SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the Transition Period From __________ to __________
Commission File No. 0-22616
NTL INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1822078
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
110 East 59th Street, New York, New York 10022
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 906-8440
----------------------------------------------------
(Registrant's telephone number, including area code)
-----------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether disclosure by delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates at March 20, 1998, valued in all cases in accordance with the
NASDAQ/NMS closing sale price for the Registrant's Common Stock was
approximately $1,289,800,000.
Number of shares of Common Stock outstanding as at March 20, 1998: 32,294,900
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document Part of 10-K in which
Incorporated
Definitive proxy statement for the
1998 Annual Meeting of the Stockholders
of NTL Incorporated: Part III
* * * * * *
This Annual Report on Form 10-K for the year ended December 31, 1997, at the
time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Section 13, 14 and 15(d) of the
Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
Certain statements contained herein constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995. When used in this Form 10-K, the words, "believe," "anticipate," "should,"
"intend," "plan," "will," "expects," "estimates," "projects," "positioned,"
"strategy," and similar expressions identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Registrant, or industry results, to be materially different from those
contemplated or projected, forecast, estimated or budgeted in or expressed or
implied by such forward-looking statements. Such factors include, among others:
general economic and business conditions, industry trends,the Registrant's
ability to continue to design network routes, install facilities, obtain and
maintain any required government licenses or approvals and finance construction
and development, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as assumptions about customer acceptance, churn
rates, overall market penetration and competition from providers of alternative
services, and availability, terms and deployment of capital.
TABLE OF CONTENTS
Page
PART I
- ------
Item 1 Business........................................................ 1
Item 2 Properties...................................................... 46
Item 3 Legal Proceedings............................................... 46
Item 4 Submission of Matters to a Vote of Stockholders................. 46
PART II
- -------
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters............................................. 47
Item 6 Selected Financial Data......................................... 48
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition.............................. 49
Item 7A Quantitative and Qualitative Disclosure About Market Risk....... 57
Item 8 Financial Statements and Supplementary Data..................... 58
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 58
PART III
- --------
Items 10, 11, 12, 13..................................................... 59
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................. 59
Exhibit Index............................................................ 60
Signatures............................................................... 70
Index to Financial Statements............................................ F-1
PART I
------
ITEM 1. BUSINESS.
- -----------------
INTRODUCTION
NTL Incorporated, formerly International CableTel Incorporated ("NTL" or
the "Company") was incorporated in April 1993 under the laws of the State of
Delaware.
NTL is a leading communications company in the United Kingdom, providing
residential, business and wholesale customers with the following services: (i)
Residential Telecoms and Television Services including residential telephony,
cable television and Internet access services, (ii) National Telecoms Services
including national business telecoms, national and international carrier
telecommunications, and satellite and radio communications services, and (iii)
Broadcasting Services including digital and analog television and radio
broadcast transmission services.
NTL provides its broad range of services over local, national and
international network infrastructure. The Company operates (i) advanced local
broadband networks serving entire communities throughout NTL's regional
franchise areas, (ii) the UK's first synchronous digital hierarchy ("SDH")
backbone telecommunications network, as well as satellite earth stations and
radio communications facilities from NTL's tower sites across the UK, and (iii)
a broadcast transmission network which provides national, regional and local
analog and digital transmission services to customers throughout the UK.
Management's objective is to exploit the convergence of the
telecommunications, entertainment and information services industries to become
a premier new era communications company in the UK, which will offer these
services to residential, business and wholesale customers on a national scale.
Management believes that the Company will be able to deliver its strategy based
on NTL's entrepreneurial approach, innovative marketing and technical
excellence.
In March 1997, the Company changed its name from International CableTel
Incorporated to NTL Incorporated to reflect the integration of the services
provided by the Company following its acquisition of NTL Group Limited in 1996,
and to capitalize on NTL Group Limited's 30 year history in the United Kingdom
as a provider of reliable communications services.
In this Report on Form 10-K, references to "pounds sterling," "pounds
sterling," "pence" or "p" are to the lawful currency of the United Kingdom and
references to "U.S. dollars," "dollars," "$" or "cents" are to the lawful
currency of the United States. Solely for the convenience of the reader, this
Form 10-K contains translations of certain pound sterling amounts into U.S.
dollars and certain U.S. dollar amounts into pounds sterling. These translations
should not be construed as representations that the pound sterling amounts
actually represent such U.S. dollar amounts or vice versa or could have been or
could be or will be converted into U.S. dollars or pounds sterling, as the case
may be, at the rate indicated or at any other rate. Unless otherwise indicated,
the translations of pounds sterling into U.S. dollars and U.S. dollars into
pounds sterling have been made at $1.6517 per 1.00 pounds sterling, 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
1
Bank of New York (the "Noon Buying Rate") on December 31, 1997. On March 20,
1998, the Noon Buying Rate was $1.6643 per 1.00 pound sterling.
PRINCIPAL BUSINESSES
RESIDENTIAL TELECOMS AND TELEVISION SERVICES
The Company is the third largest operator of local broadband communications
systems in the UK as measured by the number of homes in its franchise areas, and
has achieved the highest customer penetration and lowest churn rates of any
multi-system operator in the U.K. The Company is presently the sole provider of
broadband services in its franchise areas, offering residential telephony, cable
television ("CATV") and Internet access services to customers connected to its
networks. These services are provided over local broadband fiber networks which
have both coaxial and copper connections to the home. Based on operating results
and experience gained by management in the United States telecommunications
market, the Company has developed innovative marketing strategies which have
increased customer penetration rates, customer retention and operating
profitability.
The industry in which the Company participates has demonstrated strong
growth over the last several years. Since January 1, 1992, the industry has
connected over 3.4 million telephone lines. Since January 1, 1994, the industry
has doubled its market share of multi-channel homes to 40%. The following tables
illustrates these statistics:
UK TELEPHONY CABLE INDUSTRY STATISTICS
TELEPHONE LINES
---------------------------------------------------------------------------------
RESIDENTIAL
TOTAL RESIDENTIAL TELEPHONE LINE
TELEPHONE LINES TELEPHONE LINES HOMES PASSED PENETRATION
---------------------------------------------------------------------------------
January 1, 1998..... 3,442,196 3,038,809 10,693,809 28%
January 1, 1997..... 2,278,113 2,039,081 8,351,310 24%
January 1, 1996..... 1,419,819 1,287,248 6,042,296 21%
January 1, 1995..... 717,566 649,350 4,116,971 16%
January 1, 1994..... 314,381 279,728 2,786,202 10%
January 1, 1993..... 106,989 92,715 1,954,829 5%
January 1, 1992..... 21,225 N/A 1,343,557 -
- -------------------------
Source: ITC
MULTI-CHANNEL HOMES
---------------------------------------------------------------------------------
BROADBAND TOTAL
CABLE MULTI-CHANNEL BROADBAND CABLE
SUBSCRIBERS DTH HOMES HOMES AS A % OF TOTAL
---------------------------------------------------------------------------------
January 1, 1997..... 2,373,548 3,583,000 5,956,548 40%
January 1, 1997..... 1,872,962 3,446,000 5,318,962 35%
January 1, 1996..... 1,326,842 3,170,000 4,496,842 30%
January 1, 1995..... 908,018 2,818,000 3,726,018 24%
January 1, 1994..... 611,423 2,438,000 3,049,423 20%
- -------------------------
Source: ITC; BSkyB
2
As of December 31, 1997, the Company had 321,300 residential customers,
approximately 90% of which subscribed to both telephone and television services.
At the end of 1997 the Company had a total of 608,500 RGUs resulting in 37.3%
telephone penetration, 37.8% cable penetration and 75.1% RGU penetration of
homes marketed. By comparison, based on published statistics of the Independent
Television Commission ("ITC") dated March 9, 1998, as of January 1, 1998, UK
cable penetration averaged approximately 28.4% for telephone and approximately
22.1% for cable television. As of January 1, 1998, the UK telephony cable
industry had connected approximately 3.4 million telephone lines and
approximately 2.4 million broadband cable customers.
The following table illustrates operating statistics for the Company's
newly constructed network:
DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
Homes passed (1)............................ 1,007,000 779,100 463,000 144,000
Homes marketed.............................. 810,000 467,300 176,200 7,200
Homes marketed (as % of homes passed)....... 80% 60% 38% 5%
Total customers (2)......................... 321,300 168,200 57,700 2,280
Dual..................................... 287,200 133,800 44,630 1,680
Telephone-only........................... 15,300 15,950 6,620 370
CATV-only................................ 18,800 18,450 6,450 230
Total RGUs (3).............................. 608,500 302,000 102,330 3,960
Customer penetration........................ 40% 36% 33% 32%
RGU penetration (4)......................... 75% 65% 58% 55%
Telephone penetration....................... 37% 32% 29% 29%
CATV penetration............................ 38% 33% 29% 27%
Annualized churn............................ 11% 10% NM NM
- -------------------------
(1) "Homes passed" is the expression in common usage in the cable industry as the measurement of the size of a cabled area,
meaning the total number of residential premises which have the potential to be connected to the Company's network.
(2) As of December 31, 1997, the Company also provided service to approximately 36,250 customers connected to acquired cable
systems over which it does not offer a full range of services.
(3) An RGU (revenue generating unit) is one telephone account or one CATV account; a dual customer generates two RGUs.
(4) RGU penetration is the number of RGUs per 100 homes marketed. As defined, maximum RGU penetration is 200%.
NM Not meaningful due to the limited customer base and recent commencement of services.
The Company's customer base and RGUs both increased by nearly 100% in 1997
compared to year-end 1996. The Company believes that much of its success during
this period has been due to its marketing strategies and the introduction of
innovative residential services packages which bundle telephone and a small
selection of CATV channels within a single product offering. The Company also
gives customers the opportunity to purchase additional channel packages and
premium channels. Consistent with the Company's objectives, the high penetration
rates generated by this strategy have led to increased levels of gross profit
contribution per home passed.
The Company believes it has also maintained high levels of customer
satisfaction as indicated by the Company's low rates of churn. During 1997, the
Company maintained an annualized churn rate of less than 11%, a rate which is
significantly lower than the published churn rates of all other UK telephony
cable operators. In a recent survey of a sample of its
3
customers conducted by the Oxford Research Agency, NTL found that 89% of its
customers would recommend the service to a friend or relative, and that only 15%
had ever considered changing their telephone service back to British
Telecommunications plc ("BT").
LOCAL BROADBAND NETWORK CONSTRUCTION
NTL's local franchise areas cover approximately 2.1 million homes, spanning
a wide geography across England, Scotland, Wales and Northern Ireland. As of
December 31, 1997 the Company had constructed its broadband network past over
one million homes and had invested approximately $1.4 billion in the
construction of the network and associated plant, property and equipment. NTL's
local broadband networks use advanced high capacity SDH fiber rings which serve
entire communities, bringing fiber connections directly to businesses and
"Siamese" coaxial/copper connections to residences. The Company's local networks
currently cover approximately 2,500 route miles of fiber backbone network, with
approximately 175,000 fiber miles, and an estimated 5,000 route miles of
"Siamese" coaxial/copper connections.
The Company is installing a full-service network capable of providing a
high speed, high capacity, two-way voice, data and video communications pathway
to the customer. This approach allows the Company to pursue four revenue streams
(residential telephony, residential cable television, business
telecommunications services and Internet access services) on its network without
a significant increase in fixed investment.
The Company's licenses require it to roll out its network past a specified
number of premises (or homes) each year. The total requirement for all the
Company's licenses is to pass a minimum of 2,090,000 homes, which is less than
the actual total of homes available to the Company should it wish to construct
its network past them. Under the terms of its current telecommunications
licenses, by the end of 2005 the Company is required to construct cable
television systems past an aggregate of approximately one million additional
premises (residential and business). The Company believes it will be able to
satisfy its milestones, but there can be no assurance that such milestones will
be met or that any application to modify those milestones would be accepted. If
the Company is unable to meet the construction milestones required by any of its
licenses and is unable to obtain modifications to the milestones, the relevant
license or licenses could be revoked, which would have a material adverse effect
on the Company.
LOCAL FRANCHISE AREAS
The Company has 16 separate franchises clustered into six Regional Areas.
The Regional Areas span a wide geography across the United Kingdom and give the
Company an operating presence not only in England, but in Scotland, Wales and
Northern Ireland. In 1996, the Company acquired the remaining minority interests
in its Suburban London and South Wales Regional Areas and now has 100% ownership
interests in the licenses in all of its franchise areas.
4
Summary information for the franchises in each of the Regional Areas is set
forth below:
COMPANY'S TOTAL
OWNERSHIP HOMES IN
REGIONAL AREA FRANCHISES PERCENTAGE FRANCHISE(1)
Central Scotland............... N.W. Glasgow/Clydebank 100% 128,000
Greater Glasgow 100 254,000
Bearsden/Milngavie 100 14,000
Paisley/Renfrew 100 73,000
Inverclyde/Eastwood 100 30,000
---------
499,000
---------
South Wales.................... Cardiff/Penarth 100% 103,000
Newport 100 85,000
Swansea/Neath 100 122,000
Glamorgan/Gwent(2) 100 230,000
---------
540,000
---------
Suburban London (Surrey)....... Surrey/Hampshire 100% 136,000
---------
Suburban London (Luton)........ Central Hertfordshire 100% 102,000
East Hertfordshire 100 56,600
North Bedfordshire 100 95,000
South Bedfordshire 100 95,000
---------
348,600
---------
West Yorkshire................. Huddersfield/Dewsbury 100% 138,400
---------
Northern Ireland(3)............ 100% 428,000
---------
Total all Franchises........... 2,090,000
=========
- ------------------------
(1) Total Homes in Franchise represents the Company's regulatory milestones which were derived from the 1981 census (being
the census statistics at the date each license was granted).
(2) The final regulatory milestone for the Gwent and Glamorgan local delivery operator license ("LDL") is 230,000 homes of
the total of 330,000 homes in the LDL.
(3) The final regulatory milestone for the Northern Ireland LDL is 428,000 homes of the total of 530,000 homes in the LDL.
NATIONAL TELECOMS SERVICES
The Company offers national business telecoms, national and international
carrier telecoms services, radio communications, satellite services and national
Internet services. Based on the quarter ended December 31, 1997, the Company
generated approximately $217 million in annualized National Telecoms Services
revenue.
The Company's objective in National Telecoms Services is to successfully
integrate its strategies for developing, operating and marketing local
telephony/cable systems with its national network to provide high-quality voice,
data and video communications services throughout the UK. The Company has
constructed a national SDH fiber telecoms network, which is one of only five
independent national telecoms networks in the UK. The NTL national network
currently covers approximately 1,500 route miles and 40,000 fiber miles
throughout England, Scotland and Wales. During 1998, the Company plans to extend
the network and to include the first resilient fiber connection between Northern
Ireland, the Republic of Ireland and England.
The Company intends to compete in the major segments of the UK telecoms
market. According to published Office of Telecommunications ("OFTEL")
statistics, the total telecoms market in the UK in 1996 was estimated at
approximately 21 billion pounds sterling. Of the total telecoms market, the
Company estimates that approximately 7 billion pounds sterling represents
national business
5
telecoms, 2 billion pounds sterling represents carrier services and 1 billion
pounds sterling represents international carrier telecom services. The NTL
national network has significantly expanded the Company's telecoms opportunities
from the business within its franchise areas to the much greater UK national
market.
COMBINING LOCAL AND NATIONAL NETWORKS
A total of nine of the Company's local switches have been connected to the
NTL national network, and the Company expects an additional switch in Belfast to
be connected during 1998. The Company has already begun carrying a portion of
its own long distance voice and data traffic on the network.
The integration of its local networks with the national telecoms network
creates strategic advantages for the Company's telephony business. The national
network allows the Company to carry telecommunications traffic between each of
its franchise areas and throughout the United Kingdom and, therefore, achieve
significant savings on the interconnection fees it pays to other carriers. In
addition, using the national telecoms network gives the Company greater pricing
flexibility and will enable the Company to design and offer new telephony
service packages to its customers, which management believes should have a
positive effect on the Company's penetration rates.
NATIONAL BUSINESS TELECOMS
NTL currently offers a variety of telecommunications services to businesses
located in its franchise areas. The Company's local networks are designed to
reach entire communities in the regional areas and are connected to major
business parks, office buildings, local hospitals, universities and government
agencies.
In the business market, NTL positions itself as a new provider of
state-of-the-art communications services, with broadband capabilities that
enable new potential applications for businesses, institutions and government.
The Company offers a choice of telephony services to its business customers,
from Business Exchange Lines ("BELs"), typically single or multiple lines
delivered via twisted copper pair, to Enhanced Telephony Services (ETS). The
latter is delivered via a high quality digital connection to a customer's PBX
based on a minimum connection of 15 lines. The Company also offers managed data
services (FibreLink2), Central Exchange ("CENTREX") services and its ISDN Basic
Rate Access ("BRA") service. The Company also actively markets Closed Circuit
Television/Surveillance Systems ("CCTV") to local and public authorities,
private developments and multi-occupancy situations.
To date, the Company has been successful in obtaining telecoms contracts
from businesses located within its franchise areas. As of December 31, 1997, the
Company had a total of 6,600 business customers, which represented more than a
95% increase over year-end 1996. In 1997, the Company provided one of the
largest CENTREX orders in the UK to date -- over 600 lines to a health care
trust in the Company's Luton franchise. The Company currently provides a
155Mbit, ATM network to a group of universities and hospitals in its South Wales
franchise as
6
part of the UK's "Super Janet" network. This metropolitan area network links 13
sites with approximately 16,500 work stations (PCs), and generates approximately
2 million e-mail messages and approximately 12 million connections (web hits) to
the Internet per month.
