachs & Co. ("Goldman Sachs") in
connection with offers and sales related to market-making transactions in the
Discount Notes effected from time to time. Goldman Sachs may act as principal
or agent in such transactions, including as agent for the counterparty when
acting as principal or as agent for both counterparties, and may receive
compensation in the form of discounts and commissions, including from both
counterparties when it acts as agent for both. Such sales will be made at
prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices.
The Goldman Sachs Affiliates hold an 83.3% interest in ECCP, a Delaware
limited partnership which owns 66.7% of the outstanding ordinary shares of the
Company. In addition, the Goldman Sachs Affiliates directly hold another 4.2%
of the outstanding ordinary shares of the Company. For other information
regarding the involvement of Goldman Sachs and its affiliates in connection
with the Company, see "Risk Factors -- Control of the Group; Potential
Conflicts of Interest", "Company Organization", "Shareholders" and "Certain
Transactions". Goldman Sachs or their affiliates have acted as financial
advisor to the Company from time to time pursuant to an exclusive assignment
and receive separate fees for the provision of such services. Goldman Sachs
International served as advisor to the Company in its acquisition of LCL and is
acting as agent and financial advisor in connection with the Senior Bank
Facility. Richard Friedman, a managing director of Goldman Sachs, Muneer
Satter, a managing director of Goldman Sachs International, and John Thornton,
a managing director of Goldman Sachs, are Directors of the Company.
The Company has been advised by Goldman Sachs that, subject to applicable
laws and regulations, Goldman Sachs currently intend to make a market in the
Discount Notes. However, they are not obligated to do so and any such
market-making may be interrupted or discontinued at any time without notice. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act. There can be no assurance that an
active trading market will develop or be sustained. See "Risk Factors --
Trading Market for the Discount Notes".
The Company has agreed to indemnify Goldman Sachs against certain
liabilities, including liabilities under the Securities Act of 1933.
Goldman Sachs have informed the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority without
prior written approval of such transactions by the customer.
VALIDITY OF THE DISCOUNT NOTES
The validity of the 1994 Notes, the 1995 Notes and the 1997 Notes has
been passed upon for the Company by Sullivan & Cromwell, U.S. counsel to the
Company, as to New York law, and Katherine Wolfsohn, Legal Director of the
Company, as to English law.
EXPERTS
The consolidated financial statements of Diamond Cable Communications Plc
as of December 31, 1996 and 1997 and for each of the years in the three-year
period ended December 31, 1997 included in this Prospectus have been audited by
KPMG, independent auditors, as stated in their report appearing herein, and have
been included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
102
<PAGE> 104
GLOSSARY
Activation: see "Homes Activated" below.
BARB: Broadcasters' Audience Research Board.
Basic service: The basic cable television service, usually charged at a
flat monthly rate for a number of channels, without any premium channels which
are paid for individually.
Broadband: A general term used to describe wide bandwidth equipment or
systems which can carry a large proportion of the electromagnetic spectrum. A
broadband communications system can deliver multiple channels and other
services.
Broadcasting Act 1990: The Broadcasting Act 1990, which governs the
licensing and operation of the broadcasting industry (including the provision
of cable television services) in the United Kingdom, excluding broadcasting by
the British Broadcasting Corporation (the "BBC").
Broadcasting Act 1996: The Broadcasting Act 1996, which makes certain
amendments to the Broadcasting Act 1990 and contains new provisions (inter
alia) for the regulation of digital broadcasting in the U.K.
BSkyB: British Sky Broadcasting Group plc, the largest provider of
multichannel programming in the U.K. BSkyB was formed in November 1990 through
the combination of Sky and British Satellite Broadcasting ("BSB").
Build out: The process of digging, filling and covering underground
trenches in the streets which pass by the homes and businesses in a franchise,
constructing wiring ducts within the trenches, laying cable in the ducts and
installing and connecting the necessary electronic equipment.
Cable television/CATV: A broadband network employing radio-frequency
transmission over coaxial and/or fiber-optic cable to transmit multiple
channels carrying images, sound and data between a central facility and
individual customer's television sets. CATV networks may allow one-way or
two-way transmission.
Cable operator: An entity which has been granted licenses to build and
operate a system providing both cable television and telephone services.
Cable television license: A local delivery license ("LDL") granted by the
ITC pursuant to its authority under the Broadcasting Act or a prescribed
diffusion service license ("PDSL") issued under the CBA, in each case, for the
purpose of providing cable television services for a specific franchise area.
Cable television service: A service consisting of the sending of
television programs by hard wire to more than one home simultaneously.
CBA: The Cable and Broadcasting Act 1984, which was repealed by the
Broadcasting Act 1990.
Coaxial cable: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is standard material used in traditional
cable systems. Signals are transmitted through it at different frequencies,
giving greater channel capacity than is possible with twisted pair cable, but
less than is allowed by optical fiber.
Churn: Churn is a measure of the incidence of service terminations among
customers using a given service. 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).
103
<PAGE> 105
Digital compression: The conversion of the standard analog signal into a
digital signal, and the compression of that signal so as to facilitate multiple
channel transmission through a single channel's bandwidth.
Director General: As used herein, the Director General of
Telecommunications heads the Office of Telecommunications ("OFTEL"), and is the
principal U.K. regulator of the telecommunications industry.
DTH: Abbreviation for "Direct-to-Home". Television programs are
transmitted to individual dwellings, each served by a single satellite dish, as
distinct from a cable or SMATV system.
DTI: The Department of Trade and Industry, the U.K. Government Department
responsible for overseeing telecommunications licenses to operate and use the
physical network over which cable television programs and telecommunications
services may be provided.
Equity Homes: With respect to a given franchise area, the product of the
number of homes in the franchise area and the percentage of the direct or
indirect equity ownership of a company in the license(s) corresponding to the
franchise area.
Headend: A collection of satellite hardware, typically including a dish,
satellite receivers, modulators and amplifiers which collects, processes and
combines signals for distribution within the cable network.
Home: One person living alone or a group of people (who may or may not be
related) living, or staying temporarily, at the same address, with common
housekeeping.
Homes activated: The number of homes that can be connected to the cable
network without further extension of transmission lines, apart from the final
connection to the home.
Homes marketed: The number of homes passed for which the initial marketing
phase (including door-to-door direct marketing) has been completed.
Homes passed by civils construction: The number of homes that have had
ducting buried outside.
Interconnection: The point at which two telephone networks operated by
separate entities connect.
ITC: The Independent Television Commission, the body established by the
Broadcasting Act 1990 which oversees and licenses all types of television
broadcasting in the United Kingdom other than by the BBC and the Welsh
Authority.
LDL: A local delivery license granted since January 1, 1991 under the
Broadcasting Act 1990 which allows an operator to deliver television and other
licensed programming services by means of a licensed telecommunications network
including a cable network or microwave distribution system.
Microwave transmission: The transmission of voice or data using microwave
radio frequencies (generally above 1 GHz).
OFTEL: The Office of Telecommunications, the monitoring body established
following the enactment of the Telecommunications Act, headed by the Director
General.
Pay-per-view: A television programming service whereby payment is made for
a single viewing of a selected broadcast television program at a time chosen by
the cable operator or DTH satellite service provider (as compared with video on
demand).
PDSL: A prescribed diffusion service license granted under the CBA prior
to 1991 which allows an operator to provide cable television services by means
of a cable network.
Penetration rate: The measurement of the take-up of services. Penetration
rate of homes marketed is calculated by dividing the number of homes receiving
basic cable television or the number of residential telephone 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.
104
<PAGE> 106
Premium service: Cable programming service available only for additional
subscription over and above the basic service.
PTO: A public telephone operator that is a provider of telecommunications
services designated under the Telecommunications Act and subject to certain
obligations such as to interconnect its network with other PTO networks.
SDH: Synchronous Digital Hierarchy, a set of standards for optical
communications transmission systems that define optical rates and formats,
signal characteristics, performance, management information to be embedded
within the signals and the multiplexing techniques to be employed in optical
communications transmission systems. SDH facilitates the inter-operability of
different vendors' equipment and benefits customers by minimizing the equipment
necessary for telecommunications applications.
Single fiber optic network infrastructure: A network comprising an overlay
of fiber optic cables (for the provision of cable television and
telecommunications services) which are laid simultaneously in the same duct.
SMATV: Satellite Master Antenna Television, a television delivery system
to multiple dwellings units that utilizes one large satellite dish to receive
signals and a small distribution network to distribute signals by cable to
individual homes.
Street Works Act: The New Roads and Street Works Act 1991.
Telecommunications Act: The Telecommunications Act 1984, which governs the
licensing and operation of the telecommunications industry in the U.K.
Telecommunications license: A license granted under the Telecommunications
Act by the DTI which authorizes installation and operation of a
telecommunications network used to provide cable television and cable telephone
services.
Telephone number portability: The ability of a telephone customer to
retain its telephone number when changing telephone service providers.
Video-on-demand: A generic term applied to a range of services where a
customer has direct control over the timing and content of programming
received. The choice exercised over the potential range of programs and
particularly their start time distinguishes video-on-demand services from
services which are broadcast, such as pay-per-view.
105
<PAGE> 107
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and fulfills its
obligations with respect to such requirements by filing periodic reports with
the Commission. Reference is made to the Company's 1996 Annual Report on Form
10-K which has been filed with the Commission as described above. The
information filed by the Company with the Commission is available for
inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following Regional Offices of the Commission: Northeast Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048; and Midwest Regional
Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material are also available from the
Public Reference Branch of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Company will furnish the Trustee with annual reports, which will
include a description of operations and annual audited consolidated financial
statements prepared in conformity with U.S. GAAP and quarterly reports, which
will include unaudited quarterly consolidated financial information, prepared
in conformity with U.S. GAAP.
Such reports may be obtained, upon written request, from the Trustee at
its Corporate Trust Office located at 101 Barclay Street, New York, New York
10286. Such reports and other information may also be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
106
<PAGE> 108
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, 1997 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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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> 109
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, Diamond
Holdings plc ("Diamond Holdings"). 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 the approximately 1.2
million homes and an estimated 60,600 businesses within its contiguous franchise
areas. As of December 31, 1997, the Group's cable television and
telecommunications network had passed by civils construction approximately
536,100 homes and an estimated 26,900 businesses, of which portions of the
network passing approximately 508,800 homes and an estimated 24,900 businesses
had been activated. As of that date, the Group also had approximately 157,200
residential telephone lines, 83,800 cable television customers and 27,100
business telephone lines. Through that date, pounds sterling 428 million had
been invested (at original cost) in the construction of the network and related
systems. For certain operating data as of December 31, 1997, 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 Annual Report 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, an
explanation of important factors that could cause actual results to differ
materially from those in the forward-looking statements. Among other statements,
statements regarding the Group's operational and financial goals and objectives,
expectations regarding the construction of the Group's network and the marketing
and acceptance of its services, including those under Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" are forward looking in nature. Similarly, among
other statements, statements regarding the effects of changes in the competitive
environment and government regulation, including those under Item 1. "Business
- -- Competition" and "Business -- Milestones" and statements regarding the
expected technological and managerial strains of continued growth, service
enhancement and year 2000 information processing issues, including those under
Item 1. "Business -- Competition" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Information Systems
- -- Year 2000", are forward looking in nature. By their nature, forward-looking
statements and forecasts involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. There are a
number of factors that could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking statements
and forecasts. These factors include, among other things, changes in demand for
the products and services of the Group, changes in the cost and availability of
supplies to the Group, the rate and cost of the build out of the Group's
network, technological changes, the impact of competition and changes in
economic conditions in England.
-2-
<PAGE> 110
The Company operates only in the United Kingdom and, accordingly, publishes
its financial statements in pounds sterling. References herein to "L.", "pounds
sterling", "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 $1.6427 per pounds sterling 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, 1997. See Item 6. "Selected
Financial Data -- Exchange Rates" for information regarding the Noon Buying Rate
for the past five fiscal years. On March 18, 1997 the Noon Buying Rate was
$1.6711 per pounds sterling 1.00.
-3-
<PAGE> 111
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
three-way conference calling, voicemail, call waiting, call forward, call
barring and Internet access, (ii) business telecommunications services which
include services similar to those 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, 1995, 1996 and 1997. The
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>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995(1) 1996 1997
------- ------- -------
Homes passed by civils construction(2) . 281,311 453,496 536,110
Homes activated(3) . . . . . . . . . . . 157,906 347,246 508,801
Homes marketed(4). . . . . . . . . . . . 126,607 252,601 405,787
Student service rooms marketed (5) . . . - - 1,805
BUSINESS TELECOMMUNICATIONS
Business customers accounts. . . . . . . 2,399 3,935 5,723
Business lines connected . . . . . . . . 9,879 18,932 27,124
Private circuits(6). . . . . . . . . . . 161 226 258
Average lines per business account(7). . 4.1 4.8 4.7
Average monthly revenue per line(8)(9) . L.70.23 L.50.17 L.46.26
Pro-forma average monthly revenue
per line(9). . . . . . . . . . . . . . L.67.70 L.51.25 L.46.26
RESIDENTIAL TELEPHONE(5)
Residential lines connected. . . . . . . 52,698 104,460 157,171
Penetration rate of homes marketed(10) . 41.6% 41.4% 38.6%
Average monthly revenue per
line(9)(11). . . . . . . . . . . . . . L.19.88 L.18.40 L.18.75
Pro-forma average monthly revenue
per line(9). . . . . . . . . . . . . . L.19.22 L.18.64 L.18.75
Churn(12)(13). . . . . . . . . . . . . . 15.0% 20.6% 16.3%
CABLE TELEVISION
Basic service subscribers. . . . . . . . 30,749 59,242 83,793
Penetration rate of homes marketed(14) . 24.3% 23.5% 20.6%
Average monthly revenue per
subscriber(15) . . . . . . . . . . . . L.17.62 L.18.03 L.19.84
Churn(12)(13). . . . . . . . . . . . . . 33.8% 40.9% 32.7%
</TABLE>
(1) Information for 1995 is pro-forma combined information including both
Diamond and LCL as if LCL had been acquired on January 1, 1995.
-4-
<PAGE> 112
(2) Homes passed by civils construction is the number of homes (excluding
student services rooms) that have had ducting buried outside.
(3) Homes activated is the number of homes (excluding student services rooms)
that are capable of receiving cable service without further extension of
transmission lines, apart from the final connection to the home.
(4) Homes marketed is the number of homes activated (excluding student
services rooms) for which the initial marketing phase (including
door-to-door direct marketing) has been completed.
(5) During 1997 the Group began to provide telephone services and internet
access to students at a number of large educational establishments in its
franchise area. Academic terms make this business seasonal in nature. In
order to fairly present the results, the Company has adopted the following
policy: (i) rental revenue is recognized evenly over a full twelve month
period (or the balance of the period to the start of the next academic
year if shorter), (ii) call revenue is recognised in the month in which it
is earned and is incorporated in residential telephone average monthly
revenue per line, (iii) a student services line is recognised as the
equivalent of 3/4 of a residential line, (iv) each student room at which
service is available is treated as a home marketed and incorporated in the
calculation of residential telephone penetration and, (v) any net decrease
in the number of students taking the service between one academic year and
another is ignored for the purposes of calculating residential telephone
churn.
(6) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(7) 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.
(8) The 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
twelve.
(9) 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 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.
(10) Penetration rate of homes marketed is calculated by dividing the number
of residential lines, including student services lines recognized at the
equivalent of 3/4 of a residential line, connected on the given date by
the total number of homes marketed and student services rooms marketed as
of such date, expressed as a percentage.
(11) 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 twelve. Call revenue from student services lines
is recognized in the month in which it is earned and is incorporated in
-5-
<PAGE> 113
residential telephone average monthly revenue per line, with each student
services line recognized as the equivalent of 3/4 of a residential line.
(12) 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). The calculation of churn excludes student
services lines.
(13) Since the beginning of 1997, the Group's reported churn has excluded from
net disconnected accounts subscribers who disconnect from the service when
moving residence and reconnect to the service in their new residence.
Previously, these subscribers were not identified under the Group's
information system and were therefore reported in the churn calculation as
disconnected accounts. If churn for the year ended December 31, 1997 was
calculated on the basis used in periods prior to 1997, annualized churn
would have been 21.3% and 36.9% for residential telephone and cable
television, respectively. The difference between churn on the new and
prior bases is not necessarily indicative of the adjustment that would
arise if churn for prior periods were restated.
(14) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television on the given date by the total
number of homes marketed as of such date, expressed as a percentage.
(15) 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 twelve.
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, U.K. government policy, which was introduced by the
Conservative government that was in office until May 1, 1997, restricts the
ability of BT and CWC to use their telephone networks for conveying broadcast
entertainment to homes in cable franchise areas until at least 1998. The Labour
government which took office after May 1, 1997 has stated its intention to
review this policy and is expected to publish its proposals shortly. 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
-6-
<PAGE> 114
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 increased and 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 continued to
consolidate as evidenced by the 1995 merger of SBC CableComms and TeleWest
Communications plc, the 1997 merger of NYNEX CableComms Group plc, Videotron
Holdings Plc, Mercury and Bell Cablemedia plc and the proposed merger of NTL
and Comcast UK.
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.
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 Group's strategy of increasing the volume
of calls switched locally and minimizing interconnect charges payable to BT,
CWC 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 5,723 business telecommunications customer
accounts at December 31, 1997, including connections to a number of important
corporate and governmental entities such as The Boots Company, Imperial
Tobacco, Experian, the Nottinghamshire County Council, the Nottingham City
Council, Leicestershire County Council, Leicester City Council, Ashfield
District Council, North East Lincolnshire District Council, Lincoln County
Council, the Nottinghamshire Constabulary, 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,
Grantham Hospital, Lincoln Hospital N.H.S. Trust, the University of Nottingham,
Nottingham Trent University, Leicester University, Lincoln University, BBC
Radio Nottingham, Radio Trent, the Nottingham Building Society, Vision Express
Group, Knoll Pharmaceuticals, Pedigree Pet Foods, the Northcliff Newspaper
Group (four regional newspapers including Nottingham's Evening Post and the
-7-
<PAGE> 115
Leicester Mercury) and the Mansfield Chad Newspaper.
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,
1997, the Group provided 27,124 business lines to its 5,723 business accounts
giving the Group an average of approximately 4.7 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 Group 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
Group 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:
-- 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 barring, call forward and alarm calls. Additionally,
billing data on high density 3.5" floppy disks and CD ROM is made
available to customers.
-- Centrex. Centrex allows the customer to use the facilities of the
Group's central exchange instead of purchasing its own telephone
systems, 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
private telephone systems including reduced call charges and can
include data calls using ISDN instead of point-to-point data circuits.
-- DDI (Direct Dialing Inward). Direct Dialing Inward offers multiple
unique numbers at a customer's premises via a smaller number of access
lines.
-- Private Circuits. Private (leased) circuits permit the customer to
rent a circuit between two points, for example between two office
buildings, at fixed rates. This permits the rapid exchange of data
between customer owned computers or exchanges without passing through
the public network. The customer can choose from among different
circuit capacities, such as multiples of 64 KBit/s for low speed
applications, and 2, 8, 34, 50, 100 and 155 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
wide area networks (WANs) between local offices.
