PROSPECTUS SUPPLEMENT NO. 2 TO PROSPECTUS DATED MARCH 27, 1998
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", and together with the 1994 Notes and the
1995 Notes, the "Discount 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 June 30, 1998, the Company had approximately(pound)758 million of
indebtedness outstanding, including approximately (pound)146 million, (pound)240
million and (pound)172 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 (pound)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.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus Supplement, together with the Prospectus dated March
27, 1998 and Prospectus Supplement No. 1 thereto dated May 18, 1998, 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 transactions. Goldman, Sachs & Co. may act as a
principal or agent in such transactions. See "Plan of Distribution" in the
Prospectus.
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus Supplement is August 14, 1998.
<PAGE>
GENERAL
This Prospectus Supplement should be read in conjunction with the
Prospectus dated March 27, 1998 and Prospectus Supplement No.1 thereto dated May
14, 1998 (together, the "Prospectus"). The Prospectus has been used by Goldman,
Sachs & Co. in connection with offers and sales related to market-making
transactions in the Senior Notes. This Prospectus Supplement, together with the
Prospectus, is to be used by Goldman, Sachs & Co. in connection with such
transactions and unsolicited purchases and sales.
Capitalized terms used in this Prospectus Supplement and not otherwise
defined have the same meanings as in the Prospectus.
RECENT DEVELOPMENTS
Operating Results. Attached hereto is the Company's Quarterly Report on
Form 10-Q filed on August 14, 1998, which includes, among other things, the
Company's unaudited interim financial statements as of, and for the three and
six month periods ended June 30, 1998, and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the three and six month
periods ended June 30, 1998.
-2-
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-83740
Diamond Cable Communications Plc
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
England and Wales N/A
- ----------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Diamond Plaza, Daleside Road
Nottingham NG2 3GG, England N/A
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip code)
44-115-912-2217
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 __
The number of shares outstanding of the Registrant's Ordinary Shares of 2.5
pence each outstanding as of June 30, 1998 was 59,138,791.
1
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
INDEX
Page
INTRODUCTION ............................................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited condensed consolidated statements of
operations--Three and six months ended
June 30, 1998 and 1997....................................... 5
Condensed consolidated balance sheets--
June 30, 1998 and December 31, 1997.......................... 6
Unaudited condensed consolidated statements of
shareholders' equity -- Three and six months
ended June 30, 1998.......................................... 7
Unaudited condensed consolidated statements of cash flows --
Six months ended June 30, 1998
and 1997..................................................... 8
Notes to the unaudited condensed consolidated
financial statements......................................... 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition....................... 13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 25
SIGNATURES............................................................... 26
2
<PAGE>
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 (formerly Diamond Cable (Nottingham)
Limited) ("DCL") and its subsidiaries and (ii) a group of companies comprising
East Midlands Cable Group Limited ("EMCG"), East Midlands Cable Communications
Limited and East Midlands Cable Holdings Limited (collectively "LCL"), in both
cases through intermediate holding companies, Diamond Holdings plc and Jewel
Holdings Limited ("Jewel"). References herein to the "Group" refer to the
Company and its subsidiaries, including, since September 27, 1995, 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 June 30, 1998, the Group's cable television and telecommunications
network had passed by civils construction approximately 616,100 homes and an
estimated 28,400 businesses, of which portions of the network passing
approximately 601,000 homes and an estimated 27,600 businesses had been
activated. As of that date, the Group also had approximately 197,400 residential
telephone lines, 98,700 cable television subscribers and 33,900 business
telephone lines. Through that date, (pound)496 million had been invested (at
original cost) in the construction of the network and related systems.
--------------------
THIS DOCUMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, IDENTIFIED
AS SUCH, WITH RESPECT TO WHICH THE COMPANY IS SEEKING TO UTILIZE THE SAFE HARBOR
PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS ARE ACCOMPANIED BY, AND SHOULD BE READ IN CONJUNCTION WITH, AN
EXPLANATION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
3
<PAGE>
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. In this Report,
references to "pounds sterling," "(pound)" "pence" or "p" are to the lawful
currency of the United Kingdom and references to "U.S. dollars," "$" or "(cent)"
are to the lawful currency of the United States. Merely for convenience, this
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 pounds sterling into U.S. dollars have been made at $1.6695 per
(pound)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 June 30, 1998. On August 13, 1998, the Noon
Buying Rate was $1.6265 per (pound)1.00.
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL Incorporated ("NTL"), an alternative telecommunications
company in the UK, the common stock of which is quoted on NASDAQ (NTLi). Under
the share exchange agreement between the Company's shareholders and NTL (the
"Share Exchange Agreement"), the Company's shareholders will receive one share
of NTL common stock for every four Ordinary Shares of the Company held subject
to adjustment in the event that the average NTL share price for a predetermined
period before closing of the transaction exceeds a specified price (which will
be $52 per share until October 16, 1998). Holders of the Company's deferred
shares will receive one share of NTL common stock for each deferred share held.
