Rule 424(b)3
Registration No.: 33-98374
PROSPECTUS SUPPLEMENT NO. 2 TO PROSPECTUS DATED JUNE 23, 1997
DIAMOND CABLE COMMUNICATIONS PLC
13 1/4% SENIOR DISCOUNT NOTES DUE SEPTEMBER 30, 2004
11 3/4% SENIOR DISCOUNT NOTES DUE DECEMBER 15, 2005
________________________
Interest will not accrue on the 13 1/4% Senior Discount Notes due
September 30, 2004 (the "1994 Senior Notes") prior to September 30, 1999.
Interest on the 1994 Senior Notes will be payable on March 31 and September 30
of each year, commencing March 31, 2000, at a rate of 13 1/4% per annum. See
"Description of 1994 Senior Notes". The 1994 Senior Notes are redeemable, in
whole or in part, at the option of the Company at any time on or after September
30, 1999, at the redemption prices set forth herein plus accrued interest to the
date of redemption. The 1994 Senior Notes are also redeemable in whole, but not
in part, at the option of the Company at any time at 100% of the principal
amount plus accrued interest to the date of redemption (or, prior to September
30, 1999, at 100% of Accreted Value) in the event of certain tax law changes
requiring the payment of additional amounts as described herein. The Company is
required to offer to repurchase all outstanding 1994 Senior Notes at 101% of
principal amount plus accrued interest to the date of repurchase (or, prior to
September 30, 1999, at 101% of Accreted Value on the date of repurchase) after
the occurrence of a Change of Control. In addition, upon the occurrence of an
Asset Disposition, the Company may be obligated to make an Offer to Purchase all
or a portion of the outstanding 1994 Senior Notes at 100% of the principal
amount plus accrued interest to the date of repurchase (or, prior to December
15, 2000, at 100% of Accreted Value on the date of repurchase). See "Description
of the 1994 Senior Notes -- Redemption". There can be no assurance that the
Company will have the financial resources necessary or otherwise be able to
repurchase the 1994 Senior Notes under such circumstances.
Interest will not accrue on the 11 3/4% Senior Discount Notes due
December 15, 2005 (the "1995 Senior Notes") prior to December 15, 2000. Interest
on the 1995 Senior Notes will be payable on June 15 and December 15 of each
year, commencing June 15, 2001 at a rate of 11 3/4% per annum. See "Description
of the 1995 Senior Notes". The 1995 Senior Notes are redeemable, in whole or in
part, at the option of the Company at any time on or after December 15, 2000, at
the redemption prices set forth herein plus accrued interest to the date of
redemption. The 1995 Senior Notes are also redeemable in whole, but not in part,
at the option of the Company at any time at 100% of the principal amount plus
accrued interest to the date of redemption (or, prior to December 15, 2000, at
100% of Accreted Value) in the event of certain tax law changes requiring the
payment of additional amounts as described herein. Upon the occurrence of a
Change of Control the Company is required to offer to repurchase all outstanding
1995 Senior Notes at 101% of principal amount plus accrued interest to the date
of repurchase (or, prior to December 15, 2000, at 101% of Accreted Value on the
date of repurchase) after the occurrence of a Change of Control. In addition,
upon the occurrence of an Asset Disposition, the Company may be obligated to
make an Offer to Purchase all or a portion of the outstanding 1995 Senior Notes
at 100% of the principal amount plus accrued interest to the date of repurchase
(or, prior to December 15, 2000, at 100% of Accreted Value on the date of
repurchase). See "Description of the 1995 Senior Notes -- Redemption". There can
be no assurance that the Company will have the financial resources necessary or
otherwise be able to repurchase the 1995 Senior Notes under such circumstances.
The Senior Notes constitute unsecured senior indebtedness of the
Company. Certain of the Company's subsidiaries have entered into a senior
syndicated bank lending facility of up to (pound)175 million. Indebtedness under
the senior bank lending facility is effectively senior to the Senior Notes as
such indebtedness will be incurred by a subsidiary of the Company, guaranteed by
certain of the Company's other subsidiaries and secured by liens on the assets
of certain of the Company's subsidiaries and a pledge of the issued shares of
certain of the Company's subsidiaries other than Jewel Holdings Limited. 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.
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. At September 30, 1997, the Company had approximately (pound)540 million
of indebtedness outstanding, including approximately (pound)137 million and
(pound)229 million in accreted value of 1994 Senior Notes and the 1995 Senior
Notes, respectively, and approximately (pound)165 million in accreted value of
the 1997 Notes. The Company has not issued, and does not have any current plans
to issue, any significant indebtedness that will be subordinated to the Senior
Notes. The Company is a holding company which conducts substantially all of its
business through subsidiaries, all of which are wholly-owned. The Senior Notes
effectively rank junior to any indebtedness of the Company's subsidiaries to the
extent of the assets of such subsidiaries and to any secured indebtedness of the
Company to the extent of the assets securing such indebtedness. The 1997 Notes
rank pari passu with the 1994 and the 1995 Senior Notes.
________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus Supplement, together with the Prospectus dated June 23,
1997, is to be used by Goldman, Sachs & Co. in connection with offers and sales
of the Senior Notes related to market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. The Company will not
receive any of the proceeds of such transactions. Goldman, Sachs & Co. may act
as a principal or agent in such transactions. See "Plan of Distribution" in the
Prospectus.
GOLDMAN, SACHS & CO.
________________________
The date of this Prospectus Supplement is November 14, 1997.
GENERAL
This Prospectus Supplement should be read in conjunction with the
Prospectus dated June 23, 1997 (the "Prospectus"). The Prospectus has been used
by Goldman, Sachs & Co. in connection with offers and sales related to
market-making transactions in the Senior Notes. This Prospectus Supplement,
together with the Prospectus, is to be used by Goldman, Sachs & Co. in
connection with such transactions and unsolicited purchases and sales.
Capitalized terms used in this Prospectus Supplement and not otherwise
defined have the same meanings as in the Prospectus.
RECENT DEVELOPMENTS
Operating Results. Attached hereto is the Company's Quarterly Report on
Form 10-Q filed on November 14, 1997, which includes, among other things, the
Company's unaudited interim financial statements as of, and for the three and
nine month periods ended September 30, 1997, and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the three and nine
month periods ended September 30, 1997.
-2-
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended September 30, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-83740
Diamond Cable Communications Plc
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
England and Wales N/A
- --------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Diamond Plaza, Daleside Road
Nottingham NG2 3GG, England N/A
- --------------------------------------- -----------------------
(Address of principal executive offices) (Zip code)
44-115-912-2217
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Ordinary Shares of
2.5 pence each outstanding as of September 30, 1997 was 59,138,791.