-- Digital Services. The Group offers digital connection to the
public network using DASS2 (Digital Access Signaling System) and Q931
(European specification). The Group offers Primary Rate ISDN (30 x 64
Kbit/s channels) for voice and data, or Basic Rate ISDN offering 2
channels of 64 Kbit/s and a 16 Kbit/s 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 Signaling System) where customers are linking privately
owned telephony systems over the public network.
-- Caller ID. Caller identification allows the customer to identify
the origin of the inbound call, which is essential for the successful
operation of computer telephony integration.
-- Calling Cards. The Group currently offers pre-paid disposable and
rechargeable calling cards, which enable cardholders to make calls from
any telephone and debit the cost of the call from the credit available
on their calling card. The Group offers this service to hospital staff
and patients as a co-branded service with the Queen's Medical Centre in
Nottingham and to students at the University of Nottingham and
-8-
<PAGE> 116
Leicester University, where the Group is installing private telephones
in over 8,000 student rooms.
-- Voicemail Services. The Group has recently launched its
residential voicemail service and its business voicemail service is now
in place and undergoing customer trials in advance of an expected
commercial launch in the first quarter of 1998.
-- Internet Service. The Group offers three alternative forms of
connection (analog dial-up, 64 Kbit/s ISDN and 64 Kbit/s or 2 Mbit/s
fixed) to its Internet service, known as Diamond Cable Online. The
Group also offers web space on its server, so it can offer customers
their own home page. It also offers backbone service capacity for a
number of Internet service providers, and for EMNET (the East Midlands
Network) a European-funded organization which seeks to bring the
benefits of commercial services on the Internet to the small and
medium-size enterprises (SME's) in the region.
-- Managed Data Network Services. Customers can either manage their
own data networks by buying leased circuits from the Group or ask the
Group to manage their network connections. The Group currently offers a
managed frame relay-based service, which uses a transmission technology
designed to provide a flexible bandwidth in accordance with the
customer's need. Frame relay is primarily designed for LAN/WAN
interconnect between speeds of 64 Kbit/s and 45 Mbit/s.
-- Closed Circuit Television. The Group supplies leased private
circuits to local authorities to support the provision of closed
circuit television services in the region.
-- Automatic Call Distribution ("ACD"). The Group offers enhanced
voice managed services including ACD, where the customer can utilize
the functionality of the Group's switches to queue and manage its
inbound calls, thereby creating a call center, with visual and
statistical reporting capabilities.
The Group is evaluating a range of intelligent network platforms to form
the basis of an expanded value-added service portfolio, including freecall
numbers, enhanced number portability, personal numbering, premium rate numbers
and enhanced pre-paid calling card facilities. The same platform could offer an
authentication gateway, televoting facilities, local call numbers, customized
announcements, foreign language announcements and split charging.
The Group plans to offer in the future additional transmission technology
services suitable for managing data transfer at high speeds, such as
asynchronous transfer mode ("ATM") and switched megabit data services ("SMDS").
In the business telecommunications area, the Group generally competes
primarily on the basis of the quality of services and to a lesser extent on
price, although the Group believes that its charges for services to business
customers are competitive with those of BT, CWC and other operators.
The Group believes it 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 Group 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 Group 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 customers changing to the Group historically have 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, the Group has provided its business customers
with the opportunity to use its telephone service for their outgoing
-9-
<PAGE> 117
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 "--
Competition -- Business Telecommunications" and " -- Certain Regulatory Matters
- -- Cable Telecommunications -- Number Portability".
RESIDENTIAL TELEPHONE
The Group had residential telephone line penetration of 38.6% of homes
marketed at December 31, 1997. The Group believes it is achieving this
residential telephone penetration rate 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:
Reliability. The Group's fiber-optic network infrastructure provides
reliable, high-quality transmission across a modern network. In addition, the
Group believes that its 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. Fully itemized
monthly billing is provided to all customers at no extra fee. The Group
provides three-way conference calling free of charge to most residential
customers 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), call diversion (i.e., call forward) and voicemail. The Group's network
architecture provides a flexible platform for the Group to offer additional
telephony services as they become available in the future.
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.
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 Group believes that this
service has encouraged its customers to recommend its services to other
potential customers, particularly friends and family members, and is believed
by the Group to increase calling traffic generally. The Group believes this
word-of-mouth marketing reinforces its well-recognized brand name.
The Group regularly evaluates its pricing strategy and intends to remain
price competitive in its residential telephone business. The Group believes
competitive pricing is particularly important initially as it introduces
services and seeks to gain market share. However, over time the Group expects
new products and customer service to become a more important component of its
marketing strategy.
The Group operates an Internet access service, Diamond Cable Online, in
its operating area. This service, available to both Group telephone customers
and others, is the result of an alliance with Cable Online Ltd., a subsidiary
of NTL Ltd., and provides users with access to the Internet and World Wide Web.
The Group also offers expanded Internet services, including ISDN and leased
line connections.
CABLE TELEVISION
PROGRAMMING
-10-
<PAGE> 118
The Group 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 Group has
carried pay-per-view events and launched in March 1998, together with
several partners, a four channel movie pay-per-view service.
The Group 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. 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
customers 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 Group (giving effect to programming changes scheduled to take effect
through March 31, 1998).
<TABLE>
<CAPTION>
PROGRAMMING DESCRIPTION
- ----------- -----------
<S> <C>
NEWS AND INFORMATION
CNN International 24-hour international news service
Parliamentary Channel Live coverage of the U.K. Parliament
Channel Guide Summary of programming schedule
Preview Channel Sampling of all cable channels
Diamond Vision/Cable 7 Local programming
BBC News 24 24-hour news services
GENERAL INTEREST
BBC1 U.K. terrestrial television
BBC2 U.K. terrestrial television
ITV U.K. terrestrial television
Channel 4 U.K. terrestrial television
Channel 5 U.K. terrestrial television
Bravo Films and television series
Trouble Television series
NBC Europe U.S. and world news and entertainment
QVC -- The Shopping Channel Home shopping
Sky One(1) Drama, films and serials
Discovery Channel Science and education programming
The Challenge Channel Game show programming
Discovery Home & Leisure Education and documentary programming
The History Channel History programming
Travel Channel Travel programming
U.K. Gold Classic U.K. television programming
Live TV 24 hour U.K. entertainment and news
The Sci-Fi Channel Science fiction programming
Christian Channel Religious programming
Carlton Select Classic U.K. Television programming
Carlton Food Network Food programming
Granada Plus Classic U.K. Television programming
Granada Men and Motors Male oriented programming
Paramount Comedy Channel Situation comedy programming
Granada Good Life Health, shopping and gardening programming
</TABLE>
-11-
<PAGE> 119
<TABLE>
<CAPTION>
PROGRAMMING DESCRIPTION
- ----------- -----------
<S> <C>
MOVIES
TNT Classic movies
Sky Movies Screen1(1)(2) 24-hour feature movies
Sky Movies Screen2(1)(2) 24-hour feature movies
Sky Movies Gold(1)(2) Classic movies
HVC(2) Cult thriller movies
The Adult Channel(2) Adult entertainment
TVX, the Fantasy Channel(2) Adult entertainment
CHILDREN
The Disney Channel(1)(2) Children's entertainment
Cartoon Network Children's cartoons
Nickelodeon Children's entertainment
MUSIC
VH-1 Music videos
MTV Europe Music videos
Performance Classical music and opera
The Box Music videos selected by customer requests
Landscape Classical music accompanying scenic videos
SPORTS
Eurosport International sporting events
Sky Sports1(1)(2) U.K. and international sports
Sky Sports2(1)(2) U.K. and international sports
Sky Sports3(1)(2) U.K. and international sports
INTERNATIONAL
Zee TV(2) Asian sub-continent related programming
Asia NET Asian programming
Namaste Asian programming
ATM Asian programming
SET Asia (2) Asian programming
SAT 1 German language programming
TV5 French language programming
CNE Chinese news and entertainment
</TABLE>
_____________
(1) Programming acquired from BSkyB and governed by the BSkyB rate card.
(2) These services are offered for an additional charge or upon subscribing
to other services requiring an additional charge.
(3) Some programming shares a single channel. The group currently has analog
capacity for at least 54 channels, including channels reserved for the
Group's pay-per-view movie service, Front Row.
The Group 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 is
constrained in its ability to offer a wider range of channel packages due to
requirements imposed by programming suppliers to provide certain channels to
all or a significant percentage of customers if provided to any. The Group has
negotiated with certain suppliers reductions in these requirements which have
provided the Group greater flexibility in designing the packages of channels it
can offer consumers in certain franchise areas.
The Group currently charges pounds sterling 13.99 per month (after a pounds
sterling 1 direct debit discount) for its basic cable television service (which
consists of approximately 50 programs 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 Group has introduced a
"Connect Pack", an entry-level package of 11 channels of television plus
-12-
<PAGE> 120
telephone line rental for pounds sterling 12.98 (pounds sterling 5.99 for cable
television and pounds sterling 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 customers as well as first time customers to multichannel
television. In these franchise areas, the Group also offers its Variety Pack,
which consists of 23 channels and is offered for pounds sterling 9.99 per month
(after a pounds sterling 1 per month direct debit discount). This package
provides customers access to premium channels without having to purchase a full
basic package. The Group also believes that these programming packages encourage
existing customers to remain as cable television customers by providing a less
costly alternative to a full programming package. The Group's ability to offer
these packages is limited by the minimum percentage of customers to which the
Group is obliged to offer a channel. In some areas, the Group is now approaching
these negotiated limits, and, once those limits are reached, will only be able
to offer these packages to additional customers by renegotiating the limits or
increasing its customer base.
As part of its efforts to reduce churn, the Group has instituted a pounds
sterling 9.95 installation charge for cable service. Generally, there is no
charge to the customer for service or repair of the cable television network or
customer premises equipment.
The Group obtains much 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 customers subscribing to the service. Some programming, such as
that provided by the BBC and other terrestrial broadcasters, is provided to the
Group without charge.
PAY PER VIEW
DCL is a shareholder of Front Row Limited ("Front Row"), a joint venture
with Telewest plc, General Cable plc and NTL, which launched a
four-channel pay-per-view service in March 1998. The joint venture has secured
contracts with several of the major Hollywood studios to provide movies for the
pay-per-view service and is in discussions with other studios regarding
additional contracts. This service will enable customers to order specific
feature films on a per viewing basis for an additional charge of pounds sterling
2.99 per viewing. Films will be available on a pay-per-view basis before they
become available on terrestrial television or any subscription movie channel but
approximately three months after their release in the video rental market.
BSKYB PROGRAMMING
British Sky Broadcasting Group plc and its wholly-owned subsidiary British
Sky Broadcasting Limited (collectively, "BSkyB") currently provide the Group
with 11 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. The Group intends to
reduce the number of BSkyB channels it offers from eleven to eight, including
dropping Sky News, by March 31, 1998. 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 customers. 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. BSkyB has
flexibility under its rate card to adjust, on 60 days notice, the prices it
charges for the programs it provides to the Group. In addition, BSkyB
distributes 27 other channels (some of which share a channel) on behalf of other
providers (including some providers partly owned by BSkyB). BSkyB is also
expected to supply programming to BDB.
The Group pays a monthly fee to BSkyB for programming based on the number
of the Group's customers 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, 1997 was pounds sterling 5.6 million.
It was reported on September 3, 1996 that the Independent Television
Commission ("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 completed its investigation. In the future, the Disney
Channel will be available as a separate premium channel. The ITC has, however,
begun a broader investigation into the effects of bundling in the pay television
-13-
<PAGE> 121
market, the results of which are expected to be published in the course of 1998.
The Cable Communications Association made a submission to the ITC recommending
banning percentage carriage requirements in programming supply contracts and
banning the imposition by programming wholesalers of retail bundling
requirements. The Group believes that a favorable outcome of the ITC's
investigation could give the Group greater flexibility in packaging programming.
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 Telecommunications (the "Director General")
of Fair 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 was
operative from February 16, 1997 until October 1, 1997. With effect from
October 1, 1997, BSkyB introduced a separate charge for Sky Sports 2, which had
previously been supplied free of charge to customers subscribing to Sky Sports
1. BSkyB also withdrew its charge to cable operators for Sky Sports 3 (which
BSkyB had always supplied free of charge to DTH subscribers to Sky Sports 1).
As a result of these programming changes, BSkyB submitted and the OFT approved
a further revised rate card.
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
bonus 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 those 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 will
be reviewed by the end of 1998. 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.
-14-
<PAGE> 122
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.
Interactive services that may be offered by the Group in the future
include video games that would be transmitted periodically (or possibly upon
customer request) to a special converter box at a customer's home where they
would be available for use by the customer (as with a traditional video game)
and video-on-demand services that would enable individual customers 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.
In addition, the Group believes that its network leaves it well placed to
provide digital television services if in the Group's view providing these
services in its franchise areas becomes commercially attractive. Digital
technology allows operators to provide more channels, through digital
compression, and higher quality pictures and sound. 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 from cable
television until its customer base has expanded significantly. The Group
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
Group and paid on a full commission basis. In order to improve the management
and quality of its residential sales force, in February 1997 the Group
terminated arrangements with its independent sales contractors and began to
develop its own internal sales force through direct hiring of residential sales
people. The Group now employs and trains residential sales people directly and
pays them on the basis of a salary plus sales commission. At December 31, 1997,
the Group employed approximately 135 residential sales people, including a
number of former contracted sales people who were hired by the Group in
accordance with its employment criteria following interviews.
The Group believes that improvements in the quality of its sales force
have contributed to a recent reduction in churn and enable the sales force to
market more sophisticated products and services including Internet service and
more advanced telephone features to residential customers.
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 Group'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 Group. This approach is designed to inform potential customers of
construction status, to minimize inconvenience during construction and to
foster a loyal customer base.
During 1997, the Group intentionally slowed the pace of civils
construction to reduce the gap between homes passed by civils construction and
homes activated. 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, 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), and approximately 27% of the homes activated by
the Group's network had not yet been marketed. At December 31, 1997 these
-15-
<PAGE> 123
percentages had fallen to 5% and 20%, respectively. As more homes are activated
the Group expects to accelerate the release of homes for marketing. This may
place additional stress on the Group's management and operational resources. If
the Group is unable to manage rapid growth and development successfully, the
Group's operating results and financial condition could be materially adversely
affected.
COMPETITION
The Group faces significant competition in each of its business
telecommunications, residential telephone and cable television business areas.
In addition, new forms of media distribution, including digital terrestrial and
satellite television are expected soon to enter the marketplace. The U.K.
telecommunications industry is highly competitive. The Office of
Telecommunications ("OFTEL") has pursued a policy of encouraging competition,
and over 150 public telecommunications operator ("PTO") licenses have been
granted, although many of these have not yet been used. The Group believes that
competition will continue to intensify in each of its business areas.
BUSINESS TELECOMMUNICATIONS
The Group competes primarily with BT and a number of other competitors,
the largest of which is CWC, in providing business telecommunications services
to businesses in its franchise areas. The Group competes largely on the basis
of quality of services and, to a lesser extent, price. The Group believes that
its call charges are competitive with those of BT and CWC.
Both BT and CWC have resources substantially greater than those of the
Group. In addition each of CWC and BT has a national presence which permit it
to offer telecommunications, data transmission and other services on a
nationwide basis to business telecommunications customers with nationwide
operations beyond those that the Group is currently able to offer on its own.
With effect from May 1997, Mercury was merged with three U.K. regional cable
companies, NYNEX CableComms Group plc, Bell Cablemedia plc and Videotron
Holdings plc, to create a new group held by CWC, which is a 52.6% owned
subsidiary of Cable and Wireless plc. While the effects of the merger cannot be
predicted, the Group does not believe that the merger has had a material effect
on the Group's competitive position in the Group's franchise areas.
In April 1997, the Group was granted a national telecommunications
license, which enables it to offer telecommunications services anywhere in the
U.K. The Group is currently evaluating opportunities to offer these services
outside its franchise areas.
The Group also faces competition from a number of recent entrants to the
business telecommunications market. For example, Energis operates a national
SDH fiber optic network constructed along the existing national electricity
transmission infrastructure in England and Wales. Energis has focused on the
business telecommunications market and does not currently offer residential
telephony services. Energis's service offering, along with indirect service
from ACC, MFS WorldCom, Esprit, and other, smaller, long distance operators,
and the success of international simple resellers have increased competition in
the long distance and international telecommunications markets. Other owners of
extensive infrastructure, including local electricity distribution companies
and the owner of the former rail telecommunications network, are currently
constructing telecommunications networks or offering telecommunications
services, and it is possible that other owners of extensive infrastructure,
such as other utilities, will seek to use their existing infrastructures to
construct telecommunications networks that will compete with the Group's
telecommunications business. The Group also faces competition from mobile
telecommunications providers.
The Group believes that the Group's ability to compete effectively with BT
had been adversely affected, particularly with respect to smaller 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 Group believes that this discouraged some customers from changing
from BT to the Group's service because of the costs and inconvenience associated
with changing numbers. In response to this, the Group 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
-16-
<PAGE> 124
portability in the U.K. See " -- Certain Regulatory Matters -- Cable
Telecommunications -- Number Portability". The Group 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 Group believes that number portability will be relatively
neutral in its effect on the Group's business.
RESIDENTIAL TELEPHONE
The Group's principal competitor in providing telephone services to
residential customers is BT, which has an established market presence, fully
built networks and resources substantially greater than those of the Group. As
the substantial majority of U.K. residential telephone customers are currently
customers of BT, the Group's growth in residential telephone services depends
upon BT customers changing to the Group's telephone system. The Group believes
that price is currently one of the most important factors influencing the
decision of U.K. customers to switch to a cable telephone service. As a result,
the Group currently seeks to provide its telephone customers with monthly
savings on the cost of calls compared to BT. BT regularly reviews its prices,
generally resulting in price reductions. The Group has generally reacted to
previous BT price reductions by reducing its rates in order to maintain its
competitive price advantage. The Group believes that BT will be required for
regulatory and competitive reasons to continue to reduce its prices for most
residential customers in the future. 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 and may be given
greater flexibility in the future.
BT currently is subject to regulatory controls over the prices it may
charge to residential customers, which last 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 and per second pricing, which has led to further price
reductions for certain users. The revised price controls on BT 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 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. BT
has also implemented extensive marketing campaigns to win back customers from
cable operators.
Ionica offers a residential telephone service based on radio technology in
certain of the Group's franchise areas.
The introduction of international facilities licensing in 1996 has
increased competition for international traffic, and the Group's telephone
customers can obtain access to these alternative international service
providers.
In addition to BT, CWC and Ionica, the Group competes with mobile
telecommunications operators, such as Vodafone, Cellnet, One2One and Orange,
international service providers and other service providers, and competition is
expected to intensify in the future.
-17-
<PAGE> 125
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 cable television customers within its franchise
areas. The Group does, however, compete directly with television programming
provided by terrestrial (over-the-air) broadcast television stations and analog
DTH satellite services and may be subject to competition from SMATV systems.
The Group's cable television programming also competes to varying degrees with
other entertainment media, including home video (generally video rentals). In
the future the Group will compete with digital terrestrial television, and
digital DTH satellite services and may also 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 Group 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 Group 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 previous terrestrial channels, an additional
commercial terrestrial channel (Channel 5) commenced broadcasting March 30,
1997.
