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, 1998 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
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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]
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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 the
group of companies operating in the telecommunications and cable television
sector 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" or "Diamond" refer to the Company and its
subsidiaries.
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, 1998, the Group's cable television and
telecommunications network had passed by civils construction approximately
699,700 homes and an estimated 30,100 businesses, of which portions of the
network passing approximately 677,400 homes and an estimated 30,100 businesses
had been activated. As of that date, the Group also had approximately 232,100
residential telephone lines, 117,300 cable television customers and 37,500
business telephone lines. Through that date, (pound)567 million had been
invested (at original cost) in the construction of the network and related
systems. For certain operating data as of December 31, 1998, see Item 1.
"Business -- Certain Operating Data".
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 had
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). On
March 8, 1999, the share exchange (the "Share Exchange") contemplated by the
Share Exchange Agreement, dated as of June 16, 1998, as amended (the "Share
Exchange Agreement"), among NTL and the shareholders of the Company, was
consummated. Pursuant to the Share Exchange Agreement, on March 8, 1999, all of
the issued and outstanding ordinary shares, par value 2.5p per share (the
"Ordinary Shares") of the Company and all of the issued and outstanding deferred
shares, par value 25p per share (the "Deferred Shares," and together with the
Ordinary Shares, the "Company Shares") of the Company were exchanged for shares
of NTL's common stock, par value $.01 per share (the "NTL Common Stock"). As a
result of the Share Exchange, the Company became a wholly-owned subsidiary of
NTL.
In connection with provisions in each of the indentures pursuant to
which the Group's debt securities were issued, which require that offers to
repurchase such debt securities be made to holders of such securities at a price
of 101% of their accreted value or principal amount following a "change of
control", the Company will commence offers to repurchase its outstanding debt
securities. It is expected that these offers will be launched on or about April
1, 1999 and will expire on or about April 30, 1999.
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.
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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, and changes in the
Group's strategy in connection with the Share Exchange.
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. References herein to,
"(pound)", "pounds sterling", "pence" or "p" are to the lawful currency of the
United Kingdom and references to "U.S. dollars", "dollars", "$" or "(cent)" 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
$1.6628 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 December 31, 1998. See Item
6. "Selected Financial Data -- Exchange Rates" for information regarding the
Noon Buying Rate for the past five fiscal years. On March 29, 1999 the Noon
Buying Rate was $1.6140 per (pound)1.00.
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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 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, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Homes passed by civils construction(1)........... 453,496 536,110 699,682
Homes activated(2)............................... 347,246 508,801 677,407
Homes marketed(3)................................ 252,601 405,787 584,457
Student service rooms marketed (4)............... - 1,805 9,908
BUSINESS TELECOMMUNICATIONS
Business customers accounts...................... 3,935 5,723 7,649
Business lines connected......................... 18,932 27,124 37,473
Private circuits(5).............................. 226 258 331
Average lines per business account(6)............ 4.8 4.7 4.9
Average monthly revenue per line(7)(8)........... (pound)50.17 (pound)46.26 (pound)43.07
Pro-forma average monthly revenue
per line(8).................................... (pound)51.32 (pound)46.26 (pound)43.26
RESIDENTIAL TELEPHONE(4)
Residential lines connected...................... 104,460 157,171 232,059
Penetration rate of homes marketed(9)............ 41.4% 38.6% 39.0%
Average monthly revenue per
line(8)(10).................................... (pound)18.40 (pound)18.75 (pound)18.82
Pro-forma average monthly revenue
per line(8).................................... (pound)18.66 (pound)18.75 (pound)18.89
Churn(11)(12).................................... 20.6% 16.3% 13.5%
CABLE TELEVISION
Basic service subscribers........................ 59,242 83,793 117,290
Penetration rate of homes marketed(13)........... 23.5% 20.6% 20.1%
Average monthly revenue per
subscriber(14)................................. (pound)18.03 (pound)19.84 (pound)19.46
Churn(11)(12).................................... 40.9% 32.7% 22.4%
</TABLE>
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(1) Homes passed by civils construction 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 twelve.
(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 twelve. Call revenue from student services
lines is recognized in the month in which it is earned and is
incorporated in
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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). The calculation of churn excludes
student services lines.
(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, 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 years ended
December 31, 1997 and 1998 were 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, in 1997 and
19.6% and 27.6%, respectively, in 1998. 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 twelve.
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. In addition, the Group intends to interconnect its network
with NTL's network. 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 7,649 business telecommunications
customer accounts at December 31, 1998, including connections to a number of
important corporate and governmental entities such as The Boots Company, Capital
One, Prudential Banking plc (trading as Egg), 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
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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 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,
1998, the Group provided 37,473 business lines to its 7,649 business accounts
giving the Group an average of approximately 4.9 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:
o Custom Calling Features. The Group offers business customers three-way
conference calling and fully itemized and analyzed monthly billing at no
extra fee. At an extra charge, the Group provides services similar to
those offered to residential customers including call waiting, call
barring, call forward and alarm calls. Additionally, billing data on high
density 3.5" floppy disks and CD ROM is made available to customers.
o Centrex. Centrex allows the customer to use the facilities of the Group's
central exchange instead of purchasing its own 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.
o DDI (Direct Dialing Inward). Direct Dialing Inward offers multiple unique
numbers at a customer's premises via a smaller number of access lines.
o 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.
o 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.
o 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.
o Calling Cards. The Group currently offers pre-paid disposable 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, Leicester
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University and the University of Lincolnshire and Humberside, where the
Group has installed private telephones in 8,162 student rooms.
o Voicemail Services. The Group offers both residential voicemail and
business voicemail services.
o Internet Service. The Group offers four alternative forms of connection
(analog dial-up, 64 Kbit/s ISDN, 64 Kbit/s or 2 Mbit/s fixed and frame
relay) 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.
o 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.
o Closed Circuit Television. The Group supplies leased private circuits to
local authorities to support the provision of closed circuit television
services in the region.
o 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.
o Number Translation Services. In 1998, the Group purchased a Nortel
intelligent network platform, which has enabled the Group to offer
toll-free, local call rate and national call rate numbers to business
customers. During 1999, the Group intends to introduce non-geographic
number portability, which will enable customers to port such numbers to
the Group from other public telecommunications operators ("PTOs").
The intelligent network platform will also enable the Group to introduce
other value added services, including personal numbering, premium rate
numbers, enhanced number portability and enhanced prepaid calling card
facilities.
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").
Other new services which the Group plans to introduce in 1999 include Data
Collect and Route, a call logging service which will enable the Group to provide
customers with on-line data about their incoming and outgoing centrex calls, and
Auto Attendant, a call center service which will enable a customer's incoming
callers to use their touch-tone phone to navigate through recorded alternatives
to reach the correct extension without the need for an operator.
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
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opportunity to use its telephone service for their outgoing telephone calls,
which carry higher revenues than incoming calls, and for their specialized
telecommunications needs, while retaining their existing service provider (and
their existing telephone number) for incoming telephone calls. In conjunction
with the introduction of number translation services, the Group intends to
introduce non-geographic number portability during 1999, which will enable
customers to port their existing toll-free, local call rate and national call
rate numbers to the Group. 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 39% of homes
marketed at December 31, 1998. 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, 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.
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CABLE TELEVISION
PROGRAMMING
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 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, Front Row Television Limited ("Front Row"), a four-channel movie
pay-per-view service which also offers music and sporting events.
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 offered by the
Group at February 28, 1999.
PROGRAMMING DESCRIPTION
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NEWS AND INFORMATION
CNN International 24-hour international news service
BBC Parliament Live coverage of the U.K. Parliament
Bloomberg TV Business news
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
Sky News (1) 24-hour news services
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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
QVC-- The Shopping Channel Home shopping
Sky One(1) Drama, films and serials
Discovery Science and education programming
Challenge TV 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
God 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 Breeze Health, shopping and gardening programming
National Geographic Channel Nature and wildlife programming
Living Female oriented programming
- --------------------------------------------------------------------------------
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PROGRAMMING DESCRIPTION
- ----------- -----------
MOVIES
TNT Classic movies
Sky Premier (1)(2) 24-hour feature movies
Sky Moviemax (1)(2) 24-hour feature movies
Sky Cinema (1)(2) Classic movies
Film Four (2) Independent movies
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 - the Arts Channel 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
- -------------
(1) Programming acquired from BSkyB and, except in the case of Sky News,
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 50 channels, including channels reserved for the Group's
pay-per-view 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.
Currently, the Group offers seven basic packages, ranging in price from
(pound)8.99 to (pound)20.98 per month (including (pound)1 direct debit
discount). These packages currently include between seven and thirty-seven basic
cable channels. The price of three of the Group's packages also includes rental
of one residential telephone line. These packages are priced between (pound)8.99
and (pound)12.99 per month (including (pound)1 direct debit discount). One of
the Group's packages, available in all areas except Grimsby, is aimed at the
Asian community. Customers choosing any of the Group's packages may add premium
channels and other a la carte channels for an additional charge, and all
television customers have access to the Front Row pay-per-view service. The
price of premium channels varies depending on the basic package selected. All of
the basic packages
-11-
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include one set top converter that provides service to one television.
Additional set top converters may be rented at (pound)2.50 per month.
As part of its efforts to reduce churn, the Group has instituted a
(pound)9.95 installation charge for cable television and a (pound)14.95
installation charge for cable television and telephone. 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, 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
enables customers to order specific feature films on a per viewing basis for an
additional charge of (pound)2.99 per viewing. Films are 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. Front Row has also screened music and sporting events.
BSKYB PROGRAMMING
British Sky Broadcasting Group plc and its wholly-owned subsidiary
British Sky Broadcasting Limited (collectively, "BSkyB") currently provide the
Group with nine 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. In 1998, the
Group reduced the number of BSkyB channels it offers from eleven to nine. 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. With the exception of Sky News, the Group acquires all of
BSkyB's channels under the terms of BSkyB's industry rate card. BSkyB has
flexibility under its rate card to adjust, on 60 days' notice, the prices it
charges for those channels it provides to the Group under the rate card. In
addition, BSkyB distributes thirty-six other programs (some of which share a
channel) on behalf of other providers (including some providers partly owned by
BSkyB). BSkyB also supplies programming to ONdigital ("ONdigital"), a joint
venture owned by Carlton Communications and Granada Group.
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, 1998 was (pound)7.5 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. As a result, the Disney Channel
is now available as a separate premium channel. The ITC has, however, carried
out a broader investigation into effects of bundling in the pay television
market. In April 1998, the ITC published proposals for remedying
anti-competitive practices in the way pay-TV channels are supplied. The
solutions proposed by the ITC included:
- the prohibition of minimum carriage requirements and those tiering
obligations that prevent operators from offering basic channels either a
la carte or in small packages.
- permitting buy-through to premium channels from any basic package.
-12-
<PAGE>
- the prohibition of bundling more than one premium channel (excluding bonus
channels) except where the channels are also available a la carte.
In June 1998, the ITC issued a formal direction to all licensees
including the Group prohibiting the inclusion of minimum carriage requirements
in all new programming agreements entered into from July 1, 1998. Minimum
carriage requirements effectively require the Group to transmit a channel to a
minimum number or percentage of customers and reduce the Group's flexibility in
adapting programming packages. The prohibition also applies to existing
agreements from July 1, 1998 for digital reception and from January 1, 2000 for
analog reception. The ITC allowed exceptions from the prohibition on minimum
carriage requirements for the first 12 months of carriage of any new channel and
has since also made exceptions for Live TV and Performance which are both
cable-exclusive channels, and for certain new BBC channels. Certain program
suppliers unsuccessfully challenged the ITC's direction.
The ITC's direction also required that from September 1, 1998, the
Group make available access to premium channels from any basic tier of
programming and to make all premium channels available to customers on an a la
carte basis. The Group has implemented changes to its retail offering to reflect
this. Management anticipates that the Group will have the opportunity to
negotiate future programming agreements which allow for greater packaging
flexibility and customer choice.
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 1998, BSkyB asked the OFT to remove its basic channels from the
rate card, thereby enabling individual cable operators to negotiate alternative
pricing for carriage. Due to its market strength, the cable industry opposed the
removal of Sky One from the rate card. With effect from October 1, 1998, the OFT
agreed to removal of all basic channels except Sky One from the rate card.
However, delays in agreeing necessary consequential amendments required to
BSkyB's 1996 informal undertakings to the OFT have caused BSkyB to continue to
supply basic channels pursuant to rate card prices. The Group has been
successful in negotiating a small reduction in the fees it pays BSkyB for Sky
News, the only BSkyB basic channel carried by the Group other than Sky One, on a
short-term basis.
During 1998, BSkyB submitted a new draft rate card to the OFT. The new
draft rate card, which was to have been effective as of January 1, 1999, deleted
references to its basic channels other than Sky One and simplified the pricing
structure of its premium channels. Additionally, for the first time, it
purported to cover digital as well as analog transmission. However, BSkyB
subsequently withdrew this rate card without explanation and the Group, like
other cable operators, awaits submission by BSkyB of a new draft. As a result,
BSkyB continues to supply programming pursuant to its previous 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 offered to cable operators; and to
revise the structure of the cable rate card.
-13-
<PAGE>
Although the DGFT previously announced that the informal undertakings
given by BSkyB would be reviewed by the end of 1998, this review has not yet
been undertaken. 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.
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 matter is currently before the Court.
On September 9, 1998, BSkyB announced an agreed offer to acquire the
whole of the issued share capital of Manchester United PLC, a Premier League
football club. The Monopolies and Mergers Commission is currently considering
whether this proposed acquisition could significantly impact anticompetitive
concerns. On December 17, 1998, Premium TV, a wholly-owned subsidiary of NTL,
acquired 9,000,000 shares or 6.3% of Newcastle United from CHD, the majority
shareholder of Newcastle United, for approximately (pound)10 million in cash. In
conjunction with the sale of such shares, CHD also entered into an irrevocable
commitment to Premium TV providing that if Premium TV makes a general offer for
all of the issued share of capital of Newcastle United, CHD will accept such
offer in respect of the remaining balance of its shares in Newcastle United.
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.
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.
In connection with the Share Exchange, NTL intends to introduce over a
period of time its current and future products and services to the Group's
customers. NTL is developing a timetable by which this is intended to be
achieved from late 1999 through 2000. Any introduction of new services will be
done to ensure that there is little or no disruption to the Group's operations
or customers, and that any services offered would be additional to or
complementary with its existing services.
-14-
<PAGE>
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, 1998,
the Group employed approximately 120 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, and 12 telesales
representatives.
The Group believes that improvements in the quality of its sales force
have contributed to a 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 percentages of both homes passed by civils
construction but not activated and homes activated but not yet released to
marketing. At December 31, 1997, these percentages were respectively 5% and 20%,
having fallen from 23% and 27%, respectively, at December 31, 1996. During 1998,
the pace of both construction and marketing was greatly accelerated. At December
31, 1998, 3.2% of homes passed by civils construction had not been activated and
13.7% of homes activated had not been released to marketing. In 1999, the Group
intends to slow down civils construction to enable activated homes to be
marketed, and to remarket in marketed areas to increase penetration.
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 have entered the marketplace. The U.K. telecommunications
industry is highly competitive. The Office of Telecommunications ("OFTEL") has
pursued a policy of encouraging competition, and over 200 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 permits 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.
-15-
<PAGE>
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 recently began providing services to business customers in Derby,
which is adjacent to the Group's franchise areas, and continues to evaluate
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, MCIWorldCom, 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. In conjunction
with the introduction of number translation services, the Group intends to
introduce non-geographic number portability during 1999, which will enable
customers to port their existing toll-free, local call rate and national call
rate numbers to the Group. For a discussion of certain regulatory developments
regarding the introduction of number portability in the U.K. See " -- Certain
Regulatory Matters -- Cable Telecommunications -- Number Portability". The 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
-16-
<PAGE>
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
provides 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.
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 and CWC, the Group competes with international
service providers and mobile telecommunications operators, including Vodafone,
Cellnet, One2One and Orange, and other service providers, and competition is
expected to intensify in the future.
CABLE TELEVISION
Historically, the ITC did not grant more than one cable television
license within a franchise area. As a result, the Group previously did not
compete with other cable operators for cable television customers within its
franchise areas. On April 23, 1998, the Department of Trade and Industry
announced the U.K. government's intention to progressively end this policy,
allowing any operator to seek a license 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.
Additionally, the Group competes directly with television programming provided
by analog and digital terrestrial (over-the-air) broadcast television stations
and analog and digital 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). The Group has also begun to compete with providers of digital
terrestrial television and digital DTH satellite services and may in the future
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. has been
estimated to average over 230 minutes per person (Source: BARB). Until 1989,
four broadcast channels were the only source of television programming. An
additional commercial terrestrial channel (Channel 5) commenced broadcasting
March 30, 1997. 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).
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 analog 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 was given responsibility for
the licensing and regulation of digital terrestrial television, which provides
an additional 30 or more new terrestrial channels serving between 60% and 90% of
the U.K. population. Forty percent of the channels were set aside for digital
broadcasting by the existing terrestrial broadcasters. The ITC granted a license
for three other frequency ranges to British Digital Broadcasting Limited, which
trades as ONdigital. BSkyB has undertaken to the ITC to supply programming to
BDB for 5 years. ONdigital launched its service in November 1998. Digital
terrestrial television broadcasts from land-based transmitters and can be
received by consumers with conventional aerials. A digital decoder box or a
digital television which has ONdigital's encryption technology
-17-
<PAGE>
embedded in it is needed to view the new channels, which have digital picture
and sound quality. BSkyB has also formed 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.
DTH Satellite. DTH satellite television service providers obtain
programming from a variety of sources (including some of those used by the
Group) and transmit the programming signal up to a satellite which then
retransmits the signal down to customers. In order to receive a satellite
service, the customer must have an outdoor reception dish.
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 4.5 million at September 30, 1998. 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 analog
and digital 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 introduced a digital DTH satellite service
offering the possibility of over 200 television channels and a range of
interactive services in October 1998. BSkyB's digital service includes expanded
numbers of movie and sports channels, an expanded number of pay-per-view
channels and a number of new channels, together with an electronic program
guide. ONdigital launched its digital terrestrial service in the U.K. in
November 1998. The digital terrestrial service requires a set top box to decode
encrypted digital terrestrial signals or a digital television with ONdigital's
encryption technology embedded in it. The initial service offered by ONdigital
includes a choice of 12 basic channels (6 of which the Group offers) in addition
to the free-to-air digital terrestrial channels and a range of 6 premium
channels (all of which the Group offers) including certain of BSkyB's sports and
movie channels. 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 an analog pay-per-view movie
service, broadcast on four of its DTH satellite channels, which competes with
Front Row, the Group's pay-per-view service. This service also includes sport
and music events, some of which the Group offers to its customers.
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
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<PAGE>
U.K. (although BT and others are now conducting commercial 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 digital terrestrial and DTH satellite competitors, to increase
significantly the number of channels they are currently able to offer to their
customers. An increase in the number of channels offered by terrestrial and DTH
satellite services at competitive costs could affect the Group's current
competitive position.
FRANCHISE AREAS
The Group has been granted cable television licenses to provide cable
television services in fifteen franchise areas that form a contiguous cluster of
approximately 1,229,900 equity homes. The Group has been granted eight
individual franchise telecommunications licenses and a national
telecommunications license which enables 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).
EQUITY
OWNERSHIP HOMES
------------ --------
TELECOMMUNICATIONS LICENSES
Nottingham....................................... 100% 270,000
Mansfield........................................ 100% 85,000
Newark-on-Trent.................................. 100% 42,000
Grantham......................................... 100% 22,000
Melton Mowbray................................... 100% 19,000
Lincoln.......................................... 100% 52,000
Grimsby and Cleethorpes.......................... 100% 64,000
Leicester and Loughborough....................... 100% 203,000
LDLS(1)
Burton-upon-Trent................................ 100% 94,000
Hinckley......................................... 100% 45,000
Ravenshead....................................... 100% 2,900
Bassetlaw........................................ 100% 41,000
Lincolnshire and South Humberside................ 100% 174,000
Chesterfield..................................... 100% 107,000
Vale of Belvoir.................................. 100% 9,000
---------
Total........................................ 1,229,900
=========
- -------------------
(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
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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".
The Group may from time to time seek to acquire one or more new or
existing franchises either from 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 to interested applicants 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 Group estimated that the additional capital costs to complete the
network for the additional franchise areas would 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, 1998, approximately 729,800 of the premises in the
Group's franchise areas had been passed by civils construction and a portion of
the network passing approximately 707,500 premises had been activated. The
number of premises activated represents approximately 69% of the Group's
aggregate milestone requirements. Construction has now commenced in all of the
Group's franchise areas. While the projected rate of construction is governed
principally by the applicable regulatory milestones, the pace of construction is
also influenced by the capacity of the Group to market and connect the Group's
services to premises which have been activated. See "-- Sales and Marketing".
The Group has undertaken a rapid acceleration in the build out of its
existing franchise areas. As of December 31, 1998, the Group's cable television
and telecommunications network had passed by civils construction approximately
699,700 homes and an estimated 30,100 businesses, of which portions of the
network passing approximately 677,400 homes and an estimated 30,100 businesses
had been activated. During 1998, approximately 164,000 homes were passed by
civils construction by the Group's cable network, as compared with approximately
82,000 and 172,000 homes passed by civils construction in 1997 and 1996,
respectively. 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
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<PAGE>
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 originally relied on its own construction team for the build
out of its network. In 1998, the Group phased out the small in-house
construction team previously maintained to build out particularly difficult
areas, and the Group now uses outside contractors for all of the build out of
its network.
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, 1998, the Group met the required milestone obligations under each
of its telecommunications licenses. The Group has completed all of the milestone
obligations in its telecommunications licenses with the exception of the
Leicester and Loughborough franchise, where the final milestone falls due in
1999.
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
LDL milestones in six of the seven LDL franchises at the end of 1997, although
construction has now commenced in all LDL franchises. Following an application
by the Group to the ITC, the ITC modified the annual build milestone obligations
in all of the Group's LDL franchise areas except Vale of Belvoir. The Group has
met the modified milestone obligations in all of its LDL franchises as at
December 31, 1998, except in relation to its Ravenshead franchise. See " --
Certain Regulatory Matters -- Cable Telecommunications -- Network Construction
and Service Obligations".
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<PAGE>
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)(3)
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)(3)
Ravenshead................ -- 2,050 2,500 2,500 2,500 2,500
Bassetlaw................. -- 1,000 -- 19,000 28,000 32,800
Lincolnshire and South
Humberside................ -- -- 3,000 33,000 70,000 144,000
Chesterfield.............. -- -- -- 23,000 57,000 89,000
Vale of Belvoir........... -- 1,000 2,000 3,000 4,545 4,545
Burton-upon-Trent......... -- 2,000 14,000 36,000 58,000 77,675
Hinckley.................. -- 2,000 16,000 23,000 31,204 31,204
------- ------- ------- ------- ------- ---------
Aggregate Cumulative Totals 340,500 501,550 626,000 779,670 891,419 1,021,894
======= ======= ======= ======= ======= =========
Aggregate Annual Totals 161,050 124,450 153,670 111,749
<FN>
(1) Although reflected above on an annual basis, the group's individual
franchise telecommunications license milestones are measured on a
quarterly basiS.
(2) Final milestones are shown in bold.
(3) Telecommunications license milestones refer to premises and LDL
milestones refer to homes.
</FN>
</TABLE>
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,
1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nottingham................ 182,254 194,370 203,542 230,352 240,947 246,211
Mansfield................. 61,632 69,707 78,530 79,775 80,963 81,926
Newark-on-Trent........... 13,509 13,509 13,949 15,605 20,449 20,584
Grantham.................. 15,719 15,719 15,936 16,089 16,562 16,717
Melton Mowbray............ 10,045 10,045 10,099 10,163 10,351 10,404
Lincoln................... 34,997 44,619 49,905 50,043 53,043 54,966
Grimsby and Cleethorpes... 49,912 58,894 63,578 64,343 64,804 65,288
Leicester and Loughborough 107,008 118,721 126,563 138,330 151,062 165,452
Vale of Belvoir........... -- 1,652 2,598 2,598 2,657 2,717
Burton-upon-Trent......... -- 2,422 4,704 8,433 12,668 16,927
Hinckley.................. -- 2,012 4,361 9,530 15,144 19,715
Ravenshead................ -- 2,050 2,050 2,050 2,485 2,485
Lincolnshire and South
Humberside................ -- -- 1,348 1,348 2,568 4,077
------- ------- ------- ------- ------- -------
CUMULATIVE TOTAL...... 475,076 533,720 577,163 628,659 673,703 707,469
======= ======= ======= ======= ======= =======
</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. Although there can be no
assurance that OFTEL or the ITC will not take enforcement action in the future,
the Group considers such action unlikely, particularly in light of the
government's new policy of removing the exclusivity of existing cable television
franchises from January 1, 2001, or earlier if the current license holder
requests
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<PAGE>
that its exclusive license be replaced with a non-exclusive license. Such
non-exclusive licenses are no longer required by the ITC to contain build
schedules.
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
formerly obtained exclusively from Marconi (formerly GPT) its switches, primary
multiplexers and certain telephone transmission equipment. LCL obtained such
equipment from Nortel Limited, and the Group now also purchases Nortel
equipment. The Group obtains all of its cable television transmission equipment
and set top converters from Scientific Atlanta. Scientific Atlanta, Marconi 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.
Six 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 two switches will be commissioned
at Burton-upon-Trent and Chesterfield during the build out.
In addition to the existing switches, six remote concentrator units
("RCUs") have been interconnected to the Nottingham headend. An additional RCU
at Scunthorpe has been interconnected to the Grimsby headend. The Group expects
that an additional four RCUs will be added during the build program. There
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<PAGE>
are presently three cable television headend locations. The Nottingham location
monitors all headend locations. The interconnects are all fiber optics with
two-way capability and status monitoring.