DIAMOND CABLE COMMUNICATIONS PLC
INDEX
Page
INTRODUCTION ........................................................... 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited condensed consolidated statements of
operations -- Three and nine months ended
September 30, 1997 and 1996................................... 5
Condensed consolidated balance sheets -- September
30, 1997 and December 31, 1996................................ 6
Unaudited condensed consolidated statements of
shareholders' equity -- Three and nine months
ended September 30, 1997...................................... 7
Unaudited condensed consolidated statements of cash flows --
Nine months ended September 30, 1997
and 1996...................................................... 8
Notes to the unaudited condensed consolidated
financial statements.......................................... 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition......................... 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 24
SIGNATURES.............................................................. 25
2
INTRODUCTION
Diamond Cable Communications Plc (the "Company") is a public limited
company (with registered number 2965241) incorporated under the laws of England
and Wales. The Company is a holding company which holds all of the shares of (i)
Diamond Cable Communications (UK) Limited (formerly Diamond Cable (Nottingham)
Limited) ("DCL") and its subsidiaries and (ii) a group of companies comprising
East Midlands Cable Group Limited ("EMCG"), East Midlands Cable Communications
Limited and East Midlands Cable Holdings Limited (collectively "LCL"), in both
cases through an intermediate holding company, Jewel Holdings Limited ("Jewel").
References herein to the "Group" refer to the Company and its subsidiaries,
including, since September 27, 1995, LCL, and references to "Diamond" refer to
the Company and its subsidiaries, excluding LCL.
The Group operates a telecommunications and cable television business
focused on the East Midlands area of England. The Group is currently
constructing a broadband fiber-optic network to serve the approximately 1.2
million homes and an estimated 60,600 businesses within its contiguous franchise
areas. As of September 30, 1997, the Group's cable television and
telecommunications network had passed by civils construction approximately
509,300 homes and an estimated 25,800 businesses, of which portions of the
network passing approximately 453,000 homes and an estimated 22,100 businesses
had been activated. As of that date, the Group also had approximately 136,900
residential telephone lines, 71,400 cable television subscribers and 25,400
business telephone lines. Through that date, (pound)393 million had been
invested (at original cost) in the construction of the network and related
systems.
--------------------
THIS DOCUMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, IDENTIFIED
AS SUCH, WITH RESPECT TO WHICH THE COMPANY IS SEEKING TO UTILIZE THE SAFE HARBOR
PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS ARE ACCOMPANIED BY, AND SHOULD BE READ IN CONJUNCTION WITH, AN
EXPLANATION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
3
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. In this Report,
references to "pounds sterling," "(pound)" "pence" or "p" are to the lawful
currency of the United Kingdom and references to "U.S. dollars," "$" or "(cent)"
are to the lawful currency of the United States. Merely for convenience, this
Report contains translations of certain pound sterling amounts into U.S. dollars
at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such U.S.
dollar amounts or could have been or could be converted into U.S. dollars at the
rate indicated or at any other rate. Unless otherwise indicated, the
translations of pounds sterling into U.S. dollars have been made at $1.6117 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 September 30, 1997. On November 12, 1997,
the Noon Buying Rate was $1.7035 per (pound)1.00.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- ------------------------------------
1996 1997 1997 1996 1997 1997
------- ------- ------- ------- -------- -------
(NOTE 1) (NOTE 1)
(IN THOUSANDS)
REVENUE
Business telecommunications.................(pound) 2,117 (pound) 3,697 $5,958 (pound) 7,170 (pound) 10,217 $16,467
Residential telephone....................... 4,549 7,518 12,117 12,431 20,450 32,959
Cable television............................ 2,488 4,187 6,748 6,776 11,884 19,153
------ ----- ----- ------ ------ ------
9,154 15,402 24,823 26,377 42,551 68,579
------ ------ ------ ------ ------ ------
OPERATING COSTS AND EXPENSES
Telephone................................... (1,899) (3,173) (5,114) (7,772) (8,710) (14,038)
Programming................................. (1,472) (2,368) (3,816) (4,035) (6,918) (11,149)
Selling, general, and
administrative............................ (5,505) (7,126) (11,485) (16,058) (19,694) (31,741)
Depreciation and amortization............... (5,724) (7,042) (11,350) (15,459) (20,057) (32,326)
------- ------- -------- -------- -------- --------
(14,600) (19,709) (31,765) (43,324) (55,379) (89,254)
-------- -------- -------- -------- -------- --------
OPERATING LOSS.............................. (5,446) (4,307) (6,942) (16,947) (12,828) (20,675)
Interest income............................. 1,031 1,868 3,011 2,899 4,837 7,796
Interest expense and
amortization of debt
discount and expenses..................... (10,613) (15,875) (25,586) (30,742) (43,075) (69,424)
Foreign exchange
gains/(losses), net......................... 2,904 (16,457) (26,523) 3,045 (22,180) (35,747)
Unrealized (loss)/gain on
derivative financial
instruments............................... (322) 2,660 4,287 (3) 2,904 4,680
Realized gain on derivative
financial
instrument................................ -- -- -- -- 11,553 18,620
---------- ----------- -------- --------- -------- ------
Loss before income taxes.................... (12,446) (32,111) (51,753) (41,748) (58,789) (94,750)
Income taxes................................ -- -- -- -- -- --
---------- ----------- -------- --------- -------- ------
NET LOSS....................................(pound)(12,446) (pound)(32,111) $(51,753) (pound)(41,748) (pound)(58,789) $(94,750)
=============== =============== ========= =============== =============== =========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
5
DIAMOND CABLE COMMUNICATIONS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30,
---------------------------
AT
DECEMBER (UNAUDITED)
31,
1996 1997 1997
------------ ----------- -----------
(NOTE 1)
(IN THOUSANDS)
ASSETS
Cash and cash equivalents ................................(pound) 18,311 (pound)108,394 $174,699
Trade receivables (net of allowance
for doubtful accounts of (pound)1,691 at
December 31, 1996 and (pound)2,486 at
September 30, 1997)..................................... 6,389 6,552 10,560
Other assets.............................................. 3,904 6,911 11,138
Deferred financing costs (less
accumulated amortization of
(pound)1,325 at December 31, 1996 and
(pound)3,162 at September 30, 1997)..................... 19,573 23,323 37,590
Property and equipment, net (note 3)...................... 277,301 337,913 544,614
Goodwill (less accumulated
amortization of (pound)6,064 at December
31, 1996 and (pound)9,700 at September
30, 1997)............................................... 90,896 87,260 140,637