The Group 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 Group 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 have been set aside for digital broadcasting by the existing
terrestrial broadcasters. The ITC has granted a license for three other
frequency ranges to British Digital Broadcasting Limited ("BDB"), a joint
venture owned by Carlton Communications and Granada Group, both of which are
major terrestrial broadcasters and programming producers. BSkyB has undertaken
to the ITC to supply programming to BDB for 5 years. BDB has announced its
intention to launch at least 15 channels in September 1998. Digital terrestrial
television will broadcast from land-based transmitters and could be received by
consumers with conventional aerials. A digital decoder box will be needed to
view the new channels, which will have digital picture and sound quality. BSkyB
has announced a joint venture with BT, Midland Bank and Matsushita, called
British Interactive Broadcasting ("BIB"), to develop and market a digital set
top decoder on a heavily subsidized basis. Both BDB and BIB are currently under
investigation by EU competition authorities. The introduction of digital
terrestrial, as well as digital DTH 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
-18-
<PAGE> 126
retransmits the signal down to customers. In order to receive a satellite
service, the customer must have an outdoor reception dish.
Analog DTH satellite services are widely available in the U.K., and the
number of analog DTH satellite subscribers has increased from 500,000 in 1989
to approximately 4 million at September 30, 1997. 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 customers most 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 Group believes that it may become
less dependent on programming from BSkyB. See "-- Cable Television --
Programming".
The Group believes that DTH satellite services will continue to be
significant competitors in the future. However, the Group believes that cable
television has a number of competitive advantages over DTH satellite service,
including the following: (a) the higher up-front or ongoing costs for the
purchase or rental of a satellite dish and related equipment required for DTH;
(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 certain interactive and integrated entertainment, telecommunications and
information services over their existing networks.
The Group 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. Aggressive promotional activity by BSkyB has accentuated this advantage.
In addition, BSkyB has announced its intention to introduce a digital DTH
satellite service offering the possibility of over 200 television channels and
a range of interactive services in early summer 1998. The Group believes that
DTH satellite services may become more competitive with cable service if
digital services are successfully introduced in the U.K. such that satellite
services can provide more channels and direct specific programming to
particular subscribers.
On December 1, 1997, BSkyB launched a pay-per-view movie service,
broadcast on four of its DTH satellite channels, which will compete with Front
Row, the Group's pay-per-view movie service.
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 and others have 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.
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.
-19-
<PAGE> 127
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 eight
individual franchise telecommunications licenses and 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 franchise areas according to CACI Information Services (for the
franchises governed by individual franchise telecommunications licenses and the
Burton-upon-Trent and Hinckley LDLs) and the ITC (for the other LDLs).
<TABLE>
<CAPTION>
OWNERSHIP EQUITY HOMES
--------- ------------
<S> <C> <C>
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 a
national telecommunications license that covers all of the U.K. including
the LDL franchise areas but excluding the areas covered by the Group's
individual franchise telecommunications licenses.
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 Group
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.
Under present rules, the individual franchise 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 individual franchise
telecommunications license for the Nottingham franchise, which was the first to
become operative, expires in 2013. The individual franchise telecommunications
licenses currently held by the Group incorporate construction milestones which
are reviewed by OFTEL. LDLs include milestones which are reviewed by the ITC.
See "-- Milestones". The national telecommunications license lasts for an
initial period of 25 years from the date of grant, April 28, 1997, and is then
subject to revocation on 10 years' notice. For further descriptions of the
Group's licenses, see " -- Certain Regulatory Matters".
-20-
<PAGE> 128
The Group 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 Group 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 which
serves approximately 16,000 council properties in Nottingham and approximately
7,000 council properties in Leicester. 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, 1997, approximately 563,000 of the premises in the
Group's franchise areas had been passed by civils construction and a portion of
the network passing approximately 533,700 premises had been activated. The
number of premises activated represents approximately 52% of the Group's
aggregate milestone requirements. Construction has now commenced in twelve 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
Group'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. As of December 31, 1997, the Group's cable television
and telecommunications network had passed by civils construction approximately
536,100 homes and an estimated 26,900 businesses, of which portions of the
network passing approximately 508,800 homes and an estimated 24,900 businesses
had been activated. During 1997, the Group intentionally slowed the pace of
civils construction to reduce the large numbers of homes passed by civils
construction which were yet to be activated and/or marketed. During 1997,
approximately 82,000 homes were passed by civils construction by the Group's
cable network, as compared with approximately 173,000 and 172,000 homes passed
by civils construction in 1995 and 1996, respectively. The pace of civils
construction was also impacted by the phase out of one of the Group's largest
contractors, which went into liquidation. The Group may encounter difficulty in
obtaining qualified contractors and may encounter cost overruns or further
delays in construction. Although the Group believes it will be able to continue
to negotiate construction contracts at competitive rates, construction costs
could increase significantly over the next few years in light of the demand for
cable construction services as the industry seeks to meet milestone
requirements. As with other U.K. cable operators, the Group is generally
required to use underground construction, which is more expensive and time
consuming than aerial construction. The Group cannot broadly employ mechanized
construction methods due to existing underground utility infrastructure, and
-21-
<PAGE> 129
is responsible for the expense of restoring surface area after construction is
completed. Given the current high levels of cable construction in the U.K. and
the corresponding demand for materials, the Group has from time to time
experienced (and may in the future experience) shortages or price increases for
critical components such as fiber optic cable, ducting and cabinets.
The Group originally relied on its own construction team for the build out
of its network. Since 1994, the Group has primarily used outside contractors
and now uses outside contractors for almost all of the build out of its
network. The Group maintains a small in-house construction team primarily for
building out particularly difficult areas.
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 Group'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 individual franchise
telecommunications licenses and LDLs to construct and activate 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 milestones specified
in telecommunications licenses for eight of the Group's franchise areas where
building was due to have commenced. Compliance with the milestones in these
areas is monitored by OFTEL. During June 1996, OFTEL informed the Group that it
did not agree with the Group's historical method for calculating compliance
with its milestone obligations. Based on OFTEL's method of calculating premises
passed, the Group failed to meet its year-end 1995 milestones for six of its
eight telecommunications licenses.
The Group has renegotiated its milestone obligations with OFTEL, and at
December 31, 1997, the Group met the required milestone obligations under each
of its telecommunications licenses.
Principally because of delays by the Department of Trade and Industry in
granting the Group a national telecommunications license, and consequent delays
in the commencement of construction, the Group did not meet its current LDL
milestones in six of the seven LDL franchises at the end of 1997, although
construction has commenced in five of the seven LDL franchises. The Group has
applied to the ITC to modify its milestone obligations in all of its LDL
franchise areas except Vale of Belvoir. The Group understands that the ITC
intends to grant the requested modifications. See " -- Certain Regulatory
Matters -- Cable Telecommunications -- Network Construction and Service
Obligations".
-22-
<PAGE> 130
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>
<CAPTION>
AFTER
GROUP FRANCHISE AREAS 1996 1997 1998 1999 2000 2000
- --------------------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS LICENSE
MILESTONES(1)(2)
Nottingham...................... 132,000 190,000 230,000 230,000 230,000 230,000
Mansfield....................... 42,000 66,000 66,000 66,000 66,000 66,000
Newark-on-Trent................. 13,500 13,500 13,500 13,500 13,500 13,500
Grantham........................ 14,000 14,000 14,000 14,000 14,000 14,000
Melton Mowbray.................. 10,000 10,000 10,000 10,000 10,000 10,000
Lincoln......................... 18,000 43,000 43,000 43,000 43,000 43,000
Grimsby and Cleethorpes......... 35,000 57,000 63,000 63,000 63,000 63,000
Leicester and Loughborough...... 76,000 100,000 149,000 200,670 200,670 200,670
LDL MILESTONES(2)
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 340,500 529,000 701,000 837,670 922,419 1,021,894
======== ======= ======= ======= ======= =========
Aggregate Annual Totals 188,500 172,000 136,670 84,749
</TABLE>
- -----------
(1) Although reflected above on an annual basis, the Group's individual
franchise telecommunications license milestones are measured on a
quarterly basis.
(2) Telecommunications license milestones refer to premises and LDL
milestones refer to homes.
The table below sets forth by franchise and date the number of premises
activated.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31
1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Nottingham................. 123,910 139,286 145,402 171,922 182,254 194,370
Mansfield.................. 40,474 46,916 50,879 57,071 61,632 69,707
Newark-on-Trent............ 12,707 13,509 13,509 13,509 13,509 13,509
Grantham................... 11,515 14,894 15,719 15,719 15,719 15,719
Melton Mowbray............. 9,819 10,045 10,045 10,045 10,045 10,045
Lincoln.................... 16,887 20,131 23,389 34,089 34,997 44,619
Grimsby and Cleethorpes.... 30,699 37,130 40,885 46,618 49,912 58,894
Leicester and Loughborough. 77,017 83,280 85,562 96,271 107,008 118,721
Vale of Belvoir............ -- -- -- -- -- 1,652
Burton-upon-Trent.......... -- -- -- -- -- 2,422
Hinckley................... -- -- -- -- -- 2,012
Ravenshead................. -- -- -- -- -- 2,050
------- ------- ------- ------- ------- -------
Cumulative Total....... 323,028 365,191 385,390 445,244 475,076 533,720
======= ======= ======= ======= ======= =======
</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. 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.
-23-
<PAGE> 131
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 Group believes that it 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 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 could 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 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.
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 in Mansfield, Lincoln and Grimsby.
Leicester is interconnected with 2 Mbit/s circuits to Nottingham. Two switches
in Leicester are in service, with a third commissioned in nearby Shepshed. The
Group 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 Group 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.
-24-
<PAGE> 132
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 Group
has begun the deployment of 750 MHZ Scientific Atlanta set top converters, with
analog 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 Mbit/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
Mbit/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 routed,
if possible, to their final destination via the lowest cost routing, be it BT,
Mercury, Energis, Global One, ACC 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
customer 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 Group believes that its 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 Group 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 are being integrated in phases. The
initial objective was to physically connect the two networks through a fiber
interconnect and this has been achieved. The main purpose of the interconnect
is for the central network control office (located in Nottingham) to have the
ability to control the Nortel switches in Leicester, mainly for telephone
purposes. This interconnect also enables Nottingham to monitor the Leicester
cable television headend and transfer data of route forwarding information
between the two locations.
The physical connection point is in Shepshed, which is located between
Nottingham and Leicester and is the location of the third switch for the LCL
franchise areas.
-25-
<PAGE> 133
The retail billing processes in the Diamond and LCL franchises have been
fully integrated and the integration of wholesale billing processes is planned
for 1998.
EMPLOYEES
As of December 31, 1997, the Group had 953 employees, including 913
employees in operations and 40 employees in civils construction. With effect
from February 1997, DCL began to directly employ residential salespeople, which
increased 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 Group currently believes that its 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
(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 stated in November 1997 that it will review the existing
regulatory structure and that it expects to publish its proposals regarding the
restrictions on BT carrying broadcast entertainment over the existing network
in the near future. It is not currently possible to predict the nature of any
such proposals. See "-- Cable Telecommunications -- Restrictions on National
PTOs".
-26-
<PAGE> 134
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 15, 1997, cable television licenses had been
granted for franchise areas covering approximately 16.8 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.
Cable operators may carry U.K. licensed broadcast services, foreign
satellite programs 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.
-27-
<PAGE> 135
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 as
amended by the Broadcasting Act 1996 (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 were 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
(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).
-28-
<PAGE> 136
Telecommunications Licenses
The Group holds eight individual franchise telecommunications licenses and
a national telecommunications license which covers those areas of the U.K. for
which it does not hold an individual franchise telecommunications license,
including the areas for which it has been granted LDLs. 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 individual franchise telecommunications licenses granted to a cable
operator are for a particular area, they are 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. There are now over 200
telecommunication licensed operators in the U.K. 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 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. The cable
operator's telecommunications license also requires the licensee 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. In September 1997 OFTEL completed its review of the PTO
licenses held by cable operators to convert them to the standard "slimline"
format of non-dominant PTOs which Mercury's modified license now follows to a
large extent. Modifications to these cable operators licenses have now been
issued and have come into effect. This has resulted in the deletion of a number
of conditions in the Group's individual franchise telecommunications licenses,
for example, those relating to the pre-notification of prices and the
prohibition on unfair cross-subsidies although such conduct may fall within the
fair trading condition. See below.
The telecommunications licenses of BT and Mercury now contain a condition,
referred to as the fair trading condition, which prohibits any abuse of their
dominant position and any agreement or concerted practice between the licensee
and other entities restricting or distorting competition in the
telecommunications market. This condition has been incorporated into new
telecommunications licenses issued since 31 December 1996 including the Group's
national telecommunications license. The Group's individual licenses have now
also been modified to include the fair trading condition.
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.
-29-
<PAGE> 137
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 individual franchise 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 " --
Milestones". The Group understands that all milestones from now on will be
contained in LDLs. The Group 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 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 individual franchise
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
-30-
<PAGE> 138
Group's national telecommunications license is for an initial 25-year term and
continues thereafter subject to a 10-year notice period.
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 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 Telecommunications (Interconnection) Regulations came into force on
December 31, 1997. These implement the Interconnection Directive (Directive
97/33/EC), which will extend, to a certain extent, the categories of operator in
the U.K. who will have the right to request interconnection and a reciprocal
obligation to provide it. These rights and obligations may extend to certain
operators who operate under class licenses. It is not currently possible to
predict accurately which categories of operator/service provider will fall
within the criteria set out in these regulations and therefore to which
operators interconnection rights and obligations will be extended. Operators
-31-
<PAGE> 139
wishing to benefit from such interconnection rights and obligations will be
required to apply to OFTEL which will assess whether the relevant criteria have
been met.
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. DCL is now able to link non-contiguous
franchises under its national telecommunications license 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, Global One and ACC. The BT agreements may be terminated by
either party upon two years' notice; the Mercury agreement may be terminated by
either party upon two 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. In 1995 a House of
Lords decision 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.
Until October 1, 1997 OFTEL determined standard interconnect charges. The
first interim charge determination covered the period from April 1, 1995 to
March 31, 1996. Interim charges were based on BT's forecast financial
statements (on a fully allocated costs basis). OFTEL has now assessed final
charges based on BT's final financial statements for that period. 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 Group 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, 1997 -- Revenue". 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. OFTEL will be
issuing its determination of final charges for consultation in the very near
future. OFTEL has now determined interim charges up until September 30, 1997
and is expecting to publish final charges for that period in about March 1998
once BT publishes its first half year financial statements for 1998.
As from October 1, 1997 the twice yearly determination by OFTEL of BT's
network charges has been replaced by a system of network price controls and the
cost base for interconnection charges has been changed from fully allocated
costs to long run incremental costs. After a lengthy consultation period begun
in December 1995, in July 1997 OFTEL issued its final proposals which have been
accepted by BT and the necessary modifications have been incorporated into BT's
license. The new system provides for the application of price controls
depending on the level of competitiveness of the service. Services which are
not competitive are divided into baskets, each basket being subject to a charge
cap of RPI minus X. The July 1997 document determined the value of X for each
basket at 8%. 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
were 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 July 1997 document also sets out the starting
charges for the services in the network baskets which are based on BT's long
run incremental costs. The new system which commenced from October 1, 1997 will
run for four years.
In November 1997 OFTEL published non-legally binding guidelines on the
structure and operation of the new network charge control arrangements and on
OFTEL's approach to complaints about charges and other interconnect terms and
conditions. In respect of complaints that BT's charges are unreasonable, OFTEL
-32-
<PAGE> 140
will first test whether the charge falls between a cost floor and ceiling
determined by BT using a methodology prescribed by OFTEL and designed to
indicate whether the charge may be anti-competitive. Floors and ceilings for all
non-competitive services will be published each year by BT as part of their long
run incremental costs financial statements.
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, 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 X (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 price
cap is RPI minus 4.5% on the narrower basket of services described above.
Safeguard caps of RPI plus 0% have been imposed on certain services. OFTEL has
indicated that this is likely to be the last retail price control imposed on
BT. 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.
The telephone service prices charged by the Group currently are not
regulated by the Director General, although they are subject to the fair
trading condition.
Indirect and Equal Access
Indirect access is access to a customer through another operator whereas
equal access means preselection by the customer of the indirect access operator
or dialing parity, where the number of digits dialed for calls over the first
(access) network is the same as for calls over the second (indirect) network.
In July 1996, OFTEL released a statement setting out its policy on indirect and
equal access, dealing with the continued provision by BT of indirect access to
Mercury and other operators, the possible extension of the obligation imposed
on BT to include equal access, and the possible extension of an indirect access
obligation to Mercury and other "non-dominant" operators.
OFTEL concluded in its statement that indirect access will remain an
important route for many customers who are not yet able to take advantage of
competition in direct connections to receive the benefits of competitive
provision of telecommunication services and that, given BT's continuing dominant
position in the direct access network, BT should continue to be obligated to
provide indirect access to other operators. However, OFTEL also concluded that
this obligation on BT should not extend to providing equal access to other
operators. OFTEL, having commissioned a cost benefit analysis, concluded that,
rather than a cost benefit, there would be a significant net cost in
implementing equal access. Further, OFTEL concluded that "non-dominant"
operators (such as Mercury and the cable operators) should not be required to
give indirect access to other operators. Although all PTO licenses include a
condition regarding the provision of indirect access, it is subject to a number
of tests including the need to ensure that the requirements of fair competition
are satisfied and that indirect access, in all the circumstances, is reasonably
required. OFTEL considered that these tests were not satisfied. However, OFTEL
stated that it considers the "well established" operator threshold of 25% of
customer connections in a relevant market to be a useful guide in determining
whether a "non-dominant" operator should, in the future, be required to grant
indirect access to other operators. OFTEL stated that this threshold would not
-33-
<PAGE> 141
automatically mean that the operator would be required to grant indirect
access, but that OFTEL would investigate the issue further in respect of that
operator and market conditions generally once that threshold was reached. On
December 1, 1997 the EC Council of Telecommunications Ministers reached
political agreement on a draft directive to amend the Interconnection Directive
(Directive 97/33/EC) with regard to number portability and carrier
pre-selection. This will require member states (except those which have been
granted a derogation under the Full Competition Directive (Dir 96/19/EC)) to
introduce carrier pre-selection by January 1, 2000, for operators with
significant market power. Member states may request a deferment of this
obligation if they can show that it would impose "an excessive burden on
certain organizations or classes of organization". The U.K. government has
indicated that it is satisfied that this leaves it open for it to argue the
case for a deferment in respect to U.K. operators.
Number Portability
Telephone subscribers changing their telephone service to a cable operator
have historically had to change their telephone numbers. As a result certain
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.
On April 9, 1997, OFTEL issued a statement which set out OFTEL's proposals
to modify the license conditions of Mercury and other fixed operators including
cable operators to ensure that they too provide number portability for all
users of fixed phones including portability of specially tariffed services such
as toll-free (0800), premium rate and national rate services.