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals and, if necessary,
approval by NTL shareholders and the consent of holders of NTL's outstanding
debt. The transaction will not require the prior approval of the holders of the
Group's outstanding debt securities, but each of the indentures pursuant to
which the Group's debt securities were issued requires that offers to repurchase
such debt securities be made to holders of such securities subsequent to
closing. The parties expect the transaction to be completed in the autumn of
this year.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------
1997 1998 1998 1997 1998 1998
------ ------ ------ ------ ------ -----
(note 1) (note 1)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Business telecommunications...............(pound)3,347 (pound) 4,667 $ 7,792 (pound) 6,520 (pound) 8,999 $ 15,024
Residential telephone..................... 6,761 10,991 18,349 12,932 20,831 34,777
Cable television.......................... 3,879 5,897 9,845 7,697 11,356 18,959
------- ------- ------- -------- ------- --------
13,987 21,555 35,986 27,149 41,186 68,760
------- ------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Telephone................................. (2,941) (4,183) (6,983) (5,537) (7,921) (13,224)
Programming............................... (2,258) (3,166) (5,286) (4,550) (6,191) (10,336)
Selling, general, and
administrative.......................... (6,367) (9,195) (15,351) (12,568) (17,924) (29,924)
Depreciation and amortization............. (6,635) (10,330) (17,246) (13,015) (19,650) (32,806)
-------- -------- -------- -------- -------- --------
(18,201) (26,874) (44,866) (35,670) (51,686) (86,290)
-------- -------- -------- -------- -------- --------
OPERATING LOSS............................ (4,214) (5,319) (8,880) (8,521) (10,500) (17,530)
Interest income........................... 2,026 3,875 6,469 2,969 6,881 11,488
Interest expense and amortization of debt
discount and expenses................... (15,019) (21,456) (35,821) (27,200) (40,415) (67,473)
Foreign exchange gains/(losses), net...... 6,271 (2,332) (3,893) (5,723) 10,165 16,970
Unrealized gain on derivative financial
instruments............................. 168 -- -- 244 -- --
Realized gain on derivative financial
instruments............................. -- 2,302 3,843 11,553 412 688
-------- -------- -------- -------- ------- ---------
Loss before income taxes.................. (10,768) (22,930) (38,282) (26,678) (33,457) (55,857)
Income taxes.............................. -- -- -- -- -- --
-------- -------- -------- --------- -------- ---------
NET LOSS................................(pound)(10,768) (pound)(22,930) $(38,282) (pound)(26,678) (pound)(33,457) $(55,857)
======== ======== ========= ======== ======== =========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------- -----------
(UNAUDITED)
1997 1998 1998
------ ------ ------
(NOTE 1)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................................. (pound)75,680 (pound)221,120 $369,160
Trade receivables (net of allowance for doubtful accounts
of (pound)2,788 at December 31, 1997 and(pound)3,822 at
June 30, 1998)......................................................... 8,569 9,817 16,389
Other assets............................................................. 4,470 4,451 7,431
Deferred financing costs (less accumulated
amortization of (pound)2,627 at December 31, 1997
and (pound)3,674 at June 30, 1998)..................................... 15,533 21,477 35,856
Property and equipment, net (note 4)..................................... 365,636 416,410 695,197
Goodwill (less accumulated amortization of (pound)10,914 at December 31,
1997 and(pound)13,341 at June 30, 1998).................................. 86,046 83,621 139,605
Franchise costs (less accumulated amortization of
(pound)116 at December 31, 1997 and (pound)130 at June 30, 1998)........ 423 409 683
------- ------- ---------
TOTAL ASSETS............................................................. (pound)556,357 (pound)757,305 $1,264,321
======= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable......................................................... (pound) 22,319 (pound) 26,658 $44,505
Other liabilities........................................................ 11,224 20,319 33,923
Senior discount notes.................................................... 534,861 557,403 930,584
Senior notes............................................................. - 200,888 335,383
Capital lease obligations................................................ 8,041 7,303 12,193
Mortgage loan............................................................ 2,423 2,403 4,012
Shareholders' equity
Ordinary shares (70,000,000 authorized;
59,138,791 issued at December 31, 1997 and
at June 30, 1998).................................................... 1,478 1,478 2,468
Non-voting deferred shares (6 shares authorized and
issued at December 31, 1997 and June 30, 1998)......................... - - -
Additional paid-in-capital............................................... 134,466 134,466 224,491
Accumulated other comprehensive loss..................................... (204) (1,905) (3,181)
Accumulated deficit...................................................... (158,251) (191,708) (320,057)
-------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... (pound)556,357 (pound)757,305 $1,264,321
======== ======= =========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
</TABLE>
6
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NON-VOTING PAID-
ORDINARY SHARES DEFERRED SHARES IN-CAPITAL
--------------- --------------- ----------
(IN THOUSANDS EXCEPT SHARE DATA)
Number Number
------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998........ 59,138,791 (pound)1,478 6 -- (pound)134,466
Unrealized loss on securities..... -- -- -- -- --
Net loss.......................... -- -- -- -- --
----------- ------------ ------ ------ -------------
BALANCE AT JUNE 30, 1998.......... 59,138,791 (pound)1,478 6 -- (pound)134,466
=========== ============ ====== ====== =============
BALANCE AT APRIL 1, 1998.......... 59,138,791 (pound)1,478 6 -- (pound)134,466
Unrealized gain on securities..... -- -- -- -- --
Net loss.......................... -- -- -- -- --
----------- ------------ ------ ------ -------------
BALANCE AT JUNE 30, 1998.......... 59,138,791 (pound)1,478 6 -- (pound)134,466
=========== ============ ====== ====== =============
- ---------------
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT DEFICIT
------------- ----------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1998........ (pound) (204) (pound)(158,251) (pound)(22,511)
Unrealized loss on securities..... (1,701) -- (1,701)
Net loss.......................... -- (33,457) (33,457)
------------- ---------------- ---------------