Franchise costs (less accumulated
amortization of (pound)91 at December 31,
1996 and (pound)114 at September 30,
1997)................................................... 445 422 680
-------------- -------------- --------
TOTAL ASSETS..............................................(pound)416,819 (pound)570,775 $919,918
============== ============== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable..........................................(pound) 18,528 (pound) 21,805 $35,143
Other liabilities......................................... 19,150 13,756 22,171
Senior discount notes..................................... 314,418 530,244 854,594
Capital lease obligations................................. 8,146 7,737 12,470
Mortgage loan............................................. 2,477 2,422 3,903
Shareholders' equity
Ordinary shares (70,000,000
authorized; 59,138,791 issued at
December 31, 1996 and at September
30, 1997).............................................. 1,478 1,478 2,382
Non-voting deferred shares.............................. -- -- --
Additional paid-in-capital.............................. 134,466 134,466 216,719
Unrealized loss on securities........................... (197) (697) (1,123)
Accumulated deficit..................................... (81,647) (140,436) (226,341)
------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..................................................(pound)416,819 (pound)570,775 $919,918
============== ============== ========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
6
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NON-VOTING ADDITIONAL UNREALIZED TOTAL
DEFERRED PAID- LOSS ON ACCUMULATED SHAREHOLDERS
ORDINARY SHARES SHARES IN-CAPITAL SECURITIES DEFICIT EQUITY
------------------------- ---------- -------------- ------------ --------------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
Number Number
------ ------
BALANCE AT JANUARY 1, 1997... 59,138,791 (pound)1,478 6 -- (pound)134,466 (pound)(197) (pound) (81,647) (pound)54,100
Unrealized loss on
securities................... -- -- -- -- -- (500) -- (500)
Net loss..................... -- -- -- -- -- -- (58,789) (58,789)
---------- ------------ ---- ---- -------------- ----------- --------------- -------------
BALANCE AT
SEPTEMBER 30, 1997........... 59,138,791 (pound)1,478 6 -- (pound)134,466 (pound)(697) (pound)(140,436) (pound)(5,189)
========== ============ ==== ==== =============== =========== =============== =============
BALANCE AT JULY 1,
1997......................... 59,138,791 (pound)1,478 6 -- (pound)134,466 (pound)(943) (pound)(108,325) (pound)26,676
Unrealized gain on
securities................... -- -- -- -- -- 246 -- 246
Net loss..................... -- -- -- -- -- -- (32,111) (32,111)
---------- ------------ ---- ---- -------------- ----------- --------------- -------------
BALANCE AT
SEPTEMBER 30, 1997........... 59,138,791 (pound)1,478 6 -- (pound)134,466 (pound)(697) (pound)(140,436) (pound)(5,189)
========== ============ ==== ==== =============== =========== =============== =============
- ---------------
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
7
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1997 1997
--------------- --------------- ------------
(NOTE 1)
(IN THOUSANDS)
Cash flows from operating activities:
Net loss....................................................... (pound)(41,748) (pound)(58,789) $(94,750)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................ 15,459 20,057 32,326
Unrealized foreign exchange (gains)/losses................... (2,809) 22,270 35,892
Loss on disposition of assets................................ 18 99 160
Accretion of Senior Note discount............................ 28,901 39,865 64,250
Provision for losses on accounts receivables................. 560 795 1,281
Amortization of deferred financing costs..................... 696 1,837 2,961
Change in operating assets and liabilities:
Change in trade receivables................................ (2,425) (958) (1,544)
Change in other assets..................................... 576 (3,007) (4,846)
Change in accounts payable................................. 226 5,646 9,100
Change in other liabilities................................ 2,612 (5,744) (9,258)
--------------- -------------- ----------
Net cash provided by operating activities...................... 2,066 22,071 35,572
--------------- -------------- ----------
Cash flows from investing activities:
Cash invested in property and equipment...................... (96,089) (78,728) (126,886)
Proceeds from disposition of assets.......................... 26 39 63
Cash paid for franchises..................................... (7) -- --
--------------- -------------- ----------
Net cash used in investing activities.......................... (96,070) (78,689) (126,823)
--------------- -------------- ----------
Cash flows from financing activities:
Proceeds of issue of debt.................................... -- 153,692 247,706
Debt financing costs......................................... (8,577) (5,249) (8,460)
Repayment of mortgage loan................................... (6) (55) (89)
Capital element of capital lease repayments.................. (748) (1,187) (1,913)
Issue of shares and capital contributions (net of expenses).. 64,664 -- --
--------------- -------------- ----------
Net cash provided by financing activities...................... 55,333 147,201 237,244
--------------- -------------- ----------
Net (decrease)/increase in cash and cash
equivalents.................................................... (38,671) 90,583 145,993
Cash and cash equivalents at beginning of period............... 93,308 18,311 29,512
Effect of exchange rate changes on cash and cash equivalents... 195 (500) (806)
--------------- -------------- ----------
Cash and cash equivalents at end of period..................... (pound) 54,832 (pound)108,394 $ 174,699
============== ============== ==========
See the accompanying notes to the
Unaudited Condensed Consolidated Financial Statements.
8
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
Diamond Cable Communications Plc (the "Company") owns and operates
cable television and telecommunications systems through its subsidiaries. The
unaudited consolidated financial statements of the Company and its subsidiaries
(the "Group") have been prepared in accordance with U.S. generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The consolidated financial statements are stated in pounds sterling
((pound)). Merely for convenience the consolidated financial statements contain
translations of certain pound sterling amounts into U.S. dollars at $1.6117 per
(pound)1.00, the noon buying rate in the City of New York for cable transfers in
pounds sterling as certified for customs purposes by the Federal Reserve Bank of
New York on September 30, 1997.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of and for the periods ended
September 30, 1997 and 1996 are unaudited. However, in the opinion of the
management, such statements include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for the
periods presented. The results of operations for any interim period are not
necessarily indicative of the results for the full year. The interim
consolidated financial statements should be read in conjunction with the
financial information included in the Company's 1996 Annual Report on Form 10-K
filed with the SEC.