Appropriate license modifications were made on December 17, 1997. These
take full account of the MMC report and are based on the current license
condition in BT's PTO license. They also apply the MMC's principles on the
charges which operators can make to each other for providing portability. In
particular, the following principles are applied:
(i) the licensee would be required to provide portability on request
from another qualifying licensee;
-34-
<PAGE> 142
(ii) the principle of reciprocity would apply;
(iii) each licensee would be required to pay the initial costs of
modifying its network;
(iv) each licensee would be able to pass on to the other licensee
concerned the costs of enabling individual customers to port their numbers;
(v) the exporting licensee would not directly charge the importing
licensee for any additional conveyance costs associated with routing a call
to a ported number; and
(vi) if requested, the Director General would determine the
reasonableness of the terms and conditions upon which portability was
offered.
These license modifications came into effect on December 17, 1997.
The draft directive amending the Interconnection Directive referred to
above also requires member states to introduce number portability in respect of
geographic and non-geographic numbers on the fixed public telephone network.
This obligation is also subject to the deferment provision mentioned above.
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 new Labour government started reviewing the
restrictions upon the conveyance and provision by BT and Mercury of broadcast
entertainment ahead of the schedule set by the former Conservative government,
which did not intend to review the restrictions on conveyance and on provision
until 2001 although the government was prepared to reconsider the conveying
aspect after March 1998 on the advice of the Director General of
Telecommunications. In November 1997 the Labour government stated that it
expects to publish proposals in the near future. See " -- Certain Regulatory
Matters -- General". 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
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 two cable franchises
in the U.K., in Westminster (central London) and Milton Keynes. 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.
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
-35-
<PAGE> 143
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. 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 DTI, OFTEL
and the ITC have stated that lifting these restrictions would limit competition
by jeopardizing the investment programs of cable operators. The Labour
Government policy is to 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. The Labour government
has stated its intention to publish proposals in the near future.
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 distinguishes between "multiplex" providers, the
providers of the frequency ranges on which the television channels will be
carried, and the digital program service providers, who provide the programs to
be broadcast on the multiplexes. Each must be licensed by the ITC. Licensed
digital multiplex providers will be required to contract with licensed digital
program providers to carry their services on the multiplexes on a fair and
non-discriminatory basis.
Initially six multiplexes are available for digital terrestrial
television. Each of the existing terrestrial broadcasters have reserved
capacity on these multiplexes, being offered half a multiplex for each existing
channel. This means that the BBC has full control of one multiplex, Channel 3
and Channel 4 have joint control of a multiplex and Channel 5 and S4C each have
half of a third multiplex. Existing terrestrial broadcasters have obligations
to simulcast their existing analog channels and will be able to use their
remaining multiplex capacity to provide new free-to-air or pay services.
Following a competitive tender, the ITC announced in June 1997 that the
remaining three multiplexes would be awarded to British Digital Broadcasting
(BDB), a joint venture between Carlton Communications and Granada Group. BSkyB
was also originally a member of the joint venture but because of competition
concerns the ITC required it to divest itself of the shareholding which was
transferred equally to Carlton and Granada. BSkyB however will remain a major
supplier of programming to BDB. The joint venture arrangements are currently
being investigated by the EC competition authorities. The licenses were
formally granted by the ITC on December 19, 1997 following conclusion of the
ITC's own discussions with the EC competition authorities regarding their
concerns. The licenses contain conditions which are intended to address, among
other things, concerns over program service contracts with BSkyB. The
conditions include the limitation of program supply agreements to five years, a
requirement for the licensee to support open technical standards on integrated
TV sets and conditions to ensure that BDB is not prevented from competing with
BSkyB.
-36-
<PAGE> 144
Conditional Access
Pay television broadcasters need to use conditional access systems to
ensure that only subscribers receive their services. Conditional access systems
provide two main types of services: encryption services and customer management
services. The EC Advanced Television Standards Directive (Directive 95/47/EC)
requires, amongst other things, that conditional access services for digital
television services should be available to broadcasters on a fair, reasonable
and non-discriminatory basis. This Directive was implemented in the U.K. by the
Advanced Television Services Regulations which came into force on January 7,
1997. In addition to the requirement that conditional access services must be
offered on a fair, reasonable and non-discriminatory basis, the Regulations
provide that broadcasters may obtain information on the conditional access
system prior to its being put on the market. Further, the Regulations provide
that conditional access operators are required to cooperate with cable
operators so that cable operators are able to receive and rebroadcast
television services using their own conditional access system without incurring
unnecessary or unreasonable expense.
The Regulations also modify the Telecommunications Act 1984 to provide for
conditional access systems which make available conditional access services
including encryption, subscriber management or subscriber authorization
services to be treated as telecommunications systems. Each such system must be
licensed and the U.K. Secretary of State granted a Class License to authorize
the running of these conditional access systems which came into force also on
January 7, 1997 and runs until July 31, 2001 unless previously revoked. The
license contains similar provisions to those in the Regulations set out above
and, in addition, includes the fair trading condition.
Under the Class License, the Director General can order a licensee to make
available its intellectual property rights if the licensee is using them to
prevent or obstruct products from being made available. The Director General
can also designate an interface between the licensed system and a broadcaster's
conditional access or other transmission system as an "essential interface" and
thereafter the licensee must comply with any relevant standard specified by a
broadcaster which includes applicable European standards or other standards
specified by the Director General.
Following public consultation, OFTEL published guidelines on the
regulation of conditional access services for digital television. The
guidelines set out how OFTEL would propose to deal with anti-competitive
behavior in relation to the provision of conditional access services. The
guidelines are not legally binding and are expected to be reviewed where market
developments so require.
In July 1997 the DTI and OFTEL issued a joint consultation proposing the
extension of the current conditional access regime for digital television
broadcasts to digital non-television broadcasts and non-broadcast services in
the light of the convergence of the technologies and markets in broadcasting
and telecommunications. The services to be covered include non-broadcast
interactive services such as home-shopping and non-broadcast information
services. Conditional access systems for analog services are not included.
In addition, in October 1997, OFTEL issued a consultative document
relating to guidance on the pricing of conditional access systems to ensure
that they are offered on a fair, reasonable and non-discriminatory basis. The
aim is to ensure that prices are reasonable and that comparable broadcasters
receive comparable treatment by not being subject to differential pricing.
OFTEL proposes to group together providers of subscription services and to
assess whether they are comparable by reference to number of subscribers and
number of different services (or combination of services) offered to
subscribers.
BSkyB has entered into a joint venture, BIB, with BT, Midland Bank and
Matsushita (one of the manufacturers of decoders for accessing digital
television channels) to create and operate a platform for the provision of
digital interactive television services to U.K. viewers. The interactive
services which it hopes to offer include home banking, home shopping and
Internet access via TV screens. BIB intends to subsidize the costs of the
manufacture and installation of the decoders needed to access the services. The
joint
-37-
<PAGE> 145
venture arrangements are currently under investigation by the EC competition
authorities, having been notified by the parties and also being the subject of
a complaint.
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 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.
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.
Accounting Separation
The EC Interconnection Directive (mentioned above) requires that operators
who have special or exclusive rights for the provision of services in sectors
other than telecommunications in the same or another member state must keep
separate accounts of their telecommunications activities if their turnover from
the provision of public telecommunications networks or publicly available
telecommunications services is more than 50 million ecus. This requirement has
been implemented in the U.K. by the Telecommunications (Interconnection)
Regulations. See "-- Cable Telecommunications -- Interconnect Arrangements".
-38-
<PAGE> 146
The DTI and OFTEL take the view that cable operators have special or
exclusive rights for the provision of entertainment services over their cable
systems and therefore fall within this obligation. Several cable operators,
including the Group have challenged this interpretation because they are
subject to competition in their franchise areas from DTH satellite service
operators and will in the near future be subject to competition from digital
terrestrial television.
The implementing regulations do not set out detailed guidelines for the
accounting separation requirements.
Separation of Cable and Telecommunications Operations
The EC Commission is of the view that accounting separation provided for
under the existing Cable TV Directive (95/51/EC) is not sufficient to ensure
competition and is proposing an amending directive under its powers in Article
90 of the EC Treaty, relating to the structural separation of operators' cable
television and telecommunications activities. The draft directive was adopted
by the United States Securities and Exchange Commission (the "Commission") on
December 16, 1997 and will be subject to a two month period of consultation
commencing on the date the draft text is published in the Official Journal. At
the end of the consultation period the Commission can then formally adopt the
directive with or without taking into account comments of third parties, the
European Parliament or the European Council received during that period. The
amending directive should enter into force twenty days after its publication.
As it is still in draft form, any impact of the amending directive on UK cable
operators cannot yet be predicted. However, it would appear that the
requirement for legal separation of the provision of public telecommunications
and cable TV networks will apply to dominant telecommunications operators which
also have special/exclusive rights in respect of the provision of cable TV
networks and (if the operator is not state-controlled) in respect of the use of
relevant radio frequencies. In a footnote in a relevant Communication, the
Commission specifically described the situation in the U.K. where BT, Mercury
and Kingston Communications can operate cable TV networks, if they obtain a
franchise, but the networks have to be run separately from the main
telecommunications activities of those entities. In addition, the Commission
takes the view that full divestment could still be required in specific cases.
In its current form, the directive would not appear to require any structural
separation by the Group given the nature and extent of its current authorized
activities.
Convergence
Technological developments are leading to a convergence of the
telecommunications, broadcasting and information technology sectors. At the
beginning of December 1997 the EC Commission adopted a Green Paper addressing
this issue aimed at stimulating debate on how these markets should be regulated
in the future. The Green Paper does not suggest any solutions but merely raises
a series of questions on which it invites comment. Following consultation it is
expected that a report will be produced by June 1998.
Competition Bill
The U.K. Government has introduced a Competition Bill which proposes to
grant concurrent powers to the industry specific regulators and the Director
General of Fair Trading for the enforcement of prohibitions modeled on Article
85 and 86 of the European Community Treaty. The Bill introduces a prohibition
on the abuse of a dominant position and on anti-competitive agreements, and
introduces third party rights, stronger investigative powers, interim measures
and effective enforcement powers.
The Bill proposes that the Director General of Telecommunications is able,
but not required, to exercise concurrent powers with the Director General of
Fair Trading in relation to "commercial activities connected with
telecommunications". The Bill will enable third parties to bring enforcement
actions directly against telecommunications operators who are in breach of the
prohibitions and seek damages rather than have to wait for the Director General
of Telecommunications to make an enforcement order.
-39-
<PAGE> 147
ITEM 2. PROPERTIES
PROPERTIES
At December 31, 1997, the Group leased or rented 26 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
190,256 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 head-end/switch site in Nottingham, which was
constructed in 1995 at a cost of approximately pounds sterling 3 million. The
Group also owns a switch site property of 4,688 square feet located at Shepshed.
ITEM 3. LEGAL PROCEEDINGS
No member of the Group is a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY - HOLDERS
Not applicable.
-40-
<PAGE> 148
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
-41-
<PAGE> 149
ITEM 6. SELECTED FINANCIAL DATA
The selected data set forth below for the Group as of December 31, 1993,
1994, 1995, 1996 and 1997 and for each of the years in the five-year period
ended December 31, 1997 have been excerpted or derived from the audited
financial statements of the Group, which as of December 31, 1996 and 1997 and
for each of the years in the three-year period ended December 31, 1997 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 and the related Notes
thereto, which are included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
DECEMBER 31,
________________________________________________________________
1993 1994 1995(1) 1996 1997 1997(2)
________ ________ ________ ________ ________ _______
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business telecommunications........ L.1,237 L. 3,402 L. 5,852 L. 9,763 L. 14,208 $23,339
Residential telephone.............. 1,251 2,545 6,662 17,723 29,495 48,452
Cable television................... 719 1,324 3,479 10,091 16,602 27,272
Other revenues..................... 20 35 -- -- -- --
________ ________ _________ _________ _________ ________
Total revenues..................... 3,227 7,306 15,993 37,577 60,305 99,063
Operating costs and expenses:
Telephone.......................... (1,097) (3,067) (5,454) (9,776) (12,088) (19,857)
Programming........................ (324) (701) (1,844) (6,041) (9,749) (16,015)
Selling, general and
administrative..................... (1,632) (4,562) (13,020) (22,391) (27,192) (44,668)
Depreciation and amortization...... (2,520) (4,038) (8,867) (21,380) (27,620) (45,371)
_________ ________ _________ _________ ________ ________
Total operating costs
and expenses....................... (5,573) (12,368) (29,185) (59,588) (76,649) (125,911)
________ ________ _________ _________ _________ ________
Operating loss..................... (2,346) (5,062) (13,192) (22,011) (16,344) (26,848)
Interest income.................... _ 1,415 3,887 3,441 6,440 10,579
Interest expense, and
amortization of debt discount
and expenses....................... (231) (3,836) (17,118) (40,334) (66,367) (109,021)
Foreign exchange gains/(losses)
net............................... (221) (1,196) 925 31,018 (12,555) (20,624)
Unrealized gains/(losses) on
derivative financial instruments... _ _ (868) (7,944) 669 1,099
Other expenses..................... _ _ (1,241) _ _ _
Realized gains on derivative
financial instrument............... _ _ _ _ 11,553 18,978
________ ________ _________ _________ _________ ________
Loss before income taxes........... (2,798) (8,679) (27,607) (35,830) (76,604) (125,837)
Income taxes _ _ _ _ _ _
________ ________ _________ _________ _________ _________
Net loss........................... L.(2,798) L.(8,679) L.(27,607) L.(35,830) L.(76,604) $(125,837)
________ ________ _________ _________ _________ _________
________ ________ _________ _________ _________ _________
BALANCE SHEET DATA:
Property and equipment, net........ L.18,021 L.35,127 L.163,721 L.277,301 L.365,636 $600,630
Total assets....................... 19,882 138,606 374,172 416,819 556,357 913,928
Total debt(3)...................... 21,889 103,068 319,492 325,041 545,325 895,805
Shareholders' equity(4)............ (5,660) 26,092 25,133 54,100 (22,511) (36,978)
OTHER DATA:
EBITDA(5).......................... L. 174 L.(1,024) L. (5,566) L. (631) L. 11,276 $18,523
Net cash (used in)/provided by
operating activities............... 37 496 (4,113) (1,348) 20,876 34,293
Net cash used in investing
activities........................ (9,937) (71,941) (155,517) (128,210) (110,086) (180,838)
Net cash provided by financing
activities........................ 9,759 112,485 212,202 54,428 146,586 240,797
Deficiency of earnings to
fixed charges(6).................. (2,798) (8,679) (27,607) (35,830) (76,604) (125,837)
Capital expenditures............... 11,880 21,252 136,314 130,140 111,252 182,754
</TABLE>
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
$1.6427 = pounds sterling 1.00, the Noon Buying Rate on December 31, 1997.
-42-
<PAGE> 150
(3) Total debt at December 31, 1994 consisted of the accreted value of the
1994 Notes and capital lease obligations. Total debt at December 31, 1995
and 1996 and at September 30, 1996 consisted of the accreted value of the
1994 Notes, the accreted value of the 1995 Notes and capital lease
obligations and the mortgage loan, and total debt at December 31, 1997
included in addition to such indebtedness the accreted value of the 1997
Notes.
(4) The Group raised additional equity financing of pounds sterling 40.4
million, pounds sterling 27.0 million and pounds sterling 64.6 million in
the years ended December 31, 1994, 1995 and 1996, respectively.
(5) Earnings before interest, taxes, depreciation and amortization, foreign
exchange translation gains and losses, and realized and unrealized gains
and losses on derivative financial instruments ("EBITDA") is presented
because it is a widely accepted financial indicator of a leveraged
company's ability to service and incur indebtedness. EBITDA is not,
however, a measure of financial performance under GAAP, may not be
comparable to other similarly titled measures of other companies and should
not be considered as a substitute for net income as a measure of operating
results or for cash flows as a measure of liquidity. EBITDA for 1995
includes the costs of pounds sterling 1.24 million incurred in an abandoned
equity flotation.
(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 Group 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 pounds sterling 1.00:
<TABLE>
<CAPTION>
YEAR AVERAGE(1) HIGH LOW PERIOD-END
____ __________ ____ ____ __________
<S> <C> <C> <C> <C>
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 1.48 1.71
1997 1.64 1.70 1.58 1.64
1998 (through March 18) 1.64 1.67 1.61 1.67
__________ ____ ____ __________
</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 18, 1998 was $1.6711 = pounds sterling 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".
-43-
<PAGE> 151
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, 1997, approximately pounds sterling 428 million had
been invested (at original cost) in the construction of the Group's network and
related systems. As of December 31, 1997, approximately 563,000 of the premises
(homes and businesses) in the Group's franchise areas had been passed by civils
construction, of which approximately 533,700 premises had been activated,
representing approximately 52% 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
Group 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 customers, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Group expended net cash to fund investing activities of pounds sterling
155.5 million, pounds sterling 128.2 million and pounds sterling 110.1 million
in the years ended December 31, 1995, 1996 and 1997, respectively. In 1995, the
Company received net sale proceeds of pounds sterling 56.2 million from
marketable securities and invested net cash of pounds sterling 108.8 million in
the LCL acquisition, which was funded by new equity and a banking facility which
was repaid from the proceeds of the sale of the Company's 11 3/4% Senior
Discount Notes Due 2005 (the "1995 Notes") in December 1995. In 1995 and 1996,
the Group's net cash used in operating activities was pounds sterling 4.1
million and pounds sterling 1.3 million respectively, and in 1997 the Group's
net cash provided by operating activities was pounds sterling 20.9 million. In
1996 and 1997, the Group's investing activities consisted almost exclusively of
the ongoing construction of the network. Net cash provided by financing
activities was pounds sterling 212.2 million, pounds sterling 54.4 million and
pounds sterling 146.6 million in the years ended December 31, 1995, 1996 and
1997. The Group's cash and funding requirements historically have been met
principally through the issuance of the Company's senior discount notes in
September 1994,
-44-
<PAGE> 152
December 1995 and February 1997 (the "Discount Notes") as well as from equity
capital, advances from its shareholders, and from bank and lease financing. In
February 1998, a subsidiary of the Company, Diamond Holdings plc, issued two
new series of notes (the "1998 Notes"), raising net proceeds of approximately
pound sterling 195 million. The 1998 Notes are guaranteed by the Company as to
payment of principal, interest and any other amounts due. See "--Description of
Company Debt". In connection with the issuance of the 1998 Notes, the Group
terminated its existing bank facility.
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
LDLs to construct and activate a network passing an aggregate of 1,021,894
premises within prescribed time periods. Failure by the Group to meet its
milestones could potentially subject the Group to enforcement orders from OFTEL
or the ITC, which could lead to revocation of the relevant licenses or a
shortening of an LDL period or fines. The Group met the required quarterly
milestone obligations under each of its telecommunications licenses as at
December 31, 1997. Principally because of delays by the Department of Trade and
Industry in granting the Group a national telecommunications license, and
consequent delays in the commencement of construction, the Group did not meet
its current LDL milestones in six of its seven LDL franchises at the end of
1997, although construction has commenced in five of the seven LDL franchises.
The Group has applied to the ITC to modify its milestone obligations in
all of its LDL franchise areas except Vale of Belvoir. The Group understands
that the ITC intends to grant the requested modifications.