The cable television headends consist of Scientific Atlanta and
Magnavox fiber transmitters, fiber receivers, satellite receivers, signal
processors, modulators, encoding equipment and network status monitoring and
Panasonic automated tape distribution equipment. The cable television network is
being constructed with Scientific Atlanta transmission equipment and set top
converters. The network's downstream upper frequency capability is 750 MHZ. From
the headends, fiber is deployed to each node for feeder distribution and from
the node, coaxial cable is installed to the distribution points. The 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 Marconi 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 Marconi 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. Marconi and Nortel 120 and 180 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,
Cable & Wireless Communications, 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.
EMPLOYEES
As of December 31, 1998, the Group had 1,060 employees, including 1,012
employees in operations and 48 employees in civils construction. In 1998, the
Group phased out the small in-house construction team previously maintained to
build out particularly difficult areas, and the Group now uses outside
contractors for all of the build out of its network. 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.
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<PAGE>
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.
On April 23, 1998, the Department of Trade and Industry announced the
U.K. government's intention to progressively end this policy, allowing any
operator to seek a license 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.
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".
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<PAGE>
CABLE TELEVISION LICENSES
General. As of December 31 , 1998, cable television licenses had been
granted for over 160 franchise areas in the U.K. While the ITC had previously
indicated that it will grant only one cable television license for each
geographical area, 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. As a result,
any operator can 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. 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. In the
past, such licenses (LDLs) were awarded after competitive bids. However, it is
now the government's policy to grant licences in new areas to all suitable
applicants. 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.
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.
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.
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The Group also holds two licenses to provide television program
services under the Broadcasting Act 1990. The license for Cable 7, 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 statutory restriction on the number of cable
television licenses which may be held by any person. However, in October 1998,
the ITC indicated that where a merger would lead to a concentration of ownership
of connected homes exceeding 25% of all pay-TV homes, the ITC would consider
possible competition concerns and would consult the OFT.
CABLE TELECOMMUNICATIONS
The Telecommunications Act
The Telecommunications Act provides a licensing and regulatory
framework for telecommunications activities in the U.K. and established OFTEL
under the Director General as an independent regulatory authority.
Telecommunications policy is overseen by the DTI. The DTI on behalf of the
Secretary of State also has primary licensing authority under the
Telecommunications Act, although it may delegate that authority to the Director
General. The functions of the Director General are, among other things, to
monitor and enforce compliance with telecommunications license conditions,
establish and administer standards for telecommunications equipment and
contractors, and investigate complaints and exercise certain functions
concurrently with other regulators to promote or ensure competition in
telecommunications markets. The Director General may modify telecommunications
licenses either with the agreement of the licensee following a statutory period
of public consultation or following a report by the MMC. The Director General is
also empowered to issue enforcement orders requiring compliance with
telecommunication license conditions which have been breached (see below).
Telecommunications Licenses
The Group holds eight 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 CWC and other telephone
service providers in its franchise area. There are more than 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
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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 CWC 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 December 31, 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.
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.
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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 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.
Licensing Directive implementation
On December 31, 1998, the U.K. Government implemented the EC Licensing
Directive (97/13/EC). The Directive requires that all U.K. licences conform to a
number of key conditions and criteria set out in the Directive. All new licences
would conform to these criteria and the Government announced its intention to
amend all existing licences by the end of 1998 to ensure that they too were in
conformity with the Directive.
In September 1998, the Government issued a consultation document
setting out how it proposed to effect these changes to existing licences.
Broadly, existing licence conditions would be amended or supplemented to reflect
the precise wording and conditions of the Licensing Directive, the
Interconnection Directive, and the Revised Voice Telephony Directive. The
Government stated that it did not expect these changes to lead to material
changes to the operating circumstances of existing licensees. The final date for
completing this process of amendment was subsequently delayed to the end of June
1999, and, as of the date hereof, the Government's specific proposals for
regulations are awaited.
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 CWC to operate
local, national or international fixed-link networks in
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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 CWC 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 CWC. 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 CWC.
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
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, CWC,
Energis, Global One and ACC. The BT agreements may be terminated by either party
upon two years' notice, the CWC 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, CWC, 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.
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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, 1998 -- 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 has issued its determination of final charges for
this period. OFTEL has now determined interim charges for the period from April
1, 1997 to September 30, 1997, and is expecting to publish final charges for
that period in the near future.
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
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.
Number Translation Services
In March 1999, OFTEL issued a statement on the interconnect and retail
pricing regime for 'Number Translation Services' - freephone, national rate and
local rate numbers, the latter of which are used in the U.K. by many operators
to connect dial-up internet services.
The OFTEL document stated that its existing formula for dividing the
revenue generated by such calls between the originating network and the
terminating network - which some operators had argued allocated too much revenue
to the terminating network - would remain in place until the next retail price
control review in 2001. OFTEL will, however, explore ways in which greater
competition in this market could be encouraged through the creation of
additional retail price points for NTS services. The Group believes the effect
on the Group of OFTEL's decision is likely to be neutral, given that the Group's
origination of internet call traffic is now being balanced by substantial
internet termination revenues.
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.
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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 ("Carrier Pre-Selection")
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 CWC 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 CWC 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 CWC 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
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 sought a short deferment until the end of 2000.
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
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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 CWC 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;
(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
deadline for all PTO's, including the Group, to introduce geographic number
portability is January 1, 2000.
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 CWC of broadcast
entertainment ahead of the schedule set by the former Conservative government,
which did not intend to review the restrictions on conveyance and
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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 historical policy of granting one
cable television license for each geographic area ensured that no national PTO
subsidiaries compete with the Group in the provision of cable television
services in the same area. On April 23, 1998, the Department of Trade and
Industry announced the U.K. government's intention to progressively end this
policy, allowing any operator to seek a license 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. 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 CWC)
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 CWC 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.
Access to higher bandwidth services
In January 1999, OFTEL issued a consultation document on the
arrangements for access to so-called 'higher bandwidth' services, including fast
internet access and video on demand. The document envisaged a number of possible
arrangements whereby such services could be provided over the BT network, both
by BT itself and by third party service providers. The document sought views on
whether there was substantial unmet demand for these services, whether this
demand could be met by other means, and, if not, what form of regulatory
intervention might be appropriate to mandate the development of such services of
the BT network. OFTEL emphasized that any such intervention would need to be
consistent with OFTEL's wider policy of encouraging the development of
alternative infrastructure. As of the date hereof, it is not known what
conclusions OFTEL has drawn from responses to the consultation.
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
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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.
FUTURE DEVELOPMENTS
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
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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 venture arrangements have been approved by the EC competition authorities,
but subject to its conditions.
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
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<PAGE>
than 50 million ecus. This requirement has been implemented in the U.K. by the
Telecommunications (Interconnection) Regulations. See "-- Cable
Telecommunications -- Interconnect Arrangements".
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. However, the Group's individual franchises
do not appear to cross the revenue threshold necessary for these conditions to
become operative.
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, CWC 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.
Competition Bill
The U.K. Government enacted a new Competition Act (the "Competition
Act") which grants 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 Competition Act
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.
Under the Competition Act, 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 Competition Act enables 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.
ITEM 2. PROPERTIES
PROPERTIES
At December 31, 1998, the Group leased or rented 28 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
240,800 square feet of real property, of which approximately 131,300 square feet
consisted of external equipment and warehouse storage space. The Group owns its
head office and head-end/switch site in Nottingham, which was constructed in
1995 at a cost of approximately (pound)3 million and
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extended in 1998 at a cost of (pound)1.5 million from 44,000 square feet to a
total of 72,000 square feet. The Group also owns a switch site property of 4,688
square feet located at Shepshed.
ITEM 3. LEGAL PROCEEDINGS
A civils main build contractor employed by the Group, E H O'Neill
Limited ("O'Neill"), has commenced legal proceedings against the Group, claiming
approximately (pound)7.1 million in respect of estimated anticipated lost
profits on future work pursuant to an alleged oral agreement. The Group denies
the existence of any such agreement and intends to defend the proceedings in
full. Except as described above, 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected data set forth below for the Group as of December 31,
1994, 1995, 1996, 1997 and 1998 and for each of the years in the five-year
period ended December 31, 1998 have been excerpted or derived from the audited
financial statements of the Group, which as of December 31, 1997 and 1998 and
for each of the years in the three-year period ended December 31, 1998 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,
-----------------------------------------------------------------------------------------------
1994 1995(1) 1996 1997 1998 1998(2)
------------- -------------- -------------- -------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business telecommunications (pound)3,402 (pound)5,852 (pound)9,763 (pound)14,208 (pound)18,650 $31,011
Residential telephone.... 2,545 6,662 17,723 29,495 45,920 76,356
Cable television......... 1,324 3,479 10,091 16,602 24,186 40,216
Other revenues........... 35 -- -- -- -- --
------------- -------------- -------------- -------------- -------------- ---------
Total revenues..... 7,306 15,993 37,577 60,305 88,756 147,583
Operating costs and expenses:
Telephone................ (3,067) (5,454) (9,776) (12,088) (15,401) (25,609)
Programming.............. (701) (1,844) (6,041) (9,749) (13,015) (21,641)
Selling, general and
administrative........ (4,562) (13,020) (22,391) (27,192) (37,157) (61,785)
Depreciation and amortization (4,038) (8,867) (21,380) (27,620) (43,238) (71,896)
------------- -------------- -------------- -------------- -------------- ---------
Total operating costs
and expenses....... (12,368) (29,185) (59,588) (76,649) (108,811) (180,931)
------------- -------------- -------------- -------------- -------------- ---------
Operating loss............. (5,062) (13,192) (22,011) (16,344) (20,055) (33,348)
Interest income............ 1,415 3,887 3,441 6,440 13,084 21,756
Interest expense, and
amortization of debt discount
and expenses............ (3,836) (17,118) (40,334) (66,367) (84,626) (140,716)
Foreign exchange
gains/(losses) net...... (1,196) 925 31,018 (12,555) 7,163 11,911
Unrealized gains/(losses) on
derivative financial
instruments............. -- (868) (7,944) 669 -- --
Other expenses............. -- (1,241) -- -- -- --
Realized gains on derivative
financial instrument.... -- -- -- 11,553 412 685
------------- -------------- -------------- -------------- -------------- ---------
Loss before income taxes... (8,679) (27,607) (35,830) (76,604) (84,022) (139,712)
Income taxes............... -- -- -- -- -- --
------------- -------------- -------------- -------------- -------------- ---------
Net loss................... (pound)(8,679) (pound)(27,607) (pound)(35,830) (pound)(76,604) (pound)(84,022) $(139,712)
============= ============== ============== ============== ============== =========
BALANCE SHEET DATA:
Property and equipment, net (pound)35,127 (pound)163,721 (pound)277,301 (pound)365,636 (pound)465,866 $774,642
Total assets............... 138,606 374,172 416,819 556,357 744,621 1,238,156
Total debt(3).............. 103,068 319,492 325,041 545,325 803,392 1,335,880
Shareholders' equity(4).... 26,092 25,133 54,100 (22,511) (107,696) (179,076)
OTHER DATA:
EBITDA(5).................. (pound)(1,024) (pound)(5,566) (pound)(631) (pound)11,276 (pound)23,183 $38,548
Net cash (used in)/provided by
operating activities.... 496 (4,113) (1,348) 20,876 31,408 52,225
Net cash used in investing
activities.............. (71,941) (155,517) (128,210) (110,086) (134,314) (223,337)
Net cash provided by financing
activities.............. 112,485 212,202 54,428 146,586 193,127 321,131
Deficiency of earnings to
fixed charges(6)........ (8,679) (27,607) (35,830) (76,604) (84,022) (139,712)
Capital expenditures....... 21,252 136,314 130,140 111,252 138,661 230,566
</TABLE>
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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
$1.6628 =(pound)1.00, the Noon Buying Rate on December 31, 1998.
(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 consisted of the accreted value of the 1994 Notes, the
accreted value of the 1995 Notes and capital lease obligations and the
mortgage loan. Total debt at December 31, 1997 included in addition to
such indebtedness the accreted value of the 1997 Notes. Total debt at
December 31, 1998 included in addition to such indebtedness the accreted
value of the 1998 Notes.
(4) The Group raised additional equity financing of (pound)40.4
million,(pound)27.0 million and(pound)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 (pound)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 (pound)1.00:
YEAR AVERAGE(1) HIGH LOW PERIOD-END
- ---- ---------- ---- --- ----------
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 ............................... 1.66 1.72 1.61 1.66
1999 (through March 29) ............ 1.62 1.66 1.60 1.61
(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 29, 1999 was $1.6140 = (pound)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".
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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, 1998, approximately (pound)567 million had been
invested (at original cost) in the construction of the Group's network and
related systems. As of December 31, 1998, approximately 729,800 of the premises
(homes and businesses) in the Group's franchise areas had been passed by civils
construction, of which approximately 707,500 premises had been activated,
representing approximately 69% 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".
LIQUIDITY AND CAPITAL RESOURCES
The Group expended net cash to fund investing activities of
(pound)128.2 million, (pound)110.1 million and (pound)134.3 million in the years
ended December 31, 1996, 1997 and 1998, respectively. The Group's investing
activities consisted almost exclusively of the ongoing construction of the
network. In 1996, the Group's net cash used in operating activities was
(pound)1.3 million. In 1997 and 1998, the Group's net cash provided by operating
activities was approximately (pound)20.9 million and (pound)31.4 million,
respectively. Net cash provided by financing activities was (pound)54.4 million,
(pound)146.6 million and (pound)193.1 million in the years ended December 31,
1996, 1997 and 1998, respectively. 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, 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)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, 1998 and has now passed the final milestone in all of its
telecommunications licenses, except for the Leicester and Loughborough
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franchise, where the final milestone will fall due in 1999. 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 LDL milestones in six of its
seven LDL franchises at the end of 1997, although construction has now commenced
in all LDL franchises. Following an application by the Group to the ITC in March
1998, the ITC modified the annual build milestone obligations in all of the
Group's LDL franchise areas except Vale of Belvoir. The Group has met the
modified milestones in all of its LDL franchises at December 31, 1998, except
for its Ravenshead franchise.
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 2004. The
Group currently estimates that the additional capital expenditures from December
31, 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)310 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, 1998, the Group had constructed and activated a network
comprising approximately 69% 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 the first quarter of 2000. 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 or its exposure to foreign currency exchange rate
fluctuations, each of which factors would increase the Group's funding needs. In
connection with change of control provisions in each of the indentures pursuant
to which the Group's debt securities were issued, which require that offers to
repurchase such debt securities be made to holders of such securities at a price
of 101% of their accreted value or principal amount, the Company has commenced
offers to repurchase its outstanding debt securities. There can be no assurance
that the Company or Diamond Holdings will have sufficient funds, or be able to
raise sufficient funds, to effect such repurchases.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
The Group experienced significant increases in its customers, revenues
and expenses during the three years ended December 31, 1998. 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, 1995 to December 31, 1998 homes passed
by civils construction increased by 418,371 homes (149%), homes activated
increased by 519,501 homes (329%) and homes marketed increased by 457,850 homes
(362%). The number of homes that had been passed by civils
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construction at December 31, 1998 exceeded homes activated by 22,275 compared to
a difference of 27,309 homes at December 31, 1997 and a difference of 106,250 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. The Group accelerated the pace of civils
construction in 1998. The Group has continued to focus on its milestone
obligations, which are measured in terms of premises or homes activated. The
Group met the required quarterly milestone obligations under each of its
telecommunications licenses as at December 31, 1998 and has now passed the final
milestone in all of its telecommunications licenses, except for the Leicester
and Loughborough franchise, where the final milestone will fall due in 1999.
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 LDL
milestones in six of the seven LDL franchises at the end of 1997 although
construction has now commenced in all LDL franchises. Following an application
by the Group to the ITC in March 1998, the ITC modified the annual build
milestone obligations in all of its LDL franchise areas except Vale of Belvoir.
The Group has met the modified milestones in all of its LDL franchise areas as
at December 31, 1998, except in respect of the Ravenshead franchise.
The Group recorded an EBITDA (as defined) of (pound)23.2 million for
the year ended December 31, 1998 compared to an EBITDA of (pound)11.3 million in
1997 and an EBITDA loss of (pound)0.6 million in 1996.
In order to improve the management and quality of the residential sales
force, commencing in February 1997, the Group 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 1998, in particular from BT, CWC, BSkyB and, until it ceased
trading, Ionica, and at December 31, 1998, residential telephone line
penetration increased slightly to 39.0% compared to 38.6% as at December 31,
1997. Cable television penetration at December 31, 1998 had fallen slightly to
20.1% from 20.6% at December 31, 1997.
REVENUE
The Group's total revenues were (pound)37.5 million in 1996,
(pound)60.3 million in 1997 and (pound)88.7 million in 1998. This growth is
attributable to increases in revenues in all three of the Group's primary lines
of business.
As a result of entering into revised interconnect agreements with BT
which apply retroactively, on December 1, 1998 the Group received outgoing
interconnect charge rebates of (pound)3.8 million relating to all periods prior
to July 31, 1996 and paid incoming termination rebates of (pound)1.6 million
relating to the period from April 1, 1995 to July 31, 1996. Of these rebates,
all periods up to March 31, 1996 have been determined based on OFTEL final
rates, and the period from April 1, 1996 to July 31, 1996 has been determined
based on interim rates. The rebate paid to BT relating to the incoming
termination element was estimated for the purposes of the 1996 accounts at
(pound)1,351,000, in advance of agreement with BT. This amount was provided by
reducing residential telephone and business telecommunications revenues in 1996
by (pound)776,000 and (pound)575,000, respectively. The amount as finally agreed
with BT was (pound)266,000 in excess of the amount provided in the 1996
accounts, and this additional amount has been provided by reducing residential
telephone and business telecommunications revenues in 1998 by (pound)189,000 and
(pound)77,000, respectively.
Pending final determination of rebates, the Group recognized a
reduction in interconnect charges in the same period during which the related
reduction in revenues was recognized. Accordingly, a reduction in telephone
expenses of (pound)1,351,000 was recorded in 1996. The amount as finally agreed
with BT was (pound)2,400,000 in excess of the amount provided in the 1996
accounts, and this additional amount is recorded in the 1998 accounts by a
reduction in telephone expenses. Further rebates are due relating to the period
from April 1, 1996 to March 31, 1997 based on final rates which have been
determined by OFTEL. The further rebates that will be given to BT for this
period relating to the incoming termination element amount to an estimated
(pound)126,000. The amount of further 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. The Group has estimated that the amount of the
further rebate due to the Group from BT for the year to March 31, 1997 will
exceed the amount of the rebates to be provided by the Group to BT, and
accordingly no adjustment has been made for rebates for this period in the
accounts. Based on interim rates for the period from April 1, 1997 to September
30, 1997, no rebates will be due from or payable to BT for this period.
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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 which have been provided in the accounts 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
(pound)9.8 million (pro-forma (pound)10.0 million) in 1996, (pound)14.2 million
in 1997 and (pound)18.7 million in 1998, representing increases of 46% and 31%,
respectively. The growth in reported revenues is due primarily to 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 to 37,473 at December 31, 1998
representing increases of 43% and 38%, respectively. The growth in the number of
business lines has been partially offset by lower monthly revenue per line. The
monthly revenue per line decreased from (pound)50.17 in 1996 ((pound)51.32 on a
pro-forma basis) to (pound)46.26 in 1997 and to (pound)43.07 in 1998
((pound)43.26 on a pro-forma basis). The decrease 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 18,347 Centrex lines at December 31, 1998 compared to 11,971
Centrex lines at December 31, 1997 and 7,414 Centrex lines at December 31, 1996
representing 49%, 44% and 39% of the total number of business lines at those
dates, respectively) and (ii) a reduction 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 September 1997. BT, the
Group's principal competitor for business telecommunications services, 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, 1997 and 1998. The Group may lower prices in the future if
considered appropriate for competitive reasons.
Residential Telephone. Residential telephone revenues were (pound)17.7
million (pro-forma (pound)18.0 million) in 1996, (pound)29.5 million in 1997 and
(pound)45.9 million (pro-forma (pound)46.1 million) in 1998, representing
increases of 66% and 56%, respectively. The growth in residential telephone
revenue was due primarily to an increase in the number of residential telephone
lines from 104,460 at December 31, 1996 to 157,171 at December 31, 1997 and to
232,059 at December 31, 1998, representing increases of 50.5% and 47.6%,
respectively. Average monthly revenue per line was (pound)18.40 ((pound)18.66 on
a pro-forma basis) in 1996, (pound)18.75 in 1997 and (pound)18.82 ((pound)18.89
on a pro-forma basis) in 1998. The relatively stable level of average revenues
was in large part due to increased call usage which largely offset reductions in
call and incoming termination tariffs. The Group's churn rate (annualized) was
13.5% for 1998 and 16.3% for 1997 (19.6% in 1998 and 21.3% in 1997 before taking
into account the adjustments described in note 12 to the table under Item 1.
"Business - Certain Operating Data") as compared to 20.6% in 1996. The
relatively high churn in 1997 was attributable in part to the application of a
stricter disconnect policy relating to non-payment.
Cable Television. Cable television revenues increased from (pound)10.1
million in 1996 to (pound)16.6 million in 1997 and (pound)24.2 million in 1998,
representing increases of 65% and 46%, respectively. This growth in cable
television revenue was primarily due to an increase in the number of cable
television customers which rose from 59,242 at December 31, 1996 to 83,793 at
December 31, 1997 and to 117,290 at December 31, 1998, representing increases of
41% and 40%, respectively. Average monthly revenue per subscriber was
(pound)18.03 in 1996, (pound)19.84 in 1997 and (pound)19.46 in 1998. The
increase in average revenue per subscriber in 1997 was primarily due to
increases in cable television pricing.
The Group's churn rate was 22.4% for 1998 and 32.7% for 1997 (27.6% in
1998 and 36.9% in 1997 before taking into account the adjustments described in
Note 12 to the table under Item 1. "Business --Certain Operating Data") as
compared to a churn rate of 40.9% in 1996. The Group believes that the reduction
in churn in 1998 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 periods, 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.
OPERATING COSTS AND EXPENSES
Telephone expenses, consisting principally of interconnect charges
payable to BT, CWC, Energis and Global One, increased from (pound)9.8 million in
1996 to (pound)12.1 million in 1997 and (pound)15.4 million in 1998,
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representing increases of 24% and 27%, 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 (pound)9.5 million, (pound)12.1 million and
(pound)17.8 million during 1996, 1997 and 1998, 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 36% in 1996 to 28% in 1997
and 24% in 1998, due primarily to reduced interconnect charges paid to other
operators and the effect of adjustments to revenues and expenses relating to the
determination of the revised interconnect agreements. 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
34%, 28% and 28% for 1996, 1997 and 1998, 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 (pound)6.0 million in 1996 to
(pound)9.7 million in 1997 and (pound)13.0 million in 1998, representing
increases of 61% and 34%, respectively. The increase in costs was attributable
in large part to the increased number of customers. As a percentage of cable
television revenues, these direct costs were 60% in 1996, 59% in 1997 and 54% in
1998. The decrease in 1998 was due in large part to an increased proportion of
subscribers on higher margin basic and premium program packages in 1998 compared
to 1997.
Selling, general and administrative expenses as a percentage of total
revenues were 60% in 1996, 45% in 1997, and 42% in 1998. These costs increased
from (pound)22.4 million in 1996 to (pound)27.2 million in 1997, and to
(pound)37.2 million in 1998, representing increases of 21% in 1997 and 37% in
1998. The increases were due to higher administration and sales force costs
associated with the expansion of the Group's business, together with LDL cash
bid payments which commenced in 1998.
Depreciation and amortization expenses increased by 29% from 1996 to
1997 and by 57% from 1997 to 1998. The 1997 increase was due to the increasing
size of the Group's network. The 1998 increase was attributable to a combination
of the increasing size of the Group'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
1998 was an increase of (pound)6.6 million.
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 (pound)40.3 million, (pound)66.4 million and
(pound)84.6 million for 1996, 1997 and 1998, respectively. The 1997 increase is
due primarily to the accretion of the discount on the Discount Notes of
(pound)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 the Company's 11 3/4% Senior Discount Notes Due 2005 (the
"1995 Notes"). In addition, interest expense in 1997 includes (pound)0.9 million
for commitment fees, (pound)1.2 million for amortization of bank debt financing
costs, and (pound)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
(pound)1.1 million of other interest expense, and (pound)1.3 million for
amortization of Discount Note financing costs. The 1998 interest expense is due
primarily to the accretion of the discount on the Discount Notes of (pound)63.8
million, and interest on the 1998 Notes of (pound)17.6 million. In addition,
interest expense in 1998 includes (pound)2.2 million for amortization of
Discount Notes financing costs and 1998 Notes financing costs and (pound)0.9
million of other interest expense. Interest received was (pound)3.4 million in
1996 and (pound)6.4 million in 1997 through temporary investment of the proceeds
of the Discount Notes. Interest received in 1998 was (pound)13.1 million through
temporary investment of the proceeds of the 1998 Notes.
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
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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, 1996, the Group recognized a foreign exchange gain of
(pound)31.0 million being primarily an unrealized gain on the translation of its
liability on the 1994 Notes and the 1995 Notes. In the year ended December 31,
1997, the Group recognized a foreign exchange loss of (pound)12.6 million being
primarily an unrealized loss on the translation of its liability on the 1994
Notes, the 1995 Notes and the 1997 Notes. In the year ended December 31, 1998,
the Group recognized a gain of (pound)7.2 million primarily due to an unrealized
gain on the translation of its liability on the 1994 Notes, the 1995 Notes, the
1997 Notes and the 1998 Notes.
GAIN/LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
Losses on derivative financial instruments include an unrealized profit
of (pound)0.2 million in 1996 and an unrealized loss of (pound)0.1 million in
1997 on the mark-to-market valuation of an interest rate swap commitment.
Realized gains on derivative financial instruments of (pound)0.4 million in 1998
consists primarily of the two (pound)50 million foreign exchange forward
contracts referred to below, which were closed on June 17, 1998.