9
3. PROPERTY AND EQUIPMENT
LAND AND CABLE OFFICE MOTOR
BUILDINGS NETWORK EQUIPMENT VEHICLES TOTAL
------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
ACQUISITION COSTS
Balance at January 1, 1997..................... (pound)5,018 (pound)298,062 (pound)6,069 (pound)435 (pound)309,584
Additions...................................... 35 75,368 1,437 308 77,148
Dispositions................................... 0 (217) 0 (148) (365)
----- ------- ----- --- -------
Balance at September 30, 1997.................. 5,053 373,213 7,506 595 386,367
----- ------- ----- --- -------
ACCUMULATED DEPRECIATION
Balance at January 1, 1997..................... 314 28,941 2,780 248 32,283
Charge for period.............................. 122 15,068 1,155 53 16,398
Dispositions................................... 0 (122) 0 (105) (227)
----- ------- ----- --- -------
Balance at September 30, 1997.................. 436 43,887 3,935 196 48,454
----- ------- ----- --- -------
SEPTEMBER 30, 1997 NET BOOK
VALUE.......................................... (pound)4,617 (pound)329,326 (pound)3,571 (pound)399 (pound)337,913
===== ======= ===== === =======
DECEMBER 31, 1996 NET BOOK
VALUE.......................................... (pound)4,704 (pound)269,121 (pound)3,289 (pound)187 (pound)277,301
===== ======= ===== === =======
4. COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of its existing licenses, and
under the milestone requirements of its local delivery licenses ("LDLs"), to
construct cable systems passing a predetermined number of premises. Should the
Company fail to achieve these milestones, without license modifications, the
Director General could commence proceedings to require compliance. Similarly,
the Independent Television Commission ("ITC") may commence proceedings to
require compliance with the build milestones in the LDLs. If the Company is
unable to comply, its licenses in respect of which milestones have not been met
could be revoked, which could have a material adverse effect on the Company.
5. 1997 SENIOR NOTES
On February 21, 1997 the Company issued $420,500,000 of 10 3/4% Senior
Discount Notes due February 15, 2007 ("the 1997 Senior Notes") at an issue price
of $594.48 per $1,000 principal amount at maturity. Total proceeds received by
the Company amounted to approximately (pound)148 million ($240 million) after
issuance costs of approximately (pound)5 million. Interest on the 1997 Senior
Notes will be payable on February 15 and August 15 of each year commencing
August 15, 2002.
10
DIAMOND CABLE COMMUNICATIONS PLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company expended net cash to fund investing activities of
(pound)128.2 million and (pound)78.7 million in the year ended December 31, 1996
and the nine months ended September 30, 1997, respectively. Net cash provided by
financing activities was (pound)54.4 million in the year ended December 31, 1996
and (pound)147.2 million in the nine months ended September 30, 1997. The
Company's investing activities consisted exclusively of the ongoing construction
of the network. In 1996 the Company's net cash used in operating activities was
(pound)1.3 million and in the nine months to September 30, 1997 the Company's
net cash provided by operating activities was (pound)22.1 million. The Group's
cash and funding requirements historically have been met principally through the
issuance of senior discount notes ("Senior Notes") in September 1994, December
1995 and February 1997 as well as from equity capital, advances from its
shareholders, and from bank and lease financing.
In August 1996, certain of the Company's subsidiaries entered into a
senior bank lending agreement that permitted borrowing up to an aggregate amount
of (pound)340 million. In February 1997, the senior bank facility was amended,
and the Company has subsequently negotiated further amendments to the senior
bank facility (as amended, the "Senior Bank 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 Company through its issue of Senior Notes for proceeds of approximately
(pound)148 million in February 1997. DCL will be able to draw on the Senior Bank
Facility if certain conditions are met, including conditions related to the
operating cash flow of, equity contributions to and certain financial ratios of
Jewel and its subsidiaries (together, the "Borrower Group"). To date, no funds
have been drawn under the facility. The facility does allow for the provision of
guarantees and the Company has drawn a bond of (pound)1.2 million in order to
meet its obligations under certain of the Group's telecommunications licenses.
Indebtedness under the Senior Bank Facility would be incurred by DCL, guaranteed
by the Borrower Group and secured by a lien on the assets of the Borrower Group
and a pledge of the issued shares of the Borrower Group other than Jewel but
including DCL and LCL.
The further development and construction of the Group's cable
television and telecommunications network will require
11
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. In addition, under
the Senior Bank Facility, failure to meet the Group's milestone obligations
could under certain circumstances prevent borrowing or result in an event of
default. The Group met the required quarterly milestone obligations under each
of its telecommunications licenses as at September 30, 1997 except for its
milestone obligations in the Lincoln franchise which it met in October 1997 and
its Grimsby franchise where it fell 3,088 homes short of the franchise
milestone. The Group anticipates that it will meet the September 30, 1997
milestone obligations for Grimsby during the last quarter of 1997. Principally
because of delays by the Department of Trade and Industry in granting the Group
a national telecommunications license, and consequent delays in the commencement
of construction, the Group does not expect to meet its current LDL milestones in
six of the seven LDL franchises at the end of 1997 although construction has
commenced in four of the seven LDL franchises. The Group has commenced
negotiations with the Independent Television Commission to modify its milestone
obligations.
The Company expects that the Group's residential cable network will
extend approximately 14,300 kilometers (plus 920 kilometers to interconnect the
residential build) and pass approximately 1.2 million homes once completed. The
Company expects the network to be substantially completed by the end of 2001.
The Company currently estimates that the additional capital expenditures
required for the Group to substantially complete the network (including
estimated subscriber connection expenses) will be approximately (pound)550
million (of which (pound)460 million relates to capital expenditures occurring
from September 30, 1997 through January 1, 2001), although these amounts could
vary significantly.
The Company believes that existing cash and cash equivalents and future
cash flows from operations will be sufficient to complete the planned
construction through the second quarter of 1998, at which time the Group
estimates that approximately 59% of the aggregate final milestones will have
been constructed and activated. Thereafter, the Company will be required to
utilize additional funds, which may include amounts under the Senior Bank
Facility, the availability of which will depend upon the Group's ability to meet
certain covenants, including operating cash flow covenants which the Company
currently believes it will not meet at that time. The Company is currently
renegotiating the Senior Bank Facility; however, to the
12
extent that the Senior Bank Facility is not available or amounts available
thereunder are insufficient, the Group will be required to obtain further debt
and/or equity financing.