The Group expects that its 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
Group expects the network to be substantially completed by the end of 2001. The
Group currently estimates that the additional capital expenditures from December
31, 1997 required for the Group to substantially complete construction
sufficient to satisfy its aggregate milestone obligations of approximately 1.02
million premises (including estimated subscriber connection expenses) will be
approximately pounds sterling 435 million, although further capital expenditures
would be required to substantially complete the network. These expenditures
could vary significantly depending on the number of customers actually connected
to the network, the availability of construction resources and a number of other
factors described below. See Item 1. "Business -- Milestones".
At December 31, 1997, the Group had constructed and activated a network
comprising approximately 52% of its aggregate milestones. The Group estimates
that the net proceeds from the sale of the 1998 Notes, existing cash resources
and future cash flows from operations will be sufficient to complete the
construction and activation of its network to approximately 84% of its aggregate
final milestones, which level the Group estimates it will achieve by the end of
1999. Thereafter, the Group will be required to obtain further debt and/or
equity financing to complete construction sufficient to satisfy its aggregate
milestones. To the extent that (i) the amounts required to construct the Group's
network to meet its milestones exceed its estimates, (ii) the Group's cash flow
does not meet expectations or (iii) the Group continues its construction of the
network beyond its milestone obligations, the amount of further debt and/or
equity financing required will increase. There can be no assurance that any such
debt or equity financing will be available to the Group 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 a number of factors, including those identified in the preceding
paragraph and below, actual results may differ materially from expected results.
In particular, the anticipated further funding requirements will depend upon the
Group's cash flow which, in turn, will depend upon a number of variables,
including revenue generated from business telecommunications, residential
telephone and cable television services, churn, expenses such as programming
costs and interconnect charges, network construction and development
expenditures and financing costs. Adverse developments in any of these or other
areas could adversely affect the Group's cash flow. Moreover, there can be no
assurance that (i) conditions precedent to the availability of funds under any
future 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
-45-
<PAGE> 153
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, each of which factors would increase the Group's funding needs.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
The Group experienced significant increases in its customers, revenues and
expenses during the three years ended December 31, 1997. In general, such
increases were attributable to the Group's continued network construction,
marketing of new homes and businesses and the acquisition of LCL in 1995.
During the three-year period from December 31, 1994 to December 31, 1997 homes
passed by civils construction increased by 480,191 homes (859%), homes
activated increased by 476,768 homes (1,488%) and homes marketed increased by
374,457 homes (1,195%). The number of homes that had been passed by civils
construction at December 31, 1997 exceeded homes activated by 27,309, compared
to a difference of 106,250 homes at December 31, 1996. During 1997, the Group
intentionally slowed the pace of civils construction to reduce the gap between
homes passed by civils construction and homes activated. In addition, during
the early part of the year the pace of civils construction was affected by the
phase out of one of the Group's largest civils contractors, which went into
liquidation. The Group has continued to focus on its milestone obligations,
which are measured in terms of homes activated. The Group met the required
quarterly milestone obligations under each of its telecommunications licenses
as at December 31, 1997. Principally because of delays by the Department of
Trade and Industry in granting the Group a national telecommunications license,
and consequent delays in the commencement of construction, the Group did not
meet its current LDL milestones in six of the seven LDL franchises at the end
of 1997 although construction has commenced in five of the seven LDL
franchises. The Group has applied to the ITC to modify all of its milestone
obligations in all of its LDL franchise areas except Vale of Belvoir.
In addition, in order to improve the management and quality of its
residential sales force, in February 1997 the Group terminated arrangements
with its independent sales contractors and began to develop its own internal
sales force through direct hiring of residential sales staff. Prior to this
reorganization, the sales force consisted of approximately 150 residential
sales staff who were employed by independent contractors that the Group paid on
a full commission basis. The Group now employs residential sales staff directly
and pays them on the basis of a salary plus sales commission. At December 31,
1997, the Group employed approximately 135 residential sales staff, including
some former contracted sales staff who were hired by the Group in accordance
with its employment criteria following interviews. All of these sales staff
have now undergone a training process which the Group believes has increased
their long-term effectiveness but which has delayed their productivity in the
short term. The reorganization delayed the progress of marketing and affected
penetration in the areas being marketed during this transitional period.
Penetration was also negatively impacted during 1997 by increased competitive
activity, in particular from BT, Ionica, CWC and BSkyB. At December 31, 1997,
residential telephone line penetration was 38.6% and cable television
penetration was 20.6%, compared with 41.4% and 23.5%, respectively, at December
31, 1996.
REVENUE
The Group's total revenues were pounds sterling 16.0 million in 1995,
pounds sterling 37.5 million in 1996 and pounds sterling 60.3 million in 1997.
This growth is attributable to increases in revenues in all three of the Group's
primary lines of business and additional revenues of pounds sterling 2.25
million and pounds sterling 10.9 million attributable to the inclusion of LCL's
results for the last quarter of 1995 and the full year 1996, respectively.
As a result of entering into revised interconnect agreements with BT which
apply retroactively, the Group 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. Based on interim rates for the period from January 1, 1997, no rebates
will be due from or payable to BT for the year to December 31, 1997. The rebates
that will be given to BT relating to the incoming termination element amount to
an estimated pounds sterling 1,351,000, based on final rates for the twelve
month period from April 1, 1995 and interim rates for the nine month period
-46-
<PAGE> 154
from April 1, 1996. This amount has been provided by reducing residential
telephone and business telecommunications revenues in 1996 by pounds sterling
776,000 and pounds sterling 575,000 respectively. The total amount of rebates to
be received by the Group will be determined by the parties once BT has furnished
to the Group a proposed calculation and supporting data and OFTEL has determined
the final rates applicable for the nine month period from April 1, 1996. The
Group has estimated that the amount of the rebate due to the Group from BT will
exceed the amount of the rebates to be provided by the Group to BT. Pending
final determination of rebates, the Group 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
pounds sterling 1,351,000 was 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 final and interim rates had been in effect
since April 1995.
Business Telecommunications. Business telecommunications revenues were
pounds sterling 5.9 million in 1995, pounds sterling 9.8 million in 1996 and
pounds sterling 14.2 million in 1997, representing increases of 67% and 46%,
respectively. The growth in reported revenues is due primarily to (i) an
increase in the number of Diamond's business lines installed from 7,036 at
December 31, 1995 to 14,737 at December 31, 1996, (ii) an increase in the number
of the Group's business lines installed from 18,932 at December 31, 1996 to
27,124 at December 31, 1997 and (iii) the inclusion of pounds sterling 0.5
million and pounds sterling 2.2 million of revenue attributable to LCL in the
last quarter of 1995 and the full year of 1996, respectively. The growth in the
number of business lines has been partially offset by lower monthly revenue per
line. The monthly revenue per line for Diamond decreased from pounds sterling
74.60 in 1995 (pounds sterling 72.02 on a pro-forma basis) to pounds sterling
49.81 (pounds sterling 51.03 on a pro-forma basis) in 1996. The monthly revenue
per line for the Group decreased from pounds sterling 50.17 in 1996 (pounds
sterling 51.25 on a pro-forma basis) to pounds sterling 46.26 in 1997. This
decline was due to a combination of (i) 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 (the Group operated 11,971 Centrex
lines at December 31, 1997 compared to 7,414 Centrex lines at December 31, 1996
representing 44% and 39% of the total number of business lines at those dates,
respectively), (ii) a reduction in certain tariffs in response to price
reductions by competitors, including BT, the Group's principal competitor for
business telecommunications services, which reduced in each of June 1996 and May
1997 its prices by an average of about 10% for most of its business customers
and made smaller price reductions at other times during 1996 and 1997, 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. The Group may lower prices in the future if considered
appropriate for competitive reasons.
Residential Telephone. Residential telephone revenues were pounds sterling
6.7 million (pro-forma pounds sterling 6.4 million) in 1995, pounds sterling
17.7 million (pro-forma pounds sterling 18.0 million) in 1996 and pounds
sterling 29.5 million in 1997, representing increases of 166% and 66%,
respectively. The growth in residential telephone revenue was due primarily to
(i) an increase in the number of Diamond's residential telephone lines from
36,122 at December 31, 1995 to 76,979 at December 31, 1996, (ii) an increase in
the number of the Group's residential telephone lines from 106,460 at December
31, 1996 to 157,171 at December 31, 1997 and (iii) the inclusion of pounds
sterling 1.1 million and pounds sterling 5.5 million of residential telephone
revenue from the LCL operation for the last quarter of 1995 and the full year
1996, respectively. Monthly revenue per line for Diamond was pounds sterling
18.68 in 1995 and pounds sterling 17.59 in 1996. The Group's average monthly
revenues per line increased slightly from pounds sterling 18.40 in 1996 (pounds
sterling 18.64 on a pro-forma basis) to pounds sterling 18.75 in 1997. The
Group's churn rate (annualized) was 16.3% for 1997 (21.3% before taking into
account the adjustments described in note 13 to the table under Item 1.
"Business -- Certain Operating Data") as compared to 20.6% for 1996.
Cable Television. Cable television revenues increased from pounds sterling
3.5 million in 1995 to pounds sterling 10.1 million in 1996 and pounds sterling
16.6 million in 1997, representing increases of 190% and 65%, respectively. This
growth in cable television revenue was primarily due to a combination of (i) an
increase in the number of Diamond's cable television customers which rose from
20,261 at December 31, 1995 to 42,419 at December 31, 1996 and an increase in
the number of the Group's cable television customers from 59,242 at December 31,
1996 to 83,793 at December 31, 1997, (ii) an increase in Diamond's average
monthly revenue per subscriber from pounds sterling 16.80 for 1995 to pounds
sterling 17.70 for 1996 and an increase in the Group's average monthly revenue
per subscriber from pounds sterling 18.03 for 1996 to pounds sterling 19.84 for
1997 and (iii) the inclusion of cable television revenue of pounds sterling 0.6
million and pounds sterling 3.1 million for the LCL operation for the last
-47-
<PAGE> 155
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 32.7% for 1997 (36.9% before taking into
account the adjustments described in Note 13 to the table under Item 1.
"Business -- Certain Operating Data") as compared to a churn rate of 40.9% in
1996 and 33.8% in 1995. The Group's churn rate was 25.5% (annualized) in the
six months to December 31, 1997 (30.5% before taking into account the
adjustments mentioned above) compared to 43.5% in the six months to December 31,
1996. The Group believes that the reduction in churn in 1997 is largely the
result of new policies introduced by the Group to reduce churn, including that
it now requires subscribers to pay an installation fee in connection with new
residential services. In addition, the Group has introduced other policies
which contributed to the reducing trend in churn during 1997, including
improvements in the management and quality of the sales force, the introduction
of more program packaging choice for customers and increased focus on the
retention of customers.
The Group believes that relatively high churn in 1996 and the first half of
1997 was due in part to the effect of increases in the fourth quarter of 1996
in premium channel subscription rates which led certain longer-term customers
who had previously benefitted from grandfathered rates to disconnect service,
the effect of an increase in basic channel subscription prices, additional price
increases resulting from the Group passing on to its customers a new BSkyB
charge for Sky Sports 3 (which BSkyB provided to its own sports subscribers at
no additional charge) and other aggressive promotional activity of BSkyB, as
well as to the application of a stricter disconnect policy relating to
non-payment.
OPERATING COSTS AND EXPENSES
Telephone expenses, consisting principally of interconnect charges payable
to BT, Mercury, Energis and Global One, increased from pounds sterling 5.5
million in 1995 to pounds sterling 9.8 million in 1996 and pounds sterling 12.1
million in 1997, representing increases of 79% and 24%, respectively. 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 pounds sterling 5.0
million and pounds sterling 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 44% in
1995 to 36% in 1996 and 28% in 1997, due primarily 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 customers, the number of channels and per-subscriber rates charged
by programming suppliers, increased from pounds sterling 1.8 million in 1995 to
pounds sterling 6.0 million in 1996 and pounds sterling 9.7 million in 1997,
representing increases of 228% and 61%, respectively. As a percentage of cable
television revenues, these direct costs were 53% in 1995, 60% in 1996 and 59% in
1997. The 61% increase in 1997 compared to 1996 was attributable in large part
to the increased number of customers. The 228% 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
customers. 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 Group increased its prices for premium programming, and it increased the
price of its basic package in November 1996. The Group also introduced two
lower-priced basic packages during November 1996 available to customers in two
of the Group's franchise areas only.
Selling, general and administrative expenses increased by 72% from 1995 to
1996 and by 21% from 1996 to 1997. The increase in 1996 was due to a
combination of increased sales commissions and higher administrative 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
-48-
<PAGE> 156
and paying them on the basis of a salary plus sales commissions, resulting in a
reduction in these combined costs in 1997 compared to 1996. However, these cost
reductions were more than offset by increases in administrative costs and
marketing expenditures as the Group continued to expand its business.
Depreciation and amortization expenses increased by 141% from 1995 to 1996
and by 29% from 1996 to 1997. These increases were attributable to the
increasing size of the Group's network as well as the LCL acquisition.
The Group continues to review the potential consequences of changes in
technology, its network infrastructure and the industry structure within the UK
in general for its plans, operations and the assessment of the useful lives of
its assets.
INTEREST INCOME/EXPENSES AND OTHER EXPENSES
Interest expense was pounds sterling 17.1 million, pounds sterling 40.3
million and pounds sterling 66.4 million for 1995, 1996 and 1997, respectively.
The 1996 increase was due primarily to the accretion of the discount on the 1994
Notes and 1995 Notes of pounds sterling 38.2 million during 1996 compared to
pounds sterling 14.3 million during 1995, as well as other interest expense of
pounds sterling 1.2 million in 1996. In addition, amortization of debt financing
costs was pounds sterling 0.9 million in 1996 compared to pounds sterling 0.3
million in 1995. The 1997 increase is due primarily to the accretion of the
discount on the Discount Notes of pounds sterling 55.0 million, which included
accretion of discount on the Company's 10 3/4% Senior Discount Notes due
February 15, 2007 (the "1997 Notes") in addition to the 1994 Notes and 1995
Notes. In addition, interest expense in 1997 includes pounds sterling 0.9
million for commitment fees, pounds sterling 1.2 million for amortization of
bank debt financing costs, and pounds sterling 6.9 million for the write off of
financing costs, all of which relate to a senior bank facility which was
terminated in February 1998 as a condition of the issue of the 1998 Notes. 1997
interest expense also includes pounds sterling 1.1 million of other interest
expense, and pounds sterling 1.3 million for amortization of Discount Note
financing costs. Interest received was pounds sterling 3.9 million in 1995,
pounds sterling 3.4 million in 1996 and pounds sterling 6.4 million in 1997,
through temporary investment of the proceeds of the Discount Notes.
Other expenses of pounds sterling 1.2 million in 1995 included
costs incurred in connection with an abandoned share offering.
FOREIGN EXCHANGE GAINS/(LOSSES), NET
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, 1995, the Group recognized an unrealized foreign
exchange gain on the translation of its dollar-denominated indebtedness of
pounds sterling 0.6 million, an unrealized loss on its short-term securities of
pounds sterling 0.3 million and a net realized foreign exchange gain of pounds
sterling 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 pounds sterling 31.5
million, an unrealized gain on its short-term securities of pounds sterling 0.1
million and a net realized foreign exchange loss of pounds sterling 0.4 million
relating to its operations. In the year ended December 31, 1997 the Group
recognised an unrealized foreign exchange loss on the translation of its
liability on the 1994 Notes, the 1995 Notes and the 1997 Notes of pounds
sterling 11.7 million, and a net realized foreign exchange loss of pounds
sterling 0.8 million relating to its operations and the sale of dollar
denominated available-for-sale securities.
GAIN/LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
Losses on derivative financial instruments include an unrealized loss of
pounds sterling 0.9 million in 1995, an unrealized profit of pounds sterling 0.2
million in 1996 and an unrealized loss of pounds sterling 0.1 million in 1997 on
the mark-to-market valuation of an interest rate swap commitment.
-49-
<PAGE> 157
The Group entered into a foreign exchange forward contract on November 1,
1996 for settlement on May 6, 1997 to sell pounds sterling 200 million at a rate
of $1.6289 to pounds sterling 1. On January 31, 1997 an offsetting agreement was
entered into at a rate of $1.6014 to pounds sterling 1. The offsetting contracts
were settled on February 6, 1997 with a payment of approximately pounds sterling
3.4 million to the Group. Because of changes in prevailing rates, the Group
recorded for the year ended December 31, 1996, an unrealized loss of
approximately pounds sterling 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 Group recorded a gain of
approximately pounds sterling 11.5 million on the two offsetting forward
contracts, reflecting the reversal of the pounds sterling 8.1 million loss
referred to above and the approximately pounds sterling 3.4 million cash payment
on settlement of the contracts. The realized gain on the foreign exchange
forward contract in the first quarter of 1997 largely offset the unrealized loss
that was recorded in the same period on the translation of the U.S. dollar
denominated obligations on the Senior Notes. The Company entered into a foreign
exchange forward contract on June 23, 1997 for settlement on June 25, 1998 to
sell pounds sterling 50 million at a rate of $1.6505 to pounds sterling 1. The
Company also entered into a foreign exchange forward contract on June 27, 1997
for settlement on July 1, 1998 to sell pounds sterling 50 million at a rate of
$1.6515 to pounds sterling 1. An unrealized gain of pounds sterling 0.7 million
has been recorded in the year to December 31, 1997 on these two contracts. The
Company has the opportunity to roll forward these contracts in order to cover
specific dollar liabilities when they arise or to crystallize a profit at any
stage thought appropriate. Therefore the accounting treatment of these
contracts, 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. The Company
continues to monitor conditions in the foreign exchange market and may from time
to time enter into 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 Group's ability to satisfy its 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 pounds
sterling 27.6 million, pounds sterling 35.8 million and pounds sterling 76.6
million in 1995, 1996 and 1997, respectively.
INFORMATION SYSTEMS - YEAR 2000
The Group is actively reviewing its information systems in light of year
2000 information processing requirements. The Group believes that its main
hardware and operating systems are currently compliant and expects that its key
subscriber management and financial systems will be compliant by the end of
1998. The costs of investigating and correcting year 2000 information
processing problems has not been and is not expected by the Group to be
material. Although the Group intends to ensure that all of its systems will be
year 2000 compliant, it is generally reliant on third party suppliers for
delivery of appropriate system solutions. In addition, the Group may be
affected by year 2000 problems encountered by its primary suppliers or
customers. Significant year 2000 information processing problems encountered
by the Group or certain of its customers or suppliers could have a material
adverse effect on the Group.
FOREIGN EXCHANGE RISK
The principal form of market risk to which the Group is exposed is foreign
exchange rate risk. The Company's 1994 Notes, 1995 Notes and 1997 Notes and
Diamond Holdings' dollar denominated notes, which constitute the 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. Accordingly, as noted above, movements
in the dollar/pound sterling exchange rate can significantly affect the Group's
reported results of operations. For example, based on the aggregate accreted
value of the Discount Notes at December 31, 1997, a ten percent decrease in the
-50-
<PAGE> 158
dollar/pound exchange rate would have increased the Group's reported senior
discount note liability by approximately pounds sterling 59.4 million. In the
future, the Group will also be subject to transaction risk with respect to the
Discount Notes when the Group is obligated to commence making cash interest
payments under the Discount Notes in dollars. Such cash payments with respect to
the 1994 Notes commence in 2000.