The Group 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
Group. Because of changes in prevailing rates, the Group 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 1994 Notes and 1995 Notes during the same period. During the first
quarter of 1997, the Group recorded a gain of approximately (pound)11.5 million
on the two offsetting forward contracts, reflecting the reversal of the
(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 Senior 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 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 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
(pound)35.8 million, (pound)76.6 million and (pound)84.0 million in 1996, 1997
and 1998, respectively.
INFORMATION SYSTEMS - YEAR 2000
The future operations of the Group depend on its network infrastructure
and certain other systems performing correctly over the change of millennium and
on subsequent dates. The correct handling of date information is therefore
essential and detailed test programs are underway for all crucial
telecommunications and cable television network and systems infrastructure.
The Group has had an overall program in place since 1997. The Group has
split its business into the following areas, which encompass IT systems and
non-IT systems containing embedded technology:
o Network and switches
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o MIS
o Network construction
o Facilities
o Suppliers
o CATV network
o Customer equipment
o Internet
A project leader has been nominated in each business area with overall
responsibility for the Year 2000 computer problem for that area. Each Business
unit's plan addresses the specific phases to be undertaken, including
identification and awareness, evaluation/impact analysis, strategy development,
implementation, and testing. Every project leader is a member of the Year 2000
Compliance Committee, sponsored by the Managing Director and chaired by the IT
Director. Additionally, to ensure a rigorous and cohesive approach, a Program
Manager is responsible for coordinating and monitoring the entire program
against defined plans to completion.
The Group has installed year 2000 compliant software for the
telecommunications switches and network control systems. The cable television
infrastructure that is not currently year 2000 compliant is on schedule to be
upgraded by spring 1999.
Other systems critical to business operations, such as the subscriber
management system and the financial and accounting systems, are maintained by
the vendors. With the exception of the subscriber management system, which is
being tested currently and is due for completion in April 1999, the vendors have
supplied versions of these critical systems which are designed to be year 2000
compliant and were subject to a thorough testing program that was completed in
1998. The vendors have expressed confidence that any problems that may currently
exist can be rectified in a timely manner. The personal computer and local area
network infrastructures are being surveyed and tested, and non-compliant
elements are expected to be replaced by spring 1999.
The Group depends, to some extent, on third party suppliers for the
supply of telecommunications, cable television, systems for customer service and
billing, as well as building facilities and supplies. Maintenance contracts
exist for critical elements and assurance has been sought from all suppliers of
critical services that they will continue to supply the services without
interruption. Where no satisfactory response has been forthcoming, alternative
suppliers have been sought that can give us the assurances the Group and its
customers require.
Costs incurred in connection with year 2000 compliance are not expected
to be material. Software upgrades to the network, cable television and systems
infrastructure are supplied as part of the normal maintenance contracts. Minimal
cost has been incurred to date, and it is estimated that a further
(pound)160,000 will be required for replacement of local area network, personal
computer elements and program management and associated costs. Other components
being replaced are otherwise due for replacement through obsolescence.
Should the telecommunications network fail to operate correctly over
the date change, the business of the Group would be materially adversely
affected. Similarly, should the cable television network or the subscriber
management system and personal computer network fail to operate correctly, this
could also have materially adverse consequences to the Group. The impact of
failure of the critical network, cable television and system components could be
significant. Therefore, significant effort is being devoted to rigorous testing
programs to ensure that any potential problems are identified and rectified in a
timely manner. Despite the efforts being expended by the Group, there can be no
assurance that year 2000 compliance issues will not have a material adverse
effect on the Group's operations.
Preparatory contingency planning has been performed to address critical
issues of customer support, technical support, and management representation. A
Group-wide review is scheduled in April to assess the suitability of current
arrangements. Detailed contingency plans are targeted for completion in each
business area by the end of the second quarter of 1999. Risks and uncertainties
and their associated contingency plans relate to systems, software, equipment,
and all services which the group has assessed as being critical to business
operations, financial impact, customer service, and safety. Significant effort
has also been devoted to verify and assist in the Year 2000 remediation efforts
of our trading partners and suppliers where they could
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have an effect on our operations. Additionally, our normal business continuity,
contingency, and disaster recovery plans will be verified, and where necessary,
augmented to specifically address Year 2000 contingencies. Appropriate training
will be given to people where new or modified processes are in place to deal
with millennium issues, and rapid response teams and increased levels of support
will also be considered as required.
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, 1998, a ten percent decrease in the
dollar/pound exchange rate would have increased the Group's reported senior
discount note liability by approximately (pound)73.2 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.
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 (pound)91 million after issuance costs of (pound)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 (pound)187 million
after issuance costs of (pound)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
(pound)149 million after issuance costs of approximately (pound)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 (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 91/8% Senior Notes
due February 1, 2008. Net proceeds received by the Company amounted to
approximately (pound)195 million after issuance costs of approximately (pound)7
million.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 together 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, 1998, a ten percent decrease in the
dollar/pound exchange rate would have increased the Group's reported senior
discount note liability by approximately (pound)73.2 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 its outstanding dollar-denominated debt
instruments. 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.
INTEREST RATE RISK
The Group is exposed to interest rate risk on its short-term securities,
which represent short-term deposits placed in a cash based unit fund. Based on
the Group's 1998 year end level of short-term securities, a decrease in average
interest rates of 1 percent per annum would result in a decrease on future
earnings before tax of approximately (pound)2 million per annum.
In addition, the Group is exposed to interest rate risk on the fair
value of its fixed rate Discount Notes and 1998 Notes liabilities. Based on the
aggregate accreted value of the Discount Notes liability and 1998 Notes
liability at December 31, 1998, a decrease in average interest rates of 1
percent per annum would result in an increase in the fair value of the liability
of (pound)43 million.
The risk management discussion and the estimated amounts generated from
the analytical techniques are forward looking statements of market risk assuming
market conditions occur. Actual results in the future may differ materially from
these projected results due to actual developments in global financial markets.
The analysis methods used by the Group to assess and mitigate risk discussed
above should not be considered projections of future events or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-29 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In connection with the Share Exchange, as of March 8, 1999, the
previous directors of the Company tendered their resignations. As of March 8,
1999, the directors of the Company were comprised of:
NAME AGE POSITION HELD
- ---- --- -------------
Leigh C. Wood 41 Director and Chief Operating Officer
Ronald McKellar 53 Director and Group Finance Director
Robert Mackenzie 37 Director and Company Secretary
Ms. Wood has been Chief Operating Officer of NTL since 1996, and was
appointed a director of the Company in connection with the Share Exchange. Ms.
Wood joined Cellular Communications Inc., as Vice President Operations in 1984.
In 1993 Ms. Wood was promoted to Chief Executive Officer. Ms. Wood is also Vice
President Operations of CoreComm, Inc., as well as Cellular Communications
International, Inc. Previously, Ms. Wood was Deputy Chief Financial Officer of
General Atlantic Corp, and worked for Peat, Marwick, Mitchell, Accountants from
1979-1982. Ms. Wood has a BA in American Studies and achieved an MBA in 1983
from New York University.
Mr. McKellar has been Group Finance Director of NTL's UK operations
since 1996, and was appointed a director of the Company in connection with the
Share Exchange. Mr. McKellar was appointed Finance Director of National
Transcommunications Limited upon its privatization in 1991. Previously, Mr.
McKellar worked for Active Memory Technology, a spinout from ICL, as Group
Finance Director and Company Secretary, and as Management Accountant of the TKM
Group, initially of BMW Concessionaries and subsequently as Finance Director of
Daihatsu (UK) Ltd and Jeep (UK) Ltd. Mr. McKellar is a Chartered Accountant and
a Member of the Institute of Chartered Accountants.
Mr. Mackenzie has been the Group Legal Director and Company Secretary
for NTL's UK operations since 1993, and was appointed a director of the Company
in connection with the Share Exchange. From 1988 to 1993, Mr. Mackenzie was at
Theodore Goddard as a Solicitor in the Corporate Finance Department. During this
time Mr. Mackenzie was seconded to corporate brokers Phoenix Securities Ltd (now
DLJ Phoenix Securities) as Mergers & Acquisitions Manager. Previously, Mr.
Mackenzie worked for Mischon de Reya. Mr. Mackenzie was admitted as a Solicitor
in 1987.
Certain information concerning the directors of the Company and senior
management of the Group, during the year ended December 31, 1998, is set forth
below:
NAME AGE POSITION HELD
- ---- --- -------------
Lord Pym 76 Director and Non-Executive Chairman
Robert T. Goad 44 Director, Chief Executive Officer
Richard A. Friedman 41 Director
Thomas Nilsson 50 Director
Muneer A. Satter 38 Director
John L. Thornton 44 Director
Nicholas R. Millard 48 Chief Financial Officer
J.A. Duncan Craig 43 Chief Accounting Officer
(All of Diamond Plaza, Daleside Road, Nottingham NG2 3GG England)
Lord Pym was a Director and Non-Executive Chairman from February 1995
to March 8, 1999. 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.
-51-
<PAGE>
Mr. Goad was a Director and Chief Executive Officer from May 1994 to
March 8, 1999 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 was a Director from May 1994 to March 8, 1999. 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. Nilsson was a Director from February 1995 to March 8, 1999. 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 was a Director from May 1994 to March 8, 1999. Mr. Satter is
a managing director of Goldman Sachs International and co-head of that firm's
European Principal Investment Area. Mr. Satter joined Goldman Sachs in 1988. Mr.
Satter is also on the Advisory Committee or Board of Directors of Bran + Luebbe
GmbH, Empe Holdings GmbH and Point Holdings Limited.
Mr. Thornton was a Director from May 1994 to March 8, 1999. 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 was Chief Financial Officer from July 1995 to March 22,
1999. 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. In connection with
the Share Exchange, the service contract between the Group and Mr. Millard was
terminated by compromise agreement, with effect from March 22, 1999.
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:
NAME AGE POSITION HELD
- ---- --- -------------
Steven Boon 43 Business Sales Director
Nicholas J. Dearden 49 MIS Director, IT Program Director for Digital
Cable
Mark L. Harris 44 Technical Services Director
Susan L. Milner 42 Customer Services Director
Stuart Roberts 47 Residential Sales Director
Peter C. Savage 40 Managing Director
Kate B. Wolfsohn 37 Legal Director
Mr. Boon joined the Group in June 1994 as Branch Manager-Business Sales
in Grimsby. Prior to joining the Group, Mr. Boon held various posts at Cable and
Wireless, including in Telecomms Engineering, Project Management, Sales Support
and Technical Consultancy, both in the U.K. and around the world. Mr. Boon was
promoted to Regional Sales Manager in 1996, and, as of August 1998, Mr. Boon was
promoted to Business Sales Director.
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. As of March 1,
1999, Mr Dearden was promoted to IT Program Director for Digital Cable, with
responsibility for subscriber management system changes and system migration
required to launch digital cable services for the Group and for various other
NTL regional operations.
-52-
<PAGE>
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.
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.
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. Mr. Savage was promoted to Managing Director of the Group in
July 1998.
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.
In connection with the Share Exchange, Ms. Wolfsohn tendered her resignation as
Company Secretary as of March 8, 1999.
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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Group
during the years ended December 31, 1996, 1997 and 1998 for Nicholas R. Millard
and during the years ended December 31, 1996 and 1997 for Gary L. Davis (the
Managing Director of the Group during these years). 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, 1996, 1997 and
1998 for Stephen D. Rowles; for Mark Harris for the years ended December 31,
1996, 1997 and 1998; for Peter Savage for the year ended December 31, 1998; and
during the years ended December 31, 1997 and 1998 for John W. McAuley, who,
while not executive officers of the Group, would have been among the most highly
compensated executive officers during 1996, 1997 and 1998 had they been such.
<TABLE>
SUMMARY COMPENSATION 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 -- $196,554 --
1996 $256,845 $111,300 $37,715 --
Nicholas R. Millard,
Chief Financial Officer.... 1998 $165,449 $117,851 $80,065 5,000
1997 $70,700 $106,297 $150,114 --
</TABLE>
-53-
<PAGE>
<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>
1996 $162,669 $ 95,889 $36,076 --
John W. McAuley
Marketing and Programming
Director................... 1998 $153,809 $65,681 $70,896 2,500
1997 $147,843 $51,745 $39,702 --
Peter C. Savage
Managing Director.......... 1998 $124,283 $ 59,986 $ 24,392 20,000
Stephen D. Rowles,
Executive Director......... 1998 $136,168 $30,127 $31,460 5,000
1997 $200,257 -- $22,019 --
1996 $153,900 $ 17,230 $17,760 --
Mark Harris,
Technical Director......... 1998 $166,280 $99,768 $73,272 5,000
1997 $147,843 $82,135 $31,290 30,000
1996 $145,544 $ 85,615 $35,912 --
<FN>
(1) Payments made in 1996, 1997 and 1998 in pounds sterling are presented in U.S. dollars
based on an exchange rate of $ 1.7123 to (pound)1.00, $1.6427 to (pound)1.00 and $1.6628
to (pound)1.00, the Noon Buying Rates on December 29, 1996, December 31, 1997 and
December 31, 1998, 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. Mr. Millard's
"Other Annual Compensation" for 1998 includes $14,101 for home rental, $12,376 for the
provision of a car, $1,028 for health insurance, $52,229 in pension contributions and
$331 for use of mobile phone, 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. Mr. McAuley's "Other Annual
Compensation" for 1998 includes $13,103 for house rental, $16,836 for the provision of a
car, $1,028 for health insurance, $28,799 for school fees, $331 for use of mobile phone
and $10,799 for travel expenses, 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. Savage's "Other Annual Compensation"
for 1998 includes $13,530 for the provision of a car, $913 for health insurance, $9,616
in pension contributions and $333 for use of mobile phone. Mr. Rowles' "Other Annual
Compensation" for 1998 includes $12,423 for the provision of a car, $730 for health
insurance, $6,402 in pension contributions, $331 for use of mobile phone and $11,574 for
travel expenses, 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. Mr. Harris' "Other Annual
Compensation" for 1998 includes $13,103 for home rental, $25,883 for provision of two
cars, $913 for health insurance, $2,879 for school fees, $331 for use of mobile phone and
$30,163 for travel expenses, 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.
(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.
</FN>
</TABLE>
<PAGE>
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 (pound)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.
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<PAGE>
As a consequence of the consummation of the Share Exchange Agreement,
all options granted under the Senior Management Option Scheme became exercisable
immediately for a period of six months from the closing date, March 8, 1999.
Under the Rules of the Senior Management Option Scheme, any shares resulting
from exercise of options will be compulsorily acquired by NTL on the same terms
as the Share Exchange Agreement. Alternatively, NTL offered option holders the
choice of exchanging their options for options over NTL shares or a cashless
cancellation of their options in exchange for a number of fully paid NTL shares.
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)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)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
(pound)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 (pound)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)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, 1997 and 1998.
Set forth below is certain information regarding options granted to the
executive officers and employees whose compensation is disclosed above.
<TABLE>
OPTIONS GRANTED IN FISCAL YEAR 1998
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
% OF TOTAL STOCK PRICE APPRECIATION FOR
NUMBER OF OPTIONS OPTION TERM
SECURITIES GRANTED TO -----------------------------
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE
NAME GRANTED (#) YEAR 1998 ((POUND)/SHARE) EXPIRATION DATE 5% ((Pound)) 10%((pound))
- --------------------- ----------- ------------ ---------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark Harris.......... 5000 11% (pound)4.11 June 9, 2005 8366 19496
Jack McAuley......... 2500 6% (pound)4.11 June 9, 2005 4183 9748
Nicholas Millard..... 5000 11% (pound)4.11 June 9, 2005 8366 19496
Susan Milner......... 2500 6% (pound)4.11 June 9, 2005 4183 9748
Stuart Roberts....... 2500 6% (pound)4.11 June 9, 2005 4183 9748
Stephen Rowles....... 5000 11% (pound)4.11 June 9, 2005 8366 19496
Peter Savage......... 20000 43% (pound)4.11 June 9, 2005 33464 77985
Kate Wolfsohn........ 2500 6% (pound)4.11 June 9, 2005 4183 9748
</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 (pound)300,000 per year (excluding amounts payable under any
-55-
<PAGE>
other
provision of the Articles of Association) or such higher amount as the
shareholders may determine by an ordinary resolution. Such directors may be paid
extra remuneration by way of salary, commission or otherwise as the Board may
determine. The aggregate remuneration paid to Directors of the Company during
1996, 1997 and 1998 was (pound)267,026, (pound)307,436, and (pound)30,000,
respectively.
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
In connection with the Share Exchange, as of March 8, 1999, the Group
terminated the Management Agreement, dated July 5, 1994, as amended by a
supplemental agreement, dated February 27, 1997, with ECE Management
International, LLC. Additionally, the service contract between the Group and Mr.
Millard was terminated by compromise agreement, with effect from March 22, 1999.
Prior to the consummation of the Share Exchange, Mr. Rowles terminated his
contract with the Group to become an employee of NTL and Mr. McAuley left the
Group.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation
committee. During 1998, Mr. Goad was the only officer and employee of the
Company who participated in deliberations of the Board of Directors concerning
executive officer compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to the Share Exchange, NTL and its subsidiaries now own all of
the outstanding share capital of the Company. The following table sets forth, as
of March 15, 1999, 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.
NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER PERCENT(1)
- ------------------------------------ ----------
NTL Incorporated 59,138,791
110 East 59th Street, New York, NY 10022................... 100%
The authorized share capital of the Company consists of
(pound)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.
The non-voting deferred shares are held by NTL Incorporated and its
subsidiaries. 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 (pound)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.
-56-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 (pound)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
(pound)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". Goldman, Sachs & Co. and Columbia Management
also acted as joint financial advisors to Diamond in evaluating potential
business opportunities or other strategic alternatives leading up to the Share
Exchange and were paid fees of approximately $12,000,000, pursuant to an
engagement letter, dated as of May 1, 1998.
John Thornton, who is a managing director of Goldman Sachs
International and was a Director of the Company until March 8, 1999, 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 until March 8, 1999 also has an indirect minority interest in NTL, which
has significant cable interests in the U.K. On June 16, 1998, the Company
announced that all of the holders of its outstanding ordinary shares and
deferred shares each agreed to exchange all outstanding shares in the Company
for newly issued shares of common stock of NTL. On March 8, 1999, the Share
Exchange contemplated by the Share Exchange Agreement was consummated. As a
result of the Share Exchange, the Company became a wholly-owned subsidiary of
NTL.
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<PAGE>
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:
Page
----
Independent Auditors' Report............................... F-2
Consolidated Statements of Operations for each of the years
in the three year period ended December 31, 1998........... F-3
Consolidated Balance Sheets at December 31, 1997 and
1998....................................................... F-4
Consolidated Statements of Shareholders' Equity for each of
the years in the three year period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the
years in the three year period ended December 31, 1998..... F-6
Notes to the Consolidated Financial Statements............. F-7
2. Not applicable.
3. Exhibits:
ITEM NO. DESCRIPTION
---------- --------------------------------------------------------------
*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 Diamond Cable (Nottingham) Limited (incorporated by
reference 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 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.
*10.8 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.
*10.9 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.
*10.10 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)).
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<PAGE>
ITEM NO. DESCRIPTION
---------- --------------------------------------------------------------
*10.11 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)).
*10.12 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)).
*10.13 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)).
*10.14 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)).
*10.15 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)).
*10.16 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).
*10.17 Supplemental Management Agreement, dated February 27, 1997,
among Diamond Cable Communications Plc, Diamond Cable
Communications (UK) Ltd and ECE Management International, LLC.
*10.18 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)).
*10.19 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)).
99.1 Share Exchange Agreement among NTL Incorporated and the
Shareholders of Diamond Cable Communications Plc, dated as of
June 16, 1998
99.2 Amendment No. 1, dated as of December 21, 1998, to the Share
Exchange Agreement among NTL Incorporated and the Shareholders
of Diamond Cable Communications Plc, dated as of June 16, 1998
* Previously filed or incorporated by reference to a concurrent filing.
(b) The Company filed no Reports on Form 8-K during the three month period
ended December 31, 1998.
-59-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Diamond Cable Communications Plc
(Registrant)
By /s/ Leigh C. Wood
----------------------------------
Leigh C. Wood
Chief Operating Officer
March 30, 1999
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Leigh C. Wood
- --------------------------
Leigh C. Wood Director March 30, 1999
/s/ Ronald McKellar
- --------------------------
Ronald McKellar Director and Principal Financial Officer March 30, 1999
/s/ Robert Mackenzie
- --------------------------
Robert Mackenzie Director March 30, 1999
/s/ Peter Savage
- --------------------------
Peter Savage Principal Executive Officer March 30, 1999
/s/ Duncan Craig
- --------------------------
Duncan Craig Principal Accounting Officer March 30, 1999
</TABLE>
-62-
<PAGE>
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
PAGE
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, 1998.......................F-3
Consolidated Balance Sheets at December 31, 1997 and 1998.................F-4
Consolidated Statements of Shareholders' Equity/(Deficit) for each of
the years in the three year period ended December 31, 1998.............F-5
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998..............................F-6
Notes to the Consolidated Financial Statements............................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Diamond Cable Communications Plc
We have audited the accompanying consolidated balance sheets of Diamond
Cable Communications Plc and subsidiaries ("the Group") as of December 31, 1997
and 1998 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, 1998. These consolidated financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Group as
of December 31, 1997 and 1998 and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 1998 in
conformity with generally accepted accounting principles in the United States of
America.