The following sets forth the Company's business customers within its
franchise areas:
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1997 1996
-------------- -------------- -------------- -------------- --------------
Total Businesses (1)..... 140,000 140,000 140,000 140,000 140,000
Business Customers....... 6,600 6,100 5,460 4,360 3,375
Customer Penetration..... 4.7% 4.4% 3.9% 3.1% 2.4%
Business Lines........... 25,500 20,000 16,100 12,400 8,930
- -----------------------
(1) Represents total estimated businesses in the Company's six regional
franchise areas.
Capitalizing on the extended reach of its national network, the Company
intends to compete for a share of the business telecoms market on a national
basis. Management believes that it can build on the strengths gained in its
local franchise areas to approach targeted business users located in other areas
of the UK, initially focusing on users with multiple business locations. NTL
launched its national business telecoms service in November 1997 and its
strategy is to target medium and large businesses, beginning with those located
near the major urban areas currently served by the NTL national network.
NTL has a variety of methods to connect the "last mile" to the customers'
premise from the national network. First, as a certified national public
telecommunications operator (PTO), NTL can readily obtain the permits to
construct telecoms networks, and can therefore simply build out its network to
reach customers. Although this is clearly the most costly, the expense can be
justified in the case of large customers or when a significant level of traffic
is obtained from several customers. Second, NTL has already been successful in
utilizing its significant tower infrastructure to efficiently connect to
customers using microwave radio links. As a result of its long history in
broadcasting and other communications businesses, NTL owns or has direct access
to approximately 1,000 tower sites in attractive locations all across the UK.
Microwave radio represents an efficient and reliable method for connecting
customer locations to the national network. Third, NTL can lease circuits on the
local networks of other service providers to connect to the customers premises.
Although this may reduce the operating margin on a particular account, it
requires no capital expense, it can often be installed relatively quickly, and
the circuit can be replaced at a later date if a more profitable connection
method can be justified.
In addition, the Company has been awarded a license to operate radio fixed
access services at 10 GHz throughout the UK. The Company is currently undergoing
trials of the service. If the trials are successful, and if the Company
determines to seek and deploy the additional capital resources to pursue this
opportunity and the networks are developed, the 10 GHz license would further
facilitate the development of the Company's local access reach.
7
As a complement to its national business telecoms effort, the Company's
Vision Services group offers CCTV and remote monitoring services. Current
customers include shopping centers, hospitals, railways and prisons. Vision
Services is also currently developing a radio link camera system with potential
applications for emergency services, police patrols, broadcasters and inspection
workers. Management believes that CCTV services offer the potential to increase
network traffic, broaden the Company's product base, enhance relationships with
customers and reinforce the NTL image as a leading communications company.
CARRIER SERVICES AND INTERNATIONAL
NTL competes in the growing market for bandwidth and leased line services
as a nationwide wholesale telecommunications carrier. The Company provides
digital leased lines from 2 Mbits/sec to 155 Mbits/sec, which can be used for
voice, data, video and audio traffic to major regions of the UK. Customers
include fixed line and mobile telecommunications operators, cable operators,
Internet service providers, and various information technology and facilities
management companies. The Company's international facilities license allows it
to carry international traffic, and NTL has recently entered into an agreement
for a 25 year lease of international telecoms capacity on a new transatlantic
fiber optic cable connecting The Netherlands, Germany, the UK and the United
States. NTL is also expanding its product portfolio to include virtual private
networks, managed data networks, ATM and frame relay services and multi-media
services.
NTL first entered the trunk communications business in 1993 by building
digital networks for Westcountry TV, Yorkshire Tyne Tees Television, Anglia
Television and S4C to link their independent studio facilities with NTL's
transmission facilities. In 1994, NTL broadened the scope of this business by
expanding into competitive trunk communications when it commissioned a network
to link Vodafone's main cellular telephone exchanges. This network employed SDH
technology and was the first of its kind in the United Kingdom. NTL has since
expanded its network's geographic scope and capacity, increased its share of
Vodafone's traffic and added a number of new customers including Orange Plc.
("Orange"), the Civil Aviation Authority and Birmingham Cable.
The expansion of the Company's national digital network allows the Company
to offer state-of-the-art network alternatives for large carriers of data,
including cable/telephony companies, as well as managed network facilities
ensuring high levels of availability and service. The Company believes the
integrated network offers other potential customers a viable alternative to BT,
Cable & Wireless Communications ("C&WC") and Energis in the provision of long
distance services throughout the United Kingdom.
RADIOCOMMS
The Company's Radio Communications group ("RadioComms") offers a full range
of services including the design, build and operation of radio based networks,
and the provision of infrastructure and support services to customers with
"mission critical" communications needs.
8
RadioComms is involved in two main activities-mobile communications
maintenance support and facilities leasing. RadioComms includes the business
operations of DTELS, the emergency services communications business that NTL
Group Limited acquired from the Home Office of the United Kingdom Government in
1994. In addition to network maintenance, the Company provides a range of
installation and commissioning services for new network design and build
projects. This division serves an estimated 70% of the radio installation and
maintenance market for police and fire services in England and Wales, as well as
other major customers such as HM Coast Guard and Prison Service. These customers
provide a steady source of revenues for NTL, but are also very effective selling
references for business telecoms and demonstrate NTL's track record of
reliability.
The Company has been engaged by Ericsson Telecommunications Ltd. to assist
in the design, planning and procuring of radio sites for the Mercury One-2-One
mobile telephone network in the United Kingdom. In addition, during 1997, Page
One Communications, UK's second largest paging operator, chose NTL's RadioComms
group to project manage the roll-out of its new paging network, including site
acquisition, installation and commissioning of several hundred sites nationally.
The major growth in the radio communications market over the next five
years is expected to arise from the outsourcing of maintenance services by
public and private network operators. The Company intends to obtain maintenance
service customers by targeting those with a national or wide area
infrastructure. Management believes that the facilities leasing market will
continue to grow with the expanding market for the provision of mobile and fixed
wireless telephony services. The Company currently intends to continue to
maximize the use of its sites through effective marketing, provision of
end-to-end services and its continued responsiveness to customer needs.
SATELLITE SERVICES
NTL provides worldwide connectivity and offers a range of satellite
uplinking services to a number of satellites, including ASTRA 1C, INTELSAT,
EUTELSAT and Orion. The Company provides connections for clients requiring
video, digital audio and data services. Customers include CBS, United Artists,
Turner Broadcasting Systems and Virgin. This division operates three teleports,
in Winchester, Croydon and central London, which are connected by fiber and
radio circuits and provide uplinking services to a number of United Kingdom
cable television programming suppliers. This group also offers an international
gateway service, which is capable of providing long distance and corporate
communications.
NTL INTERNET
NTL Internet provides residential, wholesale and business Internet access
and support services, consulting and systems integration services, and Intranet
design and implementation. In 1995, the Company launched its Internet access
service as a national service throughout the United Kingdom. This service
provides access to the World Wide Web to customers in and
9
outside its Regional Areas. NTL Internet provides Internet service on a
wholesale basis to other Internet service providers as well as on a retail
basis.
NTL Internet has become one of the fastest growing Internet carriers in the
UK. The Company currently services more than 100,000 Internet users, primarily
through its wholesale relationships with Virgin.Net, Which? Online and others.
The Company also provides the Internet service for cable operators such as
Diamond Cable and Telecential.
In 1996, the Company established the Virgin.Net joint venture with Virgin
Communications Limited ("Virgin"), which began offering service in November 1996
under the name Virgin.Net. The joint venture is owned 49% by a subsidiary of the
Company and 51% by Virgin and is intended to offer Internet access and
interactive services to United Kingdom consumers and small office/home users. In
addition, Virgin.Net has contracted NTL Internet to provide the dial-up national
network and back office structure necessary for access to Virgin.Net and the
Internet. In 1997, Virgin.Net was awarded "Internet Service Provider of the
Year-Dial-up" by Internet magazine.
As with the Company's local telephony business, management believes that
access to the national telecoms network will have strategic benefits for NTL
Internet and the Company's Internet services businesses. Management expects
utilization of the Company's national telecoms network to reduce operating
costs, increase flexibility and national reach and improve the overall marketing
and product opportunities of NTL Internet.
BROADCAST SERVICES
The Company's Broadcast Services group includes the original core business
of NTL Group Limited which has been providing television and radio broadcasters
with broadcast transmission services for more than 30 years. This group designs,
installs, operates and maintains new transmitter networks and has a spectrum
planning service to plan the coverage of television and radio networks. It
operates a national infrastructure in the UK of over 1,200 owned and shared
transmission sites which deliver broadcast signals for ITV, Channel 4, S4C,
Channel 5, Teletext and many of the United Kingdom's independent local, regional
and national radio broadcasters. In addition to transmission services, the
Broadcast Services division markets value added services to its existing
television customers including additional monitoring services, reserve system
services and contribution/ distribution services.
NTL has been involved in broadcast television since the 1950s when it
designed and built the television transmission system for the United Kingdom's
first independent commercial television network. The Broadcast Services group
provides the Company with a stable contracted revenue stream from a variety of
customers through long-term contracts generally with eight to ten year terms.
The projected total value of the Company's currently contracted revenues for
national telecoms and broadcast services from January 1, 1998 through December
31, 2007 is approximately 783 million pounds sterling.
10
The foregoing projection of the expected approximate revenues receivable
pursuant to existing contracts, which includes Channel 3, Channel 4 and S4C
transmission contracts, is based on various factors and was derived utilizing
several assumptions. Important assumptions and other important factors that
could cause actual revenues to differ include, among other things, general
economic conditions, the regulatory regime prevailing from time to time,
adherence to the construction, service and other obligations of such contracts,
absence of labor or weather difficulties, absence of defaults, particularly
payment defaults, by the counter-parties to such contracts or the termination or
non-renewal of such contracts. The Company assumes no obligation to update this
projection to reflect actual revenues received by the Company, changes in
assumptions or changes in other factors affecting the information presented. The
contracts with the ITV companies and Channel 4/S4C terminate on December 31,
2002. Although historically the ITV companies and Channel 4/S4C have renewed
their contracts there can be no assurance that they will do so upon expiration
of the current contracts, that they will not seek to obtain more favorable terms
or that they would not seek to obtain from third parties all or a portion of the
transmission services currently provided by the Company. The loss of any one of
these contracts could have a material adverse effect on the business of the
Company.
TELEVISION BROADCASTING
The Company currently provides broadcast transmission services for three of
the five national television channels in the UK. Channel 3, Channel 4/S4C and
Channel 5 are all currently broadcast from NTL's network of over 1,200 owned and
shared transmission sites. Two of the four recipients of the Digital Terrestrial
Television ("DTT") multiplexes awarded to date have selected the Company as the
preferred supplier of transmission services. The Company has successfully
concluded contractual arrangements with these multiplex operators.
RADIO BROADCASTING
The Broadcast Services division also offers a range of services to local
and national radio broadcasting licensees in the United Kingdom including:
target service area planning; site location, installation and construction; and
equipment selection, procurement, operation, monitoring and maintenance. This
division offers total broadcast contract services ("TBCs"), where it designs,
builds, owns and maintains the operator's transmission facilities, and facility
management contract services ("FMCs"), where it maintains customer-owned
equipment and administers the operation of the transmission service. It
maintains over 60 TBCs and 50 FMCs. Classic FM is one of two national
independent radio networks served by the Company. In 1997, NTL was successful in
winning eight-year transmission contracts with all of the nine new independent
regional radio licensees that commenced service in 1997. NTL also recently
renewed, for periods of up to ten years, all but one of the 24 expiring
contracts of its existing customers.
The Company believes that it has positioned itself to be one of the leading
suppliers of Digital Audio Broadcasting ("DAB") services. In 1995, NTL
demonstrated the United Kingdom's
11
first commercial radio DAB multiplex. Currently, the Company is engaged in an
extended DAB marketing trial in London with the support of key radio customers.
The Broadcasting Act 1996 created a licensing regime for digital terrestrial
sound broadcasting and raises the prospect of full-time commercial DAB service,
which will offer CD-quality radio for the first time.
NTL INTERNATIONAL
NTL International, formerly known as Nexus, provides broadcasting systems
design, and specializes in services associated with the design and construction
of radio and television studio centers and technical facilities. These services
include installation, commissioning, equipment procurement, training and
consultancy for projects ranging from production and post production studio
facilities to full turnkey systems involving transmitter network planning and
installation.
NTL International was responsible for designing and constructing the
international broadcast facility for NBC at the Barcelona Olympic Games, for
which it received an Emmy award in recognition of the project. NTL International
also designed and built a 60 channel digital audio play-out center for
Music-Choice-Europe, a digital music supplier which is uplinked by the Company
and distributed throughout Europe by satellite.
BUSINESS STRATEGIES
Management's objective is to exploit the convergence of the
telecommunications, entertainment and information services industries to become
a premier new era communications company in the UK, which will offer these
services to residential, business and wholesale customers on a national scale.
Management believes that NTL will be able to deliver its strategy based on its
entrepreneurial approach, innovative marketing, state-of-the-art network and
technical excellence. The Company is currently employing several strategies to
achieve its objectives:
Installing Flexible Integrated Full-service Networks. This strategy allows
the Company to pursue four revenue streams-residential cable television,
residential telephony, business telecommunications services and Internet access
services-without significant incremental cost in fixed investment. The
integrated full-service networks provide a high speed, high-capacity, two-way
communications pathway to the consumer that is capable of delivering new
services which may emerge from the convergence of telecommunications,
information and entertainment. Such embedded flexibility would also allow NTL to
adapt its national network to offer Fram Relay and Asynchronous Transfer Mode
(ATM).
Focusing on Target Market Segments. The Company believes that tailoring its
services to the needs of its customers will increase the penetration of these
services. Examples of tailored services include the development of local
television programming and advertising and of private telecommunications
networks geared to "captive" local organizations such as governmental and
educational institutions. NTL has a track record of differentiating itself by
providing flexible and customized solutions to meet its customers' individual
requirements.
12
Maximizing Network Capacity Utilization. The fixed cost structure of
building communications networks allows the Company to gain significant
operating leverage from incremental services provided over its networks. In its
local franchises areas, the Company's strategy is to maximize gross profit
contribution per home passed, rather than revenue per customer, by increasing
overall penetration of the number of services provided over its network.
Examples of this strategy are the development of bundled product offerings that
encourage subscriptions to multiple services, multiple television pricing plans
that appeal to differing and distinct market segments and price points, and more
"a la carte" and transaction-oriented services which increase network
utilization. This strategy resulted in the design and launch of the Choices
marketing packages, which increased the Company's overall penetration rates as
well as its percentage of dual subscribers.
The Company's strategy in national telecoms is to continue to expand both
the geographical reach and breadth of services provided, so as to increase the
potential market of national business and wholesale customers. In its national
business telecoms, management is seeking to increase network utilization by
identifying cross-selling opportunities within NTL's existing customer base
through new services that capitalize upon the convergence of telecoms,
entertainment and information services. For example, NTL views its CCTV activity
as a vehicle for increasing network utilization by facilitating and improving
the quality of video transmission between sites.
Providing Superior Customer Service. The Company believes customer service
and attentiveness to the needs of customers are critical to the continued growth
of its residential and business services and places great significance on
consistently servicing customer requirements. The Company operates multiple
customer call centers, including three large centers in Luton, South Wales and
Central Scotland. Calls are answered 24 hours a day, 365 days a year. The
customer call centers currently employ approximately 200 people, who are
specially trained to deal with customers' inquiries and needs with respect to
the Company's various products and services. Each customer representative
attends a four week in house specialized training program, which is focused on
increasing a representative's knowledge of NTL's corporate culture and products
and providing the individual with specific sales skills as well as a better
understanding of the level of service expected to be provided to potential and
existing customers on an ongoing basis. Finally, as NTL recognizes the
importance of the installation in the customer's satisfaction with the services,
management has focused on monitoring installers' performance closely to ensure
compliance with strict quality standards and scheduling installations to suit
customers' requirements.
Developing Advanced Management Information Systems. NTL believes that
advanced management information systems are critical to effectively, efficiently
and accurately serving its customers. The Company uses proprietary software to
handle its subscriber management functions from one central location. The system
uses Windows-based software and can handle both business and residential
customers as well as telephony and CATV on a single platform. It is capable of
managing the Company's tariff and discounting structures, and will also allow
for the introduction of new telephony and CATV services, such as 0800 numbers.
Additionally, the system provides the functionality to support the customer
representatives inquiry handling and contributes to NTL's high level of customer
service. For example, customer representatives have
13
on-line access to customers' billing, payment and subscription histories.
Gaining Cost Efficiencies. The Company gains cost efficiencies by
centralizing certain services provided to the Regional Areas in the Company's
head office in Farnborough. Examples include network planning, marketing,
information systems, legal affairs and overnight network monitoring and customer
service. Alternatively, those cost centers which are critical to penetration,
customer service, and retention are located as close to the customer as
possible. Examples include construction management, sales, customer service, and
network maintenance, which are all located in each of the Regional Areas. In its
continuing effort to gain cost efficiencies, in 1997 the Company commenced a
reorganization of certain of its operations; in order to serve customers more
efficiently, the Company is in the process of consolidating the Customer
Operations departments currently serving its three English franchise areas into
one department, based in Luton.