The Group's results have in the past been affected by the foreign exchange
contracts described above, which the Group entered into based on its assessment
of foreign currency market conditions and a desire to manage currency exchange
exposure risks associated with the dollar-denominated senior discount note
liabilities. The Group 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
Group and the Group's ability to satisfy its obligations, including obligations
under outstanding debt instruments, as they become due.
The Group is a party to two foreign exchange forward contracts entered into
in June 1997. Effective March 17, 1998, the Group closed an interest rate swap
agreement that LCL had entered into prior to its acquisition by the Company at a
cost to the Group of pounds sterling 1,258,200. See Note 17 to the Notes to the
Consolidated Financial Statements. Neither this nor any other similar instrument
currently held by the Group is expected to materially affect the Group's results
of operations.
DESCRIPTION OF COMPANY DEBT
Description of 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 pounds sterling 91 million after issuance costs of pounds sterling 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 pounds sterling 187
million after issuance costs of pounds sterling 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 pounds
sterling 149 million after issuance costs of approximately pounds sterling 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.
Description of 1998 Notes
On February 6, 1998, Diamond Holdings plc, a subsidiary of the Company,
issued pounds sterling 135,000,000 in principal amount of its 10% Senior Notes
due February 1, 2008 and $110,000,000 in principal amount of its 9 1/8% Senior
Notes due February 1, 2008. Net proceeds received by the Company amounted to
approximately pounds sterling 195 million after issuance costs of approximately
pounds sterling 8 million.
-51-
<PAGE> 159
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Group intends to address this item in its 1998 annual report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-28 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-52-
<PAGE> 160
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the directors of the Company and senior
management of the Group is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Lord Pym 75 Director and Non-Executive Chairman
Robert T. Goad 43 Director, Chief Executive Officer
Richard A. Friedman 40 Director
John L. McDonald 23 Director*
Thomas Nilsson 49 Director
Muneer A. Satter 37 Director
John L. Thornton 44 Director
Nicholas R. Millard 47 Chief Financial Officer
J.A. Duncan Craig 42 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 Defense 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. 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 is Chairman of AMF Bowling, Inc., Chairman of AMF
Worldwide Bowling, Inc. and on the Advisory Committee or Board of Directors of
Globe Manufacturing Co., Marcus Cable Company, L.P., and Polo Ralph Lauren
Corporation.
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 and a member of the Executive Committee of Investor AB and
was Managing Director of AB Export Invest from 1985 to 1994. He is also a Board
Member of European Acquisition Capital, WM Data, Svenska Dagbladet, Compagnie
Immobiliere de Belgique, STORA Finance and Tufton Oceanic Investments Ltd.
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
- -----------
*On March 10, 1998, Mr. McDonald resigned as Director of Diamond Cable
Communications Plc and as a Director of Diamond Holdings Plc.
-53-
<PAGE> 161
Sachs in 1988. Mr. Satter is also on the Advisory Committee or Board of
Directors of Bran + Luebbe GmbH, Empe Holdings GmbH and Point Holdings Limited.
Mr. Thornton has been a Director since May 1994. Mr. Thornton joined
Goldman Sachs in 1980. He is currently Chairman of Goldman Sachs Asia and is
also a member of the six-person Executive Committee that manages Goldman Sachs
and its global operations. Mr. Thornton is also non-Executive Chairman of Laura
Ashley plc and a Director of the Ford Motor Company, British Sky Broadcasting
Group plc and the Pacific Century Group (Hong Kong and Singapore).
Mr. Millard has been Chief Financial Officer since July 1995. Prior to
joining the Group, 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 Group, 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 Group is
set forth below:
<TABLE>
<S> <C> <C>
NAME AGE POSITION HELD
---- --- -------------
Nicholas J. Dearden 48 Management Information Systems Director
Mark L. Harris 43 Technical Services Director
John W. McAuley 50 Marketing and Programming Director
Susan L. Milner 41 Customer Services Director
Stuart Roberts 46 Residential Sales Director
Stephen D. Rowles 44 Executive Director
Peter C. Savage 39 Human Resources and Administration Director
Katherine B. Wolfsohn 36 Legal Director and Company Secretary
</TABLE>
Mr. Dearden joined the Group in May 1997 as Management Information Systems
Director. Mr. Dearden has held senior management and director positions in
American Express Europe, Mercury and Action Computer Supplies.
Mr. Harris joined the Group 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 Group in August 1995 as Marketing and Programming
Director. Prior to joining the Group, Mr. McAuley had six years experience at
IBM where he held various marketing management positions. Mr. 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 Group 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. Roberts joined the Group in May 1997 as Residential Sales Director.
Prior to joining the Group, Mr. Roberts held senior sales and marketing
positions at Rank Xerox, BAT Industries and G.E.C.
-54-
<PAGE> 162
Mr. Rowles joined the Group in January 1992 as Telecommunications Director
and became Executive Director in 1997. Prior to joining the Group, 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 Group in June 1993 as Human Resources Director.
Prior to joining the Group 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 Group in November 1996 as Legal Director and
Company Secretary. Prior to joining the Group, 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 seven 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. Nilsson is the
Investor Investments appointee and, until March 10, 1998, Mr. McDonald had been
the McDonald Interests 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 (in so far 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 Group, 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 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 and
DCL, the Group is entitled to recharge to DCL fees and expenses incurred under
the Management Agreement up to a maximum amount.
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
-55-
<PAGE> 163
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. 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. See "Certain Transactions --
Management Agreement". Principals of ECE Management hold options over 110,000
shares, granted on February 23, 1995 and 220,000 shares granted on October 24,
1995 under the Senior Management Options Scheme (described below) with an
exercise price of pounds sterling 3.44 per Share and pounds sterling 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, 1995, 1996 and 1997 for Gary L. Davis (the Managing
Director of the Group during these years); and for Nicholas R. Millard. 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, 1995,
1996 and 1997 for Stephen D. Rowles, for Mark Harris for the years ended
December 31, 1995,1996 and 1997 and during the year ended December 31, 1997 for
John W. McAuley, who, while not executive officers of the Group, would have been
among the most highly compensated executive officers during 1995, 1996 and 1997
had they been such.
-56-
<PAGE> 164
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS
Name and Principal Position YEAR SALARY BONUS COMPENSATION (2) (#)
- --------------------------- ---- -------- -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Gary L. Davis,
Managing Director(3).............. 1997 $61,601 -- $96,554 --
1996 $256,845 $111,300 $37,715 --
1995 $233,025 $77,675 $31,547 218,000
Nicholas R. Millard,
Chief Financial Officer........... 1997 $70,700 $106,297 $150,114 --
1996 $162,669 $95,889 $36,076 --
1995 $69,908 $34,954 $16,223 60,000
John W. McAuley
Marketing and Programming Director 1997 $147,843 $51,745 $39,702 --
Stephen D. Rowles,
Executive Director................ 1997 $200,257 -- $22,019 --
1996 $153,900 $17,230 $17,760 --
1995 $76,620 $46,605 $14,281 --
Mark Harris,
Technical Director................ 1997 $147,843 $82,135 $31,290 30,000
1996 $145,544 $85,615 $35,912 --
1995 $125,663 $40,391 $23,025 30,000
</TABLE>
(1) Payments made in 1995, 1996 and 1997 in pounds sterling are presented in
U.S. dollars based on an exchange rate of $1.5535 to pounds sterling 1.00,
$1.7123 to pounds sterling 1.00 and $1.6427 to pounds sterling 1.00, the
Noon Buying Rates on December 29, 1995, December 31, 1996 and December 31,
1997 respectively.
(2) Mr. Davis' "Other Annual Compensation" for 1997 includes $164,270
received in connection with his retirement as Managing Director of the
Company and subsequent resignation as a Director, $3,285 for house rental,
$5,897 for the lease of a car, $296 for health insurance, $17,537 for
travel expenses, $82 for use of mobile phone and $5,186 for other living
expenses, 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, and 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. Mr. Millard's "Other Annual Compensation" for 1997 includes
$12,813 for home rental, $11,663 for the provision of a car, $749 for
health insurance, $124,320 in pension contributions, $329 for use of
mobile phone and $240 for other living expenses, 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. McAuley's "Other
Annual Compensation" for 1997 includes $9,856 for house rental, $9,582 for
the provision of a car, $749 for health insurance, $16,624 for school
fees, $329 for use of mobile phone and $2,563 for travel expenses. Mr.
Rowles' "Other Annual Compensation" for 1997 includes $11,418 for the
provision of a car, $416 for health insurance, $9,856 in pension
contributions and $329 for use of mobile phone, 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. Mr. Harris' "Other Annual Compensation" for 1997
includes $9,856 for home rental, $16,969 for the provision of two cars,
$665 for health insurance, $3,471 for school fees and $329 for use of
mobile phone, 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.
(3) Mr. Davis retired from his day-to-day responsibilities as Managing Director
of the Company effective March 12, 1997 and resigned as a Director as of
April 26, 1997. Mr. Davis received a termination payment of $164,270.
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 pounds 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
-57-
<PAGE> 165
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 pounds 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 pounds sterling 4.11
per share. On May 7, 1997, options over a total of 30,000 shares were granted to
Mark Harris under the Senior Management Option Scheme with an exercise price of
pounds sterling 4.11 per share. On November 19, 1997, options over a total of
47,500 shares were granted to senior management under the Senior Management
Option Scheme with an exercise price of pounds 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 pounds
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 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.
Except as stated above and in the table below, the Company granted no
options to the executive officers and employees whose compensation is disclosed
above during its fiscal years ended December 31, 1996 and 1997.
Set forth below is certain information regarding options granted to the
executive officers and employees whose compensation is disclosed above.
OPTIONS GRANTED IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE ---------------------
NAME GRANTED (#) YEAR 1997 (L./SHARE) EXPIRATION DATE 5% (L.) 10% (L.)
- ---- ----------- ---------- ---------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark Harris....... 30,000 39% L.4.11 May 7, 2004 L.50,196 L.116,976
</TABLE>
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 pounds sterling 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
-58-
<PAGE> 166
determine. The aggregate remuneration paid to Directors of the Company during
1995, 1996 and 1997 was pounds sterling 250,307, pounds sterling 267,026, and
pounds sterling 307,436, 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.
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 pounds sterling 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 Group 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 1997, 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.
-59-
<PAGE> 167
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 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>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1)
- ------------------------------------ ---------- ----------
<S> <C> <C>
European Cable Capital Partners, L.P.(2)
85 Broad Street, New York, NY 10004 39,447,443 66.7%
AmSouthBank of Alabama, as Trustee (3)
1901 Sixth Avenue North, Third Floor,
Harbert Plaza, Birmingham, AL 35203 8,750,238 14.8%
DCI Capital Partners
9830 Wilshire Boulevard,
Beverly Hills, California CA 90212 3,909,754 6.6%
Investor Investments AB
Arsenalsgatan 8c, P.O. Box 161574, S-103 24
Stockholm, Sweden 3,909,754 6.6%
Booth English Cable Inc.(4)
33 West Fort St., Suite 1230 Detroit, MI 48226 4,118,601 6.9%
Robert T. Goad(5)
c/o Columbia Management, Inc. P.O. Box 499,
Carmel, IN 46032 2,991,099 5.1%
All directors and executive officers of the
Company as a group (6) 2,991,099 5.1%
</TABLE>
(1) The percentage of Shares owned has been calculated based on the
59,138,791 Shares which are outstanding. The number of Shares outstanding
does not include 1,534,500 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, Goldman,
Sachs & Co. or its affiliates (the Goldman Sachs Affiliates) effectively
control 70.9% of the currently outstanding Shares.
-60-
<PAGE> 168
(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) Includes the interests held by Mr. Goad, 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 pounds sterling
3,750,001.50 divided into 150,000,000 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 but none of which carry voting rights.
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 (former Managing Director) 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 pounds sterling 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 that may jeopardize a material
license of the Company and (vii) the winding up of the Company or any equity
repayment by the Company.
-61-
<PAGE> 169
As to other provisions see Item 13. "Certain Relationships and Related
Transactions -- Shareholders Agreement."
RELATIONSHIP AGREEMENTS
Investor Investments and DCI entered into Relationship Agreements (the
"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
Group, 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 Group believes that the terms of the
Management Agreement are, taken as a whole, as favorable to the Group as those
which could have been obtained from an unaffiliated third party through
arm's-length negotiation. During 1995, 1996 and 1997, the Group recorded
expenses of pounds sterling 1,085,000, pounds sterling 1,610,000 and pounds
sterling 2,061,000, respectively, as amounts paid or payable to ECE Management
and/or ECE Management International in connection with management services
provided to the Group and all related expenses incurred. The Management
Agreement will terminate if Mr. Goad dies or ceases to perform services under
the agreement for more than 3 months. In addition, the Group may terminate the
Management Agreement (after consultation with ECE Management International) if
Diamond materially underperforms compared to ECE Management International's
business plan, provided such underperformance is not caused by events which are
beyond ECE Management International's control.
-62-
<PAGE> 170
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".
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 Group 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 Group are not taken
without the prior written approval of Investor Investments and DCI. See Item
12. "Security Ownership of Certain Beneficiary Owners and Management".
The Relationship Agreements also provide that each party thereto will (so
far as it is able) procure that any contract between the Group (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 Group 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. and Goldman Sachs International acted as purchasers
in connection with the 1998 Notes offering and received aggregate underwriting
commissions of approximately $9,950,000. 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
pounds sterling 1,091,000. Goldman Sachs International acted as agent and
financial advisor in connection with the negotiation of a recently terminated
bank facility for which it has charged fees of approximately pounds 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 to the Group.
Goldman, Sachs & Co. was the counterparty to foreign exchange contracts entered
into by the Group in 1996 and 1997. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Gains/Losses on
Derivative Financial Instruments".
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.
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
also has an indirect minority interest in NTL, which has significant cable
interests in the U.K.
-63-
<PAGE> 171
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS 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, 1997... F-3
Consolidated Balance Sheets at December 31, 1996 and 1997 F-4
Consolidated Statements of Shareholders' Equity/(Deficit)
for each of the years in the three year period ended
December 31, 1997........................................ F-5
Consolidated Statements of Cash Flows for each of the
years in the three year period ended December 31, 1997... F-6
Notes to the Consolidated Financial Statements........... F-7
</TABLE>
2. Not applicable.
3. Exhibits:
<TABLE>
<S> <C>
*3.1 Memorandum and Articles of Association of Diamond Cable
Communications Plc.
*3.2 Memorandum and Articles of Association of Diamond Holdings Plc.
(incorporated by reference to the Company's registration statement on
Form S-4 (Exhibit No. 3.2)).
*10.1 Indenture dated as of February 27, 1997 between Diamond Cable
Communications Plc and The Bank of New York, as Trustee.
*10.2 Senior Notes Depositary Agreement, February 27, 1997 between Diamond
Cable Communications Plc and the Bank of New York, as Book-Entry
Depositary.
*10.3 Shareholders Agreements, dated as of September 1, 1994 among ECCP,
AmSouth, as trustee for the McDonald Interests, CGT Family
Corporation, GS Capital Partners, L.P., William W. McDonald and
Diamond Cable Communications Plc. (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 33-83740,
Exhibit No. 10.1)).
*10.4 Management Agreement, dated July 5, 1994, between ECE Management
Company and Diamond Cable (Nottingham) Limited (incorporated by
reference to the Company's registration statement on Form S-1 (File
No. 33-83740, Exhibit No. 10.2)).
*10.5 Service Agreement, dated May 17, 1994, between Gary L. Davie and
Diamond Cable (Nottingham) Limited (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 33-83740,
Exhibit No. 10.3)).
*10.6 Service Contract, dated March 1, 1994, between Duncan Craig and
Diamond Cable (Nottingham) Limited (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 33-83740;
Exhibit No. 10.4)).
*10.7 Loan Facility agreement, dated February 13, 1997, among Diamond Cable
Communications (UK) Ltd, Jewel Holdings Limited, Natwest Markets and
National Westminster Bank plc, filed as an exhibit to the Company's
1996 Annual Report on Form 10-K, file No. 33-83740, and incorporated
by reference herein.
*10.8 Service Contract, dated as of April 1, 1996, between Diamond Cable
(Nottingham) Ltd. and Stephen Rowles, filed as an exhibit to the
Company's 1996 Annual Report on Form 10-K, File No. 33-83740, and
incorporated by reference herein.
*10.9 Service Agreement, dated July 1, 1995, between Diamond Cable
Communications Plc and Nicholas Millard, filed as an exhibit to the
Company's 1996 Annual Report on Form 10-K, File No. 33-83740, and
incorporated by reference herein.
*10.10 Senior Management Option Scheme, adopted on October 29, 1994, filed as
an exhibit to the Company's 1994 Annual Report on Form 10-K, File No.
33-83740, and incorporated by reference herein.
*10.11 Form of Subscription Agreement among Company and Shareholders relating
to equity commitment (incorporated by reference to the Company's
registration statement on Form S-1 (File No. 33-98374; Exhibit No.
10.7)).
*10.12 Form of Indenture, dated as of December 15, 1995, between Diamond
Cable Communications Plc and The Bank of New York, as Trustee
(incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-98374; Exhibit No. 4.1)).
*10.13 Form of Senior Notes Depositary Agreement, dated as of December 16,
1995, between Diamond Cable Communications Plc and The Bank of New
York, as Book-Entry Depositary (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 32-98374;
Exhibit No. 4.2)).
*10.14 Indenture, dated as of September 29, 1994 between Diamond Cable
Communications Plc and The Bank of New York, as Trustee (incorporated
by reference to the Company's registration statement on Form S-1 (File
No. 33-83740, Exhibit No. 4.1)).
*10.15 Senior Notes Depositary Agreement, dated as of September 29, 1994
between Diamond Cable Communications Plc and The Bank of New York, as
Book-Entry Depositary (incorporated by reference to the Company's
registration statement on Form S-1 (File No. 33-83740; Exhibit No.
4.2)).
*10.16 First Supplemental Indenture, dated as of May 31, 1996 between Diamond
Cable communications Plc and The Bank of New York, as Trustee
(incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-83740; Exhibit No. 4.3)).
*10.17 Service Contract, dated September 18, 1996, between Diamond Cable
(Nottingham) Ltd. and Stephen Rowles (incorporated by reference to the
Company's registration statement on Form S-4 (Exhibit No. 10.9).
*10.18 Supplemental Management Agreement, dated February 27, 1997, among
Diamond Cable Communications Plc, Diamond Cable Communications (UK)
Ltd and ECE Management International, LLC.
*10.19 Second Supplemental Agreement, dated 4 April 1997, relating to a Loan
Facility Agreement among Diamond Cable Communications (UK) Ltd,
Natwest Markets and CIBC Wood Gundy PLC.
*10.20 Indenture, dated as of February 6, 1998 among Diamond Holdings Plc,
Diamond Cable Communications Plc and The Bank of New York, as Trustee
(incorporated by reference to the Company's registration statement on
Form S-4 (Exhibit No. 4.1)).
*10.21 Senior Note Depositary Agreement, dated February 6, 1998, among Diamond
Holdings, the Bank of New York, as Global Depositary, and the Owners
of Book-Entry Interests (incorporated by reference to the Company's
registration statement on Form S-4 (Exhibit No. 4.2)).