BALANCE AT JUNE 30, 1998.......... (pound)(1,905) (pound)(191,708) (pound)(57,669)
============= ================ ===============
BALANCE AT APRIL 1, 1998.......... (pound)(2,245) (pound)(168,778) (pound)(35,079)
Unrealized gain on securities..... 340 -- 340
Net loss.......................... -- (22,930) (22,930)
------------- ---------------- ---------------
BALANCE AT JUNE 30, 1998.......... (pound)(1,905) (pound)(191,708) (pound)(57,669)
============= ================ ===============
- ---------------
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
</TABLE>
7
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998 1998
---------- ---------- ----------
(NOTE 1)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... (pound)(26,678) (pound)(33,457) $(55,857)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization................................... 13,015 19,676 32,849
Unrealized foreign exchange losses/(gains)...................... 5,242 (10,015) (16,720)
Loss on disposition of assets................................... 78 - -
Accretion of Senior Note discount............................... 25,057 31,064 51,862
Provision for losses on accounts receivable..................... 485 1,034 1,726
Amortization of deferred financing costs........................ 1,198 1,047 1,748
Change in operating assets and liabilities:
Change in trade receivables................................... (735) (2,282) (3,809)
Change in other assets........................................ (1,983) 19 32
Change in accounts payable.................................... 2,163 1,656 2,765
Change in other liabilities................................... (5,795) 8,596 14,350
-------- -------- --------
Net cash provided by operating activities......................... 12,047 17,338 28,946
-------- -------- --------
Cash flows from investing activities:
Cash invested in property and equipment......................... (51,741) (64,973) (108,472)
Proceeds from disposition of assets............................. 39 65 108
-------- -------- ---------
Net cash used in investing activities............................. (51,702) (64,908) (108,364)
-------- -------- ---------
Cash flows from financing activities:
Proceeds of issue of debt....................................... 153,692 202,381 337,875
Debt financing costs............................................ (5,246) (6,527) (10,897)
Repayment of mortgage loan...................................... (35) (21) (35)
Capital element of capital lease repayments..................... (732) (1,122) (1,873)
-------- -------- ---------
Net cash provided by financing activities......................... 147,679 194,711 325,070
-------- -------- ---------
Net increase in cash and cash equivalents......................... 108,024 147,141 245,652
Cash and cash equivalents at beginning of period.................. 18,311 75,680 126,348
Effect of exchange rate changes on cash and cash equivalents...... (746) (1,701) (2,840)
-------- -------- ---------
Cash and cash equivalents at end of period........................ (pound)125,589 (pound)221,120 $369,160
============= ============== ========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
</TABLE>
8
<PAGE>
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
Diamond Cable Communications Plc (the "Company") owns and operates
cable television and telecommunications systems through its subsidiaries. The
unaudited consolidated financial statements of the Company and its subsidiaries
(the "Group") have been prepared in accordance with U.S. generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The consolidated financial statements are stated in pounds sterling
((pound)). Merely for convenience the consolidated financial statements contain
translations of certain pound sterling amounts into U.S. dollars at $1.6695 per
(pound)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 on June 30, 1998.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The financial statements as of and for the periods ended June 30, 1998
and 1997 are unaudited. However, in the opinion of the management, such
statements include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the periods
presented. The results of operations for any interim period are not necessarily
indicative of the results for the full year. The interim financial statements
should be read in conjunction with the financial information included in the
Company's 1997 Annual Report on Form 10-K filed with the SEC.
3. COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997,
and is effective for accounting periods beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. Comprehensive loss for the six-month periods to June 30,
1997 and 1998 is shown below:
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
1997 1998 1998
--------------- -------------- ----------
(NOTE 1)
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss.......................................................... (pound)(26,678) (pound)(33,457) $(55,857)
Other comprehensive loss net of tax:-
Unrealized loss on securities................................... (746) (1,701) (2,840)
-------------- -------------- --------
Comprehensive loss............................................... (pound)(27,424) (pound)(35,158) $(58,697)
============== ============== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
LAND AND CABLE OFFICE MOTOR
BUILDINGS NETWORK EQUIPMENT VEHICLES TOTAL
------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
ACQUISITION COSTS
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998....... (pound)5,111 (pound)405,652 (pound)9,017 (pound)606 (pound)420,386
Additions........................ 639 66,369 810 258 68,076
Dispositions..................... - (116) - (196) (312)
----------- ------------- ----------- ---------- --------------
Balance at June 30, 1998......... 5,750 471,905 9,827 668 488,150
----------- ------------- ----------- ---------- --------------
ACCUMULATED DEPRECIATION
Balance at January 1, 1998....... 478 49,695 4,369 208 54,750
Charge for period................ 90 16,045 1,020 82 17,237
Dispositions..................... - (95) - (152) (247)
----------- ------------- ---------- ----------- --------------
Balance at June 30, 1998......... 568 65,645 5,389 138 71,740
----------- ------------- ---------- ----------- --------------
JUNE 30, 1998 NET BOOK VALUE..... 5,182 406,260 4,438 530 416,410
============ ============== ============ =========== ==============
DECEMBER 31, 1997 NET BOOK VALUE. (pound)4,633 (pound)355,957 (pound)4,648 (pound)398 (pound)365,636
============ ============== ============ =========== ==============
</TABLE>
The estimated useful life of set-top boxes and initial subscriber installations
was reduced from seven years to three years with effect from January 1, 1998.
The effect of the change in estimated useful life was to reduce net income for
the period by (pound)3.0 million ($5.0 million).