MARKETING STRATEGIES
The Company increases its customer base and improves market penetration for
its services by implementing separate marketing strategies tailored to its
residential and business customers. The Company believes that separately
marketing to residential and business customers based on the specific benefits
they receive from the Company's services is the most effective means of
maximizing the Company's customer base.
RESIDENTIAL MARKETING
The Company markets its local telecoms and television service under the
brand name CableTel and promotes its brand image as an integral part of the
emerging information super-highway. The Company is constructing its integrated
full-service fiber optic networks in order to bring a wide variety of services
to the consumer. This branding strategy includes the following concepts in the
Company's advertising, literature and other materials:
- positioning NTL as a local telephone company;
- introducing alternative telephone service, multi-channel television
and Internet access as the first of an expanding array of services
which will be carried on the network in the future;
- emphasizing that the Company is bringing "more choice" in television
viewing, "better value" in telephone service and "state of the art"
communications technology in providing access to the Internet;
- demonstrating the Company's commitment to quality, value and service
in its offerings as evidenced by its Code of Practice approved by
OFTEL;
- building interest, awareness, and credibility for the Company's
services.
14
The Company employs an extensive direct marketing and selling approach to
gain customers. The Company begins to build a relationship with customers before
construction commences in a given area by closely coordinating its upcoming
activities with local government authorities and community groups and eliciting
feedback on ways to minimize disruptions and inconvenience. Information packages
and construction notices are delivered to each household prior to construction.
The Company's consumer affairs advisors personally visit affected neighborhoods
and households in order to meet the special needs of the residents. All written
and telephonic inquiries from residents are input by name into a lead-tracking
database, so that when areas are released to marketing, the Company's sales
personnel have complete customer profiles of the residents in their selling
area.
The Company initiates its marketing in an area by direct mail, which is
followed by a personal appointment with a Company sales advisor. In some
regions, the sales visit is also preceded by the hand delivery to every
household of a videotape (estimated to cost approximately 45p each) which
describes NTL and its services. All information regarding both current and
future sales opportunities is entered into the database, and current sales
information is updated in the Company's provisioning, billing and subscriber
management system. Unsold household data is maintained for future telemarketing,
direct mail, and re-marketing by the sales force.
Management is currently reviewing several alternative sales and marketing
techniques. For example, NTL has launched telemarketing trials in its Luton and
Wales franchise areas to existing and new residential customers. To existing
customers, NTL promotes its second telephone line, second set top box and
channel upgrades. In addition, the Company offers a "Friend get a Friend"
program under which it offers the current subscriber and its friend one month's
free line rental.
As an additional service, the Company launched pay-per-view services to its
customers in March 1998. The Company has entered into a joint venture with
Telewest, General Cable and Diamond Cable for the provision of a cable-only
movie, sport and event pay-per-view television service called Front Row. The
joint venture comprises nearly 50% of the UK cable television industry and
represents the alternative to BSkyB's dominant position in movie and sports
rights for pay television. The pay-per-view service will be available to other
cable operators subject to agreeing terms of carriage. Front Row has signed
content output contracts with major Hollywood studios, including Warner
Brothers, Sony Pictures Entertainment (Columbia/Tristar) and the Walt Disney
Company (Walt Disney Studios, Miramax, Hollywood Pictures and Touchstone).
Additionally, as part of NTL's focus in ensuring and maximizing customer
retention, the Company usually charges an installation fee (currently 49.99
pounds sterling including VAT), which is often discounted. It also adopts a one
year service agreement and encourages direct debit payment as the "standard,"
although no discount is offered for such method of payment. The installation fee
and one year contract provide qualifying mechanisms to ensure that the customer
understands and recognizes the value of the services, while the encouragement of
direct debit payment helps to avoid non-payment or non-payment related
cancellations.
15
Bundled Product Offerings. The Company's product and pricing strategies
emphasize choice, value, and quality and are designed to encourage subscription
to multiple services and maximize long-term customer retention. With its
integrated dual service network, the Company has the opportunity to offer
bundled telephony and CATV services. Following the success of a trial in certain
of the Company's franchises, in November 1996, the Company announced the
introduction of a new promotional pricing and packaging structure called
"Choices" for its telephony and CATV service. The First Choice entry package
offers the customer the Company's telephone service, which includes call waiting
and CableTel 1471 (call return feature) at no extra charge, as well as a limited
selection of television channels which includes all the terrestrial channels,
four popular CATV channels and one NTL exclusive local TV channel. The current
price for First Choice is 8.87 pounds sterling, which is approximately the same
as BT's current line rental charge. This means that NTL's customers can receive
their telephone line and sample cable television for the price of the monthly
telephone line rental alone from BT. The customer is encouraged to choose from
several genre-based tiers of mini packages called Choice Collections and the
Popular Collection, each of which includes a number of additional cable
channels. The Premium Choices packages enable the customer to select from
several premium channels each of which can be purchased for an additional
charge.
The Company believes that this type of bundled and flexible service package
is responsive to the desires and tastes of its customers. The packages give the
customer the opportunity to trade up or down rather than churn. NTL seeks to
gain incremental revenues by pulling customers through to higher tier packages.
The promotional offer of Sample Choice serves as a shop window for other
incremental services. In addition, the Company encourages subscription to
multiple services by offering a "two for one" discount on installation charges.
Value for Money. The Company also emphasizes the "value" of its residential
telephone service. By bundling its telephone service with a limited selection of
cable channels for the price of BT's telephone line rental, the Company believes
that it offers its customers greater value for their money.
In addition to these savings incentives, using the national telecoms
network should give the Company greater pricing flexibility and therefore would
enable the Company to design and offer new telephony service packages to its
customers. By integrating its national telecoms network with its local networks,
the Company will be able to bypass the wholesale long distance fees charged by
BT and other carriers for carrying calls to and from the Company's local
telephone networks. This increased flexibility positions the Company to
introduce more volume-oriented and/or geographically based calling plans
designed to give the customer even greater choice and value. Management believes
that increased ability to design attractive marketing plans and to better
package services versus its competitors should have a positive effect on the
Company's penetration rates.
Internet Access and Other Interactive Services. As part of the Company's
multiple services product strategy, NTL Internet offers retail Internet access
at speeds of up to 56.6 Kbits/sec. Particular emphasis is being placed on
jargon-free customer service and support. The Internet-access service is
currently being offered for a monthly charge of 9.95 pounds sterling. The
Company is testing
16
the provision of Internet access at substantially higher speed through either
Ethernet access (10 Mbits/sec.), cable modems (4 Mbits/sec.) or ISDN access (128
Kbits/sec.).
BUSINESS MARKETING
In the business market, NTL positions itself as a new provider of
state-of-the-art communications services, with broadband capabilities that
enable new potential applications for businesses, institutions and government.
The Company's sales strategy for the business market employs a consultative
direct marketing and sales technique. It begins with detailed market surveys
designed to quantify the current and future needs of targeted businesses. The
Company's sales advisors call on potential customers with pertinent information
regarding the customer and with all products in the Company's portfolio at their
disposal. Regional customer service centers have been set up to ensure that the
needs of business customers post-sale can be met effectively. Service quality is
demonstrated by the Company's commitment to service guarantees and standards
which meet or exceed the best competitive practices, and is ensured through the
reliability of the Company's new, state-of-the-art network.
Business Telephony Services. The Company offers a choice of telephony
services to its business customers: Business Exchange Lines ("BELs"), typically
single or multiple lines delivered via twisted copper pair, or Enhanced
Telephony Services. The latter is delivered via a high quality digital
connection to a customer's PBX based on a minimum connection of 15 lines.
Enhanced features and facilities, such as Caller Line Identification, are
available on both services. Additional features, such as Direct Dialing Inward
("DDI"), are available only on the Enhanced Telephony Service. Two usage rates
are currently available, offering customers a choice based on their calling
patterns. Both usage and rental charges are competitively priced, and automatic
volume discounts give further savings to customers.
The Company based its initial entry into the market on its core business
telephony products and has since introduced the first managed data service,
FibreLink2, CENTREX services and its ISDN BRA service. The Company also actively
markets Closed Circuit Television/Surveillance Systems ("CCTV") to local and
public authorities, private developments and multi-occupancy situations.
CENTREX services give customers the equivalent of their own telephone
system (PBX or key system) without the expense of having to purchase, operate
and maintain one. The Company believes that the CENTREX market in the United
Kingdom is currently underserved, especially among small and medium businesses.
The pricing of CENTREX services is based on value provided to the customer
rather than pricing lower than competitors. The Company's CENTREX Services
include CENTREX Select, a single site service, and CENTREX Network, a multi-site
service giving transparency of voice communications between multiple locations.
In 1997, the Company provided one of the largest CENTREX orders in the UK to
date-over 600 lines to a health care trust in the Company's Luton franchise.
17
Managed Data Services. The Company's offerings in this area emphasize the
immediate availability of large, flexible bandwidth circuits to meet the growing
needs of the market, while meeting the demands of existing and emerging
standards. The Company's first managed data service, FibreLink2, was introduced
in January 1996 and is aimed at large businesses which need data or voice
communications between different locations and provides a bandwidth of 2
Mbits/sec. Higher bandwidth services (34-155 Mbits/sec.) are available on
request, as are lower bandwidth (64 Kbits/sec.) services. Broadband services
will be offered to address emerging multi-media and data-intensive applications,
with rates designed to reflect the value provided to the customer. The Company
currently provides a 155Mbit, ATM network to a group of universities and
hospitals in its South Wales franchise as part of the UK's "Super Janet"
network. This metropolitan area network links 13 sites with approximately 16,500
work stations (PCs), and generates approximately 3 million e-mail messages and
approximately 20 million connections (web hits) to the Internet per month.
THE NTL NETWORKS
LOCAL BROADBAND NETWORKS
The Company believes that its advanced network design is sufficiently
flexible to permit it to deliver a wide variety of existing entertainment,
telecommunications and information services and will enable it to offer
anticipated new services in the future without incurring significant additional
construction costs to adapt its existing underground network.
Network Design and Functionality. The Company is installing its
cable/telephone and telecommunications network using established
state-of-the-art technology, deploying fiber optics directly to business
concentrations and residential nodes averaging 600 telephone lines or 500 homes
respectively, and employing spare duct and transmission capacity in excess of
anticipated needs. In this manner, the Company achieves the cost efficiencies
and rapid deployment that using standardized equipment entails, while retaining
the flexibility to expand and adapt its network over time with little or no
additional underground or construction investment.
The design and construction of a new network varies depending upon factors
including the number of route miles to be installed, density of homes and
businesses, type of surface, and the architecture of the network backbone. Each
system has been designed with at least one head-end and at least one telephone
switching office. Each system's head-end and telephone switching office is
directly connected to each node by fiber optic cable. Each node is then
connected to a subscriber's premises. Construction of each system has been
planned on a neighborhood by neighborhood basis to allow revenue generating
operations to commence in a neighborhood as construction of the portion of the
system serving such neighborhood is completed.
Fiber Optics. The evolution of fiber optic technology over the past decade,
including increases in the capacity of laser transmitters and decreases in the
price of optical receivers, has enabled the economic deployment of fiber optic
cable much closer to the customer than in traditional coaxial cable CATV and
twisted copper pair telephone networks, thereby improving the quality and
capacity of the CATV and telephone service. The main advantages of deploying
18
fiber in place of both coaxial cable or copper wire are its smaller size,
greater capacity, freedom from electrical interference, and significant
reduction of the requirement for periodic maintenance. The Company is deploying
fiber to nodes serving 500 homes which are no more than several hundred meters
from the furthest home.
THE REGIONAL AREAS
The Company, through its Local Telecoms and Television Services group,
operates 16 separate franchises as six Regional Areas. Each Regional Area is
managed and operated by a local management team led by a local managing
director. The head-ends, telephone switches and technical and customer services
facilities in the Regional Areas are connected by a wide-area fiber optic
network to the Company's National Network Management Center.
Central Scotland. The Central Scotland Regional Area covers nearly 500,000
homes and includes Glasgow, the fourth largest metropolitan area in the United
Kingdom and the largest City in Scotland. It is generally considered the
commercial and industrial center of Scotland and has a higher density of
households per kilometer of cable communications network than the United Kingdom
as a whole. The Company offers locally orient and originated programming and
advertising.
South Wales. South Wales is the commercial and industrial center of Wales
and one of the United Kingdom's major contiguous urban areas. Cardiff, the
capital of Wales, Swansea (in West Glamorgan) and Newport (in Gwent) are the
region's major cities. The Company's licenses in South Wales cover approximately
540,000 homes and a substantial portion of the Welsh business community.
Suburban London (Surrey and Luton). The two Suburban London Regional Areas
comprise the Surrey and East Hampshire license area to the southwest of London
totaling 136,000 homes, and the Central and East Hertfordshire and North and
South Bedfordshire (Luton) license areas to the north of London, totaling
approximately 348,600 homes. The Company believes that the licenses in these
commuting residential communities offer an attractive blend of household density
and demographic characteristics and above average levels of disposable income.
Located between Heathrow and Gatwick international airports, the borough of
Guildford and surroundings in Surrey have become the headquarters for many
multinational high technology companies (including the cable/telephone operators
Telewest and Partners, as well as British Airways, General Motors and the
General Electric Company). To the north of London, Luton is a commercial and
industrial center hosting such manufacturers as British Aerospace and Vauxhall
(General Motors' United Kingdom division) and is the home of the fourth largest
international airport in the South of England.
West Yorkshire. Covering over 138,000 homes, Kirklees is one of the five
districts that constitute the West Yorkshire region in north central England and
is comprised of the towns of Huddersfield, Batley, Clackheaton and Dewsbury. A
manufacturing area known for textiles and engineering products, Kirklees has
recently begun to develop an active service sector which has helped to create a
stronger economy. Kirklees is geographically located between three major
19
cities in the United Kingdom, Leeds, Sheffield and Manchester. Each of these
cities already has an established cable network.
Northern Ireland. The Northern Ireland franchise, covering approximately
530,000 homes, was the largest remaining cable television, telephone and
telecommunications franchise to be awarded by the ITC. The franchise covers the
entire socio-economic area of Northern Ireland, with approximately 40% of the
population located in the Greater Belfast area in the east and another major
population area centered on Londonderry in the west. Although the economy of
Northern Ireland has traditionally been oriented more towards primary industries
such as agriculture, forestry and fishing than the United Kingdom as a whole,
service industries now employ over 70% of the population. The Company believes
that because the birth rate in the area is higher than the United Kingdom as a
whole, the population is younger and household sizes are larger than the United
Kingdom average. The Company's experience and market research has shown that the
presence of children in a household significantly increases the propensity to
subscribe to CATV.
Network Architecture. The Company's cable network is being built with four
2-way channels having an initial capacity of 750 MHz, which is sufficient to
carry over 60 analog channels of television. With digital compression of the
television signal, many more channels can be transmitted. The system is
upgradeable to 1 GHz. Generally, a maximum of one amplifier is required between
the head-end optical receivers and a home. Traditional cable systems often
employ "cascades" of more than 5 amplifiers which degrade signal quality and
increase the chances of system failure.
NTL's local telecommunications network uses a SDH redundant-ring based
architecture, which improves the Company's ability to flexibly deploy capacity
and further enhances system resilience. Telephone signals are carried from the
node to the home over traditional copper pair, over a shorter distance than in
traditional telephone networks, which improves signal quality and allows higher
bandwidth services to be more easily deployed. To connect its residential
customers, the Company uses a "dual drop" consisting of "Siamese" coaxial cable,
capable of transmitting 1 GHz of bandwidth, and two copper twisted pairs capable
of providing two telephone connections. Large business customers are connected
to the telephone network directly through fiber optic cable.
NATIONAL TELECOMS NETWORK
The Company's national network was designed specifically for the high
volume telecommunications market in the UK and it incorporates many customer
sites directly into the backbone network. Expertise in designing and installing
this network was gained through nearly 40 years of managing its television
transmission network. The NTL national network covers approximately 1,500 route
miles and 40,000 fiber miles across England, Scotland and Wales. During 1998,
the Company plans to extend the network to include the first resilient fiber
connection between Northern Ireland, the Republic of Ireland, and England.
20
The network consists of two fully redundant, SDH digital fiber/microwave
networks. The major fiber routes are complemented with microwave radio
connections which increase the capacity and reach of the network. SDH is an
advanced technology which is being increasingly adopted by the telecoms industry
for the high speed transmission of voice, data and video. The Company believes
that SDH technology improves network reliability and performance and provides
greater flexibility than conventional network architecture. Provision speeds are
also generally higher with SDH because it is remotely driven by software. In
addition, network availability, reliability, management, and routing are also
superior to conventional network architecture because signals are automatically
re-routed to the best path available if another is degraded. Management believes
that NTL has a competitive advantage over other carriers such as BT and C&WC
because SDH technology has been built in its networks from the start, thus
avoiding integration problems with older technology. On its 62 microwave radio
routes, the Company uses primarily Nera SDH digital microwave radios.
The NTL national network has been designed with significant existing
capacity as well as the ability to efficiently increase capacity in the future.
The fiber optic backbone network consists of fiber optic cable which generally
contains 24 pairs (48 fibers), each pair providing 16 x 155Mbits/sec (STM-16).
NTL has also provided for spare fiber optic pairs as well as duct space. For
example, the trunk route specification provides for two large ducts, each with
capacity for 4 sub-ducts, only one of which is currently used. Therefore, the
network capacity can be increased by a further 7 times with minimal incremental
capital cost.