KPMG
Chartered Accountants
Registered Auditors
Nottingham, England
March 30, 1999
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997 1998 1998
------- ------- ------- ------
(note 1)
(in thousands)
<S> <C> <C> <C> <C>
REVENUE
Business telecommunications......................... (pound) 9,763 (pound) 14,208 (pound) 18,650 $31,011
Residential telephone............................... 17,723 29,495 45,920 76,356
Cable television.................................... 10,091 16,602 24,186 40,216
--------------- ---------------- ---------------- ---------
37,577 60,305 88,756 147,583
--------------- ---------------- ---------------- ---------
OPERATING COSTS AND EXPENSES
Telephone ............................................ (9,776) (12,088) (15,401) (25,609)
Programming .......................................... (6,041) (9,749) (13,015) (21,641)
Selling, general and administrative .................. (22,391) (27,192) (37,157) (61,785)
Depreciation and amortization ........................ (21,380) (27,620) (43,238) (71,896)
--------------- ---------------- ---------------- ---------
(59,588) (76,649) (108,811) (180,931)
--------------- ---------------- ---------------- ---------
OPERATING LOSS ......................................... (22,011) (16,344) (20,055) (33,348)
Interest income ........................................ 3,441 6,440 13,084 21,756
Interest expense and amortization of
debt discount and expenses ........................... (40,334) (66,367) (84,626) (140,716)
Foreign exchange gains/(losses), net (note 16) ......... 31,018 (12,555) 7,163 11,911
Unrealized (losses)/gains on derivative financial
instruments (note 3) ................................. (7,944) 669 -- --
Realized gains on derivative financial
instruments (note 4) ................................. -- 11,553 412 685
--------------- ---------------- ---------------- ---------
Loss before income taxes ............................... (35,830) (76,604) (84,022) (139,712)
Income taxes (note 5) .................................. -- -- -- --
--------------- ---------------- ---------------- ---------
NET LOSS................................................ (pound) (35,830) (pound) (76,604) (pound) (84,022) $(139,712)
=============== ================ ================ =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-3
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------
1997 1998 1998
------- ------- ------
(note 1)
(in thousands except share data)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents (note 6).................................. (pound) 75,680 (pound) 164,738 $ 273,926
Trade receivables (net of allowance for doubtful
accounts of (pound)2,788 and (pound)4,775 at December 31, 1997
and 1998 respectively (note 7))................................... 8,569 9,873 16,417
Other assets........................................................ 4,470 2,229 3,706
Deferred financing costs (less accumulated amortization of
(pound)2,627 and (pound)4,830 at December 31, 1997 and
1998 respectively)................................................ 15,533 20,322 33,792
Property and equipment, net (note 8)................................ 365,636 465,866 774,642
Goodwill (less accumulated amortization of (pound)10,914 and
(pound)15,764 at December 31, 1997 and 1998 respectively)......... 86,046 81,196 135,013
Franchise costs (less accumulated amortization of(pound)116 and
(pound)142 at December 31, 1997 and 1998 respectively)............ 423 397 660
---------------- ---------------- ----------
TOTAL ASSETS........................................................ (pound) 556,357 (pound) 744,621 $1,238,156
================ ================ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Accounts payable.................................................... (pound) 22,319 (pound) 28,514 $47,413
Other liabilities................................................... 11,224 20,411 33,939
Senior discount notes (note 9)...................................... 534,861 592,763 985,646
Senior notes (note 9)............................................... - 201,154 334,479
Capital lease obligations (note 10)................................. 8,041 7,089 11,788
Mortgage loan (note 11)............................................. 2,423 2,386 3,967
Shareholders' equity/(deficit) (note 12)
Ordinary shares: 70,000,000 authorized;
59,138,791 shares issued at December 31, 1997 and 1998.......... 1,478 1,478 2,458
Non-voting deferred shares:
6 shares authorized and issued at December 31, 1997 and 1998... - - -
Additional paid-in-capital........................................ 134,466 134,466 223,590
Accumulated other comprehensive loss.............................. (204) (1,367) (2,273)
Accumulated deficit............................................... (158,251) (242,273) (402,851)
---------------- ---------------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)................ (pound) 556,357 (pound) 744,621 $1,238,156
================ ================ ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-4
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Non-voting
Ordinary shares deferred shares
Number (pound) Number (pound)
(in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996............... 43,754,175 (pound)1,094 6 (pound) -
Shares issued and
capital contributions
(net of expenses)............. 15,384,616 384 - -
Unrealized gain on
securities.................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1996............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
BALANCE AT
JANUARY 1, 1997............... 59,138,791 (pound)1,478 6 -
Unrealized loss on
securities.................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1997............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
BALANCE AT
JANUARY 1, 1998............... 59,138,791 (pound)1,478 6 -
Unrealized loss on
securities................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1998............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Total
Additional other Shareholders'
Paid-in comprehensive Acculumated Equity/
Capital loss Deficit (Deficit)
(in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996............... (pound)70,186 (pound)(330) (pound)(45,817) (pound)25,133
Shares issued and
capital contributions
(net of expenses)............. 64,280 - - 64,664
Unrealized gain on --------
securities.................... - 133 - | 133 |
Net loss....................... - - (35,830) |(35,830)|
--------
Comprehensive loss............. (35,697)
--------------- ------------- ---------------- ---------------
BALANCE AT
DECEMBER 31, 1996............. (pound)134,466 (pound)(197) (pound)(81,647) (pound)54,100
=============== ============= ================ ===============
BALANCE AT
JANUARY 1, 1997............... (pound)134,466 (pound)(197) (pound)(81,647) (pound)54,100
Unrealized loss on ---------
securities.................... - (7) - | (7)|
Net loss....................... - - (76,604) | (76,604)|
---------
Comprehensive loss............. (76,611)
--------------- ------------- ---------------- ---------------
BALANCE AT
DECEMBER 31, 1997............ (pound)134,466 (pound)(204) (pound)(158,251) (pound)(22,511)
=============== ============= ================ ===============
BALANCE AT
JANUARY 1, 1998............... (pound)134,466 (pound)(204) (pound)(158,251) (pound)(22,511)
Unrealized loss on --------
securities................... - (1,163) - | (1,163)|
Net loss....................... - - (84,022) |(84,022)|
--------
Comprehensive loss............. (85,185)
--------------- ------------- ---------------- ---------------
BALANCE AT
DECEMBER 31, 1998............ (pound)134,466 (pound)(1,367) (pound)(242,273) (pound)(107,696)
=============== ============= ================ ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-5
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997 1998 1998
------- ------- ------- ------
(note 1)
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. (pound) (35,830) (pound) (76,604) (pound) (84,022) $(139,712)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Depreciation and amortization....................... 21,380 27,620 43,238 71,896
Foreign exchange (gains)/losses..................... (31,468) 11,714 (7,151) (11,891)
(Profit)/loss on disposition of assets.............. (11) 110 - -
Provision for losses on accounts receivable......... 918 1,097 1,987 3,304
Amortization of deferred financing costs............ 943 9,301 2,203 3,663
Accretion of senior note discount................... 38,157 55,038 63,826 106,130
Change in operating assets and liabilities:
Change in trade receivables....................... (3,724) (3,277) (3,291) (5,472)
Change in other assets............................ 1,300 (566) 2,241 3,726
Change in accounts payable........................ (1,680) 4,255 4,339 7,215
Change in other liabilities....................... 8,667 (7,812) 8,038 13,366
---------------- ---------------- ----------------- ---------
Net cash (used in)/provided by operating activities... (1,348) 20,876 31,408 52,225
---------------- ---------------- ----------------- ---------
Cash flows from investing activities:
Cash invested in property and equipment............. (128,246) (110,145) (134,383) (223,452)
Proceeds from disposition of assets................. 65 62 69 115
Cash paid for franchises............................ (29) (3) - -
---------------- ---------------- ----------------- ---------
Net cash used in investing activities................. (128,210) (110,086) (134,314) (223,337)
---------------- ---------------- ----------------- ---------
Cash flows from financing activities:
Proceeds of issue of debt........................... - 153,691 202,381 336,519
Debt financing costs................................ (9,096) (5,375) (6,968) (11,586)
Repayment of mortgage loan.......................... (23) (54) (37) (62)
Capital element of capital lease obligations........ (1,117) (1,676) (2,249) (3,740)
Issue of shares and capital
contributions (net of expenses)................... 64,664 - - -
---------------- ---------------- ----------------- ---------
Net cash provided by financing activities............. 54,428 146,586 193,127 321,131
---------------- ---------------- ----------------- ---------
Net increase/(decrease) in cash ...................... (75,130) 57,376 90,221 150,019
Cash and cash equivalents at beginning of year........ 93,308 18,311 75,680 125,841
Effect of exchange rate changes on cash and
cash equivalents.................................... 133 (7) (1,163) (1,934)
---------------- ---------------- ----------------- ---------
Cash and cash equivalents at end of year (note 6)..... (pound) 18,311 (pound) 75,680 (pound) 164,738 $ 273,926
================ ================ ================= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-6
<PAGE>
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)") and for the
year 1998 also are presented in US dollars, the latter being unaudited and
presented solely for the convenience of the reader, at the rate of (pound)1 =
$1.6628, the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998.
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 3 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>
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 3 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)). 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)125,000, (pound)196,000 and
(pound)202,000 in 1996, 1997 and 1998 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 17.
F-8
<PAGE>
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.
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 required disclosures are given in note 22.
3. UNREALIZED (LOSSES)/GAINS ON DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------
1996 1997 1998
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Unrealized gain/(loss) on interest rate swap (note 16)......... (pound) 174 (pound) (57) (pound) -
Unrealized (loss)/gain on foreign exchange forward
contracts (note 16).......................................... (8,118) 726 -
--------------- --------------- ------------
(pound) (7,944) (pound) 669 (pound) -
=============== =============== ============
4. REALIZED GAINS ON DERIVATIVE FINANCIAL INSTRUMENTS
Year ended December 31
-----------------------------------------------------
1996 1997 1998
------ ------ ------
(in thousands)
Realized gain on interest rate swap (note 16).................. (pound) - (pound) - (pound) 24
Realized gain on foreign exchange forward contract (note 16)... - 11,553 388
--------------- --------------- ------------
(pound) - (pound) 11,553 (pound) 412
=============== =============== ============
</TABLE>
F-9
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
No provision for taxation has been made due to operating losses incurred to
date. The Group has tax net operating losses carried forward of approximately
(pound)405 million and approximately (pound)1 million of capital losses carried
forward at December 31, 1998.
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% (1996: 33%; 1997: 31%) are summarized as follows:
<TABLE>
Year ended December 31
-----------------------------
1996 1997 1998
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Tax benefit of net losses at 31% (1996: 33%; 1997: 31%)............. (pound) (11,824) (pound) (23,747) (pound) (26,047)
Non-deductible expenses............................................. 1,695 1,915 1,985
Valuation allowance ................................................ 10,129 21,832 24,062
---------------- ---------------- ----------------
Net tax benefit..................................................... (pound) - (pound) - (pound) -
================ ================ ================
December 31
-------------
1997 1998
------ ------
(in thousands)
Deferred tax assets relating to:
Net losses........................................................................ (pound) 91,882 (pound) 125,446
Other............................................................................. 1,173 1,489
---------------- ----------------
Deferred tax asset................................................................ 93,055 126,935
Valuation allowance............................................................... (54,650) (101,050)
---------------- ----------------
38,405 25,885
---------------- ----------------
Deferred tax liabilities relating to:
Property and equipment............................................................ (38,405) (25,885)
---------------- ----------------
Deferred tax liability............................................................ (38,405) (25,885)
---------------- ----------------
Deferred tax per consolidated balance sheet....................................... (pound) - (pound) -
================ ================
</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 losses, and tax planning strategies in making its assessment
as to the appropriateness of the reported valuation allowance.
F-10
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CASH AND CASH EQUIVALENTS
December 31
-----------------
1997 1998
---- ----
(in thousands)
Cash at bank and in hand.................. (pound) 3,723 (pound) 3,032
Short term securities .................... 71,957 161,706
------------- --------------
(pound)75,680 (pound)164,738
============= ==============
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.
7. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
charged to
Balance at costs and Amounts Balance at
January 1 expenses written off December 31
--------- --------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
1996
Allowance for doubtful accounts....................... (pound) 773 (pound)1,143 (pound) (225) (pound)1,691
============= ============ ============= ============
1997
Allowance for doubtful accounts....................... (pound) 1,691 (pound)1,204 (pound) (107) (pound)2,788
============= ============ ============= ============
1998
Allowance for doubtful accounts....................... (pound) 2,788 (pound)2,362 (pound) (375) (pound)4,775
============= ============ ============= ============
</TABLE>
F-11
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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, 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..................... (pound)4,633 (pound)355,957 (pound) 4,648 (pound)398 (pound)365,636
============ ============== ============= ========== ==============
ACQUISITION COSTS
Balance at January 1, 1998.............. 5,111 405,652 9,017 606 420,386
Additions............................... 2,372 133,094 2,627 568 138,661
Dispositions............................ - (274) (7) (213) (494)
------------ -------------- ------------- ---------- --------------
Balance at December 31, 1998............ 7,483 538,472 11,637 961 558,553
------------ -------------- ------------- ---------- --------------
ACCUMULATED DEPRECIATION
Balance at January 1, 1998.............. 478 49,695 4,369 208 54,750
Charge for year......................... 202 35,943 2,008 209 38,362
Dispositions............................ - (253) (4) (168) (425)
------------ -------------- ------------- ---------- --------------
Balance at December 31, 1998............ 680 85,385 6,373 249 92,687
------------ -------------- ------------- ---------- --------------
1998 NET BOOK VALUE..................... (pound)6,803 (pound)453,087 (pound) 5,264 (pound)712 (pound)465,866
============ ============== ============= ========== ==============
</TABLE>
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)13,042,000 and (pound)14,317,000 at December
31, 1997 and 1998 respectively. Accumulated depreciation charged against these
assets was (pound)5,238,000 and (pound)6,978,000 at December 31, 1997 and 1998
respectively.
Depreciation on assets held under capital lease arrangements charged to the
consolidated statement of operations during the year was (pound)1,375,000,
(pound)1,535,000 and (pound)1,740,000 in 1996, 1997 and 1998 respectively.
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 year by (pound)6.6 million ($11.0 million).
9. 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)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-12
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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)187 million after issuance costs of (pound)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)149 million after issuance costs of approximately (pound)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)218 million ($358 million) and (pound)151 million ($251 million) at
December 31, 1997 and 1998 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)55 million
($90 million) and (pound)64 million ($104 million) in 1997 and 1998
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.
On February 6, 1998 Diamond Holdings plc, a wholly-owned subsidiary of the
Company, issued (pound)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)195 million after issuance costs of
(pound)7 million. Interest on the Senior Notes is payable in arrears on February
1 and August 1 of each year commencing August 1, 1998.
The Discount Notes and Senior Notes contain certain covenants generally
restricting the raising of certain types of additional financing, payment of
dividends, creation of liens, sale and leaseback transactions, sale of certain
assets and engaging in certain transactions with Affiliates of Related Persons
(note 15).
The Discount Notes and Senior Notes all mature after more than five years.
F-13
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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)1,158,000, (pound)1,246,000 and
(pound)1,603,000 in 1996, 1997 and 1998 respectively.
Future minimum lease payments under capital and operating leases are
summarized as follows as of December 31, 1998:
Capital Operating
leases leases
------ ------
(in thousands)
1999......................................... (pound) 3,102 (pound) 1,248
2000......................................... 2,827 972
2001......................................... 1,526 618
2002......................................... 316 359
2003......................................... 1 271
2004 and thereafter.......................... - 2,148
Imputed interest............................. (683)
------------- -------------
(pound) 7,089 (pound) 5,616
============= =============
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 by the milestones in its telecommunications licences
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 licences or a
shortening of an LDL period or fines.
The Group has renegotiated its milestone obligations with OFTEL and at
December 31, 1998, the Group met the required milestone obligations under each
of its telecommunications licences. The Group has completed all of the milestone
obligations in its telecommunications licences with the exception of the
Leicester and Loughborough franchise, where the final milestone falls due in
1999.
Principally because of delays by the Department of Trade and Industry
in granting the Group a national telecommunications licence, and consequent
delays in the commencement of construction, the Group did not meet its annual
LDL milestones in six of the seven LDL franchises at the end of 1997, although
construction has now commenced in all of the seven LDL franchises. Following an
application by the Group to the ITC, the ITC modified the annual build milestone
obligations in all of the Group's LDL franchise areas except Vale of Belvoir.
The Group has met the modified milestone obligations in all of its LDL
franchises as at December 31, 1998, except in relation to its Ravenshead
franchise.
The Group has not been subject to date to any enforcement action by OFTEL
or the ITC due to missed milestones. Although there can be no assurance that
OFTEL or the ITC will not take enforcement action in the future, the Group
considers such action unlikely, particularly in light of the government's new
policy of removing the exclusivity of existing cable television franchises from
January 1, 2001, or earlier if the current licence holder requests that its
exclusive licence be replaced with a non-exclusive licence. Such non-exclusive
licences are no longer required by the ITC to contain build schedules.
F-14
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENT AND CONTINGENCIES (continued)
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, 1996, 1997 and 1998 the Group incurred net
losses of, (pound)35.8 million, (pound)76.6 million and (pound)84.0 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 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.
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.
Following the acquisition of the Company by NTL Incorporated ("NTL"), as
described in note 21, NTL have confirmed their intention to provide financial
support to the Company for the foreseeable future.
OTHER COMMITMENTS AND CONTINGENCIES
The Company has agreed to pay a fee of $12 million to Goldman, Sachs & Co
and Columbia Management for their role as joint financial advisers to the
Company in examining potential business opportunities or other strategic
alternatives leading up to the share exchange. At December 31, 1998 no amounts
had been provided as the liability was contingent on the consummation of the
share exchange which occurred on March 8, 1999, as described in note 21.
One of the Group's civils contractors has commenced proceedings against the
Group for approximately (pound)7.1 million. The Group believes it has defences
to the claim and intends to resist the litigation vigorously.
11. MORTGAGE LOAN
The Group entered into a mortgage loan agreement of (pound)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%.
12. SHAREHOLDERS' EQUITY/(DEFICIT)
The authorized and issued share capital of DCL during 1992 consisted of two
(pound)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)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)17.59 million. The proceeds of
the issue were used to repay the advance from shareholders.
F-15
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
On May 6, 1994 the authorized share capital of DCL was increased to
(pound)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)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)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)15.44 million (net of (pound)1 million financing fees) which had been
advanced to DCL at various dates in May and June 1994 pending formal issue of
these ordinary shares. At such date a bonus allotment of 146,981 ordinary shares
of 25 pence each was made to the holders of A shares in accordance with the
rights attaching to the A shares.
On September 1, 1994 DCL effected a ten for one share split such that the
authorized ordinary shares consisted of 40,000,000 shares of 2.5 pence each, of
which 29,016,630 were outstanding. In addition, on such date the shareholders
exchanged their shares in DCL for 29,016,630 ordinary shares of 2.5 pence each
and six A shares of 25 pence each in Diamond Cable Communications Plc ("the
Company"), a newly formed public limited company in proportion to their
shareholding in DCL.
At September 1, 1994 the authorized share capital of the Company was
70,000,000 ordinary shares of 2.5p 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)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)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)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)100,000. The holders of deferred shares will not be entitled to the
payment of any ordinary dividend or other distributions.
F-16
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY/(DEFICIT) (continued)
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)64.7 million (net of expenses).
On December 15, 1997, the Company subscribed for shares in a newly
incorporated company, Diamond Holdings plc ("Holdings").
On January 9, 1998, the Company exchanged all its ordinary shares in Jewel
for further ordinary shares in Holdings. As a result of these transactions,
Jewel became a wholly owned subsidiary of Holdings and Holdings became a wholly
owned subsidiary of the Company.
13. DEBT FINANCING COSTS
Cash expended for debt financing costs in 1996 consists of payments of
(pound)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)7.94 million relating to the arrangement costs of the
Senior Bank Facility (described herein).
14. SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid for interest was (pound)1,060,000, (pound)2,148,000 and
(pound)10,662,000 for the years ended December 31, 1996, 1997 and 1998.
15. RELATED PARTY TRANSACTIONS
In 1995 the Group declared a bonus to Mr Davis, former 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, 1997 and 1998,
the Group recorded expenses of (pound)1,610,000, (pound)2,061,000 and
(pound)2,249,000, respectively, as amounts paid or payable to ECE Management
International in connection with management services provided to the Group and
all related expenses incurred.
F-17
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS (continued)
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, 1998. 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, 1998.
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)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)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,
1997 and 1998.
John Thornton, who is a managing director of Goldman Sachs International
and was a Director of the Company until March 8, 1999, 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
until March 8, 1999 also has an indirect minority interest in ICTL, which has
significant cable interests in the UK.
16. 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%. Following acquisition by the Company, the interest rate swap was retained
and was recorded on the consolidated balance sheet in other liabilities at its
market value at December 31, 1997 of (pound)1.2 million. The interest rate swap
was terminated in March 1998, with a payment by the Company of (pound)1.2
million.
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)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 has recorded for
the year ended December 31, 1996, an unrealized loss of approximately (pound)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)11.5
million on the two offsetting forward contracts, reflecting the reversal of the
(pound)8.1 million loss referred to above and the approximately (pound)3.4
million cash payment on settlement of the contracts.
F-18
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL INSTRUMENTS (continued)
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 off-setting
agreements were entered into at rates of $1.6326 and $1.6322 to (pound)1. The
off-setting 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. For the year ended December 31, 1998 the company recorded a realized
gain of approximately (pound)0.4 million on the settlement of the off-setting
contracts reflecting the cash payment on settlement of the contracts in excess
of the gain recorded in 1997.
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.
SENIOR NOTES - The fair value of the senior notes for 1997 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 fair value of the senior notes
for 1998 has been calculated based on quoted bid prices at the year end provided
by CIBC Oppenheimer. The following table compares the carrying value with the
fair value of the debt:
<TABLE>
<CAPTION>
Year ended 31
December
1997 1998 1997 1998
Carrying Carrying Fair Fair
value value value value
(in thousands)
<S> <C> <C> <C> <C>
1994 Notes............................................ (pound)138,726 (pound)155,809 (pound)155,333 (pound)166,315
1995 Notes............................................ 230,599 255,366 249,688 262,636
1997 Notes............................................ 165,536 181,588 174,067 183,027
-------------- -------------- -------------- --------------
534,861 592,763 579,088 611,978
Senior notes.......................................... - 201,154 - 191,427
-------------- -------------- -------------- --------------
(pound)534,861 (pound)793,917 (pound)579,088 (pound)803,405
============== ============== ============== ==============
</TABLE>
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, 1998, the Group had no significant
concentrations of credit risk.
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 into
hedging contracts it did enter into foreign exchange forward contracts during
1996, 1997 and 1998 (discussed herein). Changes in currency exchange rates may
continue to have a material effect on the results of operations of the Group.
F-19
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. 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)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)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)4.11 per share.
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)4.11 per share.
Options over a total of 45,000 shares were granted to directors and senior
management on June 9, 1998 under the Senior Management Option Scheme with an
exercise price of (pound)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)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 Forfeited December Granted Forfeited December Granted Forfeited December
1, 1996 in 1996 31, 1996 in 1997 in 1997 31, 1997 in 1998 in 1998 31, 1998
------- ------- -------- ------- ------- -------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,872 (45) 1,827 77 (370) 1,534 45 (10) 1,569
===== ======== ======== ====== ======= ======= ====== ====== ========
</TABLE>
Options over 654,000 shares were exercisable at December 31, 1996, 1997 and
1998.
F-20
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SHARE OPTIONS (continued)
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%, 7.5% and 7.0% for options granted in 1995, 1996 and 1997 and
assuming options are exercised on the seventh anniversary of the date of the
grant. The pro-forma compensation cost for 1996, 1997 and 1998 is (pound)0.33
million, (pound)0.15 million and (pound)0.27 million respectively. The effects
of applying SFAS No. 123 may not be representative of the effects on reported
net income/loss for future years.
Year ended
December 31
--------------------------------------------------
1996 1997 1998
------ ------ ------
(in thousands)
Pro-forma net loss......... (pound)(36,164) (pound)(76,754) (pound)(84,290)
============== ============== ==============
18. 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)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)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
recorded a charge of (pound)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.
F-21
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. 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
------------------------
1996 1997 1998 1998
---- ---- ---- ----
(note A)
(in thousands)
<S> <C> <C> <C> <C>
Selling, general and administrative................... (pound) (1,468) (pound) (2,285) (pound) (2,897) $(4,817)
Equity accounted share of net losses of subsidiaries.. (25,391) (87,672) (88,568) (147,271)
Interest income....................................... 40,119 56,417 71,804 119,396
Interest expense and amortization of
debt discount and expenses.......................... (39,100) (56,393) (65,395) (108,739)
Foreign exchange gains/(losses), net.................. (1,542) 1,016 (366) (609)
Unrealized (loss)/gain on derivative financial
instruments......................................... (8,118) 726 - -
Realized gain on derivative financial instruments..... - 11,553 388 645
-------------- -------------- -------------- ---------
Loss before income taxes.............................. (35,500) (76,638) (85,034) (141,395)
Income taxes.......................................... - - - -
-------------- -------------- -------------- ---------
NET LOSS.............................................. (pound)(35,500) (pound)(76,638) (pound)(85,034) $(141,395)
============== ============== ============== =========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-22
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------
1997 1998 1998
------ ------ ------
(note A)
(in thousands except share data)
ASSETS
<S> <C> <C> <C>
Investments in and advances to subsidiaries..................................... (pound) 468,167 (pound)443,446 $ 737,362
Cash and cash equivalents....................................................... 28,697 28,366 47,167
Other assets.................................................................... 822 109 181
Deferred financing costs (less accumulated amortization of
(pound)2,627 and(pound)4,196 at December 31, 1997 and 1998 respectively)...... 15,533 14,041 23,348
---------------- -------------- ---------
TOTAL ASSETS.................................................................... (pound) 513,219 (pound)485,962 $808,058
================ ============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Other liabilities .............................................................. (pound) 869 (pound) 895 $ 1,488
Senior discount notes........................................................... 534,861 592,763 985,646
Shareholders' equity/(deficit)..................................................
Ordinary shares: 70,000,000 authorized;
59,138,791 shares issued at December 31, 1997 and 1998...................... 1,478 1,478 2,458
Non-voting deferred shares:
6 shares authorized and issued at December 31, 1997 and 1998............... - - -
Additional paid-in-capital.................................................... 134,466 134,466 223,590
Accumulated other comprehensive loss.......................................... (170) (321) (533)
Accumulated deficit........................................................... (158,285) (243,319) (404,591)
---------------- -------------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)............................ (pound) 513,219 (pound)485,962 $ 808,058
================ ============== =========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-23
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Non-voting
Ordinary shares deferred shares
Number (pound) Number (pound)
(in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996............... 43,754,175 (pound)1,094 6 (pound) -
Shares issued and
capital contributions
(net of expenses)............. 15,384,616 384 - -
Unrealized loss on
securities.................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1996............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
BALANCE AT
JANUARY 1, 1997............... 59,138,791 (pound)1,478 6 -
Unrealized gain on
securities.................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1997............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
BALANCE AT
JANUARY 1, 1998............... 59,138,791 (pound)1,478 6 -
Unrealized loss on
securities................... - - - -
Net loss....................... - - - -
Comprehensive loss.............
---------- ------------ --------- -----------
BALANCE AT
DECEMBER 31, 1998............ 59,138,791 (pound)1,478 6 -
========== ============ ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Total
Additional other Shareholders'
Paid-in comprehensive Accumulated Equity/
Capital loss Deficit (Deficit)
(in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996.............. (pound)70,186 (pound) - (pound) (46,147) (pound) 25,133
Shares issued and
capital contributions
(net of expenses)............ 64,280 - - 64,664
Unrealized loss on --------
securities................... - (197) - | (197)|
Net loss...................... - - (35,500) |(35,500)|
--------
Comprehensive loss............ (35,697)
-------------- ----------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1996............ (pound)134,466 (pound)(197) (pound) (81,647) (pound) 54,100
============== =========== =============== ===============
BALANCE AT
JANUARY 1, 1997.............. (pound)134,466 (pound)(197) (pound) (81,647) (pound) 54,100
Unrealized gain on ---------
securities................... - 27 - | 27 |
Net loss...................... - - (76,638) | (76,638)|
---------
Comprehensive loss............ (76,611)
-------------- ----------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1997........... (pound)134,466 (pound)(170) (pound)(158,285) (pound) (22,511)
============== =========== =============== ===============
BALANCE AT
JANUARY 1, 1998.............. (pound)134,466 (pound)(170) (pound)(158,285) (pound) (22,511)
Unrealized loss on --------
securities.................. - (151) - | (151)|
Net loss...................... - - (85,034) |(85,034)|
--------
Comprehensive loss............ (85,185)
-------------- ----------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1998........... (pound)134,466 (pound)(321) (pound)(243,319) (pound)(107,696)
============== =========== =============== ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
F-24
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------
1996 1997 1998 1998
---- ---- ---- ----
(note A)
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. (pound) (35,500) (pound)(76,638) (pound)(85,034) $(141,395)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Equity accounted share of net losses of subsidiaries... 25,391 87,672 88,568 147,271
Foreign exchange losses/(gains)........................ 820 (2,524) 318 529
Accrued interest on advances to subsidiaries........... (39,581) (53,998) (70,065) (116,504)
Amortization of deferred financing costs............... 943 1,302 1,569 2,609
Accretion of senior note discount...................... 38,157 55,038 63,826 106,130
Change in operating assets and liabilities:
Change in other assets............................... (102) 18 713 1,186
Change in other liabilities.......................... 8,380 (8,282) 26 43
--------------- -------------- -------------- ---------
Net cash (used in)/provided by operating activities...... (1,492) 2,588 (79) (131)
--------------- -------------- -------------- ---------
Cash flows from investing activities:
Advances to subsidiaries............................... (45,306) (138,652) (24) (40)
--------------- -------------- -------------- ---------
Net cash used in investing activities.................... (45,306) (138,652) (24) (40)
--------------- -------------- -------------- ---------
Cash flows from financing activities:
Proceeds of issue of debt.............................. - 153,691 - -
Debt financing costs................................... (1,637) (4,989) (77) (128)
Issue of shares and capital contributions
(net of expenses)................................... 64,664 - - -
--------------- -------------- -------------- ---------
Net cash provided by/(used in) financing activities...... 63,027 148,702 (77) (128)
--------------- -------------- -------------- ---------
Net increase/(decrease) in cash ......................... 16,229 12,638 (180) (299)
Cash and cash equivalents at beginning of year........... - 16,032 28,697 47,717
Effect of exchange rate changes on cash and
cash equivalents....................................... (197) 27 (151) (251)
--------------- -------------- -------------- ---------
Cash and cash equivalents at end of year................. (pound) 16,032 (pound) 28,697 (pound) 28,366 $ 47,167
=============== ============== ============== =========
</TABLE>
See accompanying Notes to the Condensed Financial Statements
F-25
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. 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)") and for the
year 1998 also are presented in US dollars, the latter being unaudited and
presented solely for the convenience of the reader, at the rate of (pound)1 =
$1.6628, the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998.
