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, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-83740
Diamond Cable Communications Plc
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
England and Wales N/A
- ----------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Diamond Plaza, Daleside Road
Nottingham NG2 3GG, England N/A
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
44-115-912-2217
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's Ordinary Shares of
2.5 pence each outstanding as of September 30, 1998 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, 1998 and 1997............................... 5
Condensed consolidated balance sheets--
September 30, 1998 and December 31, 1997.................. 6
Unaudited condensed consolidated statements of
shareholders' equity -- Three and nine months
ended September 30, 1998.................................. 7
Unaudited condensed consolidated statements of cash flows --
Nine months ended September 30, 1998
and 1997.................................................. 8
Notes to the unaudited condensed consolidated
financial statements...................................... 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition..................... 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 26
SIGNATURES............................................................... 27
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 intermediate holding companies, Diamond Holdings plc and Jewel
Holdings Limited ("Jewel"). References herein to the "Group" refer to the
Company and its subsidiaries, including, since September 27, 1995, LCL.
The Group operates a telecommunications and cable television business
focused on the East Midlands area of England. The Group is currently
constructing a broadband fiber-optic network to serve the approximately 1.2
million homes and an estimated 60,600 businesses within its contiguous franchise
areas. As of September 30, 1998, the Group's cable television and
telecommunications network had passed by civils construction approximately
666,400 homes and an estimated 29,700 businesses, of which portions of the
network passing approximately 644,700 homes and an estimated 29,000 businesses
had been activated. As of that date, the Group also had approximately 214,600
residential telephone lines, 106,700 cable television subscribers and 36,200
business telephone lines. Through that date, (pound)531 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 $1.6995 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, 1998. On November 10, 1998,
the Noon Buying Rate was $1.6580 per (pound)1.00.
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL Incorporated ("NTL"), an alternative telecommunications
company in the UK, the common stock of which is quoted on NASDAQ (NTLi). Under
the share exchange agreement between the Company's shareholders and NTL (the
"Share Exchange Agreement"), the Company's shareholders will receive one share
of NTL common stock for every four Ordinary Shares of the Company held subject
to adjustment in the event that the average NTL share price for a predetermined
period before closing of the transaction exceeds a specified price (which will
be $52.50 per share until November 16, 1998, increasing thereafter to $53 per
share until December 16, 1998, $53.50 per share until January 16, 1999 and $54
per share thereafter). Holders of the Company's deferred shares will receive one
share of NTL common stock for each deferred share held.
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals (which have been
obtained) and approval by NTL shareholders. Although the transaction will not
require the prior approval of the holders of the Group's outstanding debt
securities, each of the indentures pursuant to which the Group's debt securities
were issued requires that offers to repurchase such debt securities be made to
holders of such securities subsequent to closing at a price of 101% of their
accreted value or princial amount, which may influence the ability of the
parties to complete the proposed share exchange in its current form.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINTH MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
1997 1998 1998 1997 1998 1998
------ ------ ------ ------ ------ -----
(note 1) (note 1)
(in thousands)
REVENUE
Business telecommunications...............(pound)3,697 (pound) 4,651 $ 7,903 (pound)10,217 (pound)13,650 $ 23,198
Residential telephone..................... 7,518 11,975 20,351 20,450 32,806 55,754
Cable television.......................... 4,187 6,110 10,384 11,884 17,466 29,683
------- ------- ------- -------- ------- --------
15,402 22,736 38,638 42,551 63,922 108,635
------- ------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Telephone................................. (3,173) (4,469) (7,595) (8,710) (12,390) (21,057)
Programming............................... (2,368) (3,259) (5,539) (6,918) (9,450) (16,060)
Selling, general, and
administrative.......................... (7,126) (9,506) (16,155) (19,694) (27,430) (46,617)
Depreciation and amortization............. (7,042) (10,851) (18,441) (20,057) (30,501) (51,836)
-------- -------- -------- -------- -------- --------
(19,709) (28,085) (47,730) (55,379) (79,771) (135,570)
-------- -------- -------- -------- -------- --------
OPERATING LOSS............................ (4,307) (5,349) (9,092) (12,828) (15,849) (26,935)
Interest income........................... 1,868 3,383 5,749 4,837 10,264 17,444
Interest expense and amortization of debt
discount and expenses................... (15,875) (21,569) (36,657) (43,075) (61,984) (105,342)
Foreign exchange gains/(losses), net...... (16,457) 10,906 18,537 (22,180) 21,071 35,810
Unrealized gain on derivative financial
instruments............................. 2,660 -- -- 2,904 -- --
Realized gain on derivative financial
instruments............................. -- -- -- 11,553 412 700
-------- -------- -------- -------- ------- ---------
Loss before income taxes.................. (32,111) (12,629) (21,463) (58,789) (46,086) (78,323)
Income taxes.............................. -- -- -- -- -- --
-------- -------- -------- --------- -------- ---------
NET LOSS................................(pound)(32,111) (pound)(12,629) $(21,463) (pound)(58,789) (pound)(46,086) $(78,323)
======== ======== ======== ========= ======== =========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
5
DIAMOND CABLE COMMUNICATIONS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, AT SEPTEMBER 30,
---------------- ----------------
(UNAUDITED)
1997 1998 1998
------ ------ ------
(NOTE 1)
(IN THOUSANDS)
ASSETS
Cash and cash equivalents .............................................. (pound) 75,680 (pound) 186,190 $316,430
Trade receivables (net of allowance for doubtful accounts
of (pound)2,788 at December 31, 1997 and(pound)4,236 at
September 30, 1998)................................................... 8,569 9,722 16,523
Other assets............................................................ 4,470 2,448 4,160
Deferred financing costs (less accumulated
amortization of (pound)2,627 at December 31, 1997
and (pound)4,243 at September 30, 1998)............................... 15,533 20,910 35,536