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of its existing licenses, and
under the milestone requirements of its local delivery licenses ("LDLs"), to
construct cable systems passing a predetermined number of premises. Should the
Company fail to achieve these milestones, without license modifications, the
Director General could commence
10
<PAGE>
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 Company is unable to comply, its licenses in
respect of which milestones have not been met could be revoked, which could have
a material adverse effect on the Company.
6. ISSUE OF 1998 NOTES
On February 6, 1998, Diamond Holdings plc ("Diamond Holdings"), a
subsidiary of the Company, issued (pound)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 (together, the "1998 Notes"). The
1998 Notes have been guaranteed by the Company as to principal, interest and
other amounts due. Net proceeds received by Diamond Holdings amounted to
approximately (pound)195 million after issuance costs of approximately (pound)7
million.
7. SHARE EXCHANGE AGREEMENT
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL, an alternative telecommunications company in the UK, the
common stock of which is quoted on NASDAQ (NTLi). Under the Share Exchange
Agreement, the Company's shareholders will receive one share of NTL common stock
for every four Ordinary Shares of the Company held subject to adjustment in the
event that the average NTL share price for a predetermined period before closing
of the transaction exceeds a specified price (which will be $52 per share until
October 16, 1998). Holders of the Company's deferred shares will receive one
share of NTL common stock for each deferred share held.
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals and, if necessary,
approval by NTL shareholders and the consent of holders of NTL's outstanding
debt. The transaction will not require the prior approval of the holders of the
Group's outstanding debt securities, but each of the indentures pursuant to
which the Group's debt securities were issued requires that offers to repurchase
such debt securities be made to holders of such securities subsequent to
closing. The parties expect the transaction to be completed in the autumn of
this year. Assuming consummation of the Share Exchange Agreement, the holders of
the Company's outstanding Discount Notes and the 1998 Notes issued by Diamond
Holdings will have the right to require the issuer thereof to repurchase such
securities at a price of 101% of their accreted value or principal amount. There
can be no assurance that the Company or Diamond Holdings will have funds
necessary to effect such repurchases.
11
<PAGE>
8. SUMMARIZED FINANCIAL INFORMATION
The following table presents summarized consolidated financial
information for Diamond Holdings plc ("Diamond Holdings") as of and for the six
months ended June 30, 1998. This summarized financial information is being
provided pursuant to Section G of Topic 1 of Staff Accounting Bulletin No.
53--"Financial Statement Requirements in Filings Involving the Guarantee of
Securities by a Parent". The 1998 Notes have been guaranteed by the Company as
to principal, interest and other amounts due. The Company will continue to
provide such summarized financial information for Diamond Holdings for as long
as the 1998 Notes remain outstanding and guaranteed by the Company.
<TABLE>
<CAPTION>
Diamond Holdings plc (note a)
----------------------------
17 days ended Six months ended
December 31, 1997 June 30, 1998
----------------- ----------------
(in thousands)
Summarized Consolidated Income Statement
Information
<S> <C> <C>
Revenue (pound)- (pound) 41,186
Operating costs and expenses - 50,494
Net loss for the period (pound)- (pound)(36,783)
================ ===============
December 31, 1997 June 30, 1998
----------------- -------------
(in thousands)
Summarized Consolidated Balance Sheet
Information
Fixed and noncurrent assets (pound)- (pound)507,066
Current assets 50 206,198
---------------- --------------
Total assets (pound)50 (pound)713,264
================ ==============
Current liabilities (pound)- (pound) 46,159
Noncurrent liabilities - 812,390
Shareholders interest/(deficit) 50 (145,285)
---------------- --------------
Total liabilities and shareholders interest (pound)50 (pound)713,264
================ ==============
<FN>
(a) Diamond Holdings was incorporated on December 15, 1997 and is a wholly-owned, direct subsidiary
of Diamond Cable Communications Plc. On January 16, 1998 Diamond Holdings became the
intermediate holding company which holds all of the shares of all Group companies (other than
Diamond National Networks Limited, currently a company with no operations, and (pound)2 called
up share capital). The Summarized Financial Information shows operating results as if Diamond
Holdings became the intermediate holding company on January 1, 1998.
</FN>
</TABLE>
12
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company expended net cash to fund investing activities of
approximately (pound)110.1 million and (pound)64.9 million in the year ended
December 31, 1997 and the first six months of 1998, respectively. The Company's
investing activities consisted almost exclusively of the ongoing construction of
the network ((pound)110.1 million in the year ended December 31, 1997 and
(pound)65.0 million in the first six months of 1998). Net cash provided by
financing activities in the year ended December 31, 1997 was approximately
(pound)146.6 million and (pound)194.7 million in the first six months of 1998.
The Company's net cash provided by operating activities was (pound)20.9 million
in the year ended December 31, 1997 and (pound)17.3 million in the six months to
June 30, 1998. The Group's cash and funding requirements historically have been
met principally through the issuance of 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,
issued the 1998 Notes, raising net proceeds of approximately (pound)195 million.
The 1998 Notes are guaranteed by the Company as to payment of principal,
interest and any other amounts due. 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 its 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 June
30, 1998. 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 annual
milestones in six of its seven LDL franchises at the end of 1997, although
construction had commenced in five of the seven LDL franchises. Following an
application by the Group to the ITC, on March 26, 1998 the ITC formally modified
the annual build milestone obligations in all of the Group's LDL franchise areas
except Vale of Belvoir with effect from December 30, 1997. The Group has met the
modified milestones in all of its LDL franchises as at December 31, 1997.