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)"). 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 1997 and 1998 was (pound)54.0 million
and (pound)70.1 million respectively.
F-26
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
C. COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company has agreed to pay a fee of $12 million to
Goldman, Sachs & Co and Columbia Management for their role as joint financial
advisers to the Company in examining potential business opportunities or other
strategic alternatives leading up to the share exchange. At December 31, 1998 no
amounts had been provided as the liability was contingent on the consummation of
the share exchange which occurred on March 8, 1999, as described in note 21.
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, 1996, 1997 and 1998 the Group incurred net losses of
(pound)35.8 million, (pound)76.6 million and (pound)84.0 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.
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.
Following the acquisition of the Company by NTL Incorporated ("NTL"), as
described in note 21, NTL have confirmed their intention to provide financial
support to the Company for the foreseeable future.
20. SUMMARIZED FINANCIAL INFORMATION ABOUT DIAMOND HOLDINGS PLC
The following table presents summarised consolidated financial information
for Diamond Holdings plc ("Holdings") as of and for the year ended December 31,
1998. This summarized financial information is being provided pursuant to
Section G of Topic I 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
information for Holdings for as long as the 1998 Notes remain outstanding and
guaranteed by the Company.
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 all group companies. The summarized
financial information shows operating results as if Holdings became the
intermediate holding company on January 1, 1998.
Holdings raised approximately (pound)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.
F-27
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUMMARIZED FINANCIAL INFORMATION ABOUT DIAMOND HOLDINGS PLC (continued)
<TABLE>
<CAPTION>
17 days ended Year Ended
December 31, 1997 December 31, 1998
(in thousands)
SUMMARIZED CONSOLIDATED INCOME STATEMENT INFORMATION
<S> <C> <C>
Revenue (pound) - (pound) 88,756
Operating costs and expenses - 105,914
Net loss for the period (pound) - (pound) (87,556)
============= ===============
December 31, 1997 December 31, 1998
(in thousands)
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION
Fixed and non-current assets (pound) - (pound) 553,740
Current assets 50 148,415
------------- ---------------
Total assets (pound) 50 (pound) 702,155
============= ===============
Current liabilities (pound) - (pound) 48,030
Non-current liabilities - 887,542
Shareholders equity/(deficit) 50 (233,417)
------------- ---------------
Total liabilities and shareholders interest (pound) 50 (pound) 702,155
============= ===============
</TABLE>
21. SUBSEQUENT EVENT
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 had
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). On
March 8, 1999, the share exchange (the "Share Exchange") contemplated by the
Share Exchange Agreement, dated as of June 16, 1998, as amended (the "Share
Exchange Agreement"), among NTL and the shareholders of the Company, was
consummated. Pursuant to the Share Exchange Agreement, on March 8, 1999, all of
the issued and outstanding ordinary shares, par value 2.5p per share, of the
Company and all of the issued and outstanding deferred shares, par value 25p per
share, of the Company were exchanged for shares of NTL's common stock, par value
$.01 per share. As a result of the Share Exchange the Company became a wholly
owned subsidiary of NTL.
In connection with provisions in each of the indentures pursuant to which
the Group's debt securities were issued, which require that offers to repurchase
such debt securities be made to holders of such securities at a price of 101% of
their accreted value or principal amount following a "change of control", the
Company has commenced offers to repurchase its outstanding debt securities. It
is expected that these offers will be launched on or about April 1, 1999 and
will expire on or about April 30, 1999.
In connection with the Share Exchange, as of March 8, 1999, the Group
terminated the Management Agreement, dated July 5, 1994, as amended by a
supplemental agreement, dated February 27, 1997, with ECE Management
International, LLC.
F-28
<PAGE>
DIAMOND CABLE COMMUNICATIONS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Group offers three basic services over its network infrastructure, (i)
residential telephone services; (ii) business telecommunications services; and
(iii) cable television services. The gross revenues derived from these services
are disclosed in the consolidated statement of operations. Due to the integrated
nature of the Group's network infrastructure the Group only reports the direct
costs of cable television programming and combined residential and business
telephone expenses. Other expenses and assets are not allocated between
segments.
Accordingly, the reported profit by segment, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Business and residential telephone:
Revenue.............................................. (pound)27,486 (pound)43,703 (pound)64,570
Direct operating costs............................... (9,776) (12,088) (15,401)
-------------- -------------- --------------
Segment profit....................................... 17,710 31,615 49,169
-------------- -------------- --------------
Cable television:
Revenue.............................................. 10,091 16,602 24,186
Direct operating costs............................... (6,041) (9,749) (13,015)
-------------- -------------- --------------
Segment profit....................................... 4,050 6,853 11,171
-------------- -------------- --------------
Total segmental profit.................................. 21,760 38,468 60,340
Selling, general and administrative..................... (22,391) (27,192) (37,157)
Depreciation and amortization........................... (21,380) (27,620) (43,238)
-------------- -------------- --------------
Consolidated operating loss............................. (pound)(22,011) (pound)(16,344) (pound)(20,055)
============== ============== ==============
</TABLE>
F-29
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
UNAUDITED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
(IN THOUSANDS)
US GAAP
Earnings:
Loss before taxes (pound)(35,830) (pound)(76,604) (pound)(84,022)
=============== =============== ===============
<S> <C> <C> <C>
Fixed charges:
Interest element of capital lease
charges 853 535 646
Rental expense deemed to be
representative of interest factor (1) 386 415 534
Other interest expense 381 1,493 17,951
Amortisation of debt discount and
expense 39,100 64,339 66,029
--------------- --------------- ---------------
40,720 66,782 85,160
--------------- --------------- ---------------
Profit/loss before income taxes and
fixed charges 4,890 (9,822) 1,138
Fixed charges (40,720) (66,782) (85,160)
--------------- --------------- ---------------
Deficiency of earnings to fixed charges (35,830) (76,604) (84,022)
--------------- --------------- ---------------
Ratio of earnings to fixed charges (2) n/a n/a n/a
<FN>
(1) For the purposes of the calculation of the deficiency/ratio of earnings to
fixed charges the portion of rental expenses deemed to be representative of
the interest factor is 1/3 of the rental expense.
(2) The ratio of earnings to fixed charges is computed by aggregating:
(a) income from continuing operations before taxes on income;
(b) fixed charges
and dividing the total by fixed charges.
</FN>
</TABLE>
SHARE EXCHANGE AGREEMENT
AMONG
NTL INCORPORATED
AND
THE SHAREHOLDERS OF DIAMOND CABLE COMMUNICATIONS PLC
DATED AS OF JUNE 16, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
ACQUISITION OF STOCK
Section 1.1 Transfer of Stock...............................................1
Section 1.2 Consideration for Shares........................................1
Section 1.3 Fractional Shares...............................................2
ARTICLE II
CLOSING
Section 2.1 Closing.........................................................2
Section 2.2 Documents to be delivered by Transferors........................3
Section 2.3 Documents to be delivered by NTL................................4
Section 2.4 Board Meetings. ...............................................4
Section 2.5 Form of Documents to be Delivered...............................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties relating to Diamond..............5
Section 3.2 Representations and Warranties of Transferors..................21
Section 3.3 Representations and Warranties of NTL..........................24
Section 3.4 No Counterclaim................................................33
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1(a) Conduct of Business by Diamond.................................33
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Access to Information; Confidentiality.........................37
Section 5.2 Reasonable Best Efforts........................................38
Section 5.3 Stock Options and Stock Appreciation Rights....................39
Section 5.4 Fees and Expenses..............................................41
Section 5.5 Public Announcements...........................................41
Section 5.6 NASDAQ Quotation...............................................42
Section 5.7 Covenant of Transferors........................................42
Section 5.8 Covenant of NTL................................................42
Section 5.9 Standstill Agreements; Confidentiality Agreements..............42
Section 5.10 Conveyance Taxes...............................................43
Section 5.11 Debt Offers....................................................43
Section 5.12 Confidential Information.......................................43
Section 5.13 Shareholders' Agreement........................................44
Section 5.14 Bring-along for Optionholder Shares............................44
Section 5.15 Tag-along for Optionholders Shares.............................44
Section 5.16 No change to Stock Options.....................................45
Section 5.17 Indemnification; Directors and Officers Insurance..............45
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the Closing....45
Section 6.2 Conditions to Obligations of NTL...............................48
Section 6.3 Conditions to Obligations of Transferors.......................49
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Section 6.4 Frustration of Closing Conditions..............................50
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination....................................................50
Section 7.2 Effect of Termination..........................................52
Section 7.3 Amendment......................................................52
Section 7.4 Extension; Waiver..............................................52
Section 7.5 Procedure for Termination, Amendment, Extension or Waiver......53
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Survival of Representations, Etc...............................53
Section 8.2 Notices........................................................54
Section 8.3 Definitions....................................................56
Section 8.4 Interpretation.................................................57
Section 8.5 Counterparts...................................................58
Section 8.6 Entire Agreement; No Third-Party Beneficiaries.................58
Section 8.7 Governing Law..................................................58
Section 8.8 Assignment.....................................................58
Section 8.9 Consent to Jurisdiction........................................59
Section 8.10 Headings.......................................................59
Section 8.11 Severability...................................................59
Section 8.12 Liability of AmSouth in its Corporate Capacity.................60
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SHARE EXCHANGE AGREEMENT dated as of June 16, 1998, among NTL
INCORPORATED, a Delaware corporation ("NTL"), and the shareholders of Diamond
Cable Communications plc ("Diamond") set forth on the signature page hereto
("Transferors").
WHEREAS, each Transferor owns the number of ordinary shares, par value
2.5p per share, and deferred shares, par value 25p per share, of Diamond set
forth opposite its name on the signature page hereto (the "Shares").
WHEREAS, NTL desires to acquire from Transferors, and Transferors
desire to transfer to NTL, all of the Shares, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
ACQUISITION OF STOCK
Section 1.1 Transfer of Stock. Upon the terms and subject to the
conditions contained herein, each Transferor will exchange, convey, transfer,
assign and deliver to NTL with full title guarantee, and NTL will acquire on the
Closing Date (as hereinafter defined), all of the Shares set forth opposite its
name on the signature page hereto. Each Transferor shall procure that NTL
acquires good title to the Shares to be acquired by it from such Transferor free
from all liens, charges, encumbrances, equities and claims whatsoever and
together with all rights now or hereafter attaching to them. NTL shall not be
obliged to complete the acquisition of any of the Shares unless the acquisition
of all the Shares is completed simultaneously.
Section 1.2 Consideration for Shares. Upon the terms and subject to
the conditions contained herein, as consideration for the acquisition of the
Shares, on the Closing Date NTL shall transfer to each Transferor
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consideration consisting of one share of common stock, par value $.01 per share,
of NTL (the "NTL Common Stock") for (a) each four ordinary shares in Diamond,
provided that if the Closing Date shall have occurred before the fourth month
anniversary date of the date hereof and the NTL Average Stock Price is $52.00
(the "Maximum Average Stock Price") or more, the consideration for each four
ordinary shares will be the number of NTL Common Stock equal in value (at the
NTL Average Stock Price) to the Maximum Average Stock Price; provided;
however if the Closing Date shall have occurred after the fourth month
anniversary date of the date hereof, then the Maximum Average Stock Price shall
increase by $.50 on such date and on each subsequent monthly anniversary date of
the date hereof until the Closing Date and (b) each deferred share in Diamond.
Section 1.3 Fractional Shares. No fractional shares of NTL Common
Stock shall be issued pursuant to this Agreement. All fractional shares of NTL
Common Stock that a holder of shares of Diamond would otherwise be entitled to
receive as a result of the transaction contemplated hereby shall be aggregated
and if a fractional share results from such aggregation, such holder shall be
entitled to receive, in lieu thereof, an amount in cash determined by
multiplying the closing sale price of the NTL Common Stock on the NASDAQ on the
trading day immediately preceding the Closing Date by the fraction of a share of
NTL Common Stock to which such holder would otherwise have been entitled.
ARTICLE II
CLOSING
Section 2.1 Closing. The Closing of the transactions contemplated
herein (the "Closing") shall be held at 9:00 a.m., local time, at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022, on the third Business Day after the day in which all of the conditions
set out in Article VI hereof have been satisfied or been waived (the "Closing
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Date") unless NTL and the Transferors' Representative (as hereinafter defined)
otherwise agree.
Section 2.2 Documents to be Delivered by Transferors. At Closing,
Transferors shall deliver to NTL the following:
(a) duly executed transfers of the Shares by the registered holders in
favour of NTL or such person or persons nominated by NTL, the share certificates
and any additional documentation necessary to establish the transferor's title
to the Shares, to authorize the execution of such transfers and to allow the
transferees (subject to due stamping) to be registered in the Register of
Members of Diamond as holders of the Shares;
(b) the common seal, statutory books and other record books of Diamond
and its subsidiaries written up to Closing;
(c) the certificates in respect of all issued shares in the
subsidiaries of Diamond and duly executed transfers in respect of such shares
not registered in the name of Diamond or a subsidiary of Diamond in favour of
NTL or a person nominated by NTL;
(d) statements of balances at a date not more than seven days prior to
Closing on all bank accounts of Diamond and its subsidiaries;
(e) the resignation letters referred to in Section 2.4 below;
(f) an unqualified letter of resignation from the auditors of Diamond
and its subsidiaries in the form prescribed by Section 394, UK Companies Act
1985;
(g) duly executed powers of attorney in the approved terms in respect
of the rights attaching to the Shares;
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(h) evidence reasonably satisfactory to NTL that:
(i) all sums owed by Diamond or its subsidiaries to any
Transferor or their Affiliates or by any Transferor or their
Affiliates to Diamond or any of its subsidiaries have been repaid; and
(ii) any guarantees granted or, security or indemnities given by
Diamond or any of its subsidiaries in respect of obligations of any
Transferor or its Affiliates, have been released or discharged;
(i) evidence reasonably satisfactory to NTL as to the termination of
the management agreement dated as of June 1, 1994 between ECE Management Company
and Diamond Cable Limited as subsequently assigned by the parties to ECE
Management International and Diamond respectively. The Transferors hereby agree,
and shall cause Diamond to agree, that, effective on the Closing Date, the
shareholders agreement, dated September 1, 1994 among European Cable Capital
Partners, L.P., AmSouth Bank of Alabama, as Trustee, C.G.T. Family Corporation,
GS Capital Partners L.P., William W. McDonald and Diamond shall be terminated;
and Investor Investments AB, DCI Partners and European Cable Capital Partners
L.P. agree that, effective on the Closing Date, the Relationship Agreements
dated October 12, 1994 and June 21, 1996, respectively, shall be terminated, in
each case without liability to any of the parties to such agreements.
(j) a schedule setting forth each Transferors' tax basis (cost) as
determined under U.S. tax principles in all ordinary shares of Diamond and
deferred shares of Diamond, if any.
Section 2.3 Documents to be Delivered by Ntl. NTL shall deliver to
each Transferor the shares of NTL Common Stock as set out in Section 1.2 and, if
applicable, cash for fractional shares as set out in Section 1.3.
Section 2.4 Board Meetings. Each Transferor shall procure (i) the
holding of a meeting of the board
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of directors of Diamond and each of its subsidiaries immediately prior to the
Closing at which board resolutions in the approved terms shall be passed and
(ii) duly executed resignation letters in the approved terms from all of the
directors of Diamond and its subsidiaries with effect from the end of such board
meeting.
Section 2.5 Form of Documents to be Delivered. All instruments and
documents executed and delivered to NTL pursuant hereto shall be in form and
substance, and shall be executed in a manner, reasonably satisfactory to NTL.
All instruments and documents executed and delivered to Transferors pursuant
hereto shall be in form and substance, and shall be executed in a manner,
reasonably satisfactory to Transferors' Representative. All documents in the
approved terms shall be deemed to be in a form reasonably satisfactory to NTL
and Transferor's Representative.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties Relating to Diamond. Except
as fairly disclosed in the Diamond SEC Documents (as defined in Section 3.1(e))
or as set forth on the Disclosure Schedule delivered by Transferors to NTL in
connection with the execution of this Agreement (the "Transferors Disclosure
Schedule") and making reference to the particular subsection of this Agreement
to which exception is being taken, each Transferor severally and not jointly
represents and warrants to NTL as follows:
(a) Organization, Standing and Corporate Power. (i) Each of Diamond
and its subsidiaries (as defined in Section 8.7) is a corporation duly organized
and validly existing under the laws of England and Wales and has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of Diamond and its subsidiaries is duly qualified or licensed to do
business in each jurisdiction in which the nature of its business
5
<PAGE>
or operations makes such licensing necessary except where such failure would not
individually or in the aggregate have a material adverse effect on Diamond. Due
compliance has been made with all the provisions of the UK Companies Act 1985
and other legal requirements, in connection with the formation of Diamond and
its subsidiaries, the allotment, issue, purchase and redemption of shares,
debentures and other securities in Diamond and its subsidiaries, any reduction
of the authorized and issued share capital of Diamond or any of its
subsidiaries, any amendment to the memorandum or articles of association of
Diamond or any of its subsidiaries and the passing of resolutions and the
payment of dividends by Diamond and its subsidiaries. Each of Diamond and its
subsidiaries is not in breach of the provisions of its articles of association.
(ii) Complete and correct copies of the memorandum and articles
of association of Diamond, as amended to date have been filed as
Exhibits to the Diamond SEC Documents (as defined below).
(iii) In all material respects, the statutory books and minute
books of Diamond contain accurate records of all meetings and
accurately reflect all other actions taken by the shareholders, the
Board of Directors and all committees of the Board of Directors of
Diamond since Diamond's incorporation.
(b) Subsidiaries. Exhibit 21 to Diamond's Annual Report on Form 10K
for the Year Ended December 31, 1997 ("Diamond's Form 10K") sets forth all the
subsidiaries of Diamond. Except as set forth in Section 3.1(b) of the
Transferors Disclosure Schedule, all such outstanding shares of or other equity
interests in, each such subsidiary have been validly issued and are fully paid
and nonassessable and are owned directly or indirectly by Diamond, free and
clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever (collectively, "Liens") and free of
any other restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital
6
<PAGE>
stock or other ownership interests) and represent the entire allotted and
issued share capital of each company.
(c) Capital Structure. The authorized share capital of Diamond
consists of 150,000,000 ordinary shares and six (6) deferred shares. As of the
date hereof: (i) 59,138,791 ordinary shares and six (6) deferred shares were
issued and outstanding and the shares comprised all of the shares in Diamond
issued and outstanding; (ii) 870,500 ordinary shares of Diamond were reserved
for issuance pursuant to the Senior Management Option Scheme, a complete and
correct copy of the rules of which has been made available to NTL (such scheme,
the "Stock Plan") and (iii) 654,000 ordinary shares of Diamond were reserved for
issuance pursuant to an option agreement dated January 7, 1995 between Diamond
and CGT Family Corporation, a complete and correct copy of which has been made
available to NTL (such agreement, the "CGT Option Agreement"). As of the date
hereof, Section 3.1(c) of the Transferors Disclosure Schedule sets forth a
complete and correct list of the number of Shares subject to employee share
options or other rights to purchase or receive Shares granted under the Stock
Plan (collectively, "Stock Options"), the dates of grant and exercise prices
thereof. All outstanding shares of Diamond are, and all shares which may be
issued prior to the Closing Date will be, when issued, duly authorized, validly
issued, fully paid and nonassessable. Except as set forth in this Section 3.1(c)
and in Section 3.1(c) of the Transferors Disclosure Schedule and except for
changes since May 15, 1998 resulting from the issuance of Shares pursuant to the
Stock Options or the CGT Option Agreement, (x) there are not issued, reserved
for issuance or outstanding (A) any shares or other securities or loan capital
of Diamond, (B) any securities of Diamond or any Diamond subsidiary convertible
into or exchangeable or exercisable for shares or securities or loan capital of
Diamond, (C) any warrants, calls, options or other rights to acquire from
Diamond or any Diamond subsidiary, and any obligation of Diamond or any Diamond
subsidiary to issue, shares or other securities or loan capital of Diamond and
(y) there are no outstanding obligations of Diamond or any Diamond subsidiary to
repurchase, redeem or otherwise acquire any such
7
<PAGE>
securities or loan capital or to issue, deliver or sell, or cause to be issued,
delivered or sold, any such securities or loan capital. Except as set forth in
Section 3.1(c) of the Transferors Disclosure Schedule, there are no outstanding
(A) securities of Diamond or any Diamond subsidiary convertible into or
exchangeable or exercisable for shares or other securities or ownership
interests or loan capital in any Diamond subsidiary, (B) warrants, calls,
options or other rights to acquire from Diamond or any Diamond subsidiary, and
any obligation of Diamond or any Diamond subsidiary to issue, any shares, or
other securities or ownership interests or loan capital in, or any securities
convertible into or exchangeable or exercisable for any shares, securities or
ownership interests or loan capital in, any Diamond subsidiary or (C)
obligations of Diamond or any Diamond subsidiary to repurchase, redeem or
otherwise acquire any such outstanding securities or loan capital of Diamond
subsidiaries or to issue, deliver or sell, or cause to be issued, delivered or
sold, any such securities or loan capital. Except as set forth in Section 3.1(c)
of the Transferors Disclosure Schedule, neither Diamond nor any Diamond
subsidiary is a party to any agreement restricting the transfer of, relating to
the voting of, requiring registration of, or granting any preemptive or, except
as provided by the terms of the Stock Options or under the CGT Option Agreement,
antidilutive rights with respect to, any securities or loan capital of the type
referred to in the two preceding sentences. Other than the Diamond subsidiaries,
Diamond does not directly or indirectly beneficially own, any securities or
other beneficial ownership interests in any other entity.
(d) Noncontravention. Except as set forth in Section 3.1(d) of the
Transferors Disclosure Schedule, the execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under, or result in the
creation of any Lien upon any of the properties or assets
8
<PAGE>
of Diamond or any of its subsidiaries under, (i) the memorandum of association
or articles of association of Diamond or any of its subsidiaries, (ii) any loan
or credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license or similar authorization
applicable to Diamond or any of its subsidiaries or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Diamond or any of its
subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
losses or Liens that individually or in the aggregate would not (x) have a
material adverse effect on Diamond or (y) reasonably be expected to impair in
any material way the ability of any Transferor to perform its obligations under
this Agreement. No consent, approval, order or authorization of, action by or in
respect of, or registration, declaration or filing with, any federal, state,
local or foreign government, any court, administrative, regulatory or other
governmental agency, commission or authority or any nongovernmental
self-regulatory agency, commission or authority (a "Governmental Entity") is
required by or with respect to Transferors or Diamond or any of its subsidiaries
in connection with the execution and delivery of this Agreement by Transferors
or the consummation by Transferors of the transactions contemplated by this
Agreement, except for (1) such filings with Governmental Entities to satisfy the
applicable requirements of state securities or "blue sky" laws; (2) receipt of
the Required British Approvals (as defined); and (3) such consents, approvals,
orders or authorizations the failure of which to be made or obtained
individually or in the aggregate would not (x) have a material adverse effect on
Diamond or (y) reasonably be expected to impair in any material way the ability
of Transferors to perform their respective obligations under this Agreement.
(e) SEC Documents; Undisclosed Liabilities; Financial Statements.
(i) Diamond has filed all required registration statements,
prospectuses, reports,
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schedules, forms, statements and other documents (including exhibits and all
other information incorporated therein) required to be filed with the SEC since
January 1, 1996 (the "Diamond SEC Documents"). As of their respective dates, the
Diamond SEC Documents complied in all material respects with the requirements of
the Securities Act of 1933, as amended (the "Securities Act"), or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Diamond SEC Documents, and none of the Diamond SEC Documents when filed
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(ii) The financial statements of Diamond included in the Diamond
SEC Documents comply as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable
accounting requirements and the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by Form 10-Q of the
SEC) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated financial position of Diamond and
its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as reflected in such
financial statements or in the notes thereto neither Diamond nor any
of its subsidiaries has any liabilities or obligations of any nature
which, individually or in the aggregate, would have a material adverse
effect on Diamond.
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(iii) The management accounts of Diamond and its subsidiaries for
the period from January 1, 1998 to April 30, 1998 have been prepared
on a substantially consistent basis as that adopted for the financial
statements included in the Diamond SEC Documents and fairly present,
in all material respects the operating results, working capital
position and net indebtedness of Diamond and its subsidiaries as at
and for the period ended on the date to which they have been prepared
subject to normal quarterly and annual closing adjustments and subject
to the absence of (i) a statement of cash flows and (ii) explanatory
notes that would each be included in financial statements prepared in
accordance with generally accepted accounting principles.