*12 Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of Registrant (incorporated by reference to the Company's
registration statement on Form S-1 (File No. 33-98374, Exhibit No.
21.1)).
- ----------------------------
* Previously filed or incorporated by reference to a concurrent filing.
</TABLE>
(b) The Company filed no Reports on Form 8-K during the three month period
ended December 31, 1997.
-64-
<PAGE> 172
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 /s/ Robert T. Goad
------------------------------
Robert T. Goad
Chief Executive Officer
March 20, 1998
<PAGE> 173
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> /s/Robert T. Goad <C> <C>
_________________________ Director and Chief Executive Officer March 20, 1998
Robert T. Goad
/s/Lord Francis Pym
_________________________ Director and Non-Executive Chairman March 20, 1998
Lord Francis Pym
/s/Richard A. Friedman
_________________________ Director March 20, 1998
Richard A. Friedman
/s/Muneer A. Satter
_________________________ Director March 20, 1998
Muneer A. Satter
/s/John L. Thornton
_________________________ Director March 20, 1998
John L. Thornton
_________________________ Director March 20, 1998
Thomas Nilsson
/s/Nicholas R. Millard
_________________________ Chief Financial Officer March 20, 1998
Nicholas R. Millard
/s/J. A. Duncan Craig
_________________________ Chief Accounting Officer March 20, 1998
J.A. Duncan Craig
</TABLE>
<PAGE> 174
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, 1997............................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1997...................... F-4
Consolidated Statements of Shareholders' Equity/(Deficit) for each of the years
in the three year period ended December 31, 1997............................... F-5
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1997...................................... F-6
Notes to the Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE> 175
INDEPENDENT AUDITORS' REPORT
To 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, 1996 and
1997 and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the years in the three year period ended
December 31, 1997. 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 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, 1996 and 1997 and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
1997 in conformity with generally accepted accounting principles in the United
States of America.
KPMG
Chartered Accountants
Registered Auditors
Nottingham, England
March 12, 1998
F-2
<PAGE> 176
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
_______________________________________________
1995 1996 1997 1997
__________ __________ ___________ __________
<S> <C> <C> <C> <C>
(note 1)
(in thousands)
REVENUE
Business telecommunications...................... L. 5,852 L. 9,763 L. 14,208 $23,339
Residential telephone............................ 6,662 17,723 29,495 48,452
Cable television................................. 3,479 10,091 16,602 27,272
---------- --------- ---------- ---------
15,993 37,577 60,305 99,063
---------- --------- ---------- ---------
OPERATING COSTS AND EXPENSES
Telephone........................................ (5,454) (9,776) (12,088) (19,857)
Programming...................................... (1,844) (6,041) (9,749) (16,015)
Selling, general and administrative.............. (13,020) (22,391) (27,192) (44,668)
Depreciation and amortization.................... (8,867) (21,380) (27,620) (45,371)
---------- --------- ---------- ---------
(29,185) (59,588) (76,649) (125,911)
---------- --------- ---------- ---------
OPERATING LOSS................................... (13,192) (22,011) (16,344) (26,848)
Interest income.................................. 3,887 3,441 6,440 10,579
Interest expense and amortization of
debt discount and expenses....................... (17,118) (40,334) (66,367) (109,021)
Foreign exchange gains/(losses), net (note 17)... 925 31,018 (12,555) (20,624)
Unrealized (losses)/gains on derivative financial
instruments (note 3)............................. (868) (7,944) 669 1,099
Realized gain on derivative financial
instruments (note 4)............................. - - 11,553 18,978
Other expenses (note 5).......................... (1,241) - - -
---------- --------- ---------- ---------
Loss before income taxes......................... (27,607) (35,830) (76,604) (125,837)
Income taxes (note 6)............................ - - - -
---------- --------- ---------- ---------
NET LOSS......................................... L. (27,607) L.(35,830) L. (76,604) $(125,837)
========== ========= ========== =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-3
<PAGE> 177
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
_____________________________________
1996 1997 1997
___________ ___________ ___________
<S> <C> <C> <C>
(note 1)
(in thousands except share data)
ASSETS
Cash and cash equivalents (note 7)................................ L. 18,311 L. 75,680 $124,320
Trade receivables (net of allowance for doubtful
accounts of pound sterling 1,691 and pound sterling 2,788 at
December 31, 1996 and 1997 respectively (note 8))................. 6,389 8,569 14,076
Other assets...................................................... 3,904 4,470 7,343
Deferred financing costs (less accumulated amortization of
pound sterling 1,325 and pound sterling 2,627 at
December 31, 1996 and 1997 respectively).......................... 19,573 15,533 25,516
Property and equipment, net (note 9).............................. 277,301 365,636 600,630
Goodwill (less accumulated amortization of pound sterling 6,064
and pound sterling 10,914 at December 31, 1996 and 1997
respectively)..................................................... 90,896 86,046 141,348
Franchise costs (less accumulated amortization of
pound sterling 91 and pound sterling 116 at December 31,
1996 and 1997 respectively)....................................... 445 423 695
--------- --------- --------
TOTAL ASSETS...................................................... L.416,819 L.556,357 $913,928
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Accounts payable.................................................. L. 18,528 L. 22,319 $36,663
Other liabilities................................................. 19,150 11,224 18,438
Senior discount notes (note 10)................................... 314,418 534,861 878,616
Capital lease obligations (note 11)............................... 8,146 8,041 13,209
Mortgage loan (note 12)........................................... 2,477 2,423 3,980
Shareholders' equity/(deficit) (note 13)
Ordinary shares: 70,000,000 authorized;
59,138,791 shares issued at December 31, 1996 and 1997............ 1,478 1,478 2,428
Non-voting deferred shares:
6 shares authorized and issued at December 31, 1996 and 1997...... - - -
Additional paid-in-capital........................................ 134,466 134,466 220,888
Unrealized loss on securities..................................... (197) (204) (335)
Accumulated deficit............................................... (81,647) (158,251) (259,959)
--------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT).............. L.416,819 L.556,357 $913,928
========= ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-4
<PAGE> 178
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Non-voting
Ordinary share deferred shares (i) Total
______________________ __________________ Additional Unrealized Accum- Shareholders'
Pound Pound Paid-in- loss on ulated Equity/
Number sterling Number sterling capital securities Deficit (Deficit)
__________ ________ ______ ________ __________ __________ _________ _____________
(in thousands except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1995........ 31,903,232 L. 797 6 L. - L.43,505 L. - L.(18,210) L.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 L. 1,094 6 L. - L.70,186 L. (330) L.(45,817) L.25,133
========== ======== ====== ====== ======== ======== ========= ========
BALANCE AT
JANUARY 1, 1996........ 43,754,175 L. 1,094 6 L. - L.70,186 L. (330) L.(45,817) L.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 L.1,478 6 L. - L.134,466 L. (197) L.(81,647) L.54,100
========== ======== ====== ====== ======== ======== ========= ========
BALANCE AT
JANUARY 1, 1997........ 59,138,791 L.1,478 6 L. - L.134,466 L. (197) L.(81,647) L.54,100
Unrealized loss on
securities............. - - - - - (7) - (7)
Net loss............... - - - - - - (76,604) (76,604)
---------- -------- ------ ------ -------- -------- --------- --------
BALANCE AT
DECEMBER 31, 1997...... 59,138,791 L.1,478 6 L. - L.134,466 L. (204) L.(158,251) L.(22,511)
========== ======== ====== ====== ======== ======== ========= ========
</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-5
<PAGE> 179
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
______________________________________________
1995 1996 1997 1997
__________ __________ __________ __________
<S> <C> <C> <C> <C>
(note 1)
(in thousands)
Cash flows from operating activities:
Net loss............................................ L. (27,607) L.(35,830) L.(76,604) $(125,837)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Depreciation and amortization....................... 8,867 21,380 27,620 45,371
Foreign exchange (gains)/losses..................... (613) (31,468) 11,714 19,242
(Profit)/loss on disposition of assets.............. (11) (11) 110 181
Provision for losses on accounts receivable......... 407 918 1,097 1,802
Amortization of deferred financing costs............ 312 943 9,301 15,279
Accretion of senior note discount................... 14,335 38,157 55,038 90,411
Accretion of investment income...................... 524 - - -
Profit on disposition of investments................ (2,733) - - -
Change in operating assets and liabilities:
Change in trade receivables......................... (1,577) (3,724) (3,277) (5,383)
Change in other assets.............................. (2,175) 1,300 (566) (930)
Change in accounts payable.......................... 4,532 (1,680) 4,255 6,990
Change in other liabilities......................... 1,626 8,667 (7,812) (12,833)
--------- --------- --------- --------
Net cash (used in)/provided by operating activities. (4,113) (1,348) 20,876 34,293
--------- --------- --------- --------
Cash flows from investing activities:
Cash invested in property and equipment............. (102,899) (128,246) (110,145) (180,935)
Cash invested in marketable securities.............. (17,445) - - -
Proceeds from disposition of assets................. 72 65 62 102
Proceeds from disposition of investments............ 73,644 - - -
Cash paid for franchises............................ (45) (29) (3) (5)
Payment for purchase of LCL (net of cash acquired).. (108,844) - - -
--------- --------- --------- --------
Net cash used in investing activities............... (155,517) (128,210) (110,086) (180,838)
--------- --------- --------- --------
Cash flows from financing activities:
Proceeds of issue of debt........................... 194,881 - 153,691 252,468
Debt financing costs................................ (7,924) (9,096) (5,375) (8,829)
New loans........................................... 94,000 - - -
Repayment of loans.................................. (94,119) (23) (54) (89)
Capital element of capital lease obligations........ (841) (1,117) (1,676) (2,753)
Issue of shares and capital contributions
(net of expenses)................................. 26,978 64,664 - -
Net decrease in short-term borrowings............... (773) - - -
--------- --------- --------- --------
Net cash provided by financing activities........... 212,202 54,428 146,586 240,797
--------- --------- --------- --------
Net increase/(decrease) in cash..................... 52,572 (75,130) 57,376 94,252
Cash and cash equivalents at beginning of year...... 41,066 93,308 18,311 30,079
Effect of exchange rate changes on cash and
cash equivalents.................................... (330) 133 (7) (11)
--------- --------- --------- --------
Cash and cash equivalents at end of year (note 7)... L. 93,308 L. 18,311 L. 75,680 $124,320
========= ========= ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-6
<PAGE> 180
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 1997 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 = $1.6427, the Noon Buying Rate of the Federal Reserve Bank of New
York on December 31, 1997.
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 Standard ("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. The prematurity period
covers the period between connecting the first customer and substantial
completion of the network. Initial subscriber installation costs are
capitalized and depreciated over a period of 7 years. A proportion of the
costs of the installation department representing the costs of disconnecting
and reconnecting subscribers is charged to expenses.
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
consolidated statement of operations. Interest rate swaps which are designated
to assets and liabilities are accounted for on an accruals basis.
F-7
<PAGE> 181
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated
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.
IMPAIRMENT OF CABLE SYSTEMS AND GOODWILL - The Company assesses the
recoverability of these assets by determining whether the carrying value can be
recovered through projected undiscounted future operating cash flows. The
amount of impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the average cost of funds
of financing such assets. The assessment of the recoverability will be
impacted if changes in technology or other market conditions result in the
projected future operating cash flows not being 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 consolidated 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 consolidated statement of operations.
PENSION COSTS - The Group operates a defined contribution pension scheme
and also contributes up to specified limits to the third party plan of the
employee's choice. Pension costs of pound sterling 55,000, pound sterling
125,000 and pound sterling 196,000 in 1995, 1996 and 1997 respectively,
represent the contributions payable to the selected plans.
SENIOR DISCOUNT NOTES - The debt discount is amortized to the consolidated
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 consolidated 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". Compensation expense is measured as the difference between the
exercise price and the market price of the stock on the date of the grant of
the option and is amortized as a charge to the consolidated statement of
operations over the vesting period of the option. The disclosure requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation" are set out in note
18.
F-8
<PAGE> 182
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW ACCOUNTING STANDARDS APPLICABLE TO THE GROUP - SFAS No. 129,
"Disclosure of Information about Capital Structure" was issued in February 1997
and lists the requirements for disclosures about the characteristics of the
shares in issue. SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. No significant changes to the
disclosure in the consolidated financial statements have been necessary to
comply with this statement.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997, and
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. It requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. It requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of a statement of financial position. The Group has not yet evaluated
the likely impact of the level of disclosure required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997, and is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. It requires that
companies disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance. It also
requires entity wide disclosures about the products and services the entity
provides, the material countries in which it holds assets and reports revenues
and its major customers. The Group has not yet evaluated the extent of any
additional disclosure or changes to existing disclosure which may be required.
3. UNREALIZED (LOSSES)/GAINS ON DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Year ended December 31
________________________________
1995 1996 1997
__________ __________ ________
<S> <C> <C> <C>
(in thousands)
Unrealized (loss)/gain on interest rate swap (note 17) L. (868) L. 174 L. (57)
Unrealized (loss)/gain on foreign exchange forward
contracts (note 17)................................... - (8,118) 726
---------- ---------- --------
L. (868) L. (7,944) L. 669
========== ========== ========
</TABLE>
4. REALIZED GAIN ON DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Year ended December 31
______________________________
1995 1996 1997
_________ _________ ________
<S> <C> <C> <C>
(in thousands)
Realized gain on foreign exchange forward contract (note 17) L. - L. - L.11,553
========= ========= ========
</TABLE>
5. OTHER EXPENSES
Other expenses in 1995 represent costs incurred in an aborted flotation of
equity.
F-9
<PAGE> 183
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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 296 million and approximately pound sterling 1 million of capital
losses carried forward at December 31, 1997.
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 consolidated
financial statements and the expected tax benefit at the United Kingdom
statutory rate of 31% (1995 and 1996: 33%) are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
______________________________________
1995 1996 1997
_________ __________ __________
(in thousands)
<S> <C> <C> <C>
Tax benefit of net losses at 31% (1995 and 1996: 33%) L.(9,110) L.(11,824) L.(23,747)
Non-deductible expenses.............................. 367 1,695 1,915
Valuation allowance.................................. 8,743 10,129 21,832
-------- --------- ---------
Net tax benefit...................................... L. - L. - L. -
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31
________________________
1996 1997
_________ _________
(in thousands)
<S> <C> <C>
Deferred tax assets relating to:
Net losses............................................. L. 45,736 L. 91,882
Other.................................................. 447 1,173
--------- ---------
Deferred tax asset..................................... 46,183 93,055
Valuation allowance.................................... (27,299) (54,650)
--------- ---------
18,884 38,405
--------- ---------
Deferred tax liabilities relating to:
Property and equipment................................. (18,087) (38,405)
Financing costs........................................ (155) -
Other.................................................. (642) -
--------- ---------
Deferred tax liability................................. (18,884) (38,405)
--------- ---------
Deferred tax per consolidated balance sheet............ L. - L. -
========= =========
</TABLE>
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
F-10
<PAGE> 184
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses, and tax planning strategies in making its assessment as to the
appropriateness of the reported valuation allowance.
F-11
<PAGE> 185
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
December 31
___________________
1996 1997
_________ ________
<S> <C> <C>
(in thousands)
Cash at bank and in hand..... L. 1,241 L. 3,723
Short term securities........ 17,070 71,957
--------- --------
L.18,311 L.75,680
========= ========
</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.
8. 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
__________ ___________ __________ ___________ ___________
(in thousands)
<S> <C> <C> <C> <C> <C>
1995
Allowance for doubtful accounts L. 233 L. 133 L. 439 L. (32) L. 773
========== =========== ========== =========== ===========
1996
Allowance for doubtful accounts L. 773 L. - L.1,143 L. (225) L. 1,691
========== =========== ========== =========== ===========
1997
Allowance for doubtful accounts L. 1,691 L. - L.1,204 L. (107) L. 2,788
========== =========== ========== =========== ===========
</TABLE>
F-12
<PAGE> 186
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Land and Cable Office Motor
buildings network equipment vehicles Total
_________ __________ _________ _________ _________
(in thousands)
<S> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1996.. L. 3,863 L. 170,660 L. 4,701 L. 644 L.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......... L. 4,704 L.269,121 L. 3,289 L. 187 L.277,301
========= ========== ========= ========= =========
ACQUISITION COSTS
Balance at January 1, 1997.. 5,018 298,062 6,069 435 309,584
Additions................... 93 107,844 2,948 367 111,252
Dispositions................ - (254) - (196) (450)
--------- ---------- --------- --------- ---------
Balance at December 31, 1997 5,111 405,652 9,017 606 420,386
--------- ---------- --------- --------- ---------
ACCUMULATED DEPRECIATION
Balance at January 1, 1997.. 314 28,941 2,780 248 32,283
Charge for year............. 164 20,886 1,589 106 22,745
Dispositions................ - (132) - (146) (278)
--------- ---------- --------- --------- ---------
Balance at December 31, 1997 478 49,695 4,369 208 54,750
--------- ---------- --------- --------- ---------
1997 NET BOOK VALUE......... L. 4,633 L.355,957 L. 4,648 L. 398 L.365,636
========= ========== ========= ========= =========
</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 11,543,000 and pound sterling
13,042,000 at December 31, 1996 and 1997 respectively. Accumulated depreciation
charged against these assets was pound sterling 3,882,000 and pound sterling
5,238,000 at December 31, 1996 and 1997 respectively.
Depreciation on assets held under capital lease arrangements charged to the
consolidated statement of operations during the year was pound sterling 863,000,
pound sterling 1,375,000 and pound sterling 1,535,000 in 1995, 1996 and 1997
respectively.
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.
F-13
<PAGE> 187
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEBT (continued)
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.
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.
The 1994 Notes, 1995 Notes and the 1997 Notes (collectively "the Discount
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 Discount Notes are stated net of unamortized discount of approximately
pound sterling 162 million ($278 million) and pound sterling 218 million ($358
million) at December 31, 1996 and 1997 respectively. The discount is being
accreted through the consolidated statement of operations such that the Company
recognizes a fixed rate of interest, the total accretion for the year being
pound sterling 38 million ($65 million) and pound sterling 55 million ($90
million) in 1996 and 1997 respectively.
The costs relating to the issue of the Discount Notes have been deferred
and are shown as deferred financing costs in the consolidated balance sheet.
These costs are being amortized over the term of the Discount Notes, where
appropriate, as an adjustment of yield.
The Discount 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 (note 16).
The Discount Notes all mature after more than five years.
On February 6, 1998 Diamond Holdings plc, a wholly-owned subsidiary of the
Company, issued pound sterling 135,000,000 of 10% Senior Notes due February 1,
2008 and $110,000,000 of 9 1/8% Senior Notes due February 1, 2008 (together "the
Senior Notes") at par. The Senior Notes are unconditionally guaranteed as to
principal, interest and any other amounts due by the Company. Total proceeds
received by Diamond Holdings plc amounted to pound sterling 195 million after
issuance costs of pound sterling 7 million. Interest on the Senior Notes is
payable in arrears on February 1 and August 1 of each year commencing August 1,
1998.
F-14
<PAGE> 188
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 733,000, pound sterling 1,158,000
and pound sterling 1,246,000 in 1995, 1996 and 1997 respectively.