The Company expects that the Group's residential cable network will
extend approximately 14,300 kilometers (plus 920 kilometers to
13
<PAGE>
interconnect the residential build) and pass approximately 1.2 million homes
once completed. The network will be substantially completed by the end of 2001.
The Company currently estimates that the additional capital expenditures from
July 1, 1998 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 (pound)366 million, although further capital expenditures would be
required to substantially complete the network. These amounts could vary
significantly depending on such factors as the number of customers actually
connected to the network, the availability of construction resources and the
impact of competition from other cable operators or delivery mechanisms.
At June 30, 1998, the Group had constructed and activated a network
comprising approximately 62% of its aggregate milestones. The Group estimates
that existing cash resources and estimated 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 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
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
14
<PAGE>
or its exposure to foreign currency exchange rate fluctuations, each of which
factors would increase the Group's funding needs.
Assuming consummation of the Share Exchange Agreement, the holders of
the Company's outstanding Discount Notes and the 1998 Notes issued by Diamond
Holdings will have the right to require the issuer thereof to repurchase such
securities at a price of 101% of their accreted value or principal amount. There
can be no assurance that the Company or Diamond Holdings will have funds
necessary to effect such repurchases.
15
<PAGE>
SELECTED OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1996 and 1997 and at and for
the three-month period ended March 31, 1998 and the six-month period ended June
30, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30,
------------- ---------- ---------
1996 1997 1998 1998
------ ------ ----- ------
<S> <C> <C> <C> <C>
Homes passed by civils construction(1).......... 453,496 536,110 574,557 616,110
Homes activated(2).............................. 347,246 508,801 550,862 601,082
Homes marketed(3)............................... 252,601 405,787 456,438 504,049
Student services rooms marketed(4).............. - 1,805 4,583 7,086
BUSINESS TELECOMMUNICATIONS
Business customers accounts..................... 3,935 5,723 6,165 6,671
Business lines connected........................ 18,932 27,124 29,571 33,947
Private circuits(5)............................. 226 258 269 304
Average lines per business(6)................... 4.8 4.7 4.8 5.1
Average monthly revenue per line(7)(8)..........(pound)50.17 (pound)46.26 (pound)45.88 (pound)44.50
Pro-forma average monthly revenue per line(8)...(pound)51.25 (pound)46.26 (pound)45.88 (pound)44.50
RESIDENTIAL TELEPHONE(4)
Residential lines connected..................... 104,460 157,171 177,612 197,369
Penetration rate of homes marketed(9)........... 41.4% 38.6% 38.5% 38.6%
Average monthly revenue per line(8)(10).........(pound)18.40 (pound)18.75 (pound)18.77 (pound)18.77
Pro-forma average monthly revenue per line(8)...(pound)18.64 (pound)18.75 (pound)18.77 (pound)18.77
Churn(11)(12)................................... 20.6% 16.3% 12.6% 14.2%
CABLE TELEVISION
Basic service subscribers....................... 59,242 83,793 90,498 98,694
Penetration rate of homes marketed(13).......... 23.5% 20.6% 19.8% 19.6%
Average monthly revenue per subscriber(14)......(pound)18.03 (pound)19.84 (pound)19.95 (pound)19.88
Churn(11)(12)................................... 40.9% 32.7% 29.2% 26.3%
- --------------------
<FN>
(1) Homes passed by civils is the number of homes (excluding student services rooms) that have had
ducting buried outside.
(2) 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.
(3) 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.
(4) 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
recognized 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 recognized 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.
(5) Private circuits are point-to-point customer specific connections for which a fixed annual rental
charge is made.
(6) 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.
(7) 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 12 (for the years ended December 31, 1996 and 1997), by three (for the
three months ended March 31, 1998) or by six (for the six months ended June 30, 1998).
16
<PAGE>
(8) The calculation of the average monthly revenue per line (for both residential telephone and
business telecommunication revenues) for the year to December 31, 1996 reflects the reduction in
revenues stemming from rebates to BT on incoming termination revenues relating in part to 1995
but recorded in full against revenues in 1996. The rebates were calculated in accordance with
revised interconnect agreements with BT that were made effective retroactively from April 1995.
The pro-forma average monthly revenue per line (for both residential telephone and business
telecommunications revenues) gives effect to the revised interconnect agreements as if they had
been in effect from April 1995 and allocates to each period the portion of the rebates that
relates to such period.
(9) 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.
(10) The average monthly revenue per residential telephone line is calculated by dividing (i) line and
equipment rental, outgoing call charges and incoming call charges for the period by (ii) the
average number of residential telephone lines (calculated as a simple average of the number of
subscribed lines at the end of each month during the period) and dividing that amount by 12 (for
the years ended December 31, 1996 and 1997), by three (for the three months ended March 31, 1998)
or by six (for the six months ended June 30, 1998). 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.
(11) 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). Churn for the three months ended March 31, 1998 is annualized
by multiplying the amount as calculated above by four. Churn for the six months ended June 30,
1998 is annualized by multiplying the amount as calculated above by two.
(12) 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, those subscribers were not identified under the
Group's information system and were therefore included in the churn calculation as disconnected
accounts. If churn for 1997 and the quarter to March 31, 1998 were calculated on the basis used
in periods prior to 1997, annualized churn would have been 36.9% and 33.9% for cable television
and 21.3% and 17.8% for residential telephone, respectively. If churn for the six months to June
30, 1998 were calculated on the basis used in periods prior to 1997, annualized churn would have
been 31.2% for cable television and 19.8% for residential telephone. 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.