(f) Absence of Certain Changes or Events. Except (x) as disclosed in
Section 3.1(f) of the Transferors Disclosure Schedule, (y) as permitted by
Section 4.1(a) or (z) as disclosed in any Diamond SEC Document filed since
December 31, 1997 and prior to the date hereof, since December 31, 1997 Diamond
and its subsidiaries have conducted their business only in the ordinary and
usual course and since such date there has not been (i) any material adverse
change in Diamond, (ii) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, shares, other securities or
property) with respect to any of Diamond's shares, (iii) any split, combination
or reclassification of any of Diamond's shares or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for Diamond's shares except for issuances of ordinary shares
upon the exercise of Stock Options awarded prior to the date hereof in
accordance with their present terms, or pursuant to the CGT Option Agreement in
accordance with its present terms (iv)(A) any granting by Diamond or any of its
subsidiaries to any current or former director, executive officer or any of the
persons identified as a key employee of Diamond or its subsidiaries in Section
3.1(f) of Transferors' Disclosure Schedule (the "Key Employees") of any
increase in compensation, bonus or
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other benefits, except for normal increases as a result of promotions, normal
increases of base pay in the ordinary and usual course of business or as
required under any employment agreements in effect as of December 31, 1997, (B)
any granting by Diamond or any of its subsidiaries to any such current or former
director, executive officer or Key Employee of any increase in severance or
termination pay, or (C) any entry by Diamond or any of its subsidiaries into, or
any amendment of, any employment, deferred compensation, consulting, severance,
termination or indemnification agreement with any such current or former
director, executive officer or Key Employee, (v) except insofar as may have been
required by a change in GAAP, any change in accounting methods, principles or
practices by Diamond materially affecting its assets, liabilities or business,
(vi) any tax election, notice, claim agreement or surrender that individually or
in the aggregate would have a material adverse effect on Diamond or any of its
subsidiaries or tax attributes or any settlement or compromise of any material
Taxation (as hereinafter defined) liability, or (vii) any action taken by
Diamond or any of the Diamond subsidiaries during the period from December 31,
1997 through the date of this Agreement that, if taken during the period from
the date of this Agreement through the Closing Date would constitute a breach of
Section 4.1(a).
(g) Compliance With Applicable Laws; Litigation.
(i) Diamond and its subsidiaries, and the respective employees of
Diamond and its subsidiaries hold all permits, licenses, variances,
exemptions, orders, registrations and approvals of all Governmental
Entities which are required for the operation of the respective
businesses of Diamond and its subsidiaries (the "Diamond Permits"),
except where the failure to have any such Diamond Permits individually
or in the aggregate would not have a material adverse effect on
Diamond. Diamond and its subsidiaries are, and have at all times been,
in compliance with the terms of the Diamond Permits and all applicable
statutes, laws, ordinances, rules and regulations, except where the
failure so to comply individually or in the aggregate, would not have
a
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material adverse effect on Diamond. No action, demand, requirement,
investigation or proceeding by any Governmental Entity and no suit,
action or proceeding by any person, in each case with respect to
Diamond or any of its subsidiaries or any of their respective
properties is existing or pending or, to the knowledge (as defined in
Section 8.7) of Transferors, threatened other than, in each case,
those the outcome of which individually or in the aggregate would not
(A) have a material adverse effect on Diamond or (B) reasonably be
expected to impair in any material way the ability of Transferors to
perform their respective obligations under this Agreement or prevent
or materially delay the consummation of any of the transactions
contemplated by this Agreement or the obligations of Diamond or any of
its subsidiaries under any contract with any third party.
(ii) Except as set forth in Section 3.01(g) of the Transferor
Disclosure Schedule (x) neither Diamond nor any Diamond subsidiary is
subject to any outstanding order, judgment, injunction or decree or
is a party to any undertaking or assurance given to any court,
governmental agency or other regulatory body which is still in force
and (y) to the knowledge of Transferors, there is no proceeding or
threatened proceeding which may result in Diamond or any Diamond
subsidiary becoming subject to any such order, judgement, injunction
or decree or being required to be a party to any such undertaking or
assurance.
(iii) Diamond and its subsidiaries have obtained the necessary
licences pursuant to the Wireless Telegraphy Act 1949, the
Telecommunications Act 1984 the Cable and Broadcasting Act 1984, the
Broadcasting Act 1990 (as amended) and the Broadcasting Act 1996 to
enable them to engage in the cable television and telecommunications
business as described in the Diamond SEC Document (together "the
Licences"). All the Licences are listed in Section 3.1(g)(iii) of the
Transferors
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Disclosure Schedule and copies have been supplied to NTL. Except as
set forth in Section 3(g)(iii) of the Transferors
Disclosure Schedule, the Licences are (A) in full force and effect in
accordance with the copies supplied to NTL; (B) have been complied
with in all material respects including, without limitation, any build
obligations set out in such licences as currently in effect; and (C)
all fees due and payable to date in respect of such licences have been
paid in full. There are no circumstances which indicate that any of
the Licences will or may be amended in any material respect, revoked
or not renewed, in whole or in part, in the ordinary and usual course
of events and neither the Closing nor the performance by any party of
their obligations under this Agreement will, or is reasonably likely
to, give rise to any of the foregoing. No objection has been made by
the DTI, the ITC or the Director General of Telecommunications and no
proceedings have been threatened by any relevant authority (including
without limitation by any relevant local authority) which would, if
successful, have a material adverse effect on the business of Diamond,
in relation to any construction program of Diamond and its
subsidiaries, taken as a whole, for the construction of their
prospective cable television and telecommunications systems.
(h) Incentive Compensation/Benefit Plans. Diamond has delivered to NTL
true and complete copies of the documents listed in Section 3.1(h) of the
Transferors Disclosure Schedule.
(i) With respect to any employee benefit plans and arrangements
of Diamond and its subsidiaries (the "Diamond Benefit Plans"),
Diamond, its subsidiaries and any Diamond Benefit Plans have been
operated, and are, in compliance with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the Code and all other applicable laws.
(ii) No Diamond Benefit Plan is subject to Title IV of ERISA or
is a "multiemployer plan"
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within the meaning of Section 3(37) of ERISA. Neither Diamond nor any
of its subsidiaries has incurred any unsatisfied liability under Title
IV of ERISA. None of Diamond nor any of its subsidiaries has any
contingent liability under Section 4204 of ERISA.
(iii) "Schemes" means all and each of the pension schemes
identified in Section 3.1(h)(iii) of the Transferors Disclosure
Schedule, and "Scheme Documents" means the documents relating to the
Schemes identified in Section 3.1(h)(iii) of the Transferors
Disclosure Schedule. The Scheme Documents have been made available to
NTL and comprise all the material documents governing the Schemes.
Except pursuant to the Schemes or as required by applicable law,
neither Diamond or any of its subsidiaries have paid, provided or
contributed towards and are not under any obligation (whether or not
legally enforceable) to pay, provide or contribute towards any
retirement/death/disability benefit for or in respect of any present
or past officer employee (or any spouse, child or dependant of any of
them) of Diamond or any of its subsidiaries. The Schemes are approved
by the Board of the Inland Revenue as an exempt approved Scheme
(within the meaning of Section 592, Income Taxes and Corporation Act
1988).
(iv) The Scheme Documents correctly describe in all material
respects all the benefits which are paid or which may become payable
under the Schemes. The Schemes have at all times, in all material
respects, been operated, and employees have been eligible to join the
Schemes, in accordance with the provisions governing them and all
applicable laws and fiscal and other regulatory requirements. All
amounts due to the Schemes from Diamond or any of its subsidiaries
have been paid and were properly assessed and calculated in accordance
with the provisions governing the Schemes. There are no actions,
suits, complaints or claims pending or threatened against Diamond or
any of its subsidiaries or the trustees of the Schemes.
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The Schemes provide only money purchase benefits (as defined in
Section 181 of the Pension Schemes Act 1993) and lump sum death
benefits. The rates of contributions payable by Diamond and its
subsidiaries have been shown in Section 3.1(h)(iv) of the Transferors
Disclosure Schedule. The liability for all lump sum death benefits
which may become payable under the Schemes is fully insured with a
reputable insurance company on normal terms and at normal rates with
all lives assured being treated as enjoying good health and all
premiums have been properly paid.
(i) Taxes. (i) Each of Diamond and its subsidiaries has filed all
material Tax (as defined herein) returns, claims, applications,
computations and reports required to be filed by it and all such
returns, claims, applications, computations and reports are complete
and correct in all material respects, or requests for extensions to
file such returns, claims, applications, computations and reports have
been timely filed, granted and have not expired. Except as described
in Section 3.1(i) of the Transferors Disclosure Schedule, Diamond and
each of its subsidiaries has paid all Taxes (as defined herein) which
it or they have become liable to pay and it or they are not now, and
have never been, under a liability to pay any fine, surcharge,
penalty or interest in connection with any Taxes. The most recent
financial statements contained in the Diamond SEC Documents reflect an
adequate reserve in accordance with GAAP for all Taxes payable by
Diamond and its subsidiaries for all taxable periods and portions
thereof accrued through the date of such financial statements.
(ii) Except as described in Section 3.1(ii) of the Transferors
Disclosure Schedule, no deficiencies for any Taxes have been proposed,
asserted or assessed against Diamond or any of its subsidiaries that
are not adequately reserved for. Diamond has never been included as a
member of any United States consolidated tax group and neither Diamond
nor any of its subsidiaries are or have ever been liable for Taxes
levied in any jurisdiction other than the United Kingdom.
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(iii) As used in this Agreement, "Tax", "Taxes" or "Taxation"
shall include all (x) national, state, provincial or local, corporate,
capital, income, property, sales, use, occupation, lease, excise,
value added, stamp duty, stamp duty reserve and other taxes or similar
governmental charges, including any interest, penalties, fines,
charges or additions with respect thereto, (y) liability for the
payment of any amounts of the type described in (x) as a result of
being a member of an affiliated, consolidated, combined or unitary,
group or consortium, and (z) liability for the payment of any amounts
as a result of being party to any tax sharing agreement or agreement
relating to tax relief or as a result of any express or implied
obligation to indemnify any other person with respect to the payment
of any amounts of the type described in clause (x) or (y).
(j) Brokers. Except pursuant to advisory fee letters previously made
available by Diamond to NTL, no broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Diamond.
(k) Intellectual Property. Diamond and its subsidiaries own or have a
valid license to use all trademarks, service marks, trade names, patents and
copyrights (including any registrations or applications for registration of any
of the foregoing) (collectively, the "Diamond Intellectual Property") necessary
to carry on their respective businesses substantially as currently conducted.
Neither Diamond nor any such subsidiary has received any notice of infringement
of or conflict with, and, to Diamond's knowledge, there are no infringements of
or conflicts (i) with the rights of others with respect to the use of, or (ii)
by others with respect to, any Diamond Intellectual Property that individually
or in the aggregate, in either such case, would have a material adverse effect
on Diamond.
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(l) Certain Contracts. Except as set forth in Section 3.1(l) of the
Transferors Disclosure Schedule, (A) neither Diamond nor any of its subsidiaries
is a party to or bound by (i) any "material contract" (as such term is defined
in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any non-competition
agreement or any other agreement or obligation which purports to limit in any
material respect the manner in which, or the localities in which, all or any
material portion of the business of Diamond and its subsidiaries (including, for
purposes of this Section 3.1(l), NTL and its subsidiaries, assuming the
transactions contemplated hereby have taken place), taken as a whole, is or
would be conducted, (iii) any agreement or arrangement between Diamond or any
Diamond subsidiary, on the one hand, and any Transferor or its Affiliate (as
defined in Section 8.3 below), on the other, (iv) any contract or other
agreement which would prohibit or materially delay the consummation of any of
the transactions contemplated by this Agreement, (v) any partnership, joint
venture, European Economic Interest Grouping or consortium agreement or any
agreement for sharing income, or (vi) any agreement or arrangement which is
liable to be terminated by another party or under which rights of any person are
liable to arise or be affected as a result of any change in the control,
management or shareholders of Diamond and (B) none of Diamond or any subsidiary
of Diamond is subject to any agreements related to indebtedness for borrowed
money ("Debt Agreements"). (All contracts of the type described in clauses
(A)(i), (ii),(iii), (iv), (v) and (vi) and all Debt Agreements being referred to
herein as "Diamond Material Contracts"). Each Diamond Material Contract is valid
and binding on Diamond (or, to the extent a Diamond subsidiary is a party, such
entity) and is in full force and effect, and Diamond and each Diamond subsidiary
have in all material respects performed all their respective obligations
required to be performed by them to date under each Diamond Material Contract,
except where such noncompliance, individually or in the aggregate, would not
have a material adverse effect on Diamond. Neither Diamond nor any Diamond
subsidiary knows of, or has received notice of, any violation or default under
(nor, to the knowledge of Transferors, does
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there exist any condition which with the passage of time or the giving of notice
or both would result in such a violation or default under) any Diamond Material
Contract.
(m) Employees. (i) True and complete particulars relating to the
employment of each of the Key Employees are contained in Section 3.1(m) of the
Transferors Disclosure Schedule including, (A) period of continuous employment;
(B) job title or job function and workplace location; (C) all terms and
conditions of employment (including entitlement to annual salary and
arrangements relating to hours of work (including any agreement with any Key
Employee to extend such hours of work) private medical care, permanent health
insurance and company cars); and (D) details of any other benefits including but
not limited to profit sharing, bonus, commission or other incentive arrangements
whether provided on a contractual or discretionary basis. There are no employees
of Diamond or any of its subsidiaries on which the business of Diamond is
substantially dependent other than the Key Employees.
(ii) Copies of any handbooks or works rules or procedures
(including any disciplinary or grievance procedures) and all
collective, procedural, recognition or other agreements (whether
written or oral) with any trade union, works council or other staff
association or representative and details of any arrangements relating
to the election of any person as such a representative have been made
available to NTL.
(iii) Diamond has in all material respects complied with all its
obligations to, and no amount which is in arrears or unpaid is due to
or in respect of, any of the employees of Diamond or any of its
subsidiaries ("the Employees") arising out of or in connection with:
(A) any of their terms and conditions of employment and/or customs and
practices related thereto; (B) any statutes and regulations relevant
to their employment including, but not limited to, those relating to
discrimination by reason of sex, race or disability, any duties to
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inform and consult employees and/or their representatives and any
obligation to make payments to the UK Inland Revenue and to pay
National Insurance contributions; and/or (C) any orders and awards
made in relation to them or any of them.
(iv) Except as set forth in Schedule 3.1(m)(iv) of the
Transferors Disclosure Schedule there are no arrangements, whether
contractual or otherwise, entitling any of the Employees to any
payment or other benefits arising from the transactions contemplated
hereby.
(v) Except as described in Section 3.1(m)(v) of the Transferors
Disclosure Schedule there are no agreements or arrangements for the
payment of allowances, lump sums or other benefits on death or during
any periods of sickness or disablement for the benefit of any of the
Employees or their dependants.
(vi) No trade union is recognized in relation to any of the
Employees nor has Diamond or any of its subsidiaries entered into any
collective agreements relating to any of the Employees and nor is
there any works council or other staff association in existence in
relation to any of the Employees and no person has been elected as a
representative of any of the Employees nor have any arrangements been
made for any such election.
(n) Insolvency. No receiver or administrative receiver has been
appointed of the whole or any part of the assets or undertaking of Diamond or
any of its subsidiaries. No administration order has been made in relation to
Diamond or any of its subsidiaries and no petition for such an order has been
presented. No proposal for a voluntary arrangement between Diamond or any of its
subsidiaries and any of their respective creditors (or any class of them) has
been made to or is in the contemplation of Diamond or any of its subsidiaries.
No petition has been presented, no order has been made and no resolution has
been passed for the winding-up of Diamond or any of its subsidiaries. Neither
Diamond nor any of its subsidiaries has stopped payment to its creditors nor is
any of them insolvent or unable to pay its debts as and when they fall due. No
unsatisfied judgement is outstanding against Diamond or any of its subsidiaries.
Section 3.2. Representations and Warranties of Transferors. Each
Transferor severally and not jointly, as to itself only represents and warrants
to NTL:
(a) Organization, Standing and Corporate Power. Except for Transferors
that are individuals, such Transferor is a corporation, partnership or other
legal entity duly organized, validly existing and in good standing (with respect
to jurisdictions which recognize such concept) under the laws of the
jurisdiction in which it is organized.
(b) Authority; Noncontravention. Except for Transferors that are
individuals, such Transferor has all requisite corporate power and authority to
enter into this Agreement (or partnership). Except for Transferors that are
individuals, the execution and delivery of this Agreement by such Transferor and
the consummation by Transferor of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate (or partnership)
action on the part of such Transferor. This Agreement has been duly executed and
delivered by Transferor and, assuming the due authorization, execution and
delivery by NTL and each other Transferor, constitutes the legal, valid and
binding obligation of Transferor, enforceable against Transferor in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy and similar laws or by general principles of equity (whether
considered in a proceeding in equity or at law). Except as set forth in Section
3.2(b) of the Transferors Disclosure Schedule, the execution and delivery of
this Agreement by such Transferor do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement by such Transferor will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any
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obligation or loss of a benefit under, or result in the creation of any Lien
upon any of the properties or assets of such Transferor or, if applicable, any
of its subsidiaries under, (i) the memorandum of association or by-laws (or
other governing documents) of such Transferor, (ii) any material loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license or similar authorization
applicable to such Transferor or its properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to such Transferor or its properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts, violations,
defaults, rights, losses or Liens that individually or in the aggregate would
not impair in any material way the ability of such Transferor to perform its
obligations under this Agreement. No consent, approval, order or authorization
of, action by or in respect of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Transferor in connection
with the execution and delivery of this Agreement by Transferor or the
consummation by Transferor of the transactions contemplated by this Agreement,
except for (1) such filings with Governmental Entities to satisfy the applicable
requirements of state securities or "blue sky" laws; (2) receipt of the Required
British Approvals (as defined); and (3) such consents, approvals, orders or
authorizations the failure of which to be made or obtained individually or in
the aggregate would not impair in any material way the ability of Transferor to
perform its obligations under this Agreement.
(c) Title, Absence of Liens. Except as set forth in Section 3.2(c) of
the Transferors Disclosure Schedule, all Shares set forth opposite Transferor's
name on the signature page hereto are hereto owned directly or indirectly by
Transferor, free and clear of all Liens and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests).
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(d) Brokers. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Transferor.
(e) Investment Intent; Private Placement.
(i) Such Transferor is knowledgeable, sophisticated and
experienced in making, and is qualified to make, decisions with
respect to investments in equity securities presenting an investment
decision like that involved in the acquisition of the NTL Common
Stock. Such Transferor or its counsel, accountants or other investment
advisers have requested, received, reviewed and considered all
information deemed relevant by them in making an informed decision to
acquire the NTL Common Stock.
(ii) Such Transferor is acquiring the NTL Common Stock for
investment for its own account only and not with a view to, or for
resale in connection with, any "distribution" thereof within the
meaning of the Securities Act. Such Transferor has no present
intention of selling, granting any participation in, or otherwise
distributing such NTL Common Stock, except in compliance with the
Securities Act or pursuant to an available exemption thereunder.
(iii) Such Transferor understands that the NTL Common Stock which
it is to receive under this Agreement has not been registered under
the Securities Act or registered or qualified under any state
securities law in reliance on specific exemptions therefrom, which
exemptions may depend upon, among other things, the bona fide nature
of each Transferor's investment intent as expressed herein. Each
Transferor is familiar with Rule 144 under the Securities Act, as
presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act. Each Transferor
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<PAGE>
further understands that the certificate(s) representing the NTL
Common Stock shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE
SECURITIES LAWS. THE SHARES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
Section 3.2 Representations and Warranties of NTL. Except as fairly
disclosed in the NTL SEC Documents (as defined in Section 3.3(e)) or as set
forth on the Disclosure Schedule delivered by NTL to Transferors prior to the
execution of this Agreement (the "NTL Disclosure Schedule") and making reference
to the particular subsection of this Agreement to which exception is being
taken, NTL represents and warrants to Transferors as follows:
(a) Organization, Standing and Corporate Power.
(i) Each of NTL and its subsidiaries is a corporation or other
legal entity duly organized, validly existing and in good standing
(with respect to jurisdictions which recognize such concept) under the
laws of the jurisdiction in which it is organized and has the
requisite corporate or other power, as the case may be, and authority
to carry on its business as now being conducted, except, as to
subsidiaries, for those jurisdictions where the failure to be so
organized, existing or in good standing individually or in the
aggregate would not have a material adverse effect on NTL. Each of NTL
and its subsidiaries is duly qualified or licensed to do business and
is in good standing (with respect to jurisdictions which recognize
such concept) in each jurisdiction in which the nature of its business
or the ownership, leasing or operation of its properties makes such
qualification or licensing
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<PAGE>
necessary, except for those jurisdictions where the failure to be so
qualified or licensed or to be in good standing individually or in the
aggregate would not have a material adverse effect on NTL.
(ii) NTL has delivered to Transferors prior to the execution of
this Agreement complete and correct copies of its certificate of
incorporation and by-laws, as amended to date.
(b) Subsidiaries. Except as set forth in Section 3.3(b) of the NTL
Disclosure Schedule, Exhibit 21 to NTL's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 includes all the subsidiaries of NTL which
as of the date of this Agreement are subsidiaries. Except as set forth in
Section 3.3(b) of the NTL Disclosure Schedule, all the outstanding shares of
capital stock of, or other equity interests in, each such subsidiary have been
validly issued and are fully paid and nonassessable and are owned directly or
indirectly by NTL, free and clear of all Liens and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests).
(c) Capital Structure. As of the date hereof, the authorized capital
stock of NTL consists of 100,000,000 shares of NTL Common Stock and 2,500,000
shares of preferred stock, par value $.01 per share, of NTL ("NTL Preferred
Stock"). At the close of business on May 29, 1998: (i) 41,264,252 shares of NTL
Common Stock were issued and outstanding; (ii) no shares of NTL Common Stock
were held by NTL in its treasury; (iii) 117,465,922 shares of 13% Senior
Redeemable Exchangeable Preferred Stock were issued and outstanding (the "NTL
13% Preferred"), (iv) 1,000,000 shares of Series A Junior Participating
Preferred Stock were reserved for issuance pursuant to a Rights Agreement, dated
as of October 13, 1993, between NTL and Continental Stock Transfer & Trust
Company (the "Rights Agreement"); (v) 7,260,726 shares of NTL Common Stock were
reserved for issuance pursuant to the conversion of the 7% Convertible
Subordinated Notes due 2008 ("2008 Notes") and 973,429 shares of NTL Common
Stock were reserved for issuance upon the exercise of
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<PAGE>
certain warrants (2008 Notes and such warrants, the "NTL Convertible
Securities"); and (vi) 15,764,279 shares of NTL Common Stock were reserved for
issuance pursuant to various NTL employee and director stock option (such
options, collectively, the "NTL Common Stock Options"). Pursuant to an Agreement
and Plan of Amalgamation (the "Amalgamation Agreement") dated February 4, 1998,
between NTL and Comcast UK Cable Partners Limited, NTL will issue additional
shares of NTL Common Stock and may issue new classes of NTL preferred stock.
Except as set forth in this Section 3.3(c) and except for changes since May 29,
1998 resulting from the issuance of shares of NTL Common Stock pursuant to the
conversion or exercise of NTL Convertible Securities or the exercise of NTL
Employee Stock Options, as of the date hereof, (x) there are not issued,
reserved for issuance or outstanding (A) any shares of capital stock or other
voting securities of NTL, (B) any securities of NTL or any NTL subsidiary
convertible into or exchangeable or exercisable for shares of capital stock or
voting securities of NTL, (C) any warrants, calls, options or other rights to
acquire from NTL or any NTL subsidiary, and any obligation of NTL or any NTL
subsidiary to issue, any capital stock, voting securities or securities
convertible into or exchangeable or exercisable for capital stock or voting
securities of NTL, and (y) there are no outstanding obligations of NTL or any
NTL subsidiary to repurchase, redeem or otherwise acquire any such securities or
to issue, deliver or sell, or cause to be issued, delivered or sold, any such
securities. As of the date hereof, there are no outstanding (A) securities of
NTL or any NTL subsidiary convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities or ownership interests in any
NTL subsidiary, (B) warrants, calls, options or other rights to acquire from NTL
or any NTL subsidiary, and any obligation of NTL or any NTL subsidiary to issue,
any capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable or exercisable for any capital
stock, voting securities or ownership interests in, any NTL subsidiary or (C)
obligations of NTL or any NTL subsidiary to repurchase, redeem or otherwise
acquire any such outstanding securities of NTL subsidiaries or to
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issue, deliver or sell, or cause to be issued, delivered or sold, any such
securities.
(d) Authority; Noncontravention. NTL has all requisite corporate power
and authority to enter into this Agreement to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement by
NTL and the consummation by NTL of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action on the
part of NTL, including, if required, by the shareholders of NTL prior to the
Closing Date. This Agreement has been duly executed and delivered by NTL and,
assuming the due authorization, execution and delivery by Diamond and each
Transferor, constitutes the legal, valid and binding obligations of NTL,
enforceable against NTL in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy and similar laws or by
general principles of equity (whether considered in a proceeding in equity or at
law). Except as set forth in Section 3.3(d) of the NTL Disclosure Schedule, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit under, or result in the creation of any Lien upon any of the
properties or assets of NTL or any of its subsidiaries under, (i) the
certificate of incorporation or by-laws of NTL or the comparable organizational
documents of any of its subsidiaries, (ii) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise, license or similar authorization applicable to NTL or any
of its subsidiaries or their respective properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to NTL or any of its subsidiaries or their respective
properties or assets, other than, in the case of clauses (ii) and
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(iii), any such conflicts, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not (x) have a material adverse effect on
NTL or (y) reasonably be expected to impair the ability of NTL to perform its
obligations under this Agreement. No consent, approval, order or authorization
of, action by, or in respect of, or registration, declaration or filing with,
any Governmental Entity is required by or with respect to NTL or any of its
subsidiaries in connection with the execution and delivery of this Agreement by
NTL or the consummation by NTL of the transactions contemplated by this
Agreement, except for (1) such filings with Governmental Entities to satisfy the
applicable requirements of state securities or "blue sky" laws; (2) the receipt
of the Required British Approvals; and (3) such consents, approvals, orders or
authorizations the failure of which to be made or obtained individually or in
the aggregate would not (x) have a material adverse effect on NTL or (y)
reasonably be expected to impair the ability of NTL to perform its obligations
under this Agreement.