Future minimum lease payments under capital and operating leases are
summarized as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
leases leases
________ _________
(in thousands)
<S> <C> <C>
1998............... L. 2,633 L. 1,027
1999............... 2,521 809
2000............... 2,325 556
2001............... 1,342 277
2002............... 350 200
2003 and thereafter - 1,969
Imputed interest... (1,130) -
-------- --------
L. 8,041 L. 4,838
======== ========
</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 ("LDLs"), to construct
cable systems passing a predefined number of premises. Should the Group fail to
achieve these milestones, without license modifications, the Director General of
Telecommunications could commence proceedings to require compliance. Similarly
the Independent Television Commission ("ITC") may commence proceedings to
require compliance with the build milestones in the LDLs.
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
The consolidated financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the consolidated financial
statements during the years ended December 31, 1995, 1996 and 1997 the Group
incurred net losses of pound sterling 27.6 million, pound sterling 35.8 million
and pound sterling 76.6 million respectively.
The Group is obligated by the milestones in its telecommunications licenses
and LDLs to construct and activate a network passing an aggregate of 1,021,894
premises within prescribed time periods. The Group's continuation to build out
its network is dependent upon its ability to obtain sufficient debt and/or
equity financing in order to meet its network milestones. The inability of the
Group to secure financing in addition to that currently available, including the
proceeds of the issue of the Senior Notes, could result in a failure to comply
with the build milestones set forth in its licenses to operate, and ultimately
could lead to the revocation of such licenses. Under such conditions the Group
may be unable to continue to operate. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
liabilities that might be necessary should the Group be unable to continue to
operate.
F-15
<PAGE> 189
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENT AND CONTINGENCIES (continued)
To the extent that the amount required to complete the Group's network to
meet its milestones exceeds its estimates, the annualized cash flow of certain
subsidiaries does not meet expectations, or the Group continues constructing
the network beyond its milestone obligations, the amount of additional debt or
other financing required will increase.
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/(DEFICIT)
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 of 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.
F-16
<PAGE> 190
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
At September 1, 1994 the authorized share capital of the Company was
70,000,000 ordinary shares of 2.5 pence each and six A shares of 25 pence each
of which 29,016,630 ordinary shares and six A shares 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 pound 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.
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 2,376,000, pound sterling
1,060,000 and pound sterling 2,148,000 for the years ended December 31, 1995,
1996 and 1997.
F-17
<PAGE> 191
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1996 and 1997, the
Group recorded expenses of pound sterling 1,610,000 and pound sterling
2,061,000, respectively, as amounts paid or payable to 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, 1997. 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, 1997.
OTHER RELATIONSHIPS
Goldman, Sachs & Co and Goldman Sachs International acted as purchasers in
connection with the offering of the Senior Notes and received underwriting
commissions of approximately $9,600,000 . 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 the 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.
F-18
<PAGE> 192
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997 was pound
sterling 24.0 million. Following acquisition by the Company, the interest rate
swap has been retained and has been recorded on the consolidated balance sheet
in other liabilities at its market value at December 31, 1997 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 1997 was pound sterling 339,000.
FOREIGN EXCHANGE FORWARD CONTRACTS - 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. For the year ended
December 31, 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.
The Company entered into a foreign exchange forward contract on June 23,
1997 for settlement on June 25, 1998 to sell pound sterling 50 million at a rate
of $1.6505 to pound sterling 1. The Company also entered into a foreign
exchange forward contract on June 27, 1997 for settlement on July 1, 1998 to
sell pound sterling 50 million at a rate of $1.6515 to pound sterling 1. For
the year ended December 31, 1997 the Company has recorded an unrealized gain of
approximately pound sterling 726,000 on the contracts.
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
__________________________________________
1996 1997 1996 1997
Carrying Carrying Fair Fair
value value value value
_________ _________ _________ _________
(in thousands)
<S> <C> <C> <C> <C>
1994 Notes.......... L.117,062 L.138,726 L.136,740 L.155,333
1995 Notes.......... 197,356 230,599 220,726 249,688
1997 Notes.......... - 165,536 - 174,067
--------- --------- --------- ---------
L.314,418 L.534,861 L.357,466 L.579,088
========= ========= ========= =========
</TABLE>
F-19
<PAGE> 193
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FINANCIAL INSTRUMENTS (continued)
FOREIGN EXCHANGE FORWARD CONTRACTS - The foreign exchange forward contracts
have been marked to market and the resulting carrying amounts approximates their
fair values. The fair values of the instruments have been calculated based on
the difference between the forward rate available at December 31, 1997 for the
remaining maturity of the contracts 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 Group's customer base. At December 31, 1997, 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 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 foreign exchange forward contracts during
1996 and 1997 (discussed herein). Changes in currency exchange rates may
continue to have a material effect on the results of operations of the Group.
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.
F-20
<PAGE> 194
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHARE OPTIONS (continued)
Options over a total of 77,500 shares were granted to directors and senior
management on May 7, 1997 and November 19, 1997 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 Option Scheme.
The following table sets forth the number of options in issue:
<TABLE>
<CAPTION>
At At At At
January Granted December Forfeited December Granted Forfeited December
1, 1995 in 1995 31, 1995 in 1996 31, 1996 in 1997 in 1997 31, 1997
_______ _______ ________ _________ ________ _______ _________ ________
(number in thousands)
<C> <C> <C> <C> <C> <C> <C> <C>
- 1,872 1,872 (45) 1,827 77 (380) 1,524
======= ======= ======== ========= ======== ======= ========= ========
</TABLE>
Options over 654,000 shares were exercisable at December 31, 1995, 1996 and
1997.
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 of 6.25% for options granted in 1995 and 7.5% for options granted in 1997
and assuming options are exercised on the seventh anniversary of the date of the
grant. The pro-forma compensation cost for 1995, 1996 and 1997 is pound
sterling 0.22 million, pound sterling 0.33 million and pound sterling 0.15
million respectively. The effects of applying SFAS No. 123 may not be
representative of the effects on reported net income/loss for future years.
<TABLE>
<CAPTION>
Year ended
December 31
____________________________________
1995 1996 1997
__________ ___________ ___________
(in thousands)
<S> <C> <C> <C>
Pro-forma net loss... L.(27,812) L. (36,164) L. (76,754)
========== =========== ===========
</TABLE>
F-21
<PAGE> 195
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SENIOR BANK FACILITY AND RESTRICTION OF NET ASSETS
In August 1996, certain of the Company's subsidiaries entered into a senior
bank lending agreement, which provided for a borrowing facility of up to an
aggregate amount of pound sterling 340 million. In February 1997, the Senior
Bank Facility was amended, and the Group has subsequently negotiated further
amendments to the facility. These amendments included a reduction in the amount
to be available for borrowing under the facility to pound sterling 175 million
to reflect the additional proceeds available to the Group through the issuance
of the 1997 Notes. No funds were drawn under the facility. The issuance of the
Senior Notes in February 1998 replaces, in large part, the expected borrowing
under the Senior Bank Facility. As a condition to the issuance of the Senior
Notes, therefore, the Group provided notice to terminate the Senior Bank
Facility on February 6, 1998. For the year ended December 31, 1997 the Group
has recorded a charge of pound sterling 8.0 million representing the write-off
of the deferred financing cost (principally origination fees and expenses) that
had been carried on the consolidated balance sheet.
Indebtedness under the Senior Bank Facility was to be incurred and
guaranteed by certain of the Company's subsidiaries and secured by a lien on
their assets. The Senior Bank Facility contained 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 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.
As a result of the above restrictions, certain subsidiaries were subject
to restrictions on their ability to make dividend payments, loans or other
transfers of cash to the Company as at December 31, 1997. 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, 1997, 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.
F-22
<PAGE> 196
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
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.
They also represent the financial statements of the Guarantor of the offering
of Senior Notes by Diamond Holdings plc in February 1998.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
____________________________________________________
1995 1996 1997 1997
_____________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
(note A)
(in thousands)
Selling, general and administrative................. L. - L. (1,468) L. (2,285) $ (3,753)
Equity accounted share of net losses of subsidiaries (16,832) (25,391) (87,672) (144,019)
Interest income..................................... 3,543 40,119 56,417 92,676
Interest expense and amortization of
debt discount and expenses.......................... (14,646) (39,100) (56,393) (92,637)
Foreign exchange gains/(losses), net................ 909 (1,542) 1,016 1,669
Unrealized (loss)/gain on derivative financial
instruments......................................... - (8,118) 726 1,193
Realized gain on derivative financial instruments... - - 11,553 18,978
Other expenses...................................... (911) - - -
------------- ----------- ----------- -----------
Loss before income taxes............................ (27,937) (35,500) (76,638) (125,893)
Income taxes........................................ - - - -
------------- ----------- ----------- -----------
NET LOSS............................................ L.(27,937) L. (35,500) L. (76,638) $(125,893)
============= =========== =========== ===========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-23
<PAGE> 197
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
______________________________________
1996 1997 1997
______________________________________
<S> <C> <C> <C>
(note A)
(in thousands except share data)
ASSETS
Investments in and advances to subsidiaries...................... L. 349,676 L. 468,167 $769,058
Cash and cash equivalents........................................ 16,032 28,697 47,141
Other assets..................................................... 115 822 1,350
Deferred financing costs (less accumulated amortization of
L.1,325 and L.2,627 at December 31, 1996 and 1997 respectively).. 11,960 15,533 25,516
----------- ------------ -----------
TOTAL ASSETS..................................................... L. 377,783 L. 513,219 $843,065
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Other liabilities................................................ L. 9,265 L. 869 $1,427
Senior discount notes............................................ 314,418 534,861 878,616
Shareholders' equity/(deficit)...................................
Ordinary shares: 70,000,000 authorized;
59,138,791 shares issued at December 31, 1996 and 1997...... 1,478 1,478 2,428
Non-voting deferred shares:
6 shares authorized and issued at December 31, 1996 and 1997 - - -
Additional paid-in-capital....................................... 134,466 134,466 220,888
Unrealized loss on securities.................................... (197) (170) (279)
Accumulated deficit.............................................. (81,647) (158,285) (260,015)
----------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)............. L. 377,783 L. 513,219 $843,065
=========== ============ ===========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-24
<PAGE> 198
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Non-voting
Ordinary shares deferred shares Total
____________________ ___________________ Additional Unrealized Accum- Shareholders'
pound pound Paid-in- loss on ulated Equity/
Number sterling Number sterling capital securities Deficit (Deficit)
__________ ________ ________ _________ __________ ___________ ___________ _____________
(in thousands except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1995........ 31,903,232 L. 797 6 L. - L.43,505 L. - L.(18,210) L.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) - - -
Net loss............... - - - - - - (27,937) (27,937)
---------- -------- -------- --------- ---------- ----------- ----------- -------------
BALANCE AT
DECEMBER 31, 1995...... 43,754,175 L. 1,094 6 L. - L.70,186 L. - L.(46,147) L.25,133
========== ======== ======== ========= ========== =========== =========== =============
BALANCE AT
JANUARY 1, 1996........ 43,754,175 L. 1,094 6 L. - L.70,186 L. - L.(46,147) L.25,133
Shares issued and
capital contributions
(net of expenses)...... 15,384,616 384 - - 64,280 - - 64,664
Unrealized loss on
securities............. - - - - - (197) - (197)
Net loss............... - - - - - - (35,500) (35,500)
---------- -------- -------- --------- ---------- ----------- ----------- -------------
BALANCE AT
DECEMBER 31, 1996...... 59,138,791 L.1,478 6 L. - L.134,466 L. (197) L.(81,647) L.54,100
========== ======== ======== ========= ========== =========== =========== =============
BALANCE AT
JANUARY 1, 1997........ 59,138,791 L. 1,478 6 L. - L.134,466 L. (197) L.(81,647) L.54,100
Unrealized gain on
securities............. - - - - - 27 - 27
Net loss............... - - - - - - (76,638) (76,638)
---------- -------- -------- --------- ---------- ----------- ----------- -------------
BALANCE AT
DECEMBER 31, 1997...... 59,138,791 L. 1,478 6 L. - L.134,466 L. (170) L.(158,285) L. (22,511)
========== ======== ======== ========= ========== =========== =========== =============
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-25
<PAGE> 199
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
_____________________________________________________
1995 1996 1997 1997
_____________________________________________________
(in thousands)
<S> <C> <C> <C> <C>
(note A)
Cash flows from operating activities:
Net loss.............................................. L. (27,937) L. (35,500) L. (76,638) $(125,893)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Equity accounted share of net losses of subsidiaries 16,832 25,391 87,672 144,019
Foreign exchange losses/(gains).................... (613) 820 (2,524) (4,146)
Accrued interest on advances to subsidiaries........ (318) (39,581) (53,998) (88,703)
Amortization of deferred financing costs............ 312 943 1,302 2,139
Accretion of senior note discount................... 14,335 38,157 55,038 90,411
Accretion of investment income...................... 524 - - -
Profit on disposition of investments................ (2,733) - - -
Change in operating assets and liabilities:
Change in other assets.............................. (13) (102) 18 29
Change in other liabilities......................... 1,613 8,380 (8,282) (13,605)
-------------- ----------- ----------- -----------
Net cash provided by/(used in) operating activities... 2,002 (1,492) 2,588 4,251
-------------- ----------- ----------- -----------
Cash flows from investing activities:
Cash invested in marketable securities.............. (17,445) - - -
Proceeds from disposition of investments............ 73,644 - - -
Advances to subsidiaries............................ (310,611) (45,306) (138,652) (227,763)
-------------- ----------- ----------- -----------
Net cash used in investing activities................. (254,412) (45,306) (138,652) (227,763)
-------------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of issue of debt........................... 194,881 - 153,691 252,468
Debt financing costs................................ (7,924) (1,637) (4,989) (8,195)
Issue of shares and capital contributions
(net of expenses)................................... 26,978 64,664 - -
-------------- ----------- ----------- -----------
Net cash provided by financing activities............. 213,935 63,027 148,702 244,273
-------------- ----------- ----------- -----------
Net (decrease)/increase in cash....................... (38,475) 16,229 12,638 20,761
Cash and cash equivalents at beginning of year........ 38,475 - 16,032 26,336
Effect of exchange rate changes on cash and
cash equivalents...................................... - (197) 27 44
-------------- ----------- ----------- -----------
Cash and cash equivalents at end of year.............. L. - L. 16,032 L. 28,697 $47,141
============== =========== =========== ===========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-26
<PAGE> 200
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 1997 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 = $1.6427, the Noon Buying Rate of the Federal Reserve Bank of New
York on December 31, 1997.
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.
INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES - Investments in and advances
to subsidiaries are accounted for using the equity method of accounting.
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 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 1996 and 1997 was pound sterling 39.6
million and pound sterling 54.0 million respectively.
C. COMMITMENTS AND CONTINGENCIES
LIQUIDITY - The financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements during the
years ended December 31, 1995, 1996 and 1997 the Group incurred net losses of
pound sterling 27.6 million, pound sterling 35.8 million and pound sterling 76.6
million respectively.
F-27
<PAGE> 201
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
C. COMMITMENTS AND CONTINGENCIES (continued)
The Group is obligated by the milestones in its telecommunications licenses
and LDLs to construct and activate a network passing an aggregate of 1,021,894
premises within prescribed time periods. The Group's continuation to build out
its network is dependent upon its ability to obtain sufficient debt and/or
equity financing in order to meet its network milestones. The inability of the
Group to secure financing in addition to that currently available, including the
proceeds of the issue of the Senior Notes, could result in a failure to comply
with the build milestones set forth in its licences to operate, and ultimately
could lead to the revocation of such licenses. Under such conditions the Group
may be unable to continue to operate. The financial statements do not include
any adjustments relating to the recoverability and classification of liabilities
that might be necessary should the Group be unable to continue to operate.
To the extent that the amount required to complete the Group's network to
meet its milestones exceeds its estimates, the annualized cash flow of certain
subsidiaries does not meet expectations, or the Group continues constructing
the network beyond its milestone obligations, the amount of additional debt or
other financing required will increase.
21 SUMMARIZED FINANCIAL INFORMATION ABOUT DIAMOND HOLDINGS PLC
The following information is provided in accordance with the Staff
Accounting Bulletin No. 53 and represents the summarized financial information
of Diamond Holdings plc.
Diamond Holdings plc ("Holdings") was incorporated under the laws of
England and Wales on December 15, 1997. Holdings is a wholly owned subsidiary
of Diamond Cable Communications Plc ("the Company") and, on January 16, 1998
became the intermediate holding company which holds all the shares of (i)
Diamond Cable Communications (UK) Limited and (ii) East Midlands Cable
Communications Limited, East Midlands Cable Group Limited and East Midlands
Cable Holdings Limited through an intermediate holding company, Jewel Holdings
Limited.
Holdings raised approximately pound sterling 195 million by the offer of
Senior Notes in February 1998. The proceeds will be used by the Group for
general corporate purposes, including to fund a portion of the costs of
constructing the network in the Group's franchise area and related working
capital. The Senior Notes are unconditionally guaranteed by the Company.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
______________
<S> <C>
Amounts due from group undertakings........... L.49,998
Cash at bank and in hand...................... 2
--------
Total assets.................................. L.50,000
========
Liabilities................................... L. -
Shareholders' equity
Ordinary shares: 50,000,000 authorized;
50,000 shares issued........................ 50,000
--------
Total liabilities and shareholders' equity.... L.50,000
========
</TABLE>
F-28
<PAGE> 202
=====================================
NO PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ---------------------------------------
<S> <C>
Service of Process and Enforcement
of Liabilities......................... 4
Prospectus Summary..................... 5
Risk Factors........................... 16
Exchange Rates......................... 23
Capitalization......................... 23
Description of the 1994 Notes.......... 25
Description of the 1995 Notes.......... 49
Description of the 1997 Notes.......... 73
Taxation............................... 97
Plan of Distribution................... 102
Validity of the Discount Notes......... 102
Experts................................ 102
Glossary............................... 103
Available Information.................. 106
1997 Annual Report on Form 10-K........ 107
Item 1. Business...................... 4
Item 2. Properties.................... 40
Item 3. Legal Proceedings............. 40
Item 4. Submission of Matters to a
Vote of Security - Holders.... 40
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters........... 41
Item 6. Selected Financial Data....... 42
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 44
Item 7A. Quantitative and Qualitative
Disclosures about
Market Risk................... 52
Item 8. Financial Statements and
Supplementary Data............ 52
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure...... 52
Item 10. Directors and Executive
Officers of the Registrant.... 53
Item 11. Executive Compensation........ 56
Item 12. Security Ownership of Certain
Beneficial Owners and
Management.................... 60
Item 13. Certain Relationships and
Related Transactions.......... 62
Item 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K...................... 64
Index to Consolidated
Financial Statements................. F-1
</TABLE>
=====================================
DIAMOND CABLE
COMMUNICATIONS PLC
13 1/4% SENIOR DISCOUNT
NOTES DUE SEPTEMBER 30, 2004
11 3/4% SENIOR DISCOUNT
NOTES DUE DECEMBER 15, 2005
10 3/4% SENIOR DISCOUNT
NOTES DUE FEBRUARY 15, 2007
GOLDMAN, SACHS & CO.
======================================