(13) 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.
(14) The average monthly revenue per cable television subscriber is calculated by dividing total cable
television subscriber revenues (excluding installation revenues) for the period by the average
number of cable television subscribers (calculated as a simple average of the number of basic
service subscribers at the end of each month during the period) and dividing that amount by 12
(for the years ended December 31, 1996 and 1997), by three (for the three months ended March 31,
1998) or by six (for the six months ended June 30, 1998).
</FN>
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30,
1997 AND 1998
The Group continued to experience increases in its subscribers,
revenues and expenses during the six-month period ended June 30, 1998. In
general, these increases were attributable to the Group's continued network
construction, activation and marketing of new homes and businesses. Homes passed
by civils construction increased by 80,000 homes (14.9%) and homes activated
increased by 92,281 (18.1%) from December 31, 1997 to June 30, 1998. The Group
met the required quarterly milestone obligations under each of its
telecommunications licenses as at June 30, 1998.
In order to improve the management and quality of the residential sales
force, commencing in February 1997, the Company began to develop its own
internal sales force through direct hiring of residential sales people. All of
these sales staff underwent a training process which the Group believes has
increased their long-term effectiveness but which hindered their productivity in
the short-term. Sales performance was affected by increased competitive activity
during 1997 and the first half of 1998, in particular from BT, Ionica, CWC and
BSkyB and at June 30, 1998, residential telephone line penetration remained
steady at 38.6%, the same rate as at December 31, 1997. Cable television
penetration at June 30, 1998 had fallen to 19.6% from 20.6% at December 31,
1997. Penetration rates for residential telephone and cable television were
39.2% and 20.3% respectively at June 30, 1997.
REVENUE
For the three months ended June 30, 1998, total revenues were
(pound)21.6 million, a 54% increase over total revenues of (pound)14.0 million
for the comparable period in 1997. For the six months ended June 30, 1998 total
revenues were (pound)41.2 million, a 52% increase over total revenues of
(pound)27.1 million for the comparable period in 1997. This growth is
attributable to increases in revenues in all three of the Group's primary lines
of business.
Business Telecommunications. Business telecommunications revenues were
(pound)4.7 million and (pound)9.0 million for the three and six-month periods
respectively ended June 30, 1998 compared to (pound)3.3 million and (pound)6.5
million respectively for the comparable periods in 1997, representing increases
of 39% and 38% respectively. The growth in reported revenues is due primarily to
an increase in the number of business lines installed from 23,073 at June 30,
1997 to 33,947 at June 30, 1998, an increase of 47%. The average monthly revenue
per line decreased from (pound)47.05 in the six months to June 30, 1997 to
(pound)44.50 in the comparable period in 1998. The decrease was due to a
combination of, (i) an increase in centrex lines which have a lower average
revenue per line than other business customer lines (centrex services
represented 42.2% and 48.4% of the total number of business lines at June 30,
1997 and June
18
<PAGE>
30, 1998 respectively) and (ii) reductions in certain tariffs in response to
price reductions by competitors, offset in part by increased call usage per line
and higher line rental charges which were increased in September 1997. The
Company may lower prices in the future if necessary for competitive reasons.
Residential Telephone. Residential telephone revenues were (pound)11.0
million and (pound)20.8 million in the three and six-month periods respectively
to June 30, 1998 compared to (pound)6.8 million and (pound)12.9 million
respectively for the comparable periods in 1997, representing increases of 63%
and 61% respectively. The growth in residential telephone revenue is due
primarily to an increase in the number of residential telephone lines from
122,953 at June 30, 1997 to 197,369 at June 30, 1998, representing an increase
of 61%. Average monthly revenue per line was (pound)18.78 and (pound)18.70 in
the three and six-month periods respectively to June 30, 1997 and (pound)18.76
and (pound)18.77 respectively in the comparable periods in 1998. The relatively
stable level of average revenues was largely due to increased call usage which
largely offset reductions in call and incoming termination tariffs during 1997
and the first six months of 1998. The churn rate (annualized) was 14.2% for the
first six months of 1998 as compared to 17.8% in the comparable period in 1997.
The relatively high churn in the first half of 1997 was attributable in part to
the application of a stricter disconnect policy relating to non-payment. The
churn rate was 15.7% in the three months to June 30, 1998 compared to 12.6% in
the three months to March 31, 1998. The increase in churn is largely
attributable to a higher level of subscribers moving out of the cabled area in
the second quarter of 1998 compared to the first quarter of 1998.
Cable Television. Cable television revenues increased from (pound)3.9
million and (pound)7.7 million in the three and six-month periods to June 30,
1997 respectively to (pound)5.9 million and (pound)11.4 million in the
comparable periods in 1998, representing increases of 52% and 48% respectively.
This growth in cable television revenue was primarily due to an increase in the
number of the Company's cable television subscribers which rose from 63,642 at
June 30, 1997 to 98,694 at June 30, 1998, an increase of 55%. The Company's
average monthly revenue per subscriber was relatively stable, being (pound)19.81
and (pound)19.88 for the three and six months to June 30, 1998 respectively,
compared to (pound)19.80 and (pound)20.07 for the comparable periods in 1997.