In an effort to exploit synergies between its local and national networks,
the Company created its engineering support division in 1997. This division
centrally manages, monitors, and operates both the local and national networks
from a combined network management center. From one location, NTL operators will
be able to remotely monitor the networks, identify faults and contact local
field operators for repair (if necessary) and maximize network capacity
utilization by accessing information about both the local and national networks
simultaneously.
NATIONAL BROADCAST TRANSMISSION NETWORK
The Company's television transmission network consists of over 1,200 owned
and shared transmission sites, with towers ranging from fifteen feet to nearly
twelve hundred feet in height. The division's transmission tower at Emley Moor
in Yorkshire is the United Kingdom's tallest free-standing structure at over
1,000 feet. These towers are complemented by other transmission sites and relay
stations situated throughout the United Kingdom.
In addition to the transmission sites owned by this division, this division
also shares sites formerly held by the BBC (now held by Castle Transmission),
allowing it to complete its nation-wide coverage. In all, the Company maintains
over 2,000 transmitters, currently monitored from four regional centers and
maintained by 22 strategically positioned service centers.
The transmitters of the Broadcast Services division range in size from a 2
watt repeater which serves a small village to 500 kilowatt main stations that
cover large metropolitan areas. All of the transmitters are analog and can be
divided into two categories, solid state circuitry and
21
klystron tube. The klystron tube transmitters have been manufactured by Pye and
Marconi, while the solid state units were manufactured by Harris, all reputable
manufacturers of transmission equipment. Klystron tube-type television
transmitters have a useful life of 20 to 25 years, while the solid state
transmitters can last well beyond this time frame. Solid state transmitters
require less maintenance than klystron transmitters but are not available in the
high power capacity that is needed to cover the major metropolitan areas.
In addition, this division has built and currently operates and maintains
radio transmission facilities for a number of independent local radio operators.
These facilities share components of the Company's television transmission
network infrastructure.
PROPOSED PARTNERS ACQUISITION
On February 5, 1998, the Company entered into an Agreement and Plan of
Amalgamation (the "Agreement") with Comcast UK Cable Partners Limited
("Partners"). Under the Agreement, Partners' shareholders will receive 0.3745
shares of the Company's Common Stock for each share of Partners Common Stock.
Based on the closing price of the Company's Common Stock on the date of the
Agreement, the transaction is valued at approximately $600 million.
The Agreement contains provisions such that if the purchase price per
Partners' share falls below $10.00, Partners has the right to terminate the
transaction, subject to the Company's right to adjust the exchange ratio such
that Partners' shareholders would receive an amount of the Company's Common
Stock having a value of $10.00 for each Partners share. Under certain
circumstances, the consideration payable to Partners' shareholders may be
adjusted based on the proceeds of the potential exercise of certain rights of
first refusal with respect to Partners' interests in the London and Birmingham
operations described below. Completion of the transaction is subject to a number
of closing conditions including regulatory approvals, shareholder approval by
the Company and Partners and consents from their respective banks and
bondholders.
NTL believes that the acquisition of Partners will provide the Company with
the opportunity to achieve certain strategic and financial benefits including:
(i) improved operating performance and reduced operating costs, (ii) an enhanced
return on its national telecoms assets through increased network capacity
utilization, (iii) increased penetration in the national business telecoms
market by expanding its local presence and increasing its geographic coverage,
and (iv) benefits of scale in equipment procurement and programming acquisition.
PARTNERS
Partners was incorporated in 1992. As of December 31, 1997, Partners had
interests in four operations (the "Partners Operating Companies"): Birmingham
Cable Corporation Limited, in which the Partners owns a 27.5% interest, Cable
London PLC, in which Partners owns a 50.0% interest, Cambridge Holding Company
Limited, in which Partners owns a 100% interest and two companies holding the
franchises for Darlington and Teesside, England, in which Partners owns a 100%
interest.
22
The Partners Operating Companies' systems are reported to have the
potential to serve approximately 1.6 million homes and the businesses within
their franchise areas when their build-out is complete. As of December 31, 1997,
Partners' reported that the Partners Operating Companies' systems passed more
than 1,197,000 homes or approximately 75% of the homes in their franchise areas,
and served approximately 360,000 residential telephony subscribers, 298,000
cable subscribers and 11,400 business telephony subscribers.
COMPETITION
The Company faces significant competition from established and new
competitors in the areas of residential telephony, business telecommunications
services and cable television. The Company believes that competition will
intensify in each of these business areas, particularly business
telecommunications.
Residential Telephony. The Company competes primarily with BT in providing
telephone services to residential customers. BT, formerly the only major
national PTO in the United Kingdom, has an established market presence, fully
built networks and resources substantially greater than those of the Company.
According to OFTEL, at March 31, 1997, nearly 90% of United Kingdom residential
telephone exchange line customers are customers of BT. The Company's growth in
telecommunications services, therefore, depends upon its ability to convince
BT's customers to switch to the Company's telecommunications services. The
Company believes that value for money is currently one of the most important
factors influencing the decision of United Kingdom customers to switch from BT
to a cable telecommunications service. BT has, however, introduced price
reductions in certain categories of calls and, due to regulatory price controls,
BT will be making further reductions in its telecommunications prices.
Accordingly, although the Company intends to remain competitive, in the future
it may be unable to offer residential telephone services at rates lower than
those offered by BT. In such case, the Company may experience a decline in its
average per line residential telecommunications revenues, may not achieve
desired penetration rates and may experience a decline in total revenues. There
can be no assurance that any such decline in revenues or penetration rates will
not adversely affect the Company. In addition to BT, other telecommunications
competitors which may have substantially greater resources than those of the
Company could prevent the Company from increasing its share of the residential
telecommunications market.
On February 8, 1996, the Department of Trade and Industry ("DTI") announced
the award of two licenses to operate radio fixed access services in the 2 GHz
band. These new licenses enable the two licensees, BT and RadioTEL Systems, to
provide telecommunications services to customers living in defined remote rural
areas mainly in Scotland, Wales and Northern Ireland and create potential
additional competition for the Company's residential telephony services in
certain remote rural areas of the Company's Northern Ireland franchise. The
Company also competes with mobile networks. This technology could grow to become
a competitive threat to the Company's networks, particularly if call charges are
reduced further on the mobile networks. The Company's Radio Communications group
may enable the Company to benefit from the growth in this technology. There can
be no assurance, however, that the Company will be able to
23
compete successfully with BT or such other telecommunications operators.
The Company believes that it has a competitive advantage in the residential
market because of its ability to offer integrated telephone, CATV,
telecommunications services (including interactive and on-line services) and
dual product packages designed to encourage customers to subscribe to both
services. However, there can be no assurance that this competitive advantage
will continue. Indeed, BT, C&WC and other national PTOs will be entitled to
convey CATV services from 2001 and, subject to a review by the Director General
(which is already underway), possibly from as early as 1998.
British Sky Broadcasting Limited ("BskyB") is currently marketing
telecommunications services both independently and on behalf of BT. BSkyB's
joint marketing efforts with BT enable BSkyB's customers to earn additional
discounts on BT's residential telecommunications volume discount plans. In
addition, it has been reported from time to time that BT and BSkyB are
discussing the formation of cooperative arrangements. Given the respective
market positions of BT and BSkyB, the Company believes that, if the two
companies successfully combine their respective marketing strengths, the
resulting combination would provide significant competition to cable operators
including the Company.
Business Telecommunications. BT is also the Company's principal competitor
in providing business telecommunications services. In addition, the Company
competes with C&WC, Energis, Scottish Telecom in Scotland and with other
companies that have recently been granted telecommunications licenses such as
WorldCom and Colt. In the future, the Company may compete with additional
entrants to the business telecommunications market, such as AT&T U.K.
Competition is based on price range and quality of services, and the Company
expects price competition to intensify if C&WC, Energis and other new market
entrants compete aggressively. Most of these competitors have substantial
resources and there can be no assurance that these or other competitors will not
expand their businesses in the Company's existing markets or that the Company
will be able to continue to compete successfully with such competitors in the
business telecommunications market.
CATV. The Company's CATV systems compete with direct reception over-the-air
broadcast television, direct-to-home ("DTH") satellite services and satellite
master antenna systems. In addition, pay television and pay-per-view services
offered by the Company compete to varying degrees with other communications and
entertainment media, including home video, cinema exhibition of feature films,
live theater and newly emerging multimedia services. The Company expects that,
in the future, it may face competition from programming provided by
video-on-demand services, including those that may be provided by PTOs with
national licenses (i.e., national PTOs). Certain companies associated with BT
and Mercury (which recently merged with three cable operators that hold such
licenses-NYNEX CableComms, Bell Cablemedia plc and Videotron Holdings plc-to
form C&WC) hold licenses to provide cable telephone/television systems that
cannot, under current ITC policy, be built in any of the Company's franchises.
This ITC policy position may change. Any such change in policy could have a
material adverse effect on the Company.
24
On September 29, 1993, the ITC issued a statement pursuant to which it took
the position (shared by OFTEL and DTI) that BT and the other national PTOs may
provide "video-on-demand" service under their existing licenses. No assurance
can be given that video-on-demand will not provide substantial competition to
the Company within its markets in the future.
The Broadcasting Act 1996 provides for the regulation of digital
terrestrial television ("DTT") that will initially provide an additional 18 or
more new terrestrial channels serving between 60% and 90% of the United
Kingdom's population. Some of the channels are reserved for digital simultaneous
broadcasting by the existing terrestrial broadcasters. The introduction of DTT,
as well as digital satellite television will provide both additional programming
sources as well as increased competition for the Company and its subsidiaries.
There can be no assurance that satisfactory (or any) terms of carriage will be
obtained by the Company for digital satellite programs or channels.
The full extent to which existing or future competitors using existing or
developing media will compete with cable television systems may not be known for
several years. There can be no assurance, however, that existing, proposed or as
yet undeveloped technologies will not become dominant in the future and render
cable television systems less profitable or even obsolete.
Broadcast Services. In February, 1997, the United Kingdom Government sold
the BBC's Home Service and World Service transmission businesses to a consortium
led by Castle Tower Corporation. There can be no assurance that the Company will
not encounter significant competition from Castle Transmission for its
transmission business from expiration of the Company's current contracts with
the ITV contractors and Channel 4/S4C.
REGULATION
The following section summarizes certain regulatory matters relating to the
businesses of the Company.
LOCAL TELECOMS AND TELEVISION SERVICES
CATV and cable telephony/telecommunications operators in the United Kingdom
are governed by legislation under the Broadcasting Act 1990 (the "1990 Act")
(which replaced the Cable and Broadcasting Act 1984 (the "CBA")), the
Broadcasting Act 1996 (the "1996 Act") and the Telecommunications Act 1984 (the
"Telecommunications Act"). An operator of a cable television and cable telephony
franchise in the United Kingdom covering more than 1,000 homes requires the
following two licenses for each cable franchise area:
(a) a CATV license, which authorizes the provision of cable television
services within a defined geographical area and which may be either:
(i) a prescribed diffusion service license ("PDSL") (issued
pursuant to the CBA prior to January 1, 1991 and continued in effect
under the 1990 Act) which allows an operator to provide cable
television services by means of a cable network; or
25
(ii) a local delivery operator license ("LDL") issued since
January 1, 1991 pursuant to the 1990 Act which allows an operator to
deliver television and other licensed programming services by means of
a licensed telecommunications network, including a cable network or
microwave distribution system; and
(b) a telecommunications license, issued under the Telecommunications
Act by the Secretary of State for Trade and Industry (the "Secretary of
State"), which authorizes the installation and operation of the
telecommunications network used to provide CATV and telecommunications
services.
The CATV licenses and telecommunications licenses contain various
conditions which are enforced by the ITC, or OFTEL as appropriate. It is ITC
policy to grant licensees the exclusive right to provide cable television
services in the area governed by their licenses ("ITC Licenses"). The Company
holds such licenses for each of its 16 franchise areas. The ITC or the Secretary
of State has the power ultimately to revoke such licenses.
The Company's United Kingdom businesses are further subject to regulation
by the European Union ("EU").
THE BROADCASTING ACTS
LICENSING
The television services provided by the Company are regulated principally
by the ITC, which was established under the 1990 Act to license commercial
television services (except for BBC services and services provided by the Welsh
Authority), whether delivered terrestrially, by cable or satellite. Subsequent
to the 1996 Act the ambit of the ITC also extends to digital services. The ITC
regulates these services by monitoring compliance with license conditions and
has a range of enforcement powers if licensees fail to comply with them.
Before the 1990 Act, the ITC Licenses awarded by the Cable Authority (under
the CBA) were PDSLs. PDSLs are no longer granted, but they continue in effect
unchanged under the 1996 Act. Now ITC Licenses are granted as LDLs. The main
distinction between a PDSL and an LDL is a competitive tendering process and the
role the ITC plays in monitoring the development of services by licensees and
the opportunity to apply for the 40Ghz microwave video distribution service
license within the LDL area.
A local delivery service is a service using a telecommunications system
including cable or microwave systems for the purpose of delivering television or
radio services to two or more homes, and is licensable only if more than 1,000
homes can be served. In advertising a new LDL franchise the ITC specifies the
percentages of qualifying revenue ("PQRs") payable by any successful applicant
for each year for the period of the license. An LDL is then awarded on the basis
of competitive tendering usually to the applicant submitting the highest cash
bid (payable annually over the 15-year period of the license and indexed for
inflation) although the ITC will
26
not make a license award to the applicant who has submitted the highest cash
bid, where it appears to the ITC that the proposed coverage by an alternative
applicant is much higher than the ITC or the highest bidding applicant, proposed
to achieve. When awarding a licence the ITC may make it conditional on meeting
certain specified financing requirements. The fees payable to the ITC, in
addition to the original cash bid and PQR payments, consist of an initial fee
payable on grant of the license and annual fees thereafter as may from time to
time be fixed by the ITC and representing a proportion of the costs incurred by
the ITC in carrying out its functions.
A prescribed diffusion service, the forerunner to the local delivery
service, is a service involving a cable system capable of serving at least
10,000 homes. The ITC has inherited the responsibility for monitoring the way in
which the licensee develops the services which were originally proposed by the
applicant for distribution throughout its franchise areas (such as a local
channel). The fee currently payable to the ITC for a PDSL is an annual fee based
on a proportion of the ITC's costs and expenses.
DURATION OF ITC LICENSES
The duration and terms for renewal of the Company's PDSLs and LDLs are as
follows:
PDSLs. PDSLs are issued for an initial period of 15 years, although the
Company is entitled to seek an extension for a further 8-year period. If the
Company elects to extend a PDSL, upon expiration of an extended license, the
Company must apply for a new LDL under the competitive tendering process
described above. If the Company does not elect to extend a PDSL the Company is
entitled to apply for the grant of an LDL for the same area for a further 15
year period, and the ITC will set the amount of notional cash bid and PQR
payments payable over the period of the license. The ITC can only refuse to
grant the LDL to the existing licensee in such circumstances if (i) they propose
to grant a new LDL in respect of a different area, (ii) the licensee is not
operating throughout the whole of the franchise area, (iii) the licensee's
proposed service under the LDL would not cover the entire franchise area or (iv)
its proposed telecommunications system is not acceptable.
LDLs. LDLs are issued for a period of 15 years and can be renewed on one or
more occasions for 15 years. On renewal of the LDL, the ITC will set the amount
of notional cash bid and PQR payments payable over the period of the renewed
LDL. The ITC can only refuse to renew the LDL if: (i) the ITC proposes to grant
a new LDL for a different area; or (ii) in the case of a licensee that fails to
achieve the required coverage specified in its technical plan, the ITC is not
satisfied that the licensee would be able to achieve the required coverage on
renewal of the license.
The majority of the Company's ITC licenses will expire in December 2005 and
are not currently due for renewal or extension. Applications for renewal of the
LDL may be made within five years of the expiry of the LDL and not later than
the date the ITC would need to invite applicants for a new LDL for the relevant
franchise to replace the LDL upon its expiry.
The Company has a number of "transitional" LDLs ("LDTs") for areas in South
Wales
27
acquired from Metro Cable TV Limited ("Metro") in 1995. LDTs were issued under
the 1990 Act to replace old diffusion service licenses which were not PDSLs and
which were outside a cable franchise area. These are issued for an initial
period of 5 years, and may be renewed for further 5-year periods. On renewal,
the ITC may specify the amount of a notional cash bid and PQR payments over the
period of the LDT. All the Company's LDTs have been renewed without any cash bid
or PQR payment requirements and will expire in 1999. The Company will be
entitled to seek a renewal of its LDTs for further 5-year periods.
ENFORCEMENT AND REVOCATION
The ITC is empowered to revoke a license where it considers it necessary to
do so for the purpose of complying with the restrictions on ownership contained
in the 1990 Act as amended by the 1996 Act. Where the licensee is a corporate
entity, the ITC may revoke the license if any change in the nature or
characteristics of that corporate entity, or any change in the persons having
control over or interests in it, are such that, had they occurred before the
granting of the license, they would have induced the ITC to refrain from
granting the license. A license can also be revoked if the operator fails to
comply with any license condition (including, in the case of an LDL, the
establishment of the service in accordance with the technical plan submitted by
the licensee) or direction from the ITC and the ITC considers revocation to be
in the public interest or if the ITC is satisfied that the licensee ceases to be
a fit and proper person. With respect to LDLs and other licenses issued under
the 1990 Act, the ITC can also impose fines and shorten license periods.
OWNERSHIP RESTRICTIONS
The 1996 Act has substantially amended the media ownership rules set out in
the 1990 Act. The amended rules came into force on November 1, 1996.