(e) SEC Documents; Undisclosed Liabilities. NTL has filed all required
registration statements, prospectuses, reports, schedules, forms, statements and
other documents (including exhibits and all other information incorporated
therein) with the SEC since January 1, 1997 (the "NTL SEC Documents"). As of
their respective dates, the NTL SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to such NTL SEC Documents, and none of the NTL SEC Documents when filed
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of NTL included in the NTL SEC Documents
comply as to form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP (except, in
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the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position of NTL
and its consolidated subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
Except (i) as reflected in such financial statements or in the notes thereto or
(ii) for liabilities incurred in connection with this Agreement or the
transactions contemplated hereby, neither NTL nor any of its subsidiaries has
any liabilities or obligations of any nature which, individually or in the
aggregate, would have a material adverse effect on NTL.
(f) Absence of Certain Changes or Events. Except as set forth in
Section 3.3(f) of the NTL Disclosure Schedule and except for liabilities
incurred in connection with this Agreement or the transactions contemplated
hereby, since December 31, 1997, NTL and its subsidiaries have conducted their
business only in the ordinary course or as disclosed in any NTL SEC Document
filed since such date and prior to the date hereof, and there has not been (i)
any material adverse change in NTL, (ii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of NTL's capital stock, (iii) any split,
combination or reclassification of any of NTL's capital stock or any issuance or
the authorization of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of NTL's capital stock, except for issuances of
NTL Common Stock upon conversion or exercise of NTL Convertible Securities or
exercise of NTL Employee Stock Options, in each case, awarded prior to the date
hereof in accordance with their present terms, (iv) except as required by a
change in GAAP, any change in accounting methods, principles or practices by NTL
materially affecting its assets, liabilities or business or (v) any tax election
that individually or in the aggregate would have a material adverse effect on
NTL or any of its tax
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attributes or any settlement or compromise of any material income tax liability.
(g) Compliance with Applicable Laws; Litigation.
(i) NTL, its subsidiaries and employees hold all permits,
licenses, variances, exemptions, orders, registrations and approvals
of all Governmental Entities which are required for the operation of
the businesses of NTL and its subsidiaries (the "NTL Permits"), except
where the failure to have any such NTL Permits individually or in the
aggregate would not have a material adverse effect on NTL. NTL and its
subsidiaries are in compliance with the terms of the NTL Permits and
all applicable statutes, laws, ordinances, rules and regulations,
except where the failure so to comply individually or in the aggregate
would not have a material adverse effect on NTL. As of the date of
this Agreement, no action, demand, requirement or investigation by any
Governmental Entity and no suit, action or proceeding by any person,
in each case with respect to NTL or any of its subsidiaries or any of
their respective properties, is pending or, to the knowledge of NTL,
threatened, other than, in each case, those the outcome of which
individually or in the aggregate would not (A) have a material adverse
effect on NTL or (B) reasonably be expected to impair in any material
way the ability of NTL to perform its obligations under this Agreement
or prevent or materially delay the consummation of any of the
transactions contemplated by this Agreement.
(ii) Neither NTL nor any NTL subsidiary is subject to any
outstanding order, injunction or decree which has had or, insofar as
can be reasonably foreseen, individually or in the aggregate will have
a material adverse effect on NTL.
(h) Absence of Changes in Benefit Plans. Since March 31, 1998, there
has not been any adoption or amendment in any material respect by NTL or any of
its
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subsidiaries of any collective bargaining agreement or any material bonus,
pension, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, retirement, vacation,
severance, disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding providing benefits to any current or former
employee, officer or director of NTL or any of its wholly owned subsidiaries
(collectively, the "NTL Benefit Plans"), or any material change in any actuarial
or other assumption used to calculate funding obligations with respect to any
NTL pension plans, or any material change in the manner in which contributions
to any NTL pension plans are made or the basis on which such contributions are
determined.
(i) ERISA Compliance.
(i) With respect to the NTL Benefit Plans, no event has occurred
and, to the knowledge of NTL, there exists no condition or set of
circumstances, in connection with which NTL or any of its subsidiaries
could be subject to any liability that individually or in the
aggregate would have a material adverse affect on NTL under ERISA, the
Code or any other applicable law.
(ii) Neither NTL nor any of its subsidiaries has incurred any
unsatisfied liability under Title IV of ERISA (other than liability
for premiums to the Pension Benefit Guaranty Corporation arising in
the ordinary course). No NTL Benefit Plan has incurred an "accumulated
funding deficiency" (within the meaning of Section 302 of ERISA or
Section 412 of the Code) whether or not waived. To the knowledge of
NTL, there are not any facts or circumstances that would materially
change the funded status of any NTL Benefit Plan that is a "defined
benefit" plan (as defined in Section 3(35) of ERISA) since the date of
the most recent actuarial report for such plan. No NTL Benefit Plan is
a "multiemployer plan" within the meaning of Section 3(37) of ERISA.
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(j) Taxes. (i) Each of NTL and its subsidiaries has filed all material
Tax returns and reports required to be filed by it and all such returns and
reports are complete and correct in all material respects, or requests for
extensions to file such returns or reports have been timely filed, granted and
have not expired, except to the extent that such failures to file, to be
complete or correct or to have extensions granted that remain in effect
individually or in the aggregate would not have a material adverse effect on
NTL. NTL and each of its subsidiaries has paid (or NTL has paid on its behalf)
all Taxes shown as due on such returns, and the most recent financial statements
contained in the NTL SEC Documents reflect an adequate reserve in accordance
with GAAP for all Taxes payable by NTL and its subsidiaries for all taxable
periods and portions thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any Taxes have been proposed, asserted
or assessed against NTL or any of its subsidiaries that are not
adequately reserved for, except for deficiencies that individually or
in the aggregate would not have a material adverse effect on NTL. The
federal income tax returns of NTL and each of its subsidiaries
consolidated in such returns for tax years through 1992 have closed by
virtue of the applicable statute of limitations.
(k) Tax Free Reorganization Matters.
(i) NTL and Transferors each has adopted a plan of reorganization
as provided in the Code and Treasury Regulations promulgated
thereunder (the "Treasury Regulations") with respect to the intended
qualification of the share exchange as a tax free reorganization
within the meaning of Section 368(a)(1)(B) of the Code;
(ii) To the best of NTL's knowledge, immediately after the
exchange contemplated by this Agreement, NTL will own shares of
Diamond's capital stock possessing at least eighty percent (80%) of
the combined voting power of all the shares of
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capital stock of Diamond entitled to vote and at least eighty percent
(80%) of each class of shares of capital stock of Diamond not entitled
to vote;
(iii) The transactions described in this Agreement have a "bona
fide business purpose" as defined in the Treasury Regulations.
It is understood that neither NTL or Diamond is representing, warranting,
covenanting or indemnifying as to the actual qualification of the share exchange
under Section 368(a)(1)(B) of the Code.
(l) Brokers. No broker, investment banker, financial advisor or other
person, other than Donaldson, Lufkin & Jenrette, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of NTL.
Section 3.6 No Counterclaim. Transferors undertake not to exercise any
right of counterclaim or set off any claim or right of recovery against Diamond
or any of its subsidiaries or any of their respective officers, employees,
auditors or advisers in relation to any claim which may be made in respect of
the warranties and representations contained in this Agreement.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1(a) Conduct of Business by Diamond. Except as set forth in
Section 4.1(a) of the Transferors Disclosure Schedule, as otherwise contemplated
by this Agreement or the transactions contemplated hereby as fairly disclosed in
Diamond's capital expenditure budgets previously made available to NTL as part
of the development of Diamond's business telecommunication business or as
consented to by NTL in writing, such consent not to be unreasonably withheld or
delayed, during the period from the date of this
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Agreement to the Closing Date, Transferors shall cause Diamond and its
subsidiaries to carry on their respective businesses in the ordinary and usual
course consistent with past practice and, to the extent consistent therewith,
use all reasonable efforts to preserve intact their current business
organizations and use reasonable efforts to keep available the services of their
current officers and other key employees and preserve their relationships with
those persons having business dealings with them. Without limiting the
generality of the foregoing (but subject to the above exceptions), during the
period from the date of this Agreement to the Closing Date, Transferors shall
not permit Diamond or any of its subsidiaries to:
(i) other than dividends and distributions by a direct or
indirect wholly owned subsidiary of Diamond to its parent, or by a
subsidiary that is partially owned by Diamond or any of its
subsidiaries, provided that Diamond or any such subsidiary receives or
is to receive its proportionate share thereof, (w) declare, set aside
or pay any dividends on, make any other distributions in respect of,
or enter into any agreement with respect to the voting of, any of its
shares, (x) split, combine, reclassify or vary any class rights
attached to, any of its shares or issue or create or authorize the
issuance of any shares or other securities or loan capital or (y)
capitalize any amount standing to the credit of any reserve or
purchase, redeem or otherwise acquire any shares or other securities
or loan capital of Diamond or any of its subsidiaries or any rights,
warrants or options to acquire any such shares or other securities or
loan capital or otherwise reorganize its share capital (z) grant any
option over any shares or other securities or loan capital or uncalled
capital or issue any securities convertible into shares or other
securities or loan capital;
(ii) issue, deliver, sell, pledge or otherwise encumber or
subject to any Lien any shares or any other securities or loan capital
or any rights, warrants or options to acquire, any such
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shares or other securities or loan capital (other than the issuance of
ordinary shares upon the exercise of Stock Options outstanding as of
the date hereof in accordance with their present terms or pursuant to
the CGT Option Agreement in accordance with its present terms);
(iii) amend its memorandum or articles of association or other
comparable organizational documents;
(iv) acquire or agree to acquire the shares or stock or other
securities of any other body corporate or any portion of the assets of
any business or any person;
(v) sell, lease, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its properties or
assets (including securitizations) other than (A) in the ordinary
course of trading consistent with past practice or (B) the sale,
lease, license or other disposition of up to (pound)750,000 of such
assets, in the aggregate;
(vi) incur any indebtedness for borrowed money, other than
pursuant to agreements or arrangements in effect as of the date
hereof, or issue any debt securities or assume, guarantee or endorse,
or otherwise as an accommodation become responsible for the
obligations of any person for borrowed money in an amount that exceeds
individually or in aggregate (pound)500,000;
(vii) enter into any joint venture, partnership or European
Economic Interest Grouping;
(viii) enter into any contract or commitment or any transaction
otherwise than (A) in the ordinary and usual course of business and
(B) at arms' length and for full value;
(ix) enter into any contract, commitment or arrangement with
Transferors or any of their
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Affiliates or vary, supplement or amend such existing contract,
commitment or arrangement (other than on terms no less favorable than
would be obtained from unaffiliated third parties, and as approved by
a resolution of the Board of Directors of Diamond that contains such a
conclusion);
(x) engage any employees or consultants having an annual salary
in excess of (pound)100,000 or make a material change in the terms and
conditions of employment or engagement or pension benefits of any
employees or consultants;
(xi) enter into any contract or commitment which either
individually or in the aggregate may result in expenditure in excess
of (pound)250,000 per month;
(xii) enter into any material agreement, arrangement or
understanding with respect to programming (except for the transaction
with [newspaper]), software, the provisioning of cable modem internet
services, billing, the provisioning of digital CATV services and/or
the acquisition of set top boxes, switching equipment or other
computer and/or telecommunications equipment with a value in excess of
(pound)1 million;
(xiii) make or change any material Tax election or method of
accounting or settle any material Tax dispute or controversy; or
(xiv) authorize, or commit or agree to take, any of the foregoing
actions;
provided that the limitations set forth in this Section 4.1(a) (other than
clause (iii)) shall not apply to any transaction between Diamond and any wholly
owned subsidiary or between any wholly owned subsidiaries of Diamond. NTL shall
treat as confidential any information which Diamond discloses to NTL in respect
of any Affiliate and designates as confidential.
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(b) Other Actions. Except as required by law, Transferors undertake to
NTL that they shall procure that Diamond and its subsidiaries shall not, and NTL
undertakes to Transferors that it shall not and shall not permit any of its
subsidiaries to, voluntarily take any action that would, or that could
reasonably be expected to, result in (i) any of the representations and
warranties given by Transferors (where this undertaking is given by Transferors)
or by NTL (where this undertaking is given by NTL) set forth in this Agreement
that are qualified as to materiality becoming untrue at the Closing Date (as if
made at and as of such time), (ii) any of such representations and warranties
that are not so qualified becoming untrue in any material respect at the Closing
Date (as if made at and as of such time), or (iii) any of the conditions set
forth in Article VI not being satisfied.
(c) Advice of Changes. At, or prior to, the date hereof, Transferors
shall appoint one Transferor to act as the Transferors' Representative (the
"Transferors' Representative"). The Transferors' Representative is set forth on
Section 4.1, (c) of the Transferors Disclosure Schedule. Each Transferor
(through the Transferors' Representative) and NTL shall promptly advise the
Transferors' Representative or NTL, as the case may be, orally and in writing to
the extent it has knowledge of (i) any representation or warranty contained in
this Agreement that is qualified as to materiality becoming untrue or inaccurate
in any respect or any such representation or warranty that is not so qualified
becoming untrue or inaccurate in any material respect, (ii) any failure to
comply in any material respect with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied under this
Agreement and (iii) any change or event having, or which, insofar as can
reasonably be foreseen, could reasonably be expected to have a material adverse
effect on the truth of any of the representations and warranties or the ability
of the conditions set forth in Article VI to be satisfied; provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties (or
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remedies with respect thereto) or the conditions to the obligations of the
parties under this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Access to Information; Confidentiality. Subject to the
Confidentiality Agreement dated May 20, 1998, between NTL and Transferors (the
"Confidentiality Agreement"), and subject to restrictions contained in
confidentiality or other agreements to which such party is subject (which such
party will use its reasonable efforts to have waived) and applicable law,
Transferors undertake to NTL to procure that Diamond and its subsidiaries shall,
and NTL undertakes to Transferors that it shall, and shall cause each of its
subsidiaries to, afford to Transferors' Representative or NTL, as the case may
be, and to the officers, employees, accountants, counsel, financial advisors and
other representatives of Transferors' Representative or NTL, as the case may be,
reasonable access during normal business hours during the period prior to the
Closing Date to all the properties, books, contracts, commitments, personnel and
records of Diamond and its subsidiaries (where the undertaking is given by
Transferors) and of NTL and its subsidiaries (where the undertaking is given by
NTL) and, during such period, Transferors undertake to NTL to procure that
Diamond and its subsidiaries shall, and NTL shall, and shall cause each of its
subsidiaries to, furnish promptly to Transferors' Representative or NTL, as the
case may be, (a) a copy of each report, schedule, registration statement and
other document filed by Diamond or any of its subsidiaries (where the undertaken
is given by Transferors) or by NTL or any of its subsidiaries (where the
undertaken is given by NTL) during such period pursuant to the requirements of
federal or state securities laws and (b) all other information concerning the
business, properties and personnel of Diamond or any of its subsidiaries (where
the undertaken is given by Transferors) or of NTL or any of its subsidiaries
(where the undertaking given by NTL) as Transferors'
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Representative or NTL, as the case may be, may reasonably request. No review
pursuant to this Section 5.1 shall affect any representation or warranty given
by any party hereto. Transferors' Representative shall be entitled to disclose
any information received by it pursuant to this Section 5.1 to the other
Transferors. Each Transferor will and NTL will, hold, and will use all
reasonable efforts to cause its respective officers, employees, accountants,
counsel, financial advisors and other representatives and Affiliates to hold,
any nonpublic information in accordance with the terms of the Confidentiality
Agreement.
Section 5.2 Reasonable Best Efforts. (a) Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties agrees to use
reasonable best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from Governmental
Entities and the making of all necessary registrations and filings and the
taking of all steps as may be necessary to obtain an approval or waiver from, or
to avoid an action or proceeding by, any Governmental Entity, (ii) the obtaining
of all necessary consents, approvals or waivers from third parties, (iii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated by this Agreement, including seeking to have any stay
or temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement. Without limitation of the
foregoing, NTL shall, and Transferors shall procure that Diamond and its
subsidiaries shall, promptly supply such information as is reasonably necessary
to enable the confirmations and indications referred to in Section 6.1(a) to be
obtained.
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(b) In connection with and without limiting the foregoing, Transferors
and NTL shall (i) take all action necessary to ensure that no takeover statute
or similar statute or regulation is or becomes applicable to this Agreement, or
any of the other transactions contemplated by this Agreement and (ii) if any
takeover statute or similar statute or regulation becomes applicable to this
Agreement, or any other transaction contemplated by this Agreement, take all
action necessary to ensure that the transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the transactions contemplated by this Agreement.
Section 5.3 Stock Options and Stock Appreciation Rights. (a) In
respect of all outstanding Stock Options issued under the Stock Plan, NTL shall
permit each holder thereof to receive, at such holder's option, upon release of
such holder's Stock Option that either is exercisable or not or will become,
upon the Closing, exercisable under the Stock Plan, either (i) an option (the
"NTL Option") to acquire, except as provided in paragraph (b) below, on the same
terms and conditions as were applicable under such Stock Option, one share of
NTL Common Stock for every four ordinary shares in Diamond subject to the Stock
Option (to be adjusted in the same manner as provided for in Section 1.2) at an
exercise price per share of NTL Common Stock (rounded to nearest whole cent)
equal to (A) the aggregate exercise price for the ordinary shares in Diamond
that are the subject of such Stock Option divided by (B) the aggregate number of
whole shares of NTL Common Stock deemed to be subject to such Stock Option in
accordance with the foregoing or (ii) that number of shares of NTL Common Stock
(rounded down to the nearest whole number) as is equal to one share of NTL
Common Stock for every four ordinary shares in Diamond subject to the Stock
Option (to be adjusted in the same manner as provided for in Section 1.2) less
that number of shares of NTL Common Stock (rounded to the nearest whole number)
as is equal in value to (A) the aggregate exercise price for the ordinary shares
in Diamond the subject of the Stock
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Option divided by (B) the NTL Average Stock Price on the Closing Date.
(b) With respect to the NTL Options issued as contemplated in
paragraph (a) (x) 50% of each holders' NTL Options shall be exercisable from the
Closing Date, (y) 25% shall be exercisable from the first anniversary date of
the Closing Date and (z) 25% shall be exercisable from the second anniversary
date of the Closing Date. Further, such NTL Options shall also be exercisable in
full in the event that the holder of a Stock Option ceases to be an employee or
director of any company in the NTL or Diamond group save where this is as a
result of voluntary resignation or if such employee is dismissed as a result of
his or her gross misconduct in circumstances entitling NTL summarily to dismiss
the employee without prior notice under such employee's or director's service
agreement and applicable law.
(c) As soon as practicable after the date hereof, NTL (and if
appropriate, the Transferors shall procure Diamond, jointly with NTL) shall
deliver to the holders of Stock Options appropriate notices setting forth such
holders' rights pursuant to the Stock Plan and the alternatives offered to them
in accordance with Section 5.3(a) together with any form of release required to
be executed by such holders.
(d) No later than the Closing Date, NTL shall prepare and file with
the SEC a registration statement on Form S-8 (or another appropriate form)
registering a number of shares of NTL Common Stock issuable in accordance with
clauses (i) and (ii) of Section 5.3(a). Such registration statement shall be
kept effective (and the current status of the prospectus or prospectuses
required thereby shall be maintained) at least for so long as NTL Options remain
outstanding and until such time as the shares of NTL Common Stock subject to
such NTL Options as issuable pursuant to clauses (i) and (ii) of Section 5.3(a)
are no longer subject to resale restrictions under the Securities Act.
Section 5.4 Fees and Expenses. Except as provided in Section 5.10
hereof, all fees and expenses
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incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the transactions contemplated hereby are consummated. Transferors
represent and undertake that no such fees and expenses have been or will be
borne by Diamond or any of its subsidiaries.
Section 5.5 Public Announcements. NTL will consult with the
Transferors' Representative and each Transferor will, and will procure that
Diamond and its subsidiaries will, consult with NTL before issuing, and provide
the Transferors' Representative or NTL (as appropriate) the opportunity to
review, comment upon and concur with and use reasonable efforts to agree on, any
press release or other public statements with respect to the transactions
contemplated by this Agreement and shall not issue any such press release or
make any such public statement prior to such consultation, except as any party
may determine is required by applicable law, court process or by obligations
pursuant to any listing agreement with any national securities exchange. The
parties agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties.
Section 5.6 NASDAQ Quotation. NTL shall use reasonable best efforts
to cause the NTL Common Stock issuable under Section 1.2 and Section 5.3 and
upon exercise of NTL Options pursuant to Section 5.3 to be approved for
quotation on the NASDAQ, subject to official notice of issuance, as promptly as
practicable after the date hereof, and (except in respect to NTL Common Stock
issuable upon excise of Adjusted Options) in any event prior to the Closing
Date.
Section 5.7 Covenant of Transferors. Each Transferor agrees that it
will, and will cause its Affiliates to, vote any Voting Securities of NTL which
they are entitled to vote to approve the matters that will be presented to the
shareholders of NTL at the meeting called to approve the Amalgamation Agreement
that are necessary to implement that agreement.
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Section 5.8 Covenant of NTL. If so required, as promptly as
practicable after the date hereof, NTL shall take all necessary actions to
convene a special meeting of its shareholders to authorize the transaction
contemplated hereby.
Section 5.9 Standstill Agreements; Confidentiality Agreements. During
the period from the date of this Agreement through the Closing Date, Transferors
shall procure that neither Diamond nor any of its subsidiaries shall terminate,
amend, modify or waive any provision of any confidentiality or standstill
agreement to which it is a party. During such period, Transferors shall procure
that Diamond and its subsidiaries shall enforce, to the fullest extent permitted
under applicable law, the provisions of any such agreement, including by
obtaining injunctions to prevent any breaches of such agreements and to enforce
specifically the terms and provisions thereof in any court having jurisdiction.
Section 5.10 Conveyance Taxes. NTL and Transferors shall, and
Transferors shall procure that Diamond shall, cooperate in the preparation,
execution and filing of all returns, questionnaires, applications or other
documents regarding any real property transfer or gains, sales, use transfer,
value added, stock transfer and stamp taxes, any transfer, recording,
registration; and other fees or any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Closing Date; provided,
however, in the event that any stamp duty liability or obligation that arises in
connection with the transaction contemplated hereby, such obligations shall be
the obligations of NTL.
Section 5.11 Debt Offers. NTL and Transferors will each use their
respective reasonable best efforts to obtain, upon terms and conditions which
are reasonably satisfactory to NTL, any required consents of the holders of the
various debt securities of NTL and Diamond in order to permit the transactions
contemplated hereby. The costs, fees and expenses payable by Diamond in
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connection with its debt offer, if required, shall be subject to the reasonable
approval of NTL.
Section 5.12 Confidential Information. Transferors undertake to NTL
that they shall, and shall cause Diamond and its subsidiaries to, keep
confidential and not at any time after the date of this Agreement disclose or
make known in any way to anyone (other than NTL and Diamond) or use for their
own or any other person's benefit any know-how or confidential information
relating to any of the customers, suppliers or affairs of the businesses
(including any prospective business) of Diamond or its subsidiaries or otherwise
relating to the businesses of Diamond and its subsidiaries except information
which is (i) in the public domain or (ii) becomes public knowledge through no
fault of such Transferor or (iii) is required to be disclosed by court order or
other government process or the disclosure of which is necessary to enable such
Transferor to comply with applicable law or defend against claims. In the event
that such Transferor shall be required to make disclosure pursuant to the
provisions of clause (iii) of the preceding sentence, such Transferor shall
promptly notify NTL and take, at the expense of NTL, all reasonably necessary
steps requested by NTL to defend against the enforcement of such court order or
other government process, and permit NTL to participate with counsel of its
choice in any proceeding relating to the enforcement thereof.
Section 5.13 Shareholders' Agreement. Each Transferor hereby agrees
that the proposed transfer of the Shares to NTL pursuant to this Agreement shall
be deemed to comply in all respects with the provisions of Schedule 2 to the
Shareholders Agreement dated September 1, 1994 between European Cable Capital
Partners, L.P., AmSouth Bank of Alabama, CGT Family Corporation, GS Capital
Partners L.P., William W. McDonald and Diamond.
Section 5.14 Bring-along for Optionholder Shares. Transferors covenant
and undertake to NTL that insofar as the holders of Stock Options (including the
CGT Family Corporation) ("Option Shareholders") shall validly exercise their
Stock Options in accordance with
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the rules of the Stock Plan after the date of this Agreement to acquire ordinary
shares in Diamond ("Option Shares") then Transferors will, in accordance with
paragraph 8 of the Schedule to the Rules of the Stock Plan require the Option
Shareholders to sell all of the Option Shares to NTL on the same terms and
conditions as contained in this Agreement and Transferors shall take all steps
and do all matters including the giving of a notice as may be necessary to
achieve this and shall not withdraw the same unless authorized to do so by NTL.
Section 5.15 Tag-along for Optionholders Shares. Without prejudice to
the obligations of Transferors in section 5.14 NTL covenants with and undertakes
to Transferors that in the event that any holders of Stock Options (including
the CGT Family Corporation) shall validly exercise their Stock Options as
described in section 5.14 then NTL shall offer to purchase from the Option
Shareholders all of the Option Shares on the same terms and conditions as set
out in this Agreement and that such offer shall remain capable for acceptance
for a period of 14 days from the date on which it is made.
Section 5.16 No change to Stock Options. Transferors covenant and
undertake to NTL that they will procure that Diamond shall not, except as
specifically contemplated herein or with the prior consent of NTL either (a)
amend the rules of the Stock Plan or the Option Agreement (whether or not with
the prior consent of the holders of Stock Options; or (b) approach, or despatch
any document to, the holders of Stock Options.