Property and equipment, net (note 4).................................... 365,636 442,330 751,740
Goodwill (less accumulated amortization of (pound)10,914 at December 31,
1997 and(pound)14,551 at September 30, 1998)............................ 86,046 82,409 140,054
Franchise costs (less accumulated amortization of
(pound)116 at December 31, 1997 and(pound)137 at September 30, 1998).. 423 402 683
-------- -------- --------
TOTAL ASSETS............................................................ (pound)556,357 (pound)744,411 $1,265,126
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable........................................................ (pound) 22,319 (pound) 27,595 $46,897
Other liabilities....................................................... 11,224 15,731 26,735
Senior discount notes................................................... 534,861 563,499 957,667
Senior notes............................................................ - 199,725 339,432
Capital lease obligations............................................... 8,041 6,884 11,699
Mortgage loan........................................................... 2,423 2,397 4,074
Shareholders' equity
Ordinary shares (70,000,000 authorized;
59,138,791 issued at December 31, 1997 and
at September 30, 1998)............................................. 1,478 1,478 2,512
Non-voting deferred shares (6 shares authorized and
issued at December 31, 1997 and September 30, 1998).................. - - -
Additional paid-in-capital............................................. 134,466 134,466 228,525
Accumulated other comprehensive loss................................... (204) (3,027) (5,144)
Accumulated deficit.................................................... (158,251) (204,337) (347,271)
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. (pound)556,357 (pound)744,411 $1,265,126
======== ======== =========
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
6
DIAMOND CABLE COMMUNICATIONS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
ADDITIONAL
NON-VOTING PAID-
ORDINARY SHARES DEFERRED SHARES IN-CAPITAL
--------------- --------------- ----------
(IN THOUSANDS EXCEPT SHARE DATA)
Number Number
------ ------
BALANCE AT JANUARY 1, 1998........ 59,138,791 (pound)1,478 6 -- (pound)134,466
Unrealized loss on securities..... -- -- -- -- --
Net loss.......................... -- -- -- -- --
----------- ------------ ------ ------ -------------
BALANCE AT SEPTEMBER 30, 1998..... 59,138,791 (pound)1,478 6 -- (pound)134,466
=========== ============ ====== ====== =============
BALANCE AT JULY 1, 1998........... 59,138,791 (pound)1,478 6 -- (pound)134,466
Unrealized gain on securities..... -- -- -- -- --
Net loss.......................... -- -- -- -- --
----------- ------------ ------ ------ -------------
BALANCE AT SEPTEMBER 30, 1998..... 59,138,791 (pound)1,478 6 -- (pound)134,466
=========== ============ ====== ====== =============
- ---------------
See the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
LOSS DEFICIT DEFICIT
------------- ----------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
BALANCE AT JANUARY 1, 1998........ (pound) (204) (pound)(158,251) (pound)(22,511)
Unrealized loss on securities..... (2,823) -- (2,823)
Net loss.......................... -- (46,086) (46,086)
------------- ---------------- ---------------
BALANCE AT SEPTEMBER 30, 1998..... (pound)(3,027) (pound)(204,337) (pound)(71,420)
============= ================ ===============
BALANCE AT JULY 1, 1998........... (pound)(1,905) (pound)(191,708) (pound)(57,669)
Unrealized gain on securities..... (1,122) -- (1,122)
Net loss.......................... -- (12,629) (12,629)
------------- ---------------- ---------------
BALANCE AT SEPTEMBER 30, 1998..... (pound)(3,027) (pound)(204,337) (pound)(71,420)
============= ================ ===============
- ---------------
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,
------------------------------
1997 1998 1998
---------- ---------- ----------
(NOTE 1)
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.......................................................... (pound)(58,789) (pound)(46,086) $(78,323)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization................................... 20,057 30,501 51,836
Unrealized foreign exchange losses/(gains)...................... 22,270 (20,982) (35,659)
Loss on disposition of assets................................... 99 - -
Accretion of Senior Note discount............................... 39,865 46,964 79,816
Provision for losses on accounts receivable..................... 795 1,448 2,461
Amortization of deferred financing costs........................ 1,837 1,616 2,746
Change in operating assets and liabilities:
Change in trade receivables................................... (958) (2,602) (4,422)
Change in other assets........................................ (3,007) 2,022 3,437
Change in accounts payable.................................... 5,646 2,944 5,003
Change in other liabilities................................... (5,744) 4,372 7,430
------ ------ ------
Net cash provided by operating activities......................... 22,071 20,197 34,325
------ ------ ------
Cash flows from investing activities:
Cash invested in property and equipment......................... (78,728) (100,958) (171,578)
Proceeds from disposition of assets............................. 39 95 161
------ ------- -------
Net cash used in investing activities............................. (78,689) (100,863) (171,417)
------ ------- -------
Cash flows from financing activities:
Proceeds of issue of debt....................................... 153,692 202,381 343,946
Debt financing costs............................................ (5,249) (6,814) (11,580)
Repayment of mortgage loan...................................... (55) (27) (46)
Capital element of capital lease repayments..................... (1,187) (1,541) (2,619)
------- ------- -------
Net cash provided by financing activities......................... 147,201 193,999 329,701
------- ------- -------
Net increase in cash and cash equivalents......................... 90,583 113,333 192,609
Cash and cash equivalents at beginning of period.................. 18,311 75,680 128,618
Effect of exchange rate changes on cash and cash equivalents...... (500) (2,823) (4,797)
------- ------- -------
(pound)108,394 (pound)186,190 $316,430
Cash and cash equivalents at end of period........................ ====-== ======= =======
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 $1.6995 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, 1998.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The financial statements as of and for the periods ended September 30,
1998 and 1997 are unaudited. However, in the opinion of the management, such
statements include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the periods
presented. The results of operations for any interim period are not necessarily
indicative of the results for the full year. The interim financial statements
should be read in conjunction with the financial information included in the
Company's 1997 Annual Report on Form 10-K filed with the SEC.
3. COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997,
and is effective for accounting periods beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. Comprehensive loss for the nine-month periods to September
30, 1997 and 1998 is shown below:
9
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1998 1998
--------------- -------------- ----------
(NOTE 1)
(IN THOUSANDS)
Net loss.......................................................... (pound)(58,789) (pound)(46,086) $(78,323)
Other comprehensive loss net of tax:-
Unrealized loss on securities................................... (500) (2,823) (4,797)
-------------- -------------- --------
Comprehensive loss............................................... (pound)(59,289) (pound)(48,909) $(83,120)
============== ============== ========
4. PROPERTY AND EQUIPMENT
LAND AND CABLE OFFICE MOTOR
BUILDINGS NETWORK EQUIPMENT VEHICLES TOTAL
------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
ACQUISITION COSTS
Balance at January 1, 1998....... (pound)5,111 (pound)405,652 (pound)9,017 (pound)606 (pound)420,386
Additions........................ 1,511 100,506 1,109 506 103,632
Dispositions..................... - (271) (5) (213) (489)
----------- ------------- ----------- ---------- --------------
Balance at September 30, 1998.... 6,622 505,887 10,121 899 523,529
----------- ------------- ----------- ---------- --------------
ACCUMULATED DEPRECIATION
Balance at January 1, 1998....... 478 49,695 4,369 208 54,750
Charge for period................ 143 25,046 1,515 139 26,843
Dispositions..................... - (220) (5) (169) (394)
----------- ------------- ---------- ----------- --------------
Balance at September 30, 1998.... 621 74,521 5,879 178 81,199
----------- ------------- ---------- ----------- --------------
SEPTEMBER 30, 1998 NET BOOK VALUE 6,001 431,366 4,242 721 442,330
============ ============== ============ =========== ==============
DECEMBER 31, 1997 NET BOOK VALUE (pound)4,633 (pound)355,957 (pound)4,648 (pound)398 (pound)365,636
============ ============== ============ =========== ==============
The estimated useful life of set-top boxes and initial subscriber installations
was reduced from seven years to three years with effect from January 1, 1998.
The effect of the change in estimated useful life was to reduce net income for
the period by (pound)5.0 million ($8.5 million).
5. COMMITMENTS AND CONTINGENCIES
The Company is obligated under the terms of its existing licenses, and
under the milestone requirements of its local delivery licenses ("LDLs"), to
construct cable systems passing a predetermined number of premises. Should the
Company fail to achieve these milestones, without license modifications, the
Director General could commence
10
proceedings to require compliance. Similarly, the Independent Television
Commission ("ITC") may commence proceedings to require compliance with the build
milestones in the LDLs. If the Company is unable to comply, its licenses in
respect of which milestones have not been met could be revoked, which could have
a material adverse effect on the Company.
6. ISSUE OF 1998 NOTES
On February 6, 1998, Diamond Holdings plc ("Diamond Holdings"), a
subsidiary of the Company, issued (pound)135,000,000 in principal amount of its
10% Senior Notes due February 1, 2008 and $110,000,000 in principal amount of
its 9 1/8% Senior Notes due February 1, 2008 (together, the "1998 Notes".) The
1998 Notes have been fully and unconditionally guaranteed by the Company as to
principal, interest and other amounts due. Net proceeds received by Diamond
Holdings amounted to approximately (pound)195 million after issuance costs of
approximately (pound)7 million.
7. SHARE EXCHANGE AGREEMENT
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL, an alternative telecommunications company in the UK, the
common stock of which is quoted on NASDAQ (NTLi). Under the Share Exchange
Agreement, the Company's shareholders will receive one share of NTL common stock
for every four Ordinary Shares of the Company held subject to adjustment in the
event that the average NTL share price for a predetermined period before closing
of the transaction exceeds a specified price (which will be $52.50 per share
until November 16, 1998, increasing thereafter to $53 per share until December
16, 1998, $53.50 per share until January 16, 1999 and $54 per share thereafter).
Holders of the Company's deferred shares will receive one share of NTL common
stock for each deferred share held.
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals (which have been
obtained) and approval by NTL shareholders. Although the transaction will not
require the prior approval of the holders of the Group's outstanding debt
securities, each of the indentures pursuant to which the Group's debt securities
were issued requires that offers to repurchase such debt securities be made to
holders of such securities subsequent to closing at a price of 101% of their
accreted value or principal amount, which may influence the ability of the
parties to complete the proposed share exchange in its current form.
11
If such offers should be required, 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.
8. SUMMARIZED FINANCIAL INFORMATION
The following table presents summarized consolidated financial
information for Diamond Holdings plc ("Diamond Holdings") as of and for the nine
months ended September 30, 1998. This summarized financial information is being
provided pursuant to Section G of Topic 1 of Staff Accounting Bulletin No.
53--"Financial Statement Requirements in Filings Involving the Guarantee of
Securities by a Parent". The 1998 Notes have been guaranteed by the Company as
to principal, interest and other amounts due. The Company will continue to
provide such summarized financial information for Diamond Holdings for as long
as the 1998 Notes remain outstanding and guaranteed by the Company.