DCL will be able to draw on the Senior Bank Facility if it is able in
the future to meet certain conditions, including conditions related to the
operating cash flow of, equity contributions to and certain financial ratios of
the Borrower Group which are not currently met. However, the Group may not be
able to borrow sufficient funds under the Senior Bank Facility to meet its
remaining funding requirements. In particular, even after the initial conditions
to borrowing have been met the amount of funds that may be borrowed will be
limited to a specified multiple of the Borrower Group's reported annualized cash
flow (as defined in the Senior Bank Facility). This reported annualized cash
flow will depend on a number of variables, including 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 Borrower
Group's reported annualized cash flow and reduce amounts available under the
Senior Bank Facility. In particular, the reorganization of the Company's
residential sales force has resulted in some delays in the progress of marketing
during the transitional phase and reduced revenue growth in the short term as
the new sales force develops.
To the extent that (i) the Group is unable to utilize fully the Senior
Bank Facility, (ii) the amounts required to complete the Group's planned build
out exceed its estimates or (iii) the Borrower Group's reported annualized cash
flow (as defined in the Senior Bank Facility) does not meet expectations, the
Group will require additional debt and/or equity financing. There can be no
assurance that any such debt financing will be permitted under the terms of the
Group's debt instruments, which limit the incurrence of additional debt by the
Group, or that any such debt or equity financing will be available on acceptable
commercial terms or at all.
The foregoing information with regard to expected completion times,
future capital expenditures and the sufficiency of funding is forward-looking in
nature. Due to factors identified in the preceding two paragraphs and below,
actual results may differ materially from the expected results. There can be no
assurance that (i) conditions precedent to advances or the availability of funds
under any of the Group's existing and anticipated debt instruments will be
satisfied when funds are required; (ii) the Group will be able to generate
sufficient cash from operations to meet any unfunded portion of its capital
requirements when required; (iii) the cost of constructing and
13
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.
The inability of the Group to secure additional financing could result
in a failure to comply with the minimum build milestones set forth in its
licenses and could ultimately lead to the revocation of such licenses.
The Group's revenues are denominated in pounds sterling, while its
obligations to pay interest and principal on the three series of Senior Notes
are denominated in U.S. dollars. Therefore, the Company and the Group are
subject to currency exchange risks that may adversely affect their ability to
meet their obligations, including obligations under outstanding debt
instruments, as they become due.
SELECTED OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1995 and 1996 and at and for
the six month period ended June 30, 1997 and the nine-month period ended
September 30, 1997. The combined operating data at and for the year ended
December 31, 1995 reflects the acquisition of LCL on a pro-forma basis as if it
had been completed at the beginning of 1995.
DECEMBER 31, JUNE 30, SEPT. 30,
------------------------------------------------------ ------------ ------------
1995 1996 1997 1997
--------------------------------------- ----------- ------------ ------------
Diamond LCL Combined
-------------- --------- ----------
Homes passed by civils
construction(1)...................... 222,335 58,976 281,311 453,496 490,781 509,288
Homes activated(2)................... 105,951 51,955 157,906 347,246 424,593 452,974
Homes marketed(3).................... 77,657 48,950 126,607 252,601 313,994 355,760
CABLE TELEVISION
Basic service subscribers............ 20,261 10,488 30,749 59,242 63,642 71,435
Penetration rate of homes
marketed(4).......................... 26.1% 21.4% 24.3% 23.5% 20.3% 20.1%
Average monthly revenue per
subscriber(5)........................ (pound)16.80 (pound)18.89 (pound)17.62 (pound)18.03 (pound)20.07 (pound)19.75
Churn(6)............................. 35.5% 31.0% 33.8% 40.9% 42.2%(7) 37.7%(7)
RESIDENTIAL TELEPHONE
Residential lines connected.......... 36,122 16,576 52,698 104,460 122,953 136,925
Penetration rate of homes
marketed(4).......................... 46.5% 33.9% 41.6% 41.4% 39.2% 38.5%
Average monthly revenue per
line(8)(9)........................... (pound)18.68 (pound)22.19 (pound)19.88 (pound)18.40 (pound)18.70 (pound)18.74
Pro-forma average monthly
revenue per line(9).................. (pound)18.11 (pound)21.35 (pound)19.22 (pound)18.64 (pound)18.70 (pound)18.74
Churn(6)............................. 13.9% 17.2% 15.0% 20.6% 17.8%(7) 17.5%(7)
BUSINESS TELECOMMUNICATIONS
Business customers accounts.......... 1,627 772 2,399 3,935 4,777 5,301
Business lines connected............. 7,036 2,843 9,879 18,932 23,073 25,405
Private circuits(10)................. 151 10 161 226 239 247
Average lines per business
account(11).......................... 4.3 3.7 4.1 4.8 4.8 4.8
Average monthly revenue per
line(9)(12).......................... (pound)74.60 (pound)59.60 (pound)70.23 (pound)50.17 (pound)47.05 (pound)46.80
Pro-forma average monthly
revenue per line(9).................. (pound)72.02 (pound)56.88 (pound)67.70 (pound)51.25 (pound)47.05 (pound)46.80
- --------------------
<FN>
(1) Homes passed by civils is the number of homes that have had ducting buried
outside.
(2) Homes activated is the number of homes that are capable of receiving cable
service without further extension of transmission lines, apart from the
final connection to the home.
14
(3) Homes marketed is the number of homes activated for which the initial
marketing phase has been completed.
(4) Penetration rate of homes marketed is calculated by dividing the number of
homes receiving basic cable television or the number of residential lines
connected, as the case may be, on the given date by the total number of
homes marketed for the given service as of such date, expressed as a
percentage.
(5) The average monthly revenue per cable television subscriber is calculated
by dividing total cable television subscriber revenues (excluding
installation revenues) for the period by the average number of cable
television subscribers (calculated as a simple average of the number of
basic service subscribers at the end of each month during the period) and
dividing that amount by twelve (for the years ended December 31, 1995 and
1996), by six (for the six months ended June 30, 1997), or by nine (for the
nine months ended September 30, 1997).
(6) Churn is calculated by dividing net disconnections (total disconnections
less the number of disconnected accounts for which service is later
restored) in a period by the average number of subscribers in the period
(calculated as a simple average of the number of subscribers at the end of
each month during the period). Churn for the six months ended June 30, 1997
is annualized by multiplying the amount as calculated above by two. Churn
for the nine months ended September 30, 1997 is annualized by multiplying
the amount as calculated above by 1 and 1/3.