The new rules do not change the foreign ownership rules affecting cable
operations; therefore, non-EC bodies will not be prevented from owning cable
licenses, but they are restricted from holding a Channel 3 license and licenses
for certain other broadcasting and commercial radio services.
The ITC remains under a duty to ensure that certain entities, including
local authorities, political bodies and religious bodies, do not hold ITC
Licenses. The Secretary of State for Culture, Media and Sport has a wide
discretion to amend the rules restricting participation in ITC Licenses.
The 1996 Act introduces new ownership rules on licensed television
interests in the UK which will, broadly speaking, relax the existing
restrictions. It revokes all the existing ownership rules applying between the
various means of television distribution and applies one overriding rule, namely
that no one person may hold two or more licenses where his audience time exceeds
15% of the total United Kingdom audience time for the last 12 months. The type
of licenses referred to include all terrestrial television services (whether
analog or digital licenses, licensed satellite program services, or licensable
program services). ITC Licenses are not included within
28
the new restrictions. The intention is that cable is treated as a method of
delivery only, and will only be included where the cable operator in question is
responsible for the editorial content of that programming.
LOCAL SERVICES REQUIREMENT
The Company's PDSLs (i.e. all its ITC Licenses except the Northern Ireland
and Gwent and Glamorgan LDLs) require the provision of local services (including
text information, community access and programming dedicated to the Company's
local communities). In recent meetings with the ITC, the Company has begun the
formulation of a plan to develop and provide some of these services. In January
1997, the Company successfully applied for, and was awarded, a license for its
proposed new local program series to be called "On T.V." In 1997, the Company
launched On T.V. in each of its Regional Areas in partnership with local
organizations such as local universities, technical colleges, radio stations and
newspapers.
RESTRICTIONS ON TRANSFER
The 1990 Act permits the transfer of an ITC License to a third party with
the prior written consent of the ITC. The ITC has absolute discretion to refuse
any proposed transfer of such a license.
PROGRAM ORIGINATION
Under the 1990 Act, cable operators with PDSLs and LDLs may only carry
licensed program services on their systems and present only advertising and
programs (including foreign satellite programs) which conform to the
restrictions set forth in codes produced by the ITC in relation to advertising,
program sponsorship and programming content.
The 1996 Act introduced two main changes to cable "must carry" provisions:-
(i) PDSL holders were required under the 1990 Act to carry the public
analog terrestrial channels of BBC1 and 2, the regional ITV channel and
Channel 4. This obligation has been extended under the 1996 Act to include
teletext services carried on the above channels; and
(ii) the 1996 Act provides that when a cable system (PDSL or LDL) is
transmitting programs in a digital format and the ITC is satisfied that it
is appropriate to treat the system as a digital system, the ITC will serve
a notice on the licensee, at which point the licensee is required to carry
all free to air services provided by the BBC, BBC teletext, Channels 3, 4
and 5 and the public teletext on Channels 3 and 4.
Cable operators have no copyright liabilities for "must carry" services.
29
THE TELECOMMUNICATIONS ACT
LICENSING
The installation and operation of the Company's United Kingdom cable
systems, over which it provides its television and other telecommunications
services, requires a license issued under the Telecommunications Act by the
Secretary of State for Trade and Industry (a "DTI License"). The Company has a
number of DTI Licenses covering areas which coincide with the areas covered by
its ITC Licenses, as well as national and international services PTO licenses.
A DTI License authorizes a cable operator to install and operate the
physical network used to provide entertainment and telecommunications services
in its franchise. It also authorizes the operator to connect its system to other
television and telecommunications systems, including those operated by the
terrestrial broadcasting authorities, satellite broadcasters and PTOs. Although
the DTI License granted to a cable operator is for a particular franchise area,
other operators can be granted DTI licenses for that same area.
A cable operator's DTI License contains conditions regulating the manner in
which the licensee operates its telecommunications system, provides
telecommunications services, connects its systems to others and generally
operates its business. A cable operator's DTI License also contains a number of
detailed provisions relating to the technical aspects of the licensed system
(e.g., numbering, metering and the use of technical interfaces) and the manner
in which the licensee conducts its business (e.g., publicity of certain prices,
terms and conditions). In addition, a cable operator's DTI License contains
prohibitions on undue preference and discrimination in providing certain
services and unfair cross-subsidy of certain services. The cable operator's DTI
License also requires the licensee to comply with certain codes of practice and
fair trading conditions and to provide information which the Director General of
OFTEL (the "Director General") may require to carry out his statutory functions.
The fees payable for the DTI License consist of an initial fee payable on
the grant of the license and annual fees thereafter. The fees are based on a
proportion of the costs of the Director General in exercising his functions
under the Telecommunications Act. OFTEL is currently considering basing
licensing fees on a percentage of turnover.
A DTI License is not transferable. However, a change of control of a
licensee may be permitted subject to compliance with a notification requirement
provided that, among other things, the proposed change is not, in the opinion of
the Secretary of State, against the interests of national security or relations
with the government of a country or territory outside the United Kingdom.
The Telecommunications Act provides a licensing and regulatory framework
for telecommunications activities in the UK and established the office of the
Director General as an independent regulatory authority. Telecommunications
policy is overseen by the DTI. The Secretary of State also has primary licensing
authority under the Telecommunications Act, although he may delegate that
authority to the Director General. The principal functions of the
30
Director General are, among other things, to monitor and enforce compliance with
DTI License conditions, establish and administer standards for
telecommunications equipment and contractors, investigate complaints and
exercise certain functions concurrently with other regulators to promote or
ensure competition in telecommunications markets. The Director General may
modify DTI Licenses either with the agreement of the licensee following a
statutory period of public consultation or following a report of the Monopolies
and Mergers Commission (the "MMC"). The Director General is also empowered to
issue enforcement orders requiring compliance with DTI License conditions which
have been breached.
TERM, RENEWAL AND REVOCATION
DTI Licenses originally were granted for an initial period of either 15 or
23 years (depending on the technology used by the licensee), commencing on the
date service was first provided to customers. In July 1992 following the Duopoly
Review (a review of a government policy not to license operators other than BT
and Mercury (now part of C&WC)), technology-related discrimination in DTI
License length was abandoned. The United Kingdom government invited all holders
of 15-year DTI Licenses to apply for new 23-year licenses. However, a licensee
also had the right to extend a 15-year DTI License to 23 years if it provided
certain technical undertakings within five years of the date of the original
grant of license. The Company has given such undertakings with respect to all of
its DTI Licenses and, consequently, the Company's DTI Licenses will expire at
various times between 2008 and 2017.
Upon expiration, a DTI License cannot be renewed and application must be
made for a new license. If the ITC License is renewed for a franchise, a new DTI
License for the same area covered by the ITC License is likely although not
guaranteed to be issued.
A DTI License may be revoked if the licensee fails to pay the license fee
when due, if the licensee fails to comply with an enforcement order, upon the
occurrence of certain insolvency-related events or if any ITC License relating
to a licensee's system is revoked. A DTI License may also be revoked if, among
other things, the licensee fails to give the required notification to the DTI of
changes in shareholders and agreements affecting control of the licensee or if
the DTI concludes that any such change would be against the interests of
national security or the United Kingdom government's international relations.
NETWORK CONSTRUCTION
DTI Licenses for PDSL areas specify the build schedule of the system which
the cable operator is required to implement (by reference to the numbers of
premises passed) and the particular technical characteristics to which the
system must adhere. It is OFTEL's responsibility to enforce compliance with the
build schedules. The DTI Licenses for LDL areas, such as Northern Ireland and
Glamorgan and Gwent, do not specify a build schedule. This schedule is contained
in the LDL issued by the ITC, and it is the ITC's responsibility to enforce
compliance with those build schedules. Persistent failure to comply with the
build schedules could result in license revocation.
31
Under a DTI License, the cable operator is subject to and has the benefit
of the Telecommunications Code promulgated under the Telecommunications Act. The
Telecommunications Code provides certain rights and obligations with respect to
installing and maintaining equipment such as ducts, cables and cabinets on
public or private land (including the installation of equipment on public
highways). Cable operators also have the benefit of the New Roads and Street
Works Act 1991 (and equivalent legislation in Northern Ireland) which provides
them with the same rights and responsibilities with respect to construction on
public highways as other public utilities. Cable operators generally are
required to post bonds with local authorities in respect of their obligation to
ensure reinstatement of roads and streets in the event the operator becomes
insolvent, ceases to carry on business or has its DTI License terminated. In
order to install equipment on private property, cable operators should first
seek the agreement of occupiers, property owners and others, but where such
agreement is not forthcoming, they may apply for a court order dispensing with
the requirement for such an agreement.
A planning order issued in April 1994 imposes planning consent requirements
on certain works carried out under the Telecommunications Code. Under this
planning order, installation, alteration or replacement of any
telecommunications apparatus on, or within the land surrounding, a dwelling
house is deemed to be development for which planning consent is required. There
is some uncertainty as to the extent to which this restriction could affect the
development and maintenance of television and telecommunications systems. The
Department of the Environment, however, takes the view that cabling a house is a
"minor operation" and is not, therefore, "development" unless it alters the
external appearance of a building.
TELEPHONE OPERATIONS
The ability of cable television operators to provide telephony services is
subject to the restrictions contained in their DTI Licenses. All the Company's
DTI Licenses permit the Company to provide voice telephony services and to
switch their own traffic. Additionally, under the UK regulatory regime, the
Company has the right to require BT, C&WC and other public telephone operators
("PTOs") (including cable operators) to provide interconnection and, failing
agreement on the interconnection terms, the right to request OFTEL to determine
the interconnection conditions. The Company has interconnection agreements with
BT and C&WC.
Telephone Number Portability. At the request of a DTI licensed operator,
and if so directed by the Director General, BT is obligated to offer customers
number portability (i.e. the ability of telephone customers to retain their
telephone numbers when changing to another telephony operator).
Pursuant to a hearing by the MMC, BT's license was amended on July 29, 1996
in accordance with the MMC's findings. The license modifications require that BT
split total number portability costs 70:30 with the cable operator requesting
number portability. This meant that BT bore the systems' set up costs; the other
operator paid the per line set up costs; and BT and the other operator shared
extra costs associated with routing a call to a ported number until October 1997
when BT was due to introduce a new method of routing ported number calls,
32
called the "call dropback" method under which BT will bear any costs associated
with call dropback as well as any additional costs which BT incurs should they
fail to introduce the "call dropback" method by October 1997. These costs are
expected to be minimal. The Company intends to offer number portability for
customers in the future.
In December 1997, OFTEL also modified all other PTO Licenses (including
those held by the Company) to require the provision of number portability when
requested by another operator able to offer reciprocal number portability.
DTI licensees are obliged to notify OFTEL of the rates for licensed
services. The Company is required to publish rates with OFTEL for cable
television. BT is currently subject to controls on certain prices it may charge
customers.
BT has been permitted to offer retail discounts nationally to high volume
users, albeit subject to several conditions. Importantly, BT is restricted in
the manner in which it can offer discounted services by virtue of the obligation
not to show undue preference to or exercise undue discrimination against
particular persons or persons of any class or description (cable operators are
also subject to a similar prohibition on undue preference or discrimination in
relation to services). Except as mentioned above, BT is not, therefore, allowed
to offer discounted services in local markets without offering them nationally.
For so long as this policy of geographic averaging remains in effect, BT will be
restricted in its ability to respond through differential pricing to local
competition from cable operators. OFTEL has indicated that it remains firmly
committed to the principle of geographic averaging for the majority of BT's
services including voice telephony.
OFTEL also imposes controls on BT's retail pricing which is proposed to
apply for a 4 year period from July 1997. OFTEL has chosen to adopt a more
deregulated approach to permit market forces to determine pricing where
competition exists in particular markets. The principal features of the regime
are: (i) to control retail prices through 2001 only where consumer protection is
required (namely, low to medium spending residential customers (approximately
the first 80% by bill spend) and additional guarantees for small businesses-this
control is expected to cover only approximately 25% of BT's revenues; (ii) a
value of X, for the purposes of the price cap formula (RPI minus X), of 4.5% for
those residential customers and protection for the top 20% of customers by bill
spend and small businesses; (iii) that this be the last retail price control;
(iv) the introduction of price controls on network charges (the input costs of
operators competing with BT); and (v) the so-called "fair trading" condition in
BT's license which enables the Director General more effectively to deal with
anti-competitive behavior by BT. OFTEL's price cap scheme represents a first
step towards deregulation of pricing in the United Kingdom telecommunication
markets.
On October 1, 1996, the fair trading condition was introduced into BT's
license and came into effect on January 1, 1997. This fair trading condition
provides similar prohibitions to those set out in Articles 85 and 86 of the EC
Treaty in relation to anti-competitive agreements and the abuse of a dominant
position in the United Kingdom. OFTEL has incorporated this fair trading
condition into all other significant telecommunications operators licenses.
33
Interconnection and Accounting Separation. The commercial viability of
voice and other telecommunications services provided by cable operators depends
on their ability to connect with other telecommunications systems in a cost
effective manner. Cable operators' systems must connect with systems operated by
other PTOs for calls that do not originate or terminate on their system. Each
holder of a public telecommunications license (including NTL, BT and C&WC as
well as cable operators) is required to negotiate an interconnection agreement
with any other license holder that seeks one and either party may request
intervention from the Director General if there is a failure to agree on terms.
The Director General also has the power, at present, to make determinations and
directions in respect of certain obligations of any party to an interconnection
agreement. However, determinations by the Director General may be liable to
challenge in the courts. In addition, BT is required by its license to make all
interconnection agreements that it has entered into publicly available.
On March 31, 1995, OFTEL modified BT's license to implement accounting
separation for BT's "retail", "access" and "network" businesses.
OFTEL announced in July 1997 changes to the regime controlling BT's
interconnection services, to take effect from October 1997 until September 2001.
The principle elements of these changes were a new price cap for BT's wholesale
interconnection charges for call termination, call origination and within
network conveyance of RPI-8%, with additional safeguard caps of RPI-0% on
certain other wholesale services. The basis for calculating BT's costs (and
hence charges) was changed from Fully Allocated Historic Costs to Long-Run
Incremental Current Costs, the effect being to impose a further one-off
reduction in charges of about 10% on average. The review also introduced further
developments of BT's management accounts and cost information to provide greater
transparency to those purchasing or competing with BT's wholesale services.
OFTEL has stated that operators may be required to provide network
information to BT for interconnection purposes in much the same way as BT must
publish information about its own network and, once BT is subject to
quality-of-service targets and publication requirements in relation thereto,
similar requirements may apply to other operators. Such "symmetry" will be
applied to other operators in respect of wider interconnection obligations (such
as accounting separation and transparency of charge calculation for
interconnection) if OFTEL concludes that any such operator has market power and
is in a position to distort competition to the detriment of consumers. OFTEL
does not currently propose to require other operators to publish their
interconnection agreements.
Indirect Access. In July 1996, OFTEL published a Statement of its policy on
indirect access and equal access. It defined indirect access as the situation
where a customer buys a telecommunications service from an operator to which it
is not directly connected and where that operator pays another operator, to
which the customer is connected, for use of that connection. This statement
confirmed that while OFTEL has implemented a policy of indirect access to BT's
customers, it remains of the view that it is generally undesirable to oblige
non-dominant operators to provide indirect access. Accordingly, if a
telecommunications operator does not
34
have 25% of the connections in a relevant market, OFTEL would be unlikely to
conclude that indirect access should be required. If the operator did have 25%
or more of connections, OFTEL would want to consider other market conditions,
such as the share of connections held by other operators, the existence of any
barriers to switching or whether, in the long run, mandating indirect access
under such circumstances was likely to enhance competition or diminish it.
Consideration of these factors would create a framework in which a request to
mandate indirect access could be considered.
Equal Access. The licenses of BT, and C&WC enable OFTEL to require them to
make available to customers the ability to have their long-distance or
international calls carried by another operator without extra procedures, either
by pre-selection or on a call-by-call basis.
OFTEL's statement of July 1996 also confirmed that in accordance with BT's
DTI License, a full cost-benefit analysis of equal access had been undertaken.
This analysis raised doubts about the overall economic benefit of introducing
equal access. Accordingly, OFTEL has concluded that, on balance, there is no
case at present for directing BT to provide equal access.
In December 1997, the European Telecommunications Council of Ministers
approved an amendment to the Interconnection Directive which would require
Member States to ensure that operators with Significant Market Power (SMP)
introduced equal access-or carrier pre-selection (CPS) by January 1, 2000.
(OFTEL has indicated that in the UK it considers BT and Kingston Communications
to be the only operators to have SMP for this purpose.) The UK Government argued
unsuccessfully that this measure was unnecessary, given the doubts over the
benefits which would result. The Directive would enable the UK to argue that
introducing CPS in the UK should be deferred if it would be excessively
burdensome on an operator or category of operators. The proposals do not however
allow for balloting or proportional assignment of customers which may limit the
effect of CPS compared with other countries which have introduced it.
There can be no assurance that the implementation of equal or indirect
access by the Director General or the effect of the European Union's
Interconnection Directive will not adversely affect the ability of cable
television/telecommunications operators to market their telecommunications
services.
TECHNICAL AND REPORTING REQUIREMENTS
The principal technical requirements for the cable systems are contained in
the DTI Licenses and address technical requirements for transmissions,
performance requirements specified as British Standards relating to wideband
cable distribution systems and, in all cases, radio interference restrictions.
The Company's DTI Licenses impose obligations to provide any information
which OFTEL may require for the purpose of exercising their statutory functions.
This includes financial reporting, market data, and information on customer
complaint and fault handling procedures.