Diamond Holdings plc (note a)
-----------------------------
17 days ended Nine months ended
December 31, 1997 September 30, 1998
----------------- ------------------
(in thousands)
Summarized Consolidated Income
Statement Information
Revenue (pound)- (pound) 63,922
Operating costs and expenses - 77,919
Net loss for the period (pound)- (pound)(50,334)
================= ==================
December 31, 1997 September 30, 1998
----------------- ------------------
(in thousands)
Summarized Consolidated Balance
Sheet Information
Fixed and noncurrent assets (pound)- (pound)531,596
Current assets 50 170,048
----------------- -----------------
Total assets (pound)50 (pound)701,644
================= =================
Current liabilities (pound)- (pound) 42,836
Noncurrent liabilities - 818,494
Shareholders equity/(deficit) 50 (159,686)
----------------- -----------------
Total liabilities and
shareholders interest (pound)50 (pound)701,644
================= =================
(a) Diamond Holdings was incorporated on December 15, 1997 and is a
wholly-owned, direct subsidiary of Diamond Cable Communications Plc. On
January 16, 1998 Diamond Holdings became the intermediate holding
company which holds all of the shares of all Group companies (other
than Diamond
12
National Networks Limited, a company with no operations, and (pound)100
called up share capital, which was disposed of by Diamond Cable
Communications plc on November 6, 1998). The Summarized Financial
Information shows operating results as if Diamond Holdings became the
intermediate holding company on January 1, 1998.
13
DIAMOND CABLE COMMUNICATIONS PLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company expended net cash to fund investing activities of
approximately (pound)110.1 million and (pound)100.9 million in the year ended
December 31, 1997 and the first nine months of 1998, respectively. The Company's
investing activities consisted almost exclusively of the ongoing construction of
the network ((pound)110.1 million in the year ended December 31, 1997 and
(pound)101.0 million in the first nine months of 1998). Net cash provided by
financing activities in the year ended December 31, 1997 was approximately
(pound)146.6 million and in the first nine months of 1998 was (pound)194.0
million. The Company's net cash provided by operating activities was (pound)20.9
million in the year ended December 31, 1997 and (pound)20.2 million in the nine
months to September 30, 1998. The Group's cash and funding requirements
historically have been met principally through the issuance of the Discount
Notes, as well as from equity capital, advances from its shareholders, and from
bank and lease financing. In February 1998, a subsidiary of the Company, Diamond
Holdings, issued the 1998 Notes, raising net proceeds of approximately
(pound)195 million. The 1998 Notes are guaranteed by the Company as to payment
of principal, interest and any other amounts due. In connection with the
issuance of the 1998 Notes, the Group terminated its existing bank facility.
The further development and construction of the Group's cable
television and telecommunications network will require substantial capital
investment. The Group is obligated by the milestones in its telecommunications
licenses and its LDLs to construct and activate a network passing an aggregate
of 1,021,894 premises within prescribed time periods. Failure by the Group to
meet its milestones could potentially subject the Group to enforcement orders
from OFTEL or the ITC, which could lead to revocation of the relevant licenses
or a shortening of an LDL period or fines. The Group has met the final milestone
obligations under all of its telecommunications licenses except in respect of
the Leicester and Loughborough franchise. The Group met the required quarterly
milestone obligation under its telecommunications license for the Leicester and
Loughborough franchise as at September 30, 1998. Principally because of delays
by the Department of Trade and Industry in granting the Group a national
telecommunications license, and consequent delays in the commencement of
construction, the Group did not meet its annual milestones in six of its seven
LDL franchises at the end of 1997, although construction had commenced in five
of the seven LDL franchises. Following an application by the Group to the ITC,
on March 26, 1998 the ITC formally modified the annual build milestone
obligations in all of the Group's LDL franchise areas except Vale of Belvoir
with effect from December 30, 1997. The Group has met the modified milestones in
all of its LDL franchises as at December 31, 1997.
14
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.
Based on the Group's current plans, the network will be substantially completed
by the end of 2001. The Company currently estimates that the additional capital
expenditures from October 1, 1998 required for the Group to substantially
complete construction sufficient to satisfy its aggregate milestone obligations
of approximately 1.02 million premises (including estimated subscriber
connection expenses) will be approximately (pound)332 million, although further
capital expenditures would be required to substantially complete the network.
These amounts are based on the Group's current plans and could vary
significantly depending on changes in such plans as well as such other factors
as the number of customers actually connected to the network, the availability
of construction resources, the impact of competition from other cable or
telecommunications operators or television delivery platforms and the pace of
the Group's construction program.
At September 30, 1998, the Group had constructed and activated a
network comprising approximately 66% of its aggregate milestones. The Group
estimates that existing cash resources and estimated future cash flows from
operations will be sufficient to complete the construction and activation of its
network to almost 84% of its aggregate final milestones, which level the Group
estimates it will achieve by the end of 1999 based on the Group's current plans.
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
15
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 addition, the Group's strategies may vary
depending on when and whether the Share Exchange Agreement and the transactions
contemplated thereby are completed, which may affect the forward-looking
information provided above.
Assuming consummation of the Share Exchange Agreement, the holders of
the Company's outstanding Discount Notes and the 1998 Notes issued by Diamond
Holdings will have the right to require the issuer thereof to repurchase such
securities at a price of 101% of their accreted value or principal amount. There
can be no assurance that the Company or Diamond Holdings will have sufficient
funds, or be able to raise sufficient funds, to effect such repurchases.
SELECTED OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1996 and 1997 and at and for
the six-month period ended June 30, 1998 and the nine-month period ended
September 30, 1998.