(7) Since the beginning of 1997, the Company'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 Company's
information system and were therefore reported in the churn calculation as
disconnected accounts. If churn for the six months to June 30, 1997 were
calculated on the basis used in periods prior to 1997, churn would have
been (annualized) 45.6% and 21.8% for cable television and residential
telephone, respectively. If churn for the quarter to September 30, 1997
were calculated on the basis used in periods prior to 1997, churn would
have been (annualised) 33.9% and 22.9% for cable television and residential
telephone, respectively. The difference between churn on the new and prior
bases is not necessarily indicative of the adjustment that would arise if
it were possible to recalculate the churn for prior periods.
(8) 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 (for the years ended December 31, 1995 and 1996), by six (for the
six months ended June 30, 1997), or by nine (for the nine months ended
September 30, 1997).
(9) The calculation of the average monthly revenue per line (for both
residential telephone and business telecommunication revenues) for the year
to December 31, 1996 reflects the reduction in revenues stemming from
rebates to BT on incoming termination revenues relating in part to 1995 but
recorded in full against revenues in 1996. The rebates were calculated in
accordance with recently revised interconnect agreements with BT that were
made effective retroactively from April 1995. The pro-forma average monthly
revenue per line (for both residential telephone and business
telecommunications revenues) gives effect to the revised interconnect
agreements as if they had been in effect from April 1995 and allocates to
each period the portion of the rebates that relates to such period.
(10) Private circuits are point-to-point customer specific connections for which
a fixed annual rental charge is made.
(11) 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.
(12) 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
(for the years ended December 31, 1995 and 1996) , by six (for the six
months ended June 30, 1997), or by nine (for the nine months ended
September 30, 1997).
</FN>
15
RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997
The Group continued to experience increases in its subscribers,
revenues and expenses during the nine-month period ended September 30, 1997. In
general, these increases were attributable to the Group's continued network
construction, activation and marketing of new homes and businesses. Homes passed
by civils construction increased by 55,792 homes (12.3%) and homes activated
increased by 105,728 (30.4%) from December 31, 1996 to September 30, 1997.
During the nine months ended September 30, 1997, the Company intentionally
slowed the pace of civils construction to reduce the gap between homes passed by
civils construction and homes activated. In addition, during the early part of
the year the pace of civils construction was affected by the phase out of one of
the Company's largest civils contractors, which went into liquidation. The Group
has continued to focus on its milestone obligations, which are measured in terms
of homes activated. The Group met the required quarterly milestone obligations
under each of its telecommunications licenses as at September 30, 1997 except
for its milestone obligations in its Lincoln franchise which it met in October
1997 and its Grimsby franchise where it fell 3,088 homes short of the franchise
milestone. The Group anticipates that it will meet the September 30, 1997
milestone obligations for Grimsby during the last quarter of 1997. Principally
because of delays by the Department of Trade and Industry in granting the Group
a national telecommunications license, and consequent delays in the commencement
of construction, the Group does not expect to meet its current LDL milestones in
six of the seven LDL franchises at the end of 1997 although construction has
commenced in four of the seven LDL franchises. The Group has commenced
negotiations with the Independent Television Commission to modify its milestone
obligations.
In addition, in order to improve the management and quality of the
residential sales force, in February 1997 the Company terminated arrangements
with its independent sales contractors and began to develop its own internal
sales force through direct hiring of residential sales people. Prior to this
reorganization, the sales force comprised approximately 150 residential sales
people who were employed by the independent contractors that the Group paid on a
full commission basis. The Group now employs residential sales people directly
and pays them on the basis of a salary plus sales commission. At September 30,
1997, the Company employed approximately 160 residential sales people, including
some former contracted sales people who were hired by the Company in accordance
with its employment criteria following interviews. All of these sales people
have now undergone a training process which has promoted their long-term
effectiveness but which delayed their productivity in the short term. The
reorganization delayed the progress of marketing and affected penetration in the
areas being marketed during this
16
transitional period. Penetration has also been negatively impacted during 1997
by increased competitive activity in particular from BT, Ionica, Cable and
Wireless Communications and BSkyB. At September 30, 1997, residential telephone
line penetration was 38.5% and cable television penetration was 20.1% from 41.4%
and 23.5%, respectively, at December 31, 1996. Penetration rates for residential
telephone and cable television were 41.4% and 23.1% at September 30, 1996.
REVENUE
For the three months ended September 30, 1997, total revenues were
(pound)15.4 million, a 68% increase over total revenues of (pound)9.2 million
for the comparable period in 1996. For the nine months ended September 30, 1997
total revenues were (pound)42.6 million, a 61% increase over total revenues of
(pound)26.4 million for the comparable period in 1996. 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 will apply retroactively, the Company will receive outgoing interconnect
charge rebates relating to all periods prior to December 31, 1996 and must pay
incoming termination rebates relating to the period from April 1, 1995 to
December 31, 1996. Based on interim rates for the period from January 1, 1997,
no rebates will be due from or payable to BT for the nine-month period to
September 30, 1997. The rebates that will be paid to BT relating to the incoming
termination element amount to an estimated (pound)1,351,000 based on final rates
for the twelve month period from April 1, 1995 and interim rates for the
nine-month period from April 1, 1996. This amount has been provided by reducing
residential telephone and business telecommunications revenues in 1996 by
(pound)776,000 and (pound)575,000, respectively, of which (pound)149,000 and
(pound)84,000, respectively, relates to the three month period ended September
30, 1996 and (pound)523,000 and (pound)356,000, respectively, relates to the
nine-month period ended September 30, 1996. The total amount of rebates to be
received by the Company will be determined by the parties once BT has furnished
to the Company a proposed calculation and supporting data and OFTEL has
determined the final rates applicable for the period from April 1, 1996. The
Company has estimated that the amount of the rebate due to the Company from BT
will exceed the amount of the rebates to be provided by the Company to BT.
Pending final determination of rebates, the Company has recognized a reduction
in interconnect charges in the same period during which the related reduction in
revenues is being recognized. Accordingly, a reduction in telephone expenses of
(pound)1,351,000 has been recorded in 1996 of which (pound)233,000 relates to
the three month period ended September 30, 1996 and (pound)879,000 relates to
the nine-month period ended September 30, 1996.
The analysis of revenue and average revenue per line is provided below
on the basis of revenues as reported as well as on
17
a pro-forma basis for periods up to December 31, 1996 adjusting for the incoming
termination rebates in the appropriate periods as if the revised interconnect
agreements and the final rates for the year to March 31, 1996 and interim rates
for the nine months to December 31, 1996 had been in effect.