Section 5.17 Indemnification; Directors and Officers Insurance. NTL
agrees to maintain for the benefit of Diamond's past and present directors and
officers indemnification arrangements pursuant to Diamond's memorandum and
articles of association and indemnification agreements in existence on the date
hereof covering acts or omissions occurring at or prior to the Closing Date to
the dame extent as are in place at the date of this Agreement. NTL shall also
provide, for an aggregate period of not less than six years from the Closing
Date, Diamond's current directors and officers
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with a directors' and officers' liability insurance policy that provides
coverage for events occurring prior to the Closing Date that is no less
favorable than Diamond's existing policy.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the
Closing. The respective obligation of each party to effect the Closing is
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) Required British Approvals. The following shall have occurred:
(i) NTL shall have received a written indication from The
Secretary of State for Trade and Industry ("DTI"), from the
Independent Television Commission ("ITC"), in terms reasonably
satisfactory to NTL and from the Radio Communications Agency ("RCA"),
to the effect that the Closing will not lead to the revocation of any
licenses (issued pursuant to the Cable and Broadcasting Act 1984 or
the Broadcasting Act 1990 (as amended) or the Broadcasting Act 1996 or
the revocation of any of the telecommunications or wireless telegraphy
licenses or RCA licences (issued by the DTI or by the RCA acting for
the DTI pursuant to the Telecommunications Act 1984 or the Wireless
Telegraphy Act 1949) which are held by Diamond or any of its
subsidiaries, except for any licenses the loss of which would not have
a material adverse effect on Diamond;
(ii) NTL shall have received written confirmation from the Office
of Telecommunications, in terms reasonably satisfactory to NTL, that
the Director General has not after the date hereof (a) issued any
directions to Diamond or any of its subsidiaries in connection with
their
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telecommunications licenses issued pursuant to the Telecommunications
Act 1984 or their wireless telegraphy licenses issued pursuant to the
Wireless Telegraphy Act 1949, (b) given notice to Diamond or any of
its subsidiaries of its intention to make modifications to such
licenses (other than modifications which are to be made to all or
substantially all of the licenses issued pursuant to the
Telecommunications Act 1984 or the Wireless Telegraphy Act 1949 (as
appropriate), or (c) taken and has no intention to take any steps
pursuant to Section 16, 17 or 18 of the Telecommunications Act 1984 or
the Wireless Telegraphy Act 1948 in relation to enforcement of any
such licenses, except for, in the case of clause (a), such directions,
in the case of clause (b), such modifications, or, in the case of
clause (c), such enforcement steps as would not have a material
adverse effect on Diamond;
(iii) NTL shall have received written confirmation from the ITC,
in terms reasonably satisfactory to NTL, that the ITC has not after
the date hereof (a) issued any directions to Diamond or any of its
subsidiaries in connection with any license issued pursuant to the
Cable and Broadcasting Act 1984 or the Broadcasting Act 1990 (as
amended) or the Broadcasting Act 1996, (b) given notice to Diamond or
any of its subsidiaries of its intention to make modifications to any
such license (other than modifications which are to be made to all or
substantially all licenses issued pursuant to the Cable and
Broadcasting Act 1984 or the Broadcasting Act 1990 (as amended) or the
Broadcasting Act 1996 as the case may be), or (c) taken and has no
intention to take any steps in relation to enforcement of any such
license, except for, in the case of clause (a), such directions, in
the case of clause (b), such modifications, or, in the case of clause
(c), such enforcement steps as would not have a material adverse
effect on Diamond;
(iv) the Office of Fair Trading shall have indicated to NTL, in
terms reasonably satisfactory to NTL, either that the transaction
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contemplated hereby does not qualify for investigation by the
Monopolies and Mergers Commission pursuant to the Fair Trading Act
1973 or that The Secretary of State for Trade and Industry has decided
not to refer the transactions contemplated hereby to the Monopolies
and Mergers Commission;
(b) Governmental and Regulatory Approvals. Other than the Required
British Approvals (which are addressed in Sections 6.1(a), all consents,
approvals and actions of, filings with and notices to any Governmental Entity
required of Diamond, NTL or any of their subsidiaries to consummate the
transactions contemplated hereby, the failure of which to be obtained or taken
(i) is reasonably expected to have a material adverse effect on NTL or Diamond
or (ii) will result in a material violation of any laws, shall have been
obtained, all in form and substance reasonably satisfactory to Transferors'
Representative and NTL.
(c) NTL Shareholders' Approval. If so required under applicable law or
stock exchange (including NASDAQ) regulation, a resolution shall have been
passed at a special meeting of shareholders of NTL, convened after proper notice
to, and/or waiver of such notice by, the shareholders, with a quorum of the
shareholders present or represented, to approve the transactions contemplated
hereby.
(d) No Injunctions or Restraints. No judgment, order, decree, statute,
law, ordinance, rule or regulation, entered, enacted, promulgated, enforced or
issued by any court or other Governmental Entity of competent jurisdiction or
other legal restraint or prohibition (collectively, "Restraints") shall be in
effect (i) preventing the consummation of the transactions contemplated hereby,
or (ii) which otherwise is reasonably likely to have a material adverse effect
on Diamond or NTL, as applicable; provided, however, that each of the parties
shall have used its best efforts to prevent the entry of any such Restraints and
to appeal as promptly as possible any such Restraints that may be entered.
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(e) NASDAQ Quotation. The shares of NTL Common Stock issuable to
Transferors as contemplated by Section 1.2 and the shares of NTL Common Stock
issuable upon exercise of Adjusted Options pursuant to Section 5.3 shall have
been approved for quotation on the NASDAQ, subject to official notice of
issuance.
(f) Required Consents. NTL or Transferors, as the case may be, shall
have obtained (or in the case of Transferors, shall have caused Diamond to
obtain) all consents designated as "Required Consents" in the NTL Disclosure
Schedule or the Transferors Disclosure Schedule (as applicable).
Section 6.2 Conditions to Obligations of NTL. The obligation of NTL to
effect the transactions contemplated hereby is further subject to satisfaction
or waiver of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Transferors set forth herein shall be true and correct both when made and at
and as of the Closing Date, as if made at and as of such time (except to the
extent expressly made as of an earlier date, in which case as of such date),
except where the failure of such representations and warranties to be so true
and correct (without giving effect to any limitation as to "materiality" or
"material adverse effect" set forth therein) does not have, and is not likely to
have, individually or in the aggregate, a material adverse effect on NTL
(assuming the consummation of the transactions contemplated herein) or Diamond.
(b) Performance of Obligations of Transferors. Transferors shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing Date.
(c) All steps required to be taken by Diamond in accordance with
section 5.3(a) shall have been taken.
49
<PAGE>
(d) No Material Adverse Change. As of the Closing Date, there shall
not have occurred any material adverse change relating to Diamond from the date
hereof.
Section 6.3 Conditions to Obligations of Transferors. The obligation
of Transferors to effect the transactions contemplated hereby is further subject
to satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and warranties
of NTL set forth herein shall be true and correct both when made and at and as
of the Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality," or
"material adverse effect" set forth therein) does not have, and is not likely to
have, individually or in the aggregate, a material adverse effect on NTL.
(b) Performance of Obligations of NTL. NTL shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) No Material Adverse Change. As of the Closing Date, there shall
not have occurred any material adverse change relating to NTL from the date
hereof.
(d) Registration Rights. NTL shall have executed a Registration Rights
Agreement implementing the terms set forth on Exhibit 6.3(d).
(g) Tax Opinion Transferors shall have received an opinion, dated the
Closing Date, from Sullivan & Cromwell, counsel to Diamond, in form and
substance reasonably satisfactory to Transferors substantially to the effect
that on the basis of facts, representations and assumptions set forth in such
opinion, for federal income tax purposes the share exchange will constitute a
"reorganization" within the meaning of Section 368(a) of the Code, and NTL and
Diamond will each be a party to
50
<PAGE>
that reorganization within the meaning of Section 368(b) of the Code. In
rendering such opinion, Sullivan & Cromwell may receive and rely upon
representations from NTL, Diamond and others.
Section 6.4 Frustration of Closing Conditions. None of NTL or
Transferors may rely on the failure of any condition set forth in Section 6.1,
6.2 or 6.3, as the case may be, to be satisfied if such failure was caused by
the failure by any of the Transferors (in the case of the Transferors) or by NTL
(in the case of NTL) to use best efforts to consummate the transactions
contemplated by this Agreement, as required by and subject to Section 5.2.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual written consent of NTL and the Majority Transferors (for
the purposes of this Article VII, Transferors holding two-thirds or more of the
aggregate number of Shares shall constitute the "Majority Transferors");
(b) by either NTL or the Majority Transferors:
(i) if the Closing shall not have been consummated by January 31,
1999 (the "End Date"), except if such failure is due to a material
breach of this Agreement by the party seeking to terminate;
(ii) if any Restraint having any of the effects set forth in
Section 6.1(d) shall be in effect and shall have become final and
nonappealable; provided, that the party seeking to terminate this
Agreement pursuant to this Section 7.1(b)(ii) shall have used best
efforts to prevent the entry of and to remove such Restraint; or
51
<PAGE>
(iii) if so required, NTL shall have failed to acquire the
authorization of its shareholders as contemplated in Section 6.1(c)
hereof.
(c) by NTL, if any Transferor shall have breached or failed to perform
in any material respect any of their respective warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform would
give rise to the failure of a condition set forth in Section 6.2(a) or (b), and
such condition is incapable of being satisfied by the End Date;
(d) by Transferors, if NTL shall have breached or failed to perform in
any material respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform would
give rise to the failure of a condition set forth in Section 6.3(a) or (b), and
such condition is incapable of being satisfied by the End Date; or
(e) by the Majority Transferors if (i) as of a date not more than
three Business Days before the expected Closing Date, the NTL Average Stock
Price determined as of such date is less than $36.00, (ii) notice shall have
been provided to NTL hereunder of an intent to terminate and (iii) within one
Business Day of receipt of such notice, NTL shall not have agreed (by notice to
the Majority Transferors) to increase the consideration payable per each four
ordinary shares such that the value of such consideration shall be $36.00 per
share or more at such time.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement by Transferors or NTL as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of NTL or Transferors, other than the provisions of Section 3.1(j),
3.2(d), 3.3(l), the last sentence of Section 5.1, Section 5.4 and this Section
7.2, which provisions survive such termination, and except to the extent that
such
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<PAGE>
termination results from the willful and material breach by a party of any of
its representations, warranties, covenants or agreements set forth in this
Agreement.
Section 7.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties; provided that
each of the Transferors agrees to be bound by any amendment approved by and
entered into by the Majority Transferors ; provided, however, that any amendment
that has or could reasonably be expected to have a disproportionate adverse
effect on one Transferor but that does not similarly affect all Transferors will
also require the approval of the affected Transferor.
Section 7.4 Extension; Waiver. Each Transferor hereby agrees and
irrevocably appoints the Transferors' Representative to waive or extend any
provision of this Agreement. At any time prior to the Closing Date, NTL or the
Transferors' Representative may (a) extend the time for the performance of any
of the obligations or other acts of the other, (b) waive any inaccuracies in the
representations and warranties of the other contained in this Agreement or in
any document delivered pursuant to this Agreement or (c) waive compliance by the
other with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of NTL or the Transferors' Representative to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of NTL or the Transferors'
Representative to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.
Section 7.5 Procedure for Termination, Amendment, Extension or Waiver.
A termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to Section
7.4 shall, in order to be effective, require, in the case of NTL or any
Transferor who is a body corporate, action by its Board of Directors or, with
respect to any amendment to this Agreement, the
53
<PAGE>
duly authorized committee of its Board of Directors to the extent permitted
by law.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Survival of Representations, Etc. All statements contained
in the respective Disclosure Schedules or in any certificate or instrument of
conveyance delivered by or on behalf of any party pursuant to this Agreement or
in connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by such party hereunder. Except for the
representations and warranties of Transferors set forth in Section 3.2 hereof,
neither the representations and warranties of Transferors and NTL nor their
respective covenants (except for those expressly to be performed after the
Closing Date) contained herein shall survive the Closing Date. For the avoidance
of doubt, neither the Transferors nor NTL shall have any liability for a breach
of any representation, warranty or covenant under this Agreement (except for any
breach by such Transferor of its representations and warranties in Section 3.2
hereof or the breach of any covenant by such Transferors expressly to be
performed after the Closing Date in which case only the Transferor that has
committed such breach of a representation and warranty or such breach of a
covenant shall have any liability therefor) and the sole remedy of the parties
hereunder for any such breach (subject to the above exception) shall be
termination of this Agreement pursuant to Section 7.1.
Section 8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
54
<PAGE>
(a) if to NTL, to:
NTL Incorporated
110 East 59th Street
New York, New York 10022
Telecopy No.: (212) 906-8497
Attention: Richard J. Lubasch
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telecopy No.: (212) 735-2000
Attention: Thomas H. Kennedy
and to:
Travers Smith Braitwaite
10 Snow Hill,
London, England ECIA 2AL
Telecopy:(011) 44 171 236-3728
Attention: Spencer Summerfield / Simon Jay
(b) If to Transferors, to:
European Cable Capital Partners, L.P.
85 Broad Street
New York, NY 10004
Telecopy No.:
Attention:
AmSouthBank of Alabama, as Trustee
1901 Sixth Avenue North, Third Floor
Harbert Plaza
Birmingham, AL 35203
Telecopy No.:
Attention:
DCI Capital Partners
9830 Wilshire Boulevard
Beverly Hills, CA 90212
Telecopy No.:
Attention:
55
<PAGE>
Investor Investments AB
Arsenalsgatan 8c
P.O. Box 161574, S-103 24
Stockholm, Sweden
Telecopy No.:
Attention:
Booth English Cable Inc.
33 West Fort St., Suite 1230
Detroit, MI 48226
Telecopy No.:
Attention:
With a copy to:
ECE Management, Inc.
P.O. Box 499
Carmel, IN 46032
Telecopy No.:
Attention: Robert T. Goad
With a copy to:
Sullivan & Cromwell
9a Ironmonger Lane
Telecopy: 44-171-710-6565
Telephone: 44-171-710-6500
Attention: Scott D. Miller
Section 8.3 Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person, where "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a person, whether through the ownership
of voting securities, by contract, as trustee or executor, or otherwise;
(b) "knowledge" of any person means the actual knowledge of such
person or, where such person is a
56
<PAGE>
corporation, such person's executive officers or senior management of such
person's operating divisions and segments person, in each case after due inquiry
which shall include, where it is the knowledge of the Transferors, after making
due enquiry of the board of directors and senior management of Diamond and its
subsidiaries;
(c) "material adverse change" or "material adverse effect" means, when
used in connection with Diamond or NTL, any change, effect, event, occurrence or
state of facts that is, or would reasonably be expected to be, materially
adverse to the business, financial condition or results of operations of such
party and its subsidiaries taken as a whole, other than changes, effects,
events, occurrences or facts caused by changes in general economic or securities
market conditions, changes that affect the U.K. cable industry generally or
changes in the business of Diamond that result from the announcement or proposed
consummation of the transactions contemplated hereby, and the terms "material"
and "materially" have correlative meanings;
(d) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(e) a "subsidiary" of any person means another person, an amount of
the voting securities, other voting ownership or voting Partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person;
(f) "Business Day" shall mean a day on which both (i) NASDAQ if
functional for a normal trading day and (ii) banks in the City of New York are
open for business;
(g) "NTL Average Stock Price" shall mean the volume-weighted average
of the average high and low sales prices of the NTL Common Stock or NASDAQ for
each of the
57
<PAGE>
twenty trading days ending on the trading day prior to the date of
determination;
(h) "Required British Approval" shall mean those approvals and
contents set forth in Section 6.1(a);
(i) "in the approved term" shall mean a document, the terms, condition
and form of which have been agreed by the parties to this Agreement and a copy
of which has been identified as such and initialed by or on behalf of NTL and
the Transferor's Representative.
Section 8.4 Interpretation. When a reference is made in this Agreement
to an Article, Section or Exhibit, such reference shall be to an Article or
Section of, or an Exhibit to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms defined in this
Agreement shall have the defined meanings when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument or statute as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns.
58
<PAGE>
Section 8.5 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties.
Section 8.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) and the
Confidentiality Agreement (a) constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter of this Agreement and (b) are not intended to
confer upon any person other than the parties any rights or remedies.
Section 8.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof.
Section 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by either of the parties hereto without
the prior written consent of the other party; provided, however, that NTL have
the right, at any time at or prior to the Closing, to designate in writing, in
accordance with applicable law, one or more of its direct or indirect wholly
owned subsidiaries or a holding company formed in compliance with Section 251(g)
of the Delaware General Corporation Law to purchase, in whole or in part, the
Shares on the terms set out in this Agreement, and NTL shall remain jointly and
severally liable with its designee(s) under this Agreement following such
designation. Any assignment in violation of the preceding sentence shall be
void. Subject to the preceding two sentences, this Agreement will be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
59
<PAGE>
Section 8.9 Consent to Jurisdiction. Each of the parties hereto (i)
consents to submit itself to the personal jurisdiction of any federal court
located in the State of New York or any New York state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, (ii) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court,
and (iii) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than a
federal court sitting in the State of New York or a New York state court.
Section 8.10 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 8.11 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
Section 8.12 Liability of AmSouth in its Corporate Capacity.
Notwithstanding anything to the contrary in this Agreement: (a) AmSouth Bank
N.A. ("AmSouth") has entered into this Agreement solely as trustee of the trusts
listed in the signature pages hereto and shall have no liability whatsoever in
its corporate capacity for any acts taken or omitted to be taken by it under
this Agreement or otherwise in connection with the transactions provided for
herein; (b) any liability of AmSouth under this Agreement or otherwise in
connection with the transactions
60
<PAGE>
contemplated herein shall be limited to and satisfied only from the assets of
the relevant trusts now or hereafter held by AmSouth, as trustee; and (c) if
AmSouth shall resign, be removed, or otherwise cease to serve, as trustee of any
of the trusts, AmSouth shall be fully discharged from any and all liability that
it may have incurred under this Agreement or otherwise in connection with the
transactions provided for herein, in its capacity as trustee of such trusts.
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<PAGE>
IN WITNESS WHEREOF, NTL and Transferors have caused this Agreement to
be signed by them or their respective officers thereunto duly authorized, all as
of the date first written above.
NTL INCORPORATED
By: /s/ Richard J. Lubasch
--------------------------------
Name: Richard J. Lubasch
Title: Senior Vice President
<TABLE>
<CAPTION>
Number of Number of
TRANSFERORS: Ordinary Shares Deferred Shares
<S> <C> <C>
EUROPEAN CABLE CAPITAL
PARTNERS, L.P.
By: /s/ Richard Friedman 39,447,443 0
--------------------------------
Name: Richard Friedman
Title: Attorney-in-fact
AMSOUTH BANK OF ALABAMA,
(No. 2 ACCOUNT)
By: /s/ Amy E. Staats 2,187,570 2
--------------------------------
Name: Amy E. Staats
Title: Trust Officer
AMSOUTH BANK OF ALABAMA
(NO. 3 ACCOUNT)
By: /s/ Amy E. Staats 2,187,570 1
--------------------------------
Name: Amy E. Staats
Title: Trust Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Ordinary Shares Deferred Shares
<S> <C> <C>
AMSOUTH BANK OF ALABAMA
(NO. 4 ACCOUNT)
By: /s/ Amy E. Staats 2,187,556 1
--------------------------------
Name: Amy E. Staats
Title: Trust Officer
AMSOUTH BANK OF ALABAMA
(NO. 5 ACCOUNT)
By: /s/ Amy E. Staats 2,187,556 1
--------------------------------
Name: Amy E. Staats
Title: Trust Officer
BRIDGE STREET FUND 1996, L.P.
By: /s/ Richard Friedman 497,370 0
--------------------------------
Name: Richard Friedman
Title: Attorney-in-fact
CGT FAMILY CORPORATION
By: /s/ Gary E. Davis 35,000 1
--------------------------------
Name: Gary E. Davis
Title: President
/s/ Sanford R. Climan 76,923 0
------------------------------------
SANFORD R. CLIMAN
GS CAPITAL PARTNERS, L.P.
By: /s/ Richard Friedman 1,249,115 0
--------------------------------
Name: Richard Friedman
Title: Attorney-in-fact
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Ordinary Shares Deferred Shares
<S> <C> <C>
/s/ William White McDonald 503 0
------------------------------------
WILLIAM WHITE MCDONALD
STONE STREET FUND 1996, L.P.
By: /s/ Richard Friedman 733,399 0
--------------------------------
Name: Richard Friedman
Title: Attorney-in-fact
DCI CAPITAL PARTNERS
By: /s/ Michael Ovitz 3,909,754 0
--------------------------------
Name: Michael ovitz
Title: General Partner
INVESTOR INVESTMENTS AB
By: /s/ Thomas Nilsson 3,909,754 0
--------------------------------
Name: Thomas Nilsson
Title: Managing Director
BOOTH ENGLISH CABLE, INC.
By: /s/ Ralph H. Booth, II 529,292 0
--------------------------------
Name: Ralph H. Booth, II
Title: President
</TABLE>
AMENDMENT NO. 1 TO
SHARE EXCHANGE AGREEMENT
Amendment No. 1, dated as of December 21, 1998 (the "Amendment"), to
the Share Exchange Agreement, dated as of June 16, 1998 (the "Share Exchange
Agreement"), among NTL Incorporated ("NTL") and the shareholders of Diamond
Cable Communications plc ("Diamond").
W I T N E S S E T H:
WHEREAS, on June 16, 1998, the parties hereto entered into the Share
Exchange Agreement; and
WHEREAS, the parties hereto now desire to amend certain provisions of
the Share Exchange Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 1.2 of the Share Exchange Agreement is hereby amended in its
entirety to read as follows:
Section 1.2 Consideration for Shares. Upon the terms and subject
to the conditions contained herein, as consideration for the acquisition of the
Shares, on the Closing Date, NTL shall transfer to each Transferor consideration
consisting of one share of common stock, par value $.01 per share, of NTL (the
"NTL Common Stock") for (i) each deferred share in Diamond and (ii) each four
ordinary shares in Diamond; provided, however, that such consideration shall be
adjusted as follows: (A) if the Closing Date shall have occurred within four
months of the date hereof, and the NTL Average Stock Price is $52.00 (the
"Maximum Average Stock Price") or more, then the consideration for each four
ordinary shares shall be the number of shares of NTL Common Stock equal in value
(at the NTL Average Stock Price) to the Maximum Average Stock Price; (B) if the
Closing Date shall have occurred after the four month anniversary date of the
date hereof and prior to February 1, 1999, then the Maximum Average Stock Price
shall increase by $.50 on the four month anniversary date of the date hereof and
on each subsequent monthly anniversary date thereof until the Closing Date; and
(C) if the Closing Date shall have occurred on February 1, 1999 or thereafter,
the Maximum Average Stock Price shall be $65.00.
2. Section 5.3(b) of the Share Exchange Agreement is hereby amended in
its entirety to read as follows:
<PAGE>
(b) With respect to the NTL Options issued as contemplated in
paragraph (a), 100% of each holder's NTL Options shall be exercisable from
the Closing Date. Further, such NTL Options shall also be exercisable in
full in the event that the holder of a Stock Option ceases to be an
employee or director of any company in the NTL or Diamond group, except if
such employee is dismissed as a result of his or her gross misconduct in
circumstances entitling the NTL or Diamond group summarily to dismiss the
employee without prior notice under such employee's or director's service
agreement and applicable law.
3. Section 5.8 of the Share Exchange Agreement is hereby amended in its
entirety to read as follows:
Section 5.8 Covenant of NTL. As promptly as practicable after the
date of the Amendment, NTL shall take all necessary actions to convene a special
meeting of its shareholders to authorize the transaction contemplated hereby.
4. Section 6.1(c) of the Share Exchange Agreement is hereby amended in
its entirety to read as follows:
(c) NTL Shareholders' Approval. A resolution shall have been passed at
a special meeting of shareholders of NTL, convened after proper notice to,
and/or waiver of such notice by, the shareholders, with a quorum of the
shareholders present or represented, to approve the transactions
contemplated hereby.
5. Section 7.1(b)(i) of the Share Exchange Agreement is hereby amended
in its entirety as follows:
(i) if the Closing shall not have been consummated by April 30, 1999
(the "End Date"), except if such failure is due to a material breach of
this Agreement by the party seeking to terminate;
6. Unless otherwise specifically defined herein, each term used herein
which is defined in the Share Exchange Agreement shall have the meaning assigned
to such term in the Share Exchange Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each similar reference contained in the Share
Exchange Agreement shall from and after the date hereof refer to the Share
Exchange Agreement as amended hereby.
7. This Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York, regardless of the laws that might
otherwise govern under applicable principles of conflict of laws thereof.
2
<PAGE>
8. This Amendment may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
9. Except as amended hereby, all of the terms of the Share Exchange
Agreement shall remain and continue in full force and effect and are hereby
confirmed in all respects.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
NTL INCORPORATED
By: /s/ Richard J. Lubasch
-------------------------------------------------
Name: Richard J. Lubasch
Title: Senior Vice President
MAJORITY TRANSFERORS:
EUROPEAN CABLE CAPITAL
PARTNERS, L.P.
By: /s/ Terence O'Toole
-------------------------------------------------
Name: Terence O'Toole
Title: Attorney-in-fact
GS CAPITAL PARTNERS, L.P.
By: /s/ Terence O'Toole
-------------------------------------------------
Name: Terence O'Toole
Title: Attorney-in-fact
STONE STREET FUND 1996, L.P.
By: /s/ Sanjeer Mehra
-------------------------------------------------
Name: Sanjeer Mehra
Title: Attorney-in-fact
BOOTH ENGLISH CABLE, INC.
By: /s/ Ralph H. Booth, II
-------------------------------------------------
Name: Ralph H. Booth, II
Title: President
BRIDGE STREET FUND 1996, L.P.
By: /s/ Sanjeer Mehra
-------------------------------------------------
Name: Sanjeer Mehra
Title: Attorney-in-fact
4