DECEMBER 31, JUNE 30, SEPTEMBER 30
------------ -------- ------------
1996 1997 1998 1998
---- ---- ---- ----
Homes passed by civils construction(1).......... 453,496 536,110 616,110 666,416
Homes activated(2).............................. 347,246 508,801 601,082 644,679
Homes marketed(3)............................... 252,601 405,787 504,049 549,605
Student services rooms marketed(4).............. - 1,805 7,086 8,126
BUSINESS TELECOMMUNICATIONS
Business customers accounts..................... 3,935 5,723 6,671 7,176
Business lines connected........................ 18,932 27,124 33,947 36,241
Private circuits(5)............................. 226 258 304 310
Average lines per business(6)................... 4.8 4.7 5.1 5.1
Average monthly revenue per line(7)(8)..........(pound)50.17 (pound)46.26 (pound)44.50 (pound)43.05
Pro-forma average monthly revenue per line(8)...(pound)51.25 (pound)46.26 (pound)44.50 (pound)43.05
RESIDENTIAL TELEPHONE(4)
Residential lines connected..................... 104,460 157,171 197,369 214,630
Penetration rate of homes marketed(9)........... 41.4% 38.6% 38.6% 38.5%
Average monthly revenue per line(8)(10).........(pound)18.40 (pound)18.75 (pound)18.77 (pound)18.77
Pro-forma average monthly revenue per line(8)...(pound)18.64 (pound)18.75 (pound)18.77 (pound)18.77
Churn(11)(12)................................... 20.6% 16.3% 14.2% 13.7%
CABLE TELEVISION
Basic service subscribers....................... 59,242 83,793 98,694 106,761
Penetration rate of homes marketed(13).......... 23.5% 20.6% 19.6% 19.4%
Average monthly revenue per subscriber(14)......(pound)18.03 (pound)19.84 (pound)19.88 (pound)19.59
Churn(11)(12)................................... 40.9% 32.7% 26.3% 24.2%
- --------------------
16
(1) Homes passed by civils is the number of homes (excluding student
services rooms) that have had ducting buried outside.
(2) Homes activated is the number of homes (excluding student services
rooms) that are capable of receiving cable service without further
extension of transmission lines, apart from the final connection to the
home.
(3) Homes marketed is the number of homes activated (excluding student
services rooms) for which the initial marketing phase (including door
to door direct marketing) has been completed.
(4) During 1997 the Group began to provide telephone services and internet
access to students at a number of large educational establishments in
its franchise area. Academic terms make this business seasonal in
nature. In order to fairly present the results, the Company has adopted
the following policy: (i) rental revenue is recognized evenly over a
full twelve month period (or the balance of the period to the start of
the next academic year if shorter), (ii) call revenue is recognized in
the month in which it is earned and is incorporated in residential
telephone average monthly revenue per line, (iii) a student services
line is recognized as the equivalent of 3/4 of a residential line, (iv)
each student room at which service is available is treated as a home
marketed and incorporated in the calculation of residential telephone
penetration and, (v) any net decrease in the number of students taking
the service between one academic year and another is ignored for the
purposes of calculating residential telephone churn.
(5) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(6) Average lines per business account is calculated by dividing the number
of business lines connected on the given date by the number of business
customer accounts on such date.
(7) The average monthly business telecommunications revenue per line is
calculated by dividing (i) business telecommunications line and
equipment rental, outgoing call charges and incoming call charges
(including revenue from private circuits) for the period by (ii) the
average number of business telecommunications lines and private
circuits (calculated as a simple average of the number of subscribed
lines and private circuits at the end of each month during the period)
and dividing that amount by 12 (for the years ended December 31, 1996
and 1997), by six (for the six months ended June 30, 1998) or by nine
(for the nine months ended September 30, 1998).
(8) The calculation of the average monthly revenue per line (for both
residential telephone and business telecommunication revenues) for the
year to December 31, 1996 reflects the reduction in revenues stemming
from rebates to BT on incoming termination revenues relating in part to
1995 but recorded in full against revenues in 1996. The rebates were
calculated in accordance with revised interconnect agreements with BT
that were made effective retroactively from April 1995. The pro-forma
average monthly revenue per line (for both residential telephone and
business telecommunications revenues) gives effect to the revised
interconnect agreements as if they had been in effect from April 1995
and allocates to each period the portion of the rebates that relates to
such period.
(9) Penetration rate of homes marketed is calculated by dividing the number
of residential lines, including student services lines recognized at
the equivalent of 3/4 of a residential line connected on the given date
by the total number of homes marketed and student services rooms
marketed as of such date, expressed as a percentage.
(10) The average monthly revenue per residential telephone line is
calculated by dividing (i) line and equipment rental, outgoing call
charges and incoming call charges for the period by (ii) the average
number of residential telephone lines (calculated as a simple average
of the number of subscribed lines at the end of each month during the
period) and dividing that amount by 12 (for the years ended December
31, 1996 and 1997), by six (for the six months ended June 30, 1998) or
by nine (for the nine months ended September 30, 1998). Call revenue
from student services lines is recognized in the month in which it is
earned and is incorporated in residential telephone average monthly
revenue per line, with each student services line recognized as the
equivalent of 3/4 of a residential line.
(11) Churn is calculated by dividing net disconnections (total
disconnections less the number of disconnected accounts for which
service is later restored) in a period by the average number of
subscribers in the period (calculated as a simple average of the number
of subscribers at the end of each month during the period). Churn for
the six months ended June 30, 1998 is annualized by multiplying the
amount as calculated above by two. Churn for the nine months ended
September 30, 1998 is annualized by multiplying the amount as
calculated above by 1 1/3.
(12) Since the beginning of 1997, the Group's reported churn has excluded
from net disconnected accounts subscribers who disconnect from the
service when moving residence and reconnect to the service in their new
residence. Previously, those subscribers were not identified under the
Group's information system and were therefore included in the churn
calculation as disconnected accounts. If churn for 1997 and the six
months to June 30, 1998 were calculated on the basis used in periods
prior to 1997, annualized churn would have been 36.9% and 31.2% for
cable television and 21.3% and 19.8% for residential telephone,
respectively. If churn for the nine months to September 30, 1998 were
calculated on the basis used in periods prior to 1997, annualized churn
would have been 30.6% for cable television and 19.7% for residential
telephone. The difference between churn on the new and prior bases is
not necessarily indicative of the adjustment that would arise if churn
for prior periods were restated.