Business Telecommunications. Business telecommunications revenues were
(pound)3.7 million and (pound)10.2 million for the three and nine-month periods
ended September 30, 1997 compared to (pound)2.1 million and (pound)7.2 million,
respectively(pro-forma (pound)2.5 million and (pound)7.2 million, respectively)
for the comparable period in 1996, representing increases of 75% and 42%,
respectively (50% and 42%, respectively, on a pro-forma basis). The growth in
reported revenues is due primarily to an increase in the number of business
lines installed from 17,261 at September 30, 1996 to 25,405 at September 30,
1997, an increase of 47%. The growth in the number of business lines was
partially offset by lower monthly revenue per line. The monthly revenue per line
decreased from (pound)53.15 in the nine months to September 30, 1996
((pound)53.34 on a pro-forma basis) to (pound)46.80 in the comparable period in
1997. This decline was due to a combination of (i) the Group's success in
marketing Centrex services which has the effect of increasing the average number
of lines held by existing and new customers taking those services (the Company
operated 11,079 Centrex lines at September 30, 1997 compared to 6,612 Centrex
lines at September 30, 1996 representing 43.6% and 38.3% of the total number of
business lines at those dates, respectively), (ii) a reduction in certain
tariffs in response to price reductions by competitors, including BT, the
Group's principal competitor for business telecommunications services which
reduced in each of June 1996 and May 1997 its prices by an average of about 10%
for most of its business customers and made smaller price reductions at other
times during 1996 and 1997, and (iii) the installation for existing customers of
an increasing number of lines utilized for incoming calls in addition to
existing lines dedicated solely to outgoing calls. Monthly revenue per line has
remained relatively stable over the past 15 months. The Company may lower prices
in the future if considered appropriate for competitive reasons.
Residential Telephone. Residential telephone revenues were (pound)7.5
million and (pound)20.5 million in the three and nine-month periods,
respectively, to September 30, 1997 compared to (pound)4.5 million and
(pound)12.4 million, respectively, ((pound)4.8 million and (pound)12.4 million,
respectively, on a pro-forma basis) for the comparable periods in 1996, an
increase of 65% and 64%, respectively, (57% and 65%, respectively, on a
pro-forma basis). The growth in residential telephone revenue is due primarily
to an increase in the number of residential telephone lines from 89,954 at
September 30, 1996 to 136,925 at September 30, 1997, representing an increase of
52%. The number of residential telephone lines increased by 13,972 during the
three months to September 30, 1997, as compared to an increase of 11,072 during
the three
18
months to June 30, 1997. Monthly revenue per line was (pound)17.47 and
(pound)18.78 (pro-forma (pound)18.46 and (pound)18.73) in the three and
nine-month periods, respectively, to September 30, 1996 and (pound)18.80 and
(pound)18.74 in the comparable periods, respectively, in 1997. Overall tariffs
were reduced for subscribers in the Leicester franchise in July 1996 to conform
tariffs for all the Group's subscribers together with additional call tariff
reductions in late 1996 and during the nine months to September 30, 1997. These
call tariff reductions were partly offset by increases in line rental charges in
January 1997. The Company will continue to review and adjust its tariffs to
maintain price competitiveness. The churn rate (annualized) was 17.0% for the
three months to September 30, 1997 compared to 17.5% for the three months to
June 30, 1997. The churn rate (annualized) was 17.5% for the first nine months
of 1997 (22.2% before taking into account the new adjustments described above in
Note 7 to the Selected Operating Data) as compared to 20.7% in the comparable
period in 1996. The increase in churn from 20.7% in the first nine months of
1996 to 22.2% in the comparable period in 1997 is attributable in part to a
stricter disconnect policy for certain customers and ongoing efforts by BT aimed
at regaining former customers.
Cable Television. Cable television revenues increased from (pound)2.5
million and (pound)6.8 million in the three and nine-month periods to September
30, 1996, respectively, to (pound)4.2 million and (pound)11.9 million in the
comparable periods in 1997, representing increases of 68% and 75%, respectively.
This growth in cable television revenue was primarily due to a combination of
increases in the number of cable television subscribers and average revenue per
subscriber. The number of cable television subscribers rose from 50,181 at
September 30, 1996 to 71,435 at September 30, 1997, an increase of 42%. In the
three months to September 30, 1997, the Group gained 7,793 net new subscribers,
as compared to 3,634 net new subscribers in the three months to June 30, 1997.
Average monthly revenue per subscriber increased from (pound)17.07 and
(pound)17.97, respectively, for the three and nine-month periods ended September
30, 1996 to (pound)19.17 and (pound)19.75, respectively, for the comparable
periods in 1997. The increase in average revenue per subscriber was primarily
due to increases in cable television pricing offset in part by lower premium pay
channel penetration in the nine months to September 30, 1997 compared to the
same period in 1996.
The Group's annualized churn was 29.7% in the three months to September
30, 1997 compared to 37.8% in the three months to June 30, 1997 and 46.8% in the
three months to March 31, 1997 (33.9%, 41.5% and 49.7%, respectively, before
taking into account the new adjustments described above in Note 7 to the
Selected Operating Data), as compared to 45.2%, 38.1% and 36.6% in the three
months to September 30, 1996, the three months to June 30, 1996, and the three
months to March 31, 1996, respectively. The Group's annualized churn was 37.7%
for the nine months to September 30, 1997 (41.4% before taking into account the
new adjustments described above in Note 7 to the Selected Operating Data) as
compared to 40.4% in the comparable period in 1996. The Company believes that
the high churn in the first half of 1997 was due in part to the continuing
effect of increases in the fourth quarter of
19
1996 in premium channel subscription rates which led certain longer-term
customers who had previously benefitted from grandfathered rates, to disconnect
service, the effect of an increase in the basic subscription prices, additional
price increases resulting from the Company passing on to its customers a new
BSkyB charge for Sky Sports 3 (which BSkyB provided to its own sports
subscribers at no additional charge) and other aggressive promotional activity
of BSkyB, as well as to the application of a stricter disconnect policy relating
to non-payment. With the aim of reducing churn among new subscribers, the
Company now requires the payment of an installation fee in connection with the
subscription for new residential services. The Company has introduced other
policies to reduce its churn which have also contributed to the reducing trend
in churn during 1997, including improvements in the management and quality of
the sales force, the introduction of more program packaging choice for customers
and increased focus on the retention of customers.