35
EUROPEAN UNION LEGISLATION
TELECOMMUNICATIONS REGULATION
Most of European Union (EU) States' communications regimes are not as
liberal as the UK's. Member States are now however typically in agreement on the
importance of liberalizing their communications sectors, which is facilitating
the European Commission attempts to fully liberalize the voice telephony market
and infrastructure across the EU as from January 1, 1998 (subject to
transitional periods for certain Member States). Some of the key Commission
Directives which became effective on January 1, 1998 in this field are:
A Directive requiring Member States to abolish all restrictions on the
supply of transmission capacity by CATV network operators to service operators
and allow the use of cable networks for the carriage of telecommunications
services, other than voice telephony, within Member States from January 1, 1996.
The Directive does not affect the provision of CATV services.
A Directive which provides for full competition in telecommunication
services and network infrastructure by January 1, 1998. This Directive also
provided for the liberalization of self-provided infrastructure (such as
utilities' networks) for the provision of services other than voice telephony
from July 1, 1996. Voice telephony was liberalized on January 1, 1998. The
Directive's provisions are generally comparable to the existing United Kingdom
regime which is already liberalized with respect to the provision of
telecommunication services and infrastructure. Following industry consultation,
the duopoly which had allowed BT and Mercury to operate international facilities
has been abolished and the Company was awarded a license to run international
facilities on December 19, 1996.
A Directive on the application of open network provision ("ONP") to voice
telephony. This Directive sets rules and targets for basic telephone service in
areas such as telephone directories, tariffs, billing procedures and quality of
service. It also requires telephone companies to provide interconnection on
open, objective and non-discriminatory terms, (which is now generally the case
for cable operators in the United Kingdom). The Commission has proposed a new
Directive to replace this ONP voice telephony Directive during 1998. This new
Directive does not deal with interconnection which is the subject of a further
Directive.
A Directive on Interconnection in telecommunications with regard to
ensuring universal service and interoperability through application of the ONP
principles came into force on January 1, 1998. The Directive sets out a
harmonized framework to be implemented by Member State regulatory authorities
regarding the interconnection of public telecommunications networks and services
utilizing the ONP principles of transparency, objectivity and
non-discrimination. This proposal aims to ensure open access to networks and
services and to guarantee the rights and obligations of operators and service
providers for interconnection with the networks and services of others. The
Directive is broadly in line with the approach which OFTEL is implementing
through its interconnection and accounting separation program in the United
Kingdom. The Directive links obligations in these areas to the concept of SMP.
OFTEL has said that it does not regard companies such as NTL as having SMP at
present. This situation could
36
change if NTL were to substantially increase its market share. The Directive
does contain an obligation for operators with "Special and Exclusive Rights" in
a sector other than telecommunications to introduce accounting separation
between their activities in that sector and the telecommunications sector. The
UK authorities have said that they consider companies with cable television
franchises to have such rights. It is unclear at this stage whether this will
result in significant or onerous obligations.
A European Directive on telecommunications licensing came into force on
January 1, 1998 and introduced some changes to the licensing regime. The main
effect was to require license terms and conditions to be non-discriminatory as
between different categories of operations, to introduce greater transparency
into the process of granting or refusing a license; to prescribe that fees which
can be charged for licenses must be no more than necessary to cover the costs of
administering and enforcing the license; to set out the administrative procedure
to be followed when revoking a license, and to prescribe the broad categories of
conditions which may be included in individual and general licenses. During
1998, the DTI and OFTEL intend to review and if necessary amend all existing PTO
licenses under the Telecommunications Act 1934 in order to fully implement this
Directive. It is not envisaged at this time that this will have a material
effect on the rights and obligations which NTL faces under its licenses.
OTHER REGULATORY ISSUES
Following a review completed by the Office of Fair Trading ("OFT") in July
1996, BSkyB has accepted new undertakings to the OFT to address concerns in
respect of its wholesale pricing in addition to modifications to those
undertakings agreed to in March 1995 (which addressed concerns about the
bundling of programs and rate card discount schemes). The OFT also announced
that a new industry ratecard would be approved only after consultation with the
cable industry.
This consultation ended on November 5, 1996. On December 16, 1996, the OFT
approved the structure of the ratecard. Since this date, subsequent ratecards
have been approved by the OFT to reflect changes in BSkyB's programming and
pricing. BSkyB's wholesale prices for cable operators are contained in the
industry ratecard, the structure of which (although not the level of pricing) is
subject to approval by the OFT. Changes to the structure of the ratecard must be
approved by the OFT although further changes to the ratecard may occur as a
result of commercial negotiations between BSKyB and the cable operators
regarding the pricing levels within the ratecard structure or following further
regulatory developments.
BSkyB's wholesale prices for its premium channels are calculated as a
percentage of its own DTH retail price. Following its review of BSkyB in 1996,
the OFT concluded that there was no evidence that such linkage between the
direct-to-home ("DTH") retail price and its wholesale price charged to cable
operators was anti-competitive and that no action was required on this issue.
Additionally, the OFT said that it had reviewed BSkyB's accounts and will
continue to do so every six months, to ensure that BSkyB is not
cross-subsidizing its retail DTH business from revenues of its wholesale cable
supply business to the detriment of competition.
37
However in relation to BSkyB's requirement that cable operators carry its
basic channels to 100% of their subscribers, the OFT found in its 1996 review
that this was inhibiting cable operators in their ability to offer tailored
packages and was inhibiting the growth of local cable industry. BSkyB has
accepted an undertaking not to require carriage in excess of 80% in the future,
although BSkyB will be permitted to increase the prices of its basic channels by
1.25% for each percentage point by which carriage of the channels falls short of
100%. BSkyB also accepted an undertaking not to bundle bonus programs (such as
occurred in respect of the Disney Channel) with premium channels in the future.
The ITC is currently investigating the handling of channels at all levels and is
including within such investigation a complaint concerning the terms of supply
of the Disney Channel.
REGULATION OF COMPETITION
The Company is subject to UK and European Community competition law regimes
administered by the OFT and OFTEL in the UK, and by the Commission and civil
courts in each member state of the EU and to individual national regimes in the
countries where it operates, presently the UK.
UK REGIME
UK law controls agreements and arrangements which affect competition
through the Restrictive Trade Practices Act 1976 ("RTPA"), monopolies and
mergers through the Fair Trading Act 1973 ("FTA") and unilateral
anti-competitive practices through the Competition Act 1980 ("CA").
In relation to the mergers provisions of the FTA, the Secretary of State
must either take certain undertakings or assurances from the enterprises
concerned or refer them to the MMC for investigation and consideration against a
broad public interest test laid down in the FTA. Monopolies and anti-competitive
practices are considered by the MMC against the same test. Monopolies and
anti-competitive practices references to the MMC are made by the DGFT, although
in the latter case, he may accept undertakings or assurances instead of making a
reference. In all three cases, the MMC may recommend action where they find that
there are matters operating, or which can be expected to operate against the
public interest. Ultimately, the Secretary of State has extensive powers to
impose remedial action in respect of matters operating against the public
interest (including divestment and the imposition of conditions on the
contracts, pricing policies and other conduct of the enterprises) either through
undertakings negotiated by the DGFT or by secondary legislation.
Under the Telecommunications Act, the Director General has concurrent
jurisdiction with the DGFT under the CA in relation to courses of conduct which
may restrict, distort or prevent competition in the markets for
telecommunications apparatus and telecommunications services and under the FTA
relating to monopoly situations (as defined in the FTA) in relation to
commercial activities connected with telecommunications and in relation to
courses of conduct which may affect interests of consumers of telecommunications
apparatus, and telecommunications services.
38
A legislative bill is currently passing through the UK Parliament which
would introduce new and stronger competition law within the UK. The proposals
envisage a regime modelled on Articles 85 and 86 of the EC Treaty, which
prohibit agreements that have the effect of preventing, restricting or
distorting competition in the UK and abuses of market power. It is proposed that
the prohibitions will be accompanied by strong investigatory powers including a
right of forcible entry, rights to third party actions, and fines of up to 10%
of a company's turnover. The government proposes the powers will be enforceable
in the telecommunications sector by the Director General of Telecommunications.
The company envisages that this will provide a much stronger framework than
hitherto for addressing anti-competitive behaviour by dominant firms in
telecommunications and broadcasting markets.
EUROPEAN COMMUNITY REGIME
EC competition law governs agreements which prevent, restrict or distort
competition and the abuse of dominant market positions through Articles 85 and
86 of the EC Treaty.
Article 85(1) renders unlawful agreements and concerted practices which may
affect trade between member states and which have as their object or effect the
prevention, restriction or distortion of competition within the common market
(that is, the member states of the EC/EEA collectively). Article 85(2) makes
offending provisions (if severable from the main agreement) void. Article 85(3)
allows for exemption (on an individual basis or by category of agreements) from
the provisions of Article 85(1) and 85(2) for agreements whose beneficial
effects in improving production or distribution or promoting technical or
economic progress outweigh their restrictive effects, provided that consumers
receive a fair share of the benefit, that competition will not be eliminated and
that no unnecessary restrictions are accepted. The word "agreement" in this
context is not confined to legally binding agreements and agreements may be
written or oral and can consist in an informal continuing business relationship.
The Commission is entrusted with the principal enforcement powers, and the
exclusive right to grant exemptions under Article 85(3). It has power to impose
heavy fines (up to 10% of a group's annual revenue) in respect of breaches of
Article 85(1). A prohibited agreement will also be unenforceable before the
national courts. In most cases notification of potentially infringing agreements
to the Commission under Article 85 with a request for an exemption under Article
85(3) protects against the risk of fines from the date of notification.
Article 86 prohibits abuse by one or more enterprises of a dominant market
position in the EU or a substantial part of it, insofar as the abuse may affect
trade between member states. A company may be dominant in several Member States
or part of a single Member State. A company enjoys a dominant position whenever
it possesses such market strength that it can act to an appreciable extent
independently of its competitors and customers. Determining whether an
undertaking occupies a dominant position is a complex question of law and
economics, but broadly a market share of as little as 40% may confer dominance
in a market for a product. However, dominance is not unlawful per se; only the
abuse of a dominant position is prohibited by Article 86. An enterprise may
abuse a dominant position under Article 86, for example,
39
engaging in excessive pricing of its products or services, or by denying other
enterprises access to an essential facility or asset which it controls. Any
action that is designed to, or could, seriously injure competitors, suppliers,
or distributors is likely to raise issues under Article 86. The Commission has
the same powers to fine in relation to abusive conduct as in relation to breach
of Article 85, but there is no procedure for obtaining exemption.
It is possible that a third party who suffers loss as a result of the
performance by an entity of an agreement which infringes Article 85(1) could
claim damages against such entity to compensate it for its quantifiable loss.
The position in relation to infringement of Article 86 is similar. The Directors
believe that no such claim is pending or likely to be brought successfully in
respect of any agreement to which the Company is currently party or in respect
of its business practices.
BROADCAST AND NATIONAL TELECOMS SERVICES
A significant proportion of the Company's total revenues is attributable to
the provisions of television and radio transmission and distribution services
and the provision of telecommunications services. In the United Kingdom, the
provision of such services is governed by the Telecommunications Act and The
Wireless Telegraphy Act 1949 (the "Wireless Telegraphy Act"). Set forth below is
a brief summary of the principal licenses of the Company's National Telecoms and
Broadcast Services divisions granted pursuant to these Acts.
TELECOMMUNICATIONS ACT LICENSES
The Company holds five licenses under the Telecommunications Act (in
addition to Telecommunications Act licenses for its cable franchises).
License to run telecommunications systems for the provision of television
and radio transmission services (the "Transmission License"). The Transmission
License enables the Company to run telecommunications systems for the provision
of television and radio transmission services. It permits NTL to carry out its
core business of providing transmission services to television and radio
broadcasters. The Transmission License was granted on December 20, 1990 for a
period of 25 years from January 1, 1991. It is subject to revocation thereafter
on 10 years' notice in writing. No notice may be given before the end of the
fifteenth year.
The Company's Transmission License contains conditions and other provisions
which, among other things: (i) require the Company to provide specified
telecommunications services to specified persons on request; (ii) specify
certain criteria to be met by the Company in providing those services; (iii)
require the connection of the Company's telecommunications systems with those of
certain other transmission operators and the transmission over those systems by
such operators of messages for general reception; (iv) require the Company to
publish its charges and terms and conditions of business and not to show undue
preference to or exercise undue discrimination against particular persons in the
provision of certain telecommunications services; (v) requires the Company to
hold Wireless Telegraphy Act licenses in respect of each item of
40
wireless telegraphy comprised in its system; (vi) impose on the Company an
obligation to share its transmission sites with other transmission operators;
(vii) restrict the prices which the Company is allowed to charge for the
provision of certain services. (see "-Price Cap Review" below); (viii) prohibit
the Company from cross-subsidizing the unregulated side of its business, and
(ix) impose a requirement for separate accounts to be produced in relation to
both the regulated and unregulated parts of the Company's business. However, the
Company is not obliged to do anything "not reasonably practicable."
The Secretary of State may revoke the Transmission License in the
circumstances described under "The Telecommunications Act-Term, Renewal and
Revocation" above.
License to run telecommunications systems for the provision of outside
broadcasting services by means of satellite systems (the "OBS License"). The OBS
License, which permits the Company to run telecommunications systems for the
provision of outside broadcasting services by means of satellite systems,
enables the Company to operate satellite up-links from outside broadcast sites
(sites which are not permanently equipped or adapted for television or radio
broadcasting). The OBS License was granted on February 6, 1991 for a period of
25 years from February 7, 1991, thereafter revocable on 10 years' notice in
writing. No notice may be given before the end of the fifteenth year. The OBS
License contains conditions similar to those in the Transmission License. The
OBS License specifies the circumstances in which it may be revoked by the
Secretary of State which include on revocation of the Transmission License.
License to run telecommunications systems ("Telecoms License"). The
Telecoms License enables the Company to convey messages (including voice and
data) between points on NTL's telecommunications networks. The Telecoms License
also contains conditions and revocation provisions similar to those in the
Transmission License. The Telecoms License was granted on December 30, 1992 for
a period of 10 years from 30 December 1992. Thereafter it is revocable on 5
years' written notice. No notice may be given before the end of the fifth year.
License to run telecommunications systems ("PTO License"). The PTO License
permits the Company to run telecommunications systems of every description
within the United Kingdom and to provide telecommunications services both
authorizations are subject to certain exceptions. The Company's PTO License was
granted on February 14, 1996 for a period of 25 years from that date.
Thereafter, it is revocable on 10 years' written notice. No notice may be given
before the end of the fifteenth year. The Company's PTO License also includes a
condition obliging it, subject to certain exceptions, to enter into an agreement
to connect its system to the system of any operator which requires it to do so,
provided that operator has been granted a license authorizing it to connect its
system to the Company's system. The PTO License details the exceptions and
conditions subject to which the Telecommunications Code will apply to the
Company. The Telecommunications Code confers certain important rights on PTO's
in relation to network construction, buildings and land.
International Facilities License. The international facilities license
permits the Company to provide direct international facilities based services,
without being required to do so via BT or Mercury. The license will enable the
Company to take advantage of the expanding volumes of
41
international telecommunication traffic, especially data services such as the
internet, and substantially reduce the Company's international call conveyance
costs. In this connection, the Company has been awarded a telecommunications
license in the Republic of Ireland and intends to submit applications for
further such licenses in the United States, France, Germany, Italy, Greece and
The Netherlands.
WIRELESS TELEGRAPHY ACT LICENSES
The Company holds a number of Wireless Telegraphy Act licenses of which the
most important are the following:
License for the Transmission of Broadcasting Services. This license was
granted on January 1, 1991 and permits the licensee to operate wireless
telegraphy stations at those sites set out in a schedule to the License. In
respect of each station, site and mast heights, power, polarisation and
frequency to be used are specified.
Microwave Fixed Link License. This license permits the licensee to
establish and use fixed stations for sending and receiving wireless telegraphy
at those sites as detailed in the schedule to the license.
Private Mobile Radio License. This license permits the licensee to
establish sending and receiving stations for wireless telegraphy (both base
stations and mobile stations) and to use these stations for the purpose of
sending and receiving spoken messages concerning the business of the licensee.
Earth Station Licenses. The Company holds 12 earth station licenses. These
licenses permit the licensee to establish earth stations at specified locations
in the UK for the purpose of providing wireless telegraphy up-links between the
earth station and specified geo-stationary satellites.
Each of the four types of license referred to above continue in force from
year to year unless revoked by the Secretary of State or unless any of the
license fees are unpaid by the licensee in which case the relevant license
expires.
Licenses for the Transmission of Broadcasting Services (special status).
The Company provides transmission services for a large number of radio stations
pursuant to its License for the Transmission of Broadcasting Services dated
January 1, 1991 (see above). In respect of two radio stations, Classic FM and
Virgin Radio, NTL has been issued licenses which are specific for those radio
stations. This has been done for the sake of administrative convenience because,
in both cases, the license fees are paid direct to the Radio Communications
Agency by the radio station concerned.
Radio Fixed Access License. A Radio Fixed Access License has been granted
for services provided at 10 GHz. This license allows the Company to provide
short-range radio-links between business customers and its network.
42
Miscellaneous Licenses. The Company holds a number of miscellaneous
Wireless Telegraphy Act licenses including testing and development licenses and
commissioned programme makers licenses.
Conditions in NTL's Wireless Telegraphy Act Licenses. The Company's
Wireless Telegraphy Act licenses contain conditions relating to revocation of
the Licenses and notifications to the Secretary of State. In general, the
Secretary of State may revoke a Wireless Telegraphy Act license at any time.