17
(13) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television on the given date by the
total number of homes marketed as of such date, expressed as a
percentage.
(14) The average monthly revenue per cable television subscriber is
calculated by dividing total cable television subscriber revenues
(excluding installation revenues) for the period by the average number
of cable television subscribers (calculated as a simple average of the
number of basic service subscribers at the end of each month during the
period) and dividing that amount by 12 (for the years ended December
31, 1996 and 1997), by six (for the six months ended June 30, 1998) or
by nine (for the nine months ended September 30, 1998).
RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1998
The Group continued to experience increases in its subscribers,
revenues and expenses during the nine-month period ended September 30, 1998. In
general, these increases were attributable to the Group's continued network
construction, activation and marketing of new homes and businesses. Homes passed
by civils construction increased by 130,306 (24.3%) and homes activated
increased by 135,878 (26.7%) from December 31, 1997 to September 30, 1998. The
Group has met the final milestone obligations under all of its
telecommunications licenses except in respect of the Leicester and Loughborough
franchise. The Group met the required quarterly milestone obligation under its
telecommunications license for the Leicester and Loughborough franchise as at
September 30, 1998.
In order to improve the management and quality of the residential sales
force, commencing in February 1997, the Company began to develop its own
internal sales force through direct hiring of residential sales people. All of
these sales staff underwent a training process which the Group believes has
increased their long-term effectiveness but which hindered their productivity in
the short-term. Sales performance was affected by increased competitive activity
during 1997 and 1998, in particular from BT, CWC, BSkyB and, in the relevant
period, Ionica, and at September 30, 1998, residential telephone line
penetration remained relatively steady at 38.5%, compared to 38.6% as at
December 31, 1997. Cable television penetration at September 30, 1998 had fallen
to 19.4% from 20.6% at December 31, 1997. Penetration rates for residential
telephone and cable television were 38.5% and 20.1%, respectively, at September
30, 1997.
REVENUE
For the three months ended September 30, 1998, total revenues were
(pound)22.7 million, a 48% increase over total revenues of (pound)15.4 million
for the comparable period in 1997. For the nine months ended September 30, 1998
total revenues were (pound)63.9 million, a 50% increase over total revenues of
(pound)42.6 million for the comparable period in 1997. This growth is
attributable to increases in revenues in all three of the Group's primary lines
of business.
Business Telecommunications. Business telecommunications revenues were
(pound)4.7 million and (pound)13.7 million for the three and nine-month periods
respectively ended September 30, 1998 compared to (pound)3.7 million and
(pound)10.2 million, respectively, for the comparable periods in 1997,
18
representing increases of 26% and 34%, respectively. The growth in reported
revenues is due primarily to an increase in the number of business lines
installed from 25,405 at September 30, 1997 to 36,241 at September 30, 1998, an
increase of 43%. The average monthly revenue per line decreased from
(pound)46.80 in the nine months to September 30, 1997 to (pound)43.05 in the
comparable period in 1998. The decrease was due to a combination of, (i) an
increase in centrex lines which have a lower average revenue per line than other
business customer lines (centrex services represented 43.6% and 49.5% of the
total number of business lines at September 30, 1997 and September 30, 1998,
respectively) and (ii) reductions in certain tariffs in response to price
reductions by competitors, offset in part by increased call usage per line and
higher line rental charges which were increased in September 1997. The Company
may lower prices in the future if necessary for competitive reasons.
Residential Telephone. Residential telephone revenues were (pound)12.0
million and (pound)32.8 million in the three and nine-month periods respectively
to September 30, 1998 compared to (pound)7.5 million and (pound)20.5 million,
respectively, for the comparable periods in 1997, representing increases of 59%
and 60%, respectively. The growth in residential telephone revenue is due
primarily to an increase in the number of residential telephone lines from
136,925 at September 30, 1997 to 214,630 at September 30, 1998, representing an
increase of 57%. Average monthly revenue per line was (pound)18.80 and
(pound)18.74 in the three and nine-month periods, respectively, to September 30,
1997 and (pound)18.76 and (pound)18.77, respectively, in the comparable periods
in 1998. The relatively stable level of average revenues was largely due to
increased call usage which largely offset reductions in call and incoming
termination tariffs during 1997 and the first nine months of 1998. The churn
rates (annualized) were 12.9% and 13.7% for the three and nine months,
respectively, to September 30, 1998 as compared to 17.0% and 17.5%,
respectively, in the comparable periods in 1997. The relatively high churn in
the first nine months of 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)4.2
million and (pound)11.9 million in the three and nine-month periods to September
30, 1997 respectively to (pound)6.1 million and (pound)17.5 million in the
comparable periods in 1998, representing increases of 46% and 47%, respectively.
This growth in cable television revenue was primarily due to an increase in the
number of the Company's cable television subscribers which rose from 71,435 at
September 30, 1997 to 106,761 at September 30, 1998, an increase of 49%. The
Company's average monthly revenue per subscriber was relatively stable, being
(pound)19.09 and (pound)19.59 for the three and nine months to September 30,
1998, respectively, compared to (pound)19.17 and (pound)19.75 for the comparable
periods in 1997.