The Group's churn rates were 23.7% and 26.3% for the three and six
months respectively to June 30, 1998 as compared to churn rates of 37.8% and
42.2% in the comparable periods in 1997. The Group believes that the reduction
in churn this year 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 introduced other policies which contributed to the reducing trend in churn
between comparable quarters including improvements in the management and quality
of the
19
<PAGE>
sales force, the introduction of more program packaging choice for customers and
increased focus on the retention of customers.
OPERATING COSTS AND EXPENSES
Telephone expenses, consisting principally of interconnect charges
payable to BT, Mercury, Energis and Global One were (pound)2.9 million and
(pound)5.5 million in the three and six-month periods to June 30, 1997
respectively and (pound)4.2 million and (pound)7.9 million in the three and
six-month periods to June 30, 1998. As a percentage of combined business
telecommunications and residential telephone revenues, these direct costs
decreased from 29% and 28% in the three and six-month periods to June 30, 1997
respectively to 27% and 26% in the comparable periods in 1998 due primarily to
reduced interconnect tariffs paid to these operators.
Direct costs for cable television programming, which generally depend
on the number of subscribers and per-subscriber rates charged by programming
suppliers, increased from (pound)2.3 million and (pound)4.6 million in the three
and six-month periods to June 30, 1997 respectively to (pound)3.2 million and
(pound)6.2 million in the comparable periods in 1998. As a percentage of cable
television revenues, these direct costs decreased from 58% in the three-month
period ended June 30, 1997 to 54% in the comparable period in 1998 and from 59%
to 55% in the six-month periods to June 30, 1997 and 1998 respectively. The
decrease was in large part due to an increased proportion of subscribers on
higher margin basic and premium program packages in 1998 compared to the
comparable periods in 1997.
Selling, general and administrative expenses as a percentage of total
revenues in the three and six-month periods to June 30, 1997 were 46% compared
to 43% and 44% respectively in the comparable periods in 1998. These costs
increased by 44% and 43% respectively from the three and six-month periods to
June 30, 1997 to the comparable periods in 1998. The increase was due to higher
administration and sales force costs associated with the expansion of the
Company's business, together with LDL cash bid payments which commenced in 1998.
Depreciation and amortization expenses increased by 56% from the
three-month period to June 30, 1997 to the comparable period in 1998 and by 51%
from the six-month period to June 30, 1997 to the comparable period in 1998.
This increase was attributable to a combination of the increasing size of the
Company's network and the additional depreciation resulting from a change in the
estimated useful lives of set-top boxes and initial subscriber installations. In
anticipation of changes in technology, the estimated useful lives of set-top
boxes and initial subscriber installations was reduced from seven years to three
years with effect from January 1, 1998. The effect of the change in estimated
useful life on the depreciation charge for the three and six-month periods to
June 30, 1998 was an increase of (pound)1.6 million and (pound)3.0 million
respectively.
20
<PAGE>
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/EXPENSE
Interest expense was (pound)21.5 million and (pound)40.4 million in the
three and six-month periods ended June 30, 1998 respectively compared to
(pound)15.0 million and (pound)27.2 million in the comparable periods in 1997.
The increase is due primarily to the accretion on the Discount Notes of
(pound)15.9 million and (pound)31.1 million in the three and six-month periods
to June 30, 1998 (compared to (pound)13.8 million and (pound)25.0 million
respectively in the comparable periods in 1997) and (pound)4.9 million and
(pound)7.9 million respectively accrued interest on the 1998 Notes. In addition,
amortization of debt financing costs was (pound)0.6 million and other interest
expense was (pound)0.1 million in the three months to June 30, 1998, compared to
(pound)0.7 million and (pound)0.5 million respectively in the three months to
June 30, 1997. Amortization of debt financing costs was (pound)1.0 million and
other interest expense was (pound)0.4 million in the six months to June 30,
1998, compared to (pound)1.2 million and (pound)1.0 million respectively in the
six months to June 30, 1997. Interest received was (pound)3.9 million in the
three months to June 30, 1998 compared to (pound)2.0 million in the three months
to June 30, 1997. Interest received was (pound)6.9 million in the six months to
June 30, 1998 compared to (pound)3.0 million in the six months to June 30, 1997
and the increase was primarily due to temporary investment of the proceeds of
the 1998 Notes.
FOREIGN EXCHANGE
A substantial portion of the Group's existing debt obligations are
denominated in U.S. dollars, while the Group's revenues and accounts are
generated and stated in pounds sterling. Foreign currency translation gains and
losses, except for unrealized gains and losses on available-for-sale securities,
are reported as part of the profit or loss of the Group. In the three months
ended June 30, 1997, the Group recognized a net foreign exchange gain of
(pound)6.3 million primarily due to the unrealized gain on translation of its
liability on the Discount Notes. In the six months ended June 30, 1997 the group
recognized a net foreign exchange loss of (pound)5.7 million primarily due to
the unrealized loss on translation of its liability on the Discount Notes.
Because of changes in prevailing rates, during the three months ended June 30,
1998, the Group recorded a net foreign exchange loss of (pound)2.3 million and
during the six months ended June 30, 1998 the Group recorded a net foreign
exchange gain of (pound)10.2 million primarily due to the unrealized losses and
gains on translation of its liability on the Discount Notes and 1998 Notes.
21
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
Realized gains on derivative financial instruments of (pound)2.3
million in the three months to June 30, 1998 and (pound)0.4 million in the six
months to June 30, 1998 consist primarily of the settlement on the two (pound)50
million foreign exchange forward contracts referred to below which were closed
on June 17, 1998.