There are no notification requirements in respect of a change of control. The
license for the transmission of broadcasting services contain provisions which
enable the Secretary of State to revoke the license if, among other things, (1)
the licensee is, in the opinion of the Secretary of State, not a fit and proper
body to hold such a license; (ii) it appears to him requisite or expedient to do
so for purposes connected with the EU or any other international organization or
obligation or co-operation; (iii) the licensee ceases to hold any contracts for
the broadcasting of television or sound broadcasting services or (iv) the
licensee's license granted under the Telecommunications Act is for any reason
revoked.
At present, Wireless Telegraphy License fees are set as to recover
administration costs only. Under new legislation, the DTI has published
proposals to supplement this system with additional fees designed to reflect the
scarcity value of certain types of spectrum, notably congested microwave fixed
link bands. These proposals would not affect broadcasting spectrum, nor that
allocated in connection with the Company's 10GHz license.
DAB Testing. The Company is currently testing DAB under a series of
temporary licenses in anticipation of applying for a local or national radio
multiplex license in accordance with proposals contained in the Broadcasting
Act. These temporary licenses are issued by the Radio Authority under the
Broadcasting Act 1990. Under this Act, a body which is, or which is controlled
by a body which is, not formed under the law of an EC member state is currently
disqualified from holding a license to test DAB. The current license is,
therefore, held by an independent industry association on behalf of the Company.
However, under the present Broadcasting Act, a non-EC company will not be
prohibited from holding a license to provide local or national radio multiplex
services, and this interim position will be regularized in due course.
PRICE CAP REVIEW
The Company's regulated business may be divided into two categories: Price
Regulated Business and Applicable Rate Business. Price Regulated Business
comprises those telecommunication services which the Company is obliged to
provide pursuant to its Transmission License and in respect of which price
controls are imposed. The Company's Applicable Rate Business comprises those
telecommunications services which the Company is obliged to provide but which do
not fall within the definition of Price Regulated Business. Charges for
Applicable Rate Business are agreed between the Company and the relevant
customer. If despite all reasonable efforts agreement cannot be reached between
the Company and a significant proportion of its customers in respect of any
particular telecommunications service, the charge will be determined by the
Director General.
43
In respect of any services provided by the Company which are not Price
Regulated Business or Applicable Rate Business, the prices charged by the
Company are wholly unregulated, except for the overriding duty not to engage in
any pricing policy which constitutes undue preference or undue discrimination
against any person or class of person in respect of telecommunications services.
The Company's unregulated income would include, for example, charges for site
rentals to PCN operators.
The Company's Price Regulated Business is, essentially, the television
transmission service provided to the ITV (Channel 3) companies and Channel 4/S4C
including the operation and maintenance of transmission equipment and the
provision to third party transmission operators of the accommodation, masts and
antennae necessary for the operation of broadcast transmission services.
On December 24, 1996, the Director General issued the formal modification
to the Company's Telecommunications Act Licenses to effect the price controls
which are to apply to the Company for the period from January 1, 1997 to
December 31, 2002. The Price Cap Review had two purposes: (1) to establish a new
"Po" (the Company's allowable revenues for the first year of the next control
period, 1997, in respect of the Company's Maximum Price Regulated Business) and
(2) to establish a new "X" (the percentage by which such revenues must, after
allowing for consumer price inflation, be reduced each year thereafter). The
Director General's review concluded that, on present assumptions, the new Po is
53.15 million pounds sterling and the new X is 4.0%.
In addition to price control, the Price Cap Review raised a number of other
issues which will impact upon the Company's Price Regulated Business in the
future. In particular, the Director General suggested that it would be desirable
for the Company to "unbundle" the prices for operational services and required
site rentals which it charges to each broadcaster (such as Channel 3 and Channel
4/S4C) in the form of a transmission fee in order to expose those elements of
the service which are potentially competitive and allow broadcasters to choose
an alternative supplier if they wish. OFTEL has proposed to review whether the
Company should publish a ratecard with a menu of prices for unbundled services
in 2002 when the Company's regulated business is next due for full review. At
present, the system for calculating the proportion of Channel 3's total
transmission fee which is charged to each individual franchisee is based on net
advertising revenues ("NAR") accruing to each franchisee, rather than the costs
of actually providing the transmission service to each of the franchisees.
OFTEL proposed that the Company should continue to charge Channel 3 as a
group a single price for each component of its transmission service, albeit that
each component would be separately distinguished. This arrangement would
continue unless and until NAR arrangements no longer applied. This decision
could only be taken after agreement with the Department of Culture, Media and
Sport and consultation with other interested bodies.
44
EUROPEAN UNION LEGISLATION
NTL's business is further regulated by the EU under various European
Commission Directives. In addition, EU law, in particular Directive 94/46,
regulates the provision of satellite services within the EU. In addition,
possible future EU legislation (Green Paper on Convergence) NTL may be subject
to additional controls as a result of dealing both with broadcasting and
telephony services on a single network.
GENERAL
RESEARCH AND DEVELOPMENT
The Company's research and development activities involve the analysis of
technological developments affecting its cable television, telephone and
telecommunications business, the evaluation of existing services and sales and
marketing techniques and the development of new services and techniques.
PATENTS, COPYRIGHTS AND LICENSES
The Company does not have any material patents or copyrights nor does it
believe that patents play a material role in its business. The Company is
substantially dependent on the licenses and franchises granted by the
legislative agencies which regulate their respective businesses. The loss of any
one or more of the licenses and franchises of the Company could have a material
adverse effect on the Company's business and financial condition. There are no
material intellectual property licenses used by the Company the loss of which
would have such an effect.
CUSTOMERS
Except for the Company's broadcast services business, no material part of
the Company's business is dependent upon a single customer or a few customers,
the loss of any one or more of which would have a materially adverse effect on
the Company. The broadcast services business is, however, substantially
dependent on the revenues it receives pursuant to its contracts with the ITV
companies, Channel 4/S4C and Vodafone the loss of one or more of which may have
a material adverse effect on the Company.
EMPLOYEES
At December 31, 1997 the Company and its subsidiaries had approximately
4,135 employees. Approximately 1,200 employees are represented by the
Broadcasting, Entertainment, Cinematographic and Theatre Union which has entered
into a collective bargaining agreement with NTLIH. No other employees of the
Company are represented by any labor organization. The Company believes that its
relationship with its employees is good.
45
ITEM 2. PROPERTIES
- -------------------
PROPERTIES
The Company's subsidiaries own, lease or occupy under license eight
business unit and regional head-offices in Glasgow, Cardiff, Newport,
Huddersfield, Fleet, Belfast, Luton and London and the corporate head-office in
Farnborough. In addition, the Company's subsidiaries own or lease eight
switching centers/head-ends and 38 operational hub-sites together with
warehouses and other non-operational properties, as well as various cable
television, telephone and telecommunications equipment used in each of its
regional systems.
The Company through NTL Investment Holdings Limited ("NTLIH"), an indirect
wholly-owned subsidiary of the Company and the parent company of NTL Group
Limited, also owns, leases or occupies under license approximately 770
properties, of which approximately 700 are used as transmitter sites. The
Company's staff are present at 72 of such properties, which are used either as
operational bases or as offices. Approximately 200 of the sites are freehold,
approximately 440 leasehold and approximately 130 occupied under license. In
addition, the Company through NTLIH also is the lessee or licensee of
approximately 600 transmitter sites which are owned by Castle Transmission and
shared between the two organizations pursuant to a site sharing agreement.
Substantially all the Company's assets and properties are subject to fixed and
floating charges securing the amounts outstanding under the Company's
outstanding bank facility.
The Company maintains offices under lease for its corporate staff in New
York City and in Princeton, New Jersey.
The Company believes that its facilities are presently adequate for their
current use. The Company intends to continue to expand its systems in accordance
with the requirements of its network build schedules and acquire new sites as
part of the ongoing expansion of its transmission networks.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
LEGAL PROCEEDINGS
The Company is involved in, or has been involved in, certain disputes and
litigation arising in the ordinary course of its business, including claims
involving contractual disputes and claims for damages to property and personal
injury resulting from the construction of the Company's networks and the
maintenance and servicing of the Company's transmission masts, none of which are
expected to have a material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
- --------------------------------------------------------
There were no matters that were submitted to a vote of the Company's
stockholders during the quarter ended December 31, 1997.
46
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------
The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market under the symbol "NTLI" and on EASDAQ under the symbol "NTLI.ED". From
October 14, 1993 through March 26, 1997, the Common Stock traded on Nasdaq Stock
Market's National Market under the symbol "ICTL". The following table sets
forth, for the periods indicated, the high and low last sale prices as reported
on Nasdaq Stock Market's National Market.
LAST SALE PRICE
HIGH LOW
-----------------------
1996
----
First Quarter $30.13 $22.00
Second Quarter 33.25 28.00
Third Quarter 30.00 22.63
Fourth Quarter 28.00 23.13
1997
----
First Quarter 26.75 18.25
Second Quarter 27.00 19.25
Third Quarter 27.63 20.75
Fourth Quarter 29.13 25.25
1998
----
First Quarter (through March 20) 44.50 27.06
On March 20, 1998, the closing sale price for the Company's Common Stock,
as reported on the Nasdaq Stock Market's National Market was $44.50. As of March
20, 1998, there were approximately 522 record holders of the Common Stock. This
figure does not reflect beneficial ownership of shares held in nominee name.
The Company has never paid cash dividends on its Common Stock. Pursuant to
the indentures governing the Company's Senior Notes and the Certificates of
Designation governing the Company's Preferred Stock, certain provisions
currently materially limit the Company's ability to pay dividends on the
Company's equity securities. In addition, there are legal and contractual
restrictions on the ability of the Company's subsidiaries to transfer funds to
the Company in the form of cash dividends, loans or advances. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Liquidity and Capital Resources". The Company does not currently intend to pay
cash dividends in the foreseeable future on shares of its capital stock. The
Company anticipates that for the foreseeable future any cash flow generated from
subsidiaries' operations will be used to develop and expand the Company's
business and for debt service. Any future determination as to the payment of
dividends will be at
47
the discretion of the Company's Board of Directors and will depend upon the
Company's operating results, financial condition and capital requirements,
indenture and other contractual restrictions, general business conditions and
such other factors as the Company's Board of Directors deems relevant. There can
be no assurance that the Company will pay dividends at any time in the future.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The following table sets forth certain financial data for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993. This information should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
(1)
INCOME STATEMENT DATA:
Operating revenues $ 491,755 $ 228,343 $ 33,741 $ 13,745 $ 10,078
(Loss) before extraordinary item (328,557) (254,454) (90,785) (29,573) (11,076)
Net (loss) (333,057) (254,454) (90,785) (29,573) (11,076)
Basic and diluted net (loss) per
common share:
(Loss) before extraordinary item (2) (10.60) (8.20) (3.01) (.98) (.83)
Net (loss) per common share (2) (10.74) (8.20) (3.01) (.98) (.83)
Weighted average number of common
shares used in the computation of
basic and diluted net loss per common 32,117 31,041 30,190 30,175 13,327
share (2)
AS OF DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
(1)
BALANCE SHEET DATA:
Working capital (deficiency) $ (51,916) $ 242,102 $ 76,128 $251,544 $410,421
Fixed assets, net 1,756,985 1,459,528 639,674 191,725 36,422
Total assets 2,421,639 2,454,611 1,010,669 664,366 594,976
Long-term debt 2,015,057 1,732,168 513,026 143,488 130,553
Senior Redeemable Exchangeable
Preferred Stock 108,534 - - - -
Shareholders' equity (deficiency) (61,668) 328,114 339,257 436,534 452,402
(1) In May 1996, the Company purchased NTL Group Limited for an aggregate
purchase price of approximately $439,000,000, including goodwill of
approximately $263,000,000. The net assets and results of operations of NTL
Group Limited are included in the consolidated financial statements from
the date of the acquisition.
(2) After giving retroactive effect to the four-for-three stock split by way of
stock dividend paid in August 1995.
The Company did not declare or pay any cash dividends during the years
indicated.
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS
As a result of the acquisition of NTL Group Limited in May 1996, the
Company consolidated the results of operations of NTL Group Limited from the
date of acquisition.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Local telecommunications and television revenues increased to $189,407,000
from $89,209,000 as a result of customer growth that increased the Company's
current revenue stream.
National and international telecommunications revenues increased to
$162,738,000 from $45,430,000 as a result of the acquisition of NTL Group
Limited in May 1996, plus the new site acquisition, installation, design and
construction projects and additional site sharing revenue in 1997.
Broadcast transmission and other revenues increased to $130,799,000 from
$83,618,000 as a result of the acquisition of NTL Group Limited in May 1996,
plus the revenues from NTL Group Limited's ten-year contract to broadcast
Channel 5 in the United Kingdom which commenced in 1997.
Operating expenses increased to $301,644,000 from $144,315,000. NTL Group
Limited operating expenses in the year ended December 31, 1997 and in the period
from May 9, 1996, the date of acquisition, to December 31, 1996 were
$185,995,000 and $71,871,000, respectively. The remainder of the increase was
primarily the result of increases in programming and interconnection costs.
Selling, general and administrative expenses increased to $169,133,000 from
$114,992,000. NTL Group Limited selling, general and administrative expenses in
the year ended December 31, 1997 and in the period from May 9, 1996, the date of
acquisition, to December 31, 1996 were $18,799,000 and $9,384,000, respectively.
The remainder of the increase was the result of increases in telecommunications
and CATV sales and marketing costs and in additional personnel and overhead to
service the increasing customer base.
Franchise fees of $23,587,000 and $13,117,000 in 1997 and 1996,
respectively, are for the Northern Ireland license. Franchise fee expense was
incurred upon the start of operations in Northern Ireland in June 1996.
Corporate expenses increased to $18,324,000 from $14,899,000 primarily due
to an increase in personnel and related costs. The 1997 and 1996 amounts include
$1,852,000 and $2,906,000, respectively, of non-cash expense related to
non-compete agreements.
49
Nonrecurring charges of $20,642,000 in 1997 include restructuring costs of
$15,629,000 and deferred costs written-off of $5,013,000. Restructuring costs
include costs of employee severance and related costs, lease exit costs and
penalties associated with the cancellation of contractual obligations. The
deferred costs of $5,013,000 written-off arose in connection with the Company's
unsuccessful bid for DTT multiplex licenses.
Depreciation and amortization expense increased to $150,509,000 from
$98,653,000. The increase was primarily due to an increase in depreciation of
telecommunications and CATV equipment. Depreciation and amortization expense of
NTL Group Limited and amortization of goodwill as a result of the acquisition
was $37,724,000 and $20,339,000 in the year ended December 31, 1997 and in the
period from May 9, 1996, the date of acquisition, to December 31, 1996,
respectively.
Interest expense increased to $202,570,000 from $137,032,000 due to the
issuance of the 10% Senior Notes in February 1997, the issuance of the 7%
Convertible Subordinated Notes in June 1996 and the increase in accretion of the
original issue discount on the deferred coupon notes. Interest of $78,817,000
and $37,889,000 was paid in the years ended December 31, 1997 and 1996,
respectively.
Other gains of $21,497,000 in 1997 include a gain on sale of fixed assets
of $11,497,000 and a $10,000,000 payment from LeGroupe Videotron Ltee pursuant
to the settlement of a lawsuit.
In connection with the repayment of debt, a subsidiary of NTL Group Limited
recorded an extraordinary loss in 1997 of $4,500,000 from the write-off of
unamortized deferred financing costs.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Local telecommunications and television revenues increased to $89,209,000
from $24,804,000 as a result of customer growth that increased the Company's
current revenue stream.
National and international telecommunications revenues increased to
$45,430,000 from none as a result of the acquisition of NTL Group Limited.
Broadcast transmission and other revenues increased to $83,618,000 from
none as a result of the acquisition of NTL Group Limited.
Operating expenses increased to $144,315,000 from $24,415,000. NTL Group
Limited operating expenses from May 9, 1996, the date of acquisition, through
December 31, 1996 were $71,871,000. The remainder of the increase was the result
of increases in programming costs, interconnection costs and costs of operating
the telecommunications and CATV network.
Selling, general and administrative expenses increased to $114,992,000 from
$57,932,000. NTL Group Limited selling, general and administrative expenses from
May 9, 1996, the date of acquisition, through December 31, 1996 were $9,384,000.
The remainder of the increase was the
50
result of increases in telecommunications and CATV sales and marketing costs and
in additional personnel and overhead to service the increasing customer base.
Franchise fees of $13,117,000 in 1996 are for the Northern Ireland license
and were payable to the ITC beginning in January 1997. Franchise fee expense was
incurred upon the start of operations in Northern Ireland in June 1996.
Corporate expenses increased to $14,899,000 from $14,697,000 due to an
increase in personnel and related costs. The 1996 and 1995 amounts include
$2,906,000 and $3,256,000, respectively, of non-cash expense related to
non-compete agreements.
Depreciation and amortization expense increased to $98,653,000 from
$29,823,000. Depreciation and amortization expense of NTL Group Limited and
amortization of goodwill as a result of the acquisition was $20,339,000 from May
9, 1996, the date of acquisition, through December 31, 1996. The remainder of
the increase was primarily due to an increase in depreciation of
telecommunications and CATV equipment.
Interest and other income increased to $33,634,000 from $21,185,000 due to
an increase in funds available for short-term investment.