The Group's churn rates were 20.3% and 24.2% for the three and nine
months respectively to September 30, 1998 as compared to churn rates of 29.7%
and 37.7% in the comparable periods in 1997. The Group believes
19
that the reduction in churn this year is largely the result of new policies
introduced by the Group to reduce churn, including that it now requires
subscribers to pay an installation fee in connection with new residential
services. In addition, the Group introduced other policies which contributed to
the reducing trend in churn between comparable 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, Mercury, Energis and Global One were (pound)3.2 million and
(pound)8.7 million in the three and nine-month periods to September 30, 1997,
respectively, and (pound)4.5 million and (pound)12.4 million in the three and
nine-month periods to September 30, 1998, respectively. As a percentage of
combined business telecommunications and residential telephone revenues, these
direct costs decreased from 28% in the three and nine-month periods to September
30, 1997, respectively, to 27% in each of the comparable periods in 1998 due
primarily to reduced interconnect tariffs paid to these operators.
Direct costs for cable television programming, which generally depend
on the number of subscribers and per-subscriber rates charged by programming
suppliers, increased from (pound)2.4 million and (pound)6.9 million in the three
and nine-month periods to September 30, 1997, respectively, to (pound)3.3
million and (pound)9.5 million in the respective comparable periods in 1998. As
a percentage of cable television revenues, these direct costs decreased from 57%
in the three-month period ended September 30, 1997 to 53% in the comparable
period in 1998 and from 58% to 54% in the nine-month periods to September 30,
1997 and 1998, respectively. The decrease was in large part due to an increased
proportion of subscribers on higher margin basic and premium program packages in
1998 compared to the comparable periods in 1997.
Selling, general and administrative expenses as a percentage of total
revenues in the three and nine-month periods to September 30, 1997 were 46%
compared to 42% and 43%, respectively, in the comparable periods in 1998. These
costs increased by 33% and 39%, respectively, from the three and nine-month
periods to September 30, 1997 to the comparable periods in 1998. The increase
was due to higher administration and sales force costs associated with the
expansion of the Company's business, together with LDL cash bid payments which
commenced in 1998.
Depreciation and amortization expenses increased by 54% from the
three-month period to September 30, 1997 to the comparable period in 1998 and by
52% from the nine-month period to September 30, 1997 to the comparable period in
1998. This increase was attributable to a combination of the increasing size of
the Company's network and the
20
additional depreciation resulting from a change in the estimated useful lives of
set-top boxes and initial subscriber installations. In anticipation of changes
in technology, the estimated useful lives of set-top boxes and initial
subscriber installations was reduced from seven years to three years with effect
from January 1, 1998. The effect of the change in estimated useful life on the
depreciation charge for the three and nine-month periods to September 30, 1998
was an increase of (pound)2.0 million and (pound)5.0 million, respectively.
The Group continues to review the potential consequences of changes in
technology, its network infrastructure and the industry structure within the UK
in general for its plans, operations and the assessment of the useful lives of
its assets.
INTEREST INCOME/EXPENSE
Interest expense was (pound)21.6 million and (pound)62.0 million in the
three and nine-month periods ended September 30, 1998, respectively, compared to
(pound)15.9 million and (pound)43.1 million in the comparable periods in 1997.
The increase is due primarily to the accretion on the Discount Notes of
(pound)15.9 million and (pound)47.0 million in the three and nine-month periods
to September 30, 1998 (compared to (pound)14.9 million and (pound)39.9 million,
respectively, in the comparable periods in 1997) and interest on the 1998 Notes
of (pound)4.9 million and (pound)12.8 million in the three and nine month
periods to September 30, 1998, respectively. In addition, amortization of debt
financing costs was (pound)0.6 million and other interest expense was (pound)0.2
million in the three months to September 30, 1998, compared to (pound)0.6
million and (pound)0.4 million, respectively, in the three months to September
30, 1997. Amortization of debt financing costs was (pound)1.6 million and other
interest expense was (pound)0.6 million in the nine months to September 30,
1998, compared to (pound)1.8 million and (pound)1.4 million, respectively, in
the nine months to September 30, 1997. Interest received was (pound)3.4 million
in the three months to September 30, 1998 compared to (pound)1.9 million in the
three months to September 30, 1997. Interest received was (pound)10.3 million in
the nine months to September 30, 1998 compared to (pound)4.8 million in the nine
months to September 30, 1997 and the increase was primarily due to temporary
investment of the proceeds of the 1998 Notes.
FOREIGN EXCHANGE
A substantial portion of the Group's existing debt obligations are
denominated in U.S. dollars, while the Group's revenues and accounts are
generated and stated in pounds sterling. Foreign currency translation gains and
losses, except for unrealized gains and losses on available-for-sale securities,
are reported as part of the profit or loss of the Group. In the three months and
nine months ended September 30, 1997 the Group recognized net foreign exchange
losses of (pound)16.5 million and (pound)22.2 million, respectively, primarily
due to the unrealized loss on translation of its liability on the Discount
Notes. Because of changes
21
in prevailing rates, during the three months ended September 30, 1998, the Group
recorded a net foreign exchange gain of (pound)10.9 million and during the nine
months ended September 30, 1998 the Group recorded a net foreign exchange gain
of (pound)21.1 million primarily due to the unrealized gains on translation of
its liability on the Discount Notes and 1998 Notes.
DERIVATIVE FINANCIAL INSTRUMENTS
Realized gains on derivative financial instruments of (pound)0.4
million in the nine months to September 30, 1998 consists primarily of the
settlement on the two (pound)50 million foreign exchange forward contracts
referred to below which were closed on June 17, 1998.
The Company entered into a foreign exchange forward contract on
November 1, 1996 for settlement on May 6, 1997 to sell (pound)200 million at a
rate of $1.6289 to (pound)1. On January 31, 1997 an offsetting agreement was
entered into at a rate of $1.6014 to (pound)1. The offsetting contracts were
settled on February 6, 1997 with a payment of approximately (pound)3.4 million
to the Company. Because of changes in prevailing rates, the Company recorded for
the year ended December 31, 1996, an unrealized loss of approximately (pound)8.1
million on the pounds sterling sell forward contract which partially offset the
gain that was recorded on the translation of the U.S. dollar denominated
obligations on the Discount Notes issued in 1994 and 1995 during the same
period. During the first quarter of 1997, the Company recorded a gain of
approximately (pound)11.5 million on the two offsetting forward contracts,
reflecting the reversal of an (pound)8.1 million loss referred to above and the
approximately (pound)3.4 million cash payment on settlement of the contracts.