OPERATING COSTS AND EXPENSES
Telephone expenses, consisting principally of interconnect charges
payable to BT, Mercury, Energis, and Global One increased from (pound)1.9
million for the three month period ended September 30, 1996 to (pound)3.2
million in the comparable period in 1997, and from (pound)7.8 million in the
nine-month period ended September 30, 1996 to (pound)8.7 million in the
comparable period in 1997. 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)2.7 million and (pound)8.1 million in the three and
nine-month periods, respectively, to September 30, 1996. As a percentage of
combined business telecommunications and residential telephone revenues, these
direct costs decreased from 37% and 41% on a pro-forma basis in the three and
nine-month periods, respectively, to September 30, 1996 to 28% in the comparable
periods in 1997 due primarily to reduced interconnect charges paid to these
operators.
Direct costs for cable television programming, which generally depend
on the number of subscribers and per-subscriber rates charged by programming
suppliers, increased from (pound)1.5 million in the three months to September
30, 1996 to (pound)2.4 million in the comparable period in 1997, a 61% increase,
and from (pound)4.0 million for the nine-month period to September 30, 1996 to
(pound)6.9 million in the comparable period in 1997, a 71% increase.
As a percentage of cable television revenues, these direct costs were
59% and 60% for the three and nine-month periods, respectively, to September 30,
1996, and were 57% and 58% for the three and nine-month periods to September 30,
1997, respectively.
Selling, general and administrative expenses increased by 29% from the
three months to September 30, 1996 to the comparable
20
period in 1997 and by 23% from the nine months to September 30, 1996 to the
comparable period in 1997. The increases were due to higher administration costs
associated with the expansion of the Company's business.
Depreciation and amortization expenses increased by 23% from the three
month period to September 30, 1996 to the comparable period in 1997 and by 30%
from the nine-month period to September 30, 1996 to the comparable period in
1997. This increase was attributable to the increasing size of the Company's
network.
INTEREST INCOME/EXPENSE
Interest expense was (pound)10.6 million and (pound)15.9 million for
the three months to September 30, 1996 and three months to September 30, 1997,
respectively, and (pound)30.7 million and (pound)43.1 million for the nine
months to September 30, 1996 and nine months to September 30, 1997,
respectively. The increase from 1996 to 1997 is due primarily to the accretion
of the discount on the Senior Notes of (pound)14.8 million during the third
quarter of 1997 and (pound)39.9 million during the first nine months of 1997
compared to (pound)9.8 million and (pound)28.9 million, respectively, in the
comparable periods in 1996. Interest expense includes other interest of
(pound)0.4 million and (pound)0.8 million in the three month periods ended
September 30, 1997 and September 30, 1996 respectively, and (pound)1.4 million
and (pound)1.8 million in the first nine months of 1997 and the first nine
months of 1996 respectively. In addition, amortization of debt financing costs
was (pound)0.6 million in the three-month period ended September 30, 1997 and
(pound)1.8 million in the first nine months of 1997. Interest received in the
three month period ended September 30, 1997 was (pound)1.9 million and
(pound)4.8 million in the nine-month period ended September 30, 1997, through
temporary investment of the proceeds of the 1997 Senior Notes.
FOREIGN EXCHANGE
A substantial portion of the Group's existing debt obligations are
denominated in U.S. dollars, while the Group's revenues and accounts are
generated and stated in pounds sterling. Foreign currency translation gains and
losses, except for unrealized gains and losses on available-for-sale securities,
are reported as part of the profit or loss of the Group. In the year ended
December 31, 1996, the Group recognized a net foreign exchange gain of
(pound)31.0 million primarily due to the unrealized gain on translation of its
liability on the Senior Notes. During the nine months ended September 30, 1997,
the Group recorded a net foreign exchange loss of (pound)22.2 million primarily
due to the unrealized loss on translation of its liability on the Senior Notes.
21
GAINS ON DERIVATIVE FINANCIAL INSTRUMENTS
Unrealized gains on derivative financial instruments of (pound)2.9
million in the nine months to September 30, 1997 consist of a gain of (pound)3.1
million on the mark-to-market valuation of two foreign exchange forward
contracts (referred to below), partly offset by a loss of (pound)0.2 million on
the mark-to-market valuation of an interest rate swap commitment.
The Company entered into a foreign exchange forward contract on
November 1, 1996 for settlement on May 6, 1997 to sell (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)1.00. The offsetting contracts were
settled on February 6, 1997 with a payment of approximately (pound)3.4 million
to the Company. Because of changes in prevailing rates, the Company recorded for
the year ended December 31, 1996, an unrealized loss of approximately (pound)8.1
million on the pounds sterling sell forward contract which partially offset the
gain that was recorded on the translation of the U.S. dollar denominated
obligations on the 1994 Senior Notes and 1995 Senior Notes during the same
period. During the first quarter of 1997, the Company has recorded a gain of
approximately (pound)11.5 million on the two offsetting forward contracts,
reflecting the reversal of an (pound)8.1 million loss referred to above and the
approximately (pound)3.4 million cash payment on settlement of the contracts.
The realized gain on the foreign exchange forward contract in the first quarter
of 1997 largely offset the unrealized loss that was recorded in the same period
on the translation of the U.S. dollar denominated obligations on the 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)1.00. 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)1.00. The Company has the opportunity to
roll forward these contracts in order to cover specific dollar liabilities when
they arise or to crystallize a profit at any stage thought appropriate.
Therefore the accounting treatment of these contracts, which are not designated
to an asset or liability, are recorded on the balance sheet in other assets or
other liabilities at their market value. Any gains or losses are recognized in
the statement of operations. Since the end of the third quarter, the pound
sterling has appreciated against the U.S. dollar. At November 12, 1997, the Noon
Buying Rate was $1.7035 = (pound)1.00. 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
Company and the Group's ability to satisfy their obligations, including
obligations under outstanding debt instruments, as they become due.
22
NET LOSS
As a result of the foregoing factors, Diamond had net losses of
(pound)32.1 million in the three month period ended September 30, 1997, compared
to a net loss of (pound)12.4 million recorded in the comparable period of 1996,
and a loss of (pound)58.8 million for the nine-month period ended September 30,
1997 compared to a loss of (pound)41.7 million in the comparable period of 1996.
23
DIAMOND CABLE COMMUNICATIONS PLC
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
None.
(b) Reports on Form 8-K -
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND CABLE COMMUNICATIONS PLC
Date: November 14, 1997 By: /s/ Robert Goad
Robert Goad
(Chief Executive Officer)
Date: November 14, 1997 By: /s/ Nicholas Millard
Nicholas Millard
(Chief Financial Officer)
Date: November 14, 1997 By: /s/ Duncan Craig
Duncan Craig
(Chief Accounting Officer)
25