The Company entered into a foreign exchange forward contract on
November 1, 1996 for settlement on May 6, 1997 to sell (pound)200 million at a
rate of $1.6289 to (pound)1. On January 31, 1997 an offsetting agreement was
entered into at a rate of $1.6014 to (pound)1. The offsetting contracts were
settled on February 6, 1997 with a payment of approximately (pound)3.4 million
to the Company. Because of changes in prevailing rates, the Company recorded for
the year ended December 31, 1996, an unrealized loss of approximately (pound)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 Discount Notes issued in 1994 and 1995 during the same
period. During the first quarter of 1997, the Company recorded a gain of
approximately (pound)11.5 million on the two offsetting forward contracts,
reflecting the reversal of an (pound)8.1 million loss referred to above and the
approximately (pound)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 Discount
Notes. The Company entered into a foreign exchange forward contract on June 23,
1997 for settlement on June 25, 1998 to sell (pound)50 million at a rate of
$1.6505 to (pound)1. The Company also entered into a foreign exchange forward
contract on June 27, 1997 for settlement on July 1, 1998 to sell (pound)50
million at a rate of $1.6515 to (pound)1. On June 16, 1998 two offsetting
agreements were entered into at rates of $1.6326 and $1.6322 to (pound)1. The
offsetting contracts were settled on June 17, 1998 with a payment of (pound)1.1
million to the Company. Because of changes in prevailing rates, the Company
recorded for the year ended December 31, 1997 an unrealized gain of
approximately (pound)0.7 million on the two (pound)50 million sell forward
contracts. During the first half of 1998 the Company recorded a realized gain of
approximately (pound)0.4 million on the settlement of the offsetting contracts
reflecting the cash payment on settlement of the contracts in excess of the gain
recognized during 1997. 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 Company's operations and financial condition. Therefore,
changes in currency exchange rates may continue to have a material effect on the
results of operations of the Group and may materially affect the Company's
ability to satisfy its obligations, including obligations under outstanding debt
instruments, as they become due.
22
<PAGE>
NET LOSS
As a result of the foregoing factors, Diamond had net losses of
(pound)22.9 million in the three-month period ended June 30, 1998, compared to
net losses of (pound)10.8 million in the comparable period of 1997, and a loss
of (pound)33.5 million for the six-month period ended June 30, 1998 compared to
a loss of (pound)26.7 million in the comparable period in 1997.
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 have not been and are 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.
RECENT DEVELOPMENTS
On April 23, 1998 the Department of Trade and Industry announced the
U.K. government's intention to progressively end the policy of granting only one
cable television license for a franchise area. Any operator can now seek a
licence to compete in the provision of broadcast entertainment in those areas
outside current cable franchises. From January 1, 2001 competition within
current cable franchises will also be permitted.
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL, an alternative telecommunications company in the UK, the
common stock of which is quoted on NASDAQ (NTLi). Under the Share Exchange
Agreement, the Company's shareholders will receive one share of NTL common stock
for every four Ordinary Shares of the Company held subject to adjustment in the
event that the average NTL share price for a predetermined period before closing
of the transaction exceeds a specified price (which will be $52 per share until
October 16, 1998). Holders of the Company's deferred shares will receive one
share of NTL common stock for each deferred share held.
23
<PAGE>
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals and, if necessary,
approval by NTL shareholders and the consent of holders of NTL's outstanding
debt. The transaction will not require the prior approval of the holders of the
Group's outstanding debt securities, but each of the indentures pursuant to
which the Group's debt securities were issued requires that offers to repurchase
such debt securities be made to holders of such securities subsequent to
closing. The parties expect the transaction to be completed in the autumn of
this year. Assuming consummation of the Share Exchange Agreement, the holders of
the Company's outstanding Discount Notes and the 1998 Notes issued by Diamond
Holdings will have the right to require the issuer thereof to repurchase such
securities at a price of 101% of their accreted value or principal amount. There
can be no assurance that the Company or Diamond Holdings will have funds
necessary to effect such repurchases.
24
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
None.
(b) Reports on Form 8-K -
The Company filed on June 17, 1998 a report on Form 8-K incorporating a
press release announcing the signing of the Share Exchange Agreement with NTL
Incorporated.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND CABLE COMMUNICATIONS PLC
Date: August 13, 1998 By: /s/ Robert T. Goad
-----------------------------
Robert Goad
(Chief Executive Officer)
Date: August 13, 1998 By: /s/ Nicholas Millard
-----------------------------
Nicholas Millard
(Chief Financial Officer)
Date: August 13, 1998 By: /s/ Duncan Craig
------------------------------
Duncan Craig
(Chief Accounting Officer)
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC
FORM 10-Q DATED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000929649
<NAME> DIAMOND CABLE COMMUNICATIONS Plc
<MULTIPLIER> 1,000
<CURRENCY> L
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.6695
<CASH> 221,120
<SECURITIES> 0
<RECEIVABLES> 13,639
<ALLOWANCES> 3,822
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 488,150
<DEPRECIATION> 71,740
<TOTAL-ASSETS> 757,305
<CURRENT-LIABILITIES> 0
<BONDS> 758,291
0
0
<COMMON> 1,478
<OTHER-SE> (59,147)
<TOTAL-LIABILITY-AND-EQUITY> 757,305
<SALES> 0
<TOTAL-REVENUES> 41,186
<CGS> 0
<TOTAL-COSTS> 51,686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,034
<INTEREST-EXPENSE> 40,415
<INCOME-PRETAX> (33,457)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,457)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