The realized gain on the foreign exchange forward contract in the first quarter
of 1997 largely offset the unrealized loss that was recorded in the same period
on the translation of the U.S. dollar denominated obligations on the Discount
Notes. The Company entered into a foreign exchange forward contract on June 23,
1997 for settlement on June 25, 1998 to sell (pound)50 million at a rate of
$1.6505 to (pound)1. The Company also entered into a foreign exchange forward
contract on June 27, 1997 for settlement on July 1, 1998 to sell (pound)50
million at a rate of $1.6515 to (pound)1. On June 16, 1998 two offsetting
agreements were entered into at rates of $1.6326 and $1.6322 to (pound)1. The
offsetting contracts were settled on June 17, 1998 with a payment of (pound)1.1
million to the Company. Because of changes in prevailing rates, the Company
recorded for the year ended December 31, 1997 an unrealized gain of
approximately (pound)0.7 million on the two (pound)50 million sell forward
contracts. During the first half of 1998 the Company recorded a realized gain of
approximately (pound)0.4 million on the settlement of the offsetting contracts
reflecting the cash payment on settlement of the contracts in excess of the gain
recognized during 1997. The Company continues to monitor conditions in the
foreign exchange market and may from time to time enter into foreign currency
contracts based on its assessment of foreign currency market conditions and
their effect on the Company's operations and financial condition. Therefore,
22
changes in currency exchange rates may continue to have a material effect on the
results of operations of the Group and may materially affect the Company's
ability to satisfy its obligations, including obligations under outstanding debt
instruments, as they become due.
NET LOSS
As a result of the foregoing factors, the Group had net losses of
(pound)12.6 million in the three-month period ended September 30, 1998, compared
to net losses of (pound)32.1 million in the comparable period of 1997, and net
losses of (pound)46.1 million for the nine-month period ended September 30, 1998
compared to net losses of (pound)58.8 million in the comparable period in 1997.
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 plans to install year 2000 compliant software for the
telecommunications switches and network control systems by the end of December
1998. Cable television infrastructure that is not currently year 2000 compliant
is scheduled to be upgraded by March 1999.
Other systems critical to business operations, such as the subscriber
management system and the financial and accounting systems, are maintained by
the vendors. The vendors have supplied versions of these critical systems which
are designed to be year 2000 compliant and are currently subject to a thorough
testing program due for completion by December 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
to be surveyed and tested, and non-compliant elements are expected to be
replaced by March 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.
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)100,000 will be required for replacement of local area
23
network and personal computer elements. 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.
RECENT DEVELOPMENTS
On April 23, 1998 the Department of Trade and Industry announced the
U.K. government's intention to progressively end the policy of granting only one
cable television license for a franchise area. Any operator can now seek a
licence to compete in the provision of broadcast entertainment in those areas
outside current cable franchises. From January 1, 2001 competition within
current cable franchises will also be permitted.
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each have
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL, an alternative telecommunications company in the UK, the
common stock of which is quoted on NASDAQ (NTLi). Under the Share Exchange
Agreement, the Company's shareholders will receive one share of NTL common stock
for every four Ordinary Shares of the Company held subject to adjustment in the
event that the average NTL share price for a predetermined period before closing
of the transaction exceeds a specified price (which will be $52.50 per share
until November 16, 1998, increasing thereafter to $53 until December 16, 1998,
$53.50 per share until January 16, 1999 and $54 per share thereafter). Holders
of the Company's deferred shares will receive one share of NTL common stock for
each deferred share held.
The proposed share exchange is subject to a number of conditions,
including the receipt of required regulatory approvals (which have been
obtained) and approval by NTL shareholders. Although the transaction will not
require the prior approval of the holders of the Group's outstanding debt
securities, each of the indentures pursuant to which the Group's debt securities
were issued requires that offers to repurchase such debt securities be made to
holders of such securities subsequent to closing at a price of 101% of their
accreted value or principal amount, which may influence the ability of the
parties to complete the proposed share exchange in its current form.
24
If such offers should be required, 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.
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 applies to existing agreements
from July 1, 1998 for digital reception and from January 1, 2000 for analogue
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. The ITC's direction
has been the subject of an unsuccessful challenge brought by certain program
suppliers. Leave to appeal has been sought from the court by the program
suppliers but has not yet been granted.
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, provided the direction is upheld, the Group
will have the opportunity to negotiate future programming agreements which allow
for greater packaging flexibility and customer choice.
In October 1998, BSkyB launched its digital DTH satellite service in
the U.K. In addition to existing channels offered by BSkyB as part of its
analogue service, 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 plans to launch its digital terrestrial service in the U.K.
in November 1998. The digital terrestrial service will require a set top box to
decode encrypted digital terrestrial signals. The initial service offered by
ONdigital is expected to include a choice of 12 basic channels (7 of which the
Group offers) in addition to the free-to-air digital terrestrial channels and a
range of 6 premium channels (4 of which the Group offers) including certain of
BSkyB's sports and movie channels.
25
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.
26
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 , 1998 By:
----------------------------
Robert Goad
(Chief Executive Officer)
Date: November , 1998 By:
----------------------------
Nicholas Millard
(Chief Financial Officer)
Date: November , 1998 By:
----------------------------
Duncan Craig
(Chief Accounting Officer)
27