Interest expense increased to $137,032,000 from $28,379,000 due to the
interest on the bank loan in connection with the NTL Group Limited acquisition
in 1996 plus the issuance of the 11-1/2% Series B Senior Deferred Coupon Notes
and the 7% Convertible Subordinated Notes in 1996. Interest of $37,889,000 and
$13,918,000 was paid during the years ended December 31, 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company will continue to require significant amounts of capital to
finance construction of its local and national networks, for connection of
telephone, telecommunications and CATV customers to the networks, for other
capital expenditures, as well as for cash interest payments. Based on the
information currently available, the Company estimates that, from January 1,
1998 through December 31, 1998 (assuming conversion of the 7-1/4% Convertible
Subordinated Notes due to the March 1998 call for redemption in April 1998),
these requirements will aggregate 436 million pounds sterling (approximately
$720 million). The Company intends to fund its requirements from cash, cash
equivalents and marketable securities on hand of $103.9 million as of December
31, 1997 and from the aggregate proceeds of approximately $1.25 billion (after
discounts, commissions and expenses) from the issuance in March 1998 of
125,000,000 pounds sterling principal amount, 9-1/2% Senior Notes due 2008,
300,000,000 pounds sterling accreted value, 10-3/4% Senior Deferred Coupon Notes
due 2008 and $1,300,000,000 accreted value, 9-3/4% Senior Deferred Coupon Notes
due 2008 (together the "New Notes"). The Company's commitments for equipment and
services at December 31, 1997 of approximately $78 million are included in the
anticipated requirements.
51
In 1997, NTL (UK) Group, Inc., a wholly-owned subsidiary of the Company,
which is the holding company for its United Kingdom operations and the parent
company of NTLIH, and NTLIH entered into an agreement with The Chase Manhattan
Bank pursuant to which Chase has agreed to fully underwrite a 555 million pounds
sterling, eight-year term loan facility with an initial four-year revolving
period (the "New Credit Facility"). By April 14, 1999, Chase's commitment will
be reduced to no less than 480,000,000 pounds sterling or such greater amount as
is necessary to ensure that the Company's United Kingdom operations remain fully
funded by reference to an agreed business plan. The New Credit Facility will be
used to finance capital expenditures and working capital for the Company's
United Kingdom operations, including its local broadband, national
telecommunications and national digital television networks. A portion of the
New Credit Facility (75 million pounds sterling) is conditional upon the
execution of contracts to provide digital television transmission services to
certain third parties. Chase has provided a portion of the New Credit Facility
in the form of a 350 million pounds sterling facility to the Company on the same
terms as to restrictions, covenants, guarantees and security as the 555 million
pounds sterling facility. As of March 20, 1998, the Company had 10 million
pounds sterling outstanding under the New Credit Facility. The principal amount
outstanding under the 350 million pounds sterling facility is required to be
repaid on December 31, 2005. Interest is payable either monthly, quarterly or
semi-annually, at the option of NTLIH, at LIBOR plus, at a maximum, 2.25% per
annum. The commitment fee is .375% per annum on the unutilized portion of the
350 million pounds sterling facility and is payable quarterly in arrears. The
New Credit Facility is secured by first fixed and floating charges over all
present and future assets and undertakings of the United Kingdom group. The New
Credit Facility contains customary financial covenants, and certain restrictions
relating to, among other things: (i) incurrence of additional indebtedness or
guarantees, (ii) investments, acquisitions and mergers and (iii) dividend and
other payment restrictions. In the absence of a default, the New Credit Facility
generally permits payments to the Company to pay interest and principal of
existing indebtedness of the Company.
In connection with the New Credit Facility, the Company entered into a
European Currency Option with a bank in which the Company may purchase U.S.
dollars at a fixed rate of 1 pound sterling to $1.40. The option is exercisable
on specified dates through June 2001 for specified amounts of U.S. dollars. The
dates and U.S. dollar amounts correspond to the Company's interest payment dates
and amounts for its U.S. dollar denominated debt and anticipated amounts of
parent company expenses.
The Company is highly leveraged. After giving effect to the issuance of the
New Notes, the accreted value at December 31, 1997 of the Company's total
long-term indebtedness (including the Redeemable Preferred Stock) is
approximately $3.4 billion, representing approximately 102% of total
capitalization. The following tables summarizes the terms of those
52
notes and redeemable preferred stock issued by the Company.
11-1/2% 12-3/4% 10-7/8% 10-3/4% 9-3/4%
Series B Senior Series A Senior Senior Deferred Senior Sterling Senior
Deferred Coupon Deferred Coupon Coupon Deferred Coupon Deferred Coupon
Notes Notes Notes Notes Notes
Denomination................ $ $ $ Pounds Sterling $
Net Proceeds (in 000's)..... 582,000 145,125 119,797 170,584 778,340
Issue Date.................. January 30, 1996 April 20, 1995 October 7, 1993 March 13, 1998 March 13, 1998
Issue Price(1).............. 57.155% 53.995% 58.873% 58.62% 61.724%
Aggregate Principal Amount
at Maturity (in 000's).... 1,050,000 277,803 212,000 300,000 1,300,000
Maturity Date............... February 1, 2006 April 15, 2005 October 15, 2003 April 1, 2008 April 1, 2008
Yield or Interest Rate(2)... 11-1/2% 12-3/4% 10-7/8% 10-3/4% 9-3/4%
Interest or Dividend February 1 and April 15 and April 15 and April 1 and April 1 and
Payment August 1 October 15 October 15 October 1 October 1
Dates..................... from 8-1-01 from 10-15-00 From 4-15-99 from 10-1-2003 from 10-1-2003
Earliest Optional
Redemption Date(4)........ February 1, 2001 April 15, 2000 October 15, 1998 April 1, 2003 April 1, 2003
Redemption 105.75 (2001) 103.64 (2000) 103.107 (1998) 105.375 (2003) 104.875 (2003)
Price(%)(5)............... to 100 (2003) to 100 (2002) to 100 (2000) to 100 (2006) to 100 (2006)
Conversion Price(6)......... N/A N/A N/A N/A N/A
Senior/Subordinated......... Senior Senior Senior Senior Senior
(table continues on the following page)
53
7% 7-1/4%
Convertible Convertible 9-1/2% 10% Redeemable
Subordinated Subordinated Senior Sterling Series B Preferred
Notes Notes (7) Notes Senior Notes Stock
Denomination................ $ $ Pounds Sterling $ $
Net Proceeds (in 000's)..... 267,437 186,065 121,161 389,000 96,625
Issue Date.................. June 12, 1996 April 20, 1995 March 13, 1998 February 14, 1997 February 14, 1997
Issue Price(1).............. 100% 100% 99.670% 100% 100%
Aggregate Principal Amount
at Maturity (in 000's).... 275,000 191,750 125,000 400,000 100,000
Maturity Date............... June 15, 2008 April 15, 2005 April 1, 2008 February 15, 2007 February 15, 2009
Yield or Interest Rate(2)... 7% 7-1/4% 9-1/2% 10% 13%
Interest or Dividend June 15 and April 15 and April 1 and February 15 and May 15, August 15,
Payment December 15 October 15 October 1 August 15 November 15 and
Dates..................... from 12-15-96 from 10-15-95 From 10-1-98 from 8-15-97 February 15
from 5-15-97(3)
Earliest Optional
Redemption Date(4)........ June 15, 1999 April 15, 1998 April 1, 2003 February 15, 2002 February 15, 2002
Redemption 104.9 (1999) 105.08 (1998) 104.75 (2003) 105 (2002) 106.5 (2002)
Price(%)(5)............... to 100 (2006) to 100.73 (2004) to 100 (2006) to 100 (2005) to 100 (2005)
Conversion Price(6)......... 37.875 27.56 N/A N/A N/A
Senior/Subordinated......... Subordinated Subordinated Senior Senior N/A
- -------------------------
(1) Percent of aggregate principal amount at maturity (or aggregate liquidation preference in the case of the Redeemable Preferred
Stock).
(2) Percent per annum.
(3) Dividend payments on the Redeemable Preferred Stock are payable in cash or additional shares of Redeemable Preferred Stock, at
the Company's option. From May 15, 2004, dividend payments are payable in cash.
(4) This is the first date when redeemable at the Company's option. The Redeemable Preferred Stock is mandatorily redeemable for
cash on February 15, 2009.
(5) Expressed as a percentage of principal amount or liquidation preference, as applicable, plus, in each case, accrued and unpaid
interest or dividends thereon to the applicable redemption date.
(6) This is the conversion price per share of the Company's common stock, adjusted for the four-for-three stock split in August 1995
and subject to further adjustments in certain events.
(7) These notes have been called for redemption effective April 20, 1998, unless converted on or prior to April 19, 1998.
Pursuant to the terms of the Northern Ireland LDL, CableTel Northern
Ireland Limited (a wholly-owned subsidiary of the Company) is required to make
annual cash payments to the ITC for fifteen years in the amount of approximately
14.4 million pounds sterling (subject to adjustments for inflation). CableTel
Northern Ireland Limited began making payments of 1.2 million pounds sterling
per month in January 1997. Such payments are in addition to the percentages of
qualifying revenue already set by the ITC of 0% for the first ten years and 2%
for the last five years of the fifteen year
54
license. Pursuant to the terms of the Glamorgan and Gwent LDL, CableTel South
Wales Limited (a wholly-owned subsidiary of the Company) is required to make
annual cash payments to the ITC for fifteen years, commencing in the first full
calendar year after the start of operations, in the amount of 104,188 pounds
sterling (subject to adjustment for inflation). Such payments are in addition to
the percentages of qualifying revenue already set by the ITC of 0% for the first
five years, 2% for the second five years and 4% for the last five years of the
fifteen year license.
The Company has significant capital requirements for the completion of its
telephone, telecommunications and CATV network passed the total of 2,090,000
homes required by its regulatory build schedules, for its LDL payments and for
scheduled cash interest and principal payments, as well as requirements for
other capital expenditures. The Company expects to fund these requirements with
cash on hand, proceeds from the New Notes, funds from the New Credit Facility
and cash from operations. There can be no assurance that: (i) actual
construction costs will not exceed the amounts estimated or that additional
funding substantially in excess of the amounts estimated will not be required,
(ii) conditions precedent to advances under the New Credit Facility will be
satisfied when funds are required, (iii) the Company and its subsidiaries will
be able to generate sufficient cash from operations to meet capital
requirements, debt service and other obligations as they fall due when required,
(iv) the Company will be able to access such cash flow or (v) the Company will
not incur losses from its exposure to exchange rate fluctuations or be adversely
affected by interest rate fluctuations.
The Company's operations are conducted through its direct and indirect
wholly-owned subsidiaries. As a holding company, the Company holds no
significant assets other than its investments in and advances to its
subsidiaries. The Company is therefore dependent upon the receipt of sufficient
funds from its subsidiaries to meet its own obligations. Accordingly, the
Company's ability to make scheduled interest and principal payments when due to
holders of indebtedness of the Company and the Company's ability to pay cash
dividends to its stockholders is dependent upon the receipt of sufficient funds
from its subsidiaries.
To the extent that the Company obtains financing in United States dollars
and incurs costs in the construction and operation of the Company's regional
systems in the United Kingdom in British pounds sterling, it will encounter
currency exchange rate risks. At December 31, 1997, the Company had
approximately $42 million in pounds sterling cash accounts to reduce this risk.
In addition, the Company's New Credit Facility and the pounds sterling
denominated New Notes will also reduce this risk. Furthermore, the Company's
revenues are generated primarily in British pounds sterling while its interest
and principal obligations with respect to most of the Company's existing
indebtedness are payable in dollars. The Company has entered into an option
agreement to hedge some of the risk of exchange rate fluctuations related to
interest payments on U.S. dollar denominated debt.
The information in the preceding paragraphs does not include the impact of
the proposed Partners acquisition. In addition, the information in the preceding
paragraphs includes projections; in reviewing such information it should be kept
in mind that actual results may differ materially from those in such
projections. These projections were based on various factors and were derived
utilizing numerous assumptions. Important assumptions and factors that could
55
cause actual results to differ materially from those in these projections
include the Company's ability to continue to design networks, install
facilities, obtain and maintain any required governmental licenses or approvals
and finance construction and development, all in a timely manner at reasonable
costs and on satisfactory terms and conditions, as well as assumptions about
customer acceptance, churn rates, overall market penetration and competition
from providers of alternative services. The failure of such assumptions to be
realized as well as other factors may also cause actual results to differ
materially from those projected. The Company assumes no obligations to update
these projections to reflect actual results, changes in assumptions or changes
in other factors affecting such projections.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of the
computer systems of certain significant customers and vendors for handling the
year 2000. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not believe
that the cost of such actions will have a material adverse effect on the
Company. There can be no assurance, however, that there will not be a delay in,
or increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
the Company. In addition, the failure of certain of the Company's significant
customers and vendors to address the year 2000 issue could have a material
adverse effect on the Company.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash used in operating activities was $17,271,000 and $21,405,000 in the
years ended December 31, 1997 and 1996, respectively. The decrease in cash used
in operating activities is primarily due to changes in operating assets and
liabilities.
Purchases of fixed assets were $503,656,000 in 1997 and $505,664,000 in
1996 as a result of the continuing fixed asset purchases and construction in
1997. In May 1997, the Company paid $57,330,000 to the former shareholders of
NTL Group Limited in respect of the final payment of deferred purchase price.
56
Proceeds from borrowings and sale of preferred stock, net of financing
costs, of $490,302,000 in 1997 is comprised of the proceeds from the 10% Notes
and the Redeemable Preferred Stock of $500,000,000, net of financing costs
incurred of $15,660,000, plus proceeds from borrowings under the NTLIH Term Loan
and Revolving Facility (the "NTLIH Facility") of $13,104,000 less $7,142,000 of
financing costs paid in connection with the New Credit Facility. Principal
payments of $242,424,000 represent the repayment of the NTLIH Facility (which
was a requirement of the New Credit Facility).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- ------------------------------------------------------------------
NTL is required to provide these disclosures in its Annual Report on Form
10-K for the year ending December 31, 1998.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ---------------------------------------------------
The consolidated financial statements of the Company are filed under this Item
commencing on page F-1 of this Report.
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------------------------
Revenues $106,817 $114,822 $126,734 $143,402
Operating loss (45,231) (51,772) (54,438) (40,623)
Loss before extraordinary item (85,761) (87,674) (83,357) (71,765)
Net loss (85,761) (87,674) (83,357) (76,265)
Basic and diluted loss per common
share before extraordinary item (2.73) (2.84) (2.70) (2.34)
Basic and diluted net loss per common share (2.73) (2.84) (2.70) (2.48)
1996
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------------------------
Revenues $ 18,434 $ 47,783 $ 77,256 $ 84,870
Operating loss (28,183) (33,751) (44,390) (51,309)
Net loss (42,724) (59,158) (74,070) (78,502)
Basic and diluted net loss per common share (1.41) (1.95) (2.35) (2.45)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
- ---------------------------------------------------------
Not applicable.
58
PART III
--------
ITEMS 10, 11, 12, AND 13.
- ------------------------
The information required by PART III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement
involving the election of directors which the Company expects to file, pursuant
to Regulation 14A, within 120 days following the end of its fiscal year.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a)(1) Financial Statements - See list of Financial Statements on page F-1.
(2) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
(3) Exhibits - See Exhibit Index on page 60.
(b) During the fourth quarter of 1997, the Company filed a Current Report
on Form 8-K dated October 20, 1997 (reporting a matter under Item 5 -
Other Events). No financial statements were filed with this report.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - See list of Financial Statement
Schedules on page F-1.
59
EXHIBIT INDEX
Exhibit No.
- ----------
2.1 Amended and Restated Agreement of Reorganization and Plan of Merger,
dated as of May 28, 1993, among the Company, OCOM and CableTel Merger
Inc. (Incorporated by reference to Exhibit 2, Registration File No.
33-63570)
2.2 Deed of Irrevocable undertaking dated March 28, 1996 by and among
Addroute Limited, certain shareholders in the NTL Group Limited, NTL
Group Limited and the Company (Incorporated by reference to the
Company's Registration Statement on Form S-4, File No. 333-1010).
2.3 Form of Offer Document dated March 28, 1996 of Addroute Limited for
NTL Group Limited (Incorporated by reference to the Company's
Registration Statement on Form S-4, File No. 333-1010).
2.4 Deed of Adjustment dated March 28, 1996 by and among Addroute Limited
and Mercury Asset Management plc. (Incorporated by reference to the
Company's Registration Statement on Form S-4, File No. 333-1010).
2.5 Share Exchange Agreement, dated as of August 30, 1996, by and among
the Company, B/G Co., Booth American Company, Columbia Management,
Inc. and Robert T. Goad (Incorporated by reference to the Company's
Registration Statement on Form S-3, File No. 333-16751).
2.6 Share Purchase Agreement, dated October 7, 1996, by and among the
Company, South Wales Electricity plc and Swalec Telco Investment
Limited (Incorporated by reference to the Company's Registration
Statement on Form S-3, File No. 333-16751).
3.1 Restated Certificate of Incorporation. (Incorporated by reference from
the Company's Registration Statement on Form S-3, Registration File
No. 333-07879)
3.1(a) Certificate of Ownership and Merger, dated as of March 26, 1997
(Incorporated by reference to Company's Form 8-K, dated and filed with
the Commission on March 26, 1997).
3.2 Restated By-Laws (Incorporated by reference to Exhibit 3.2,
Registration No. 33-63570)
4.1 Specimen of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1, Registration File No. 33-63570)
60
4.2 Warrant Agreement dated February 14, 1996 between the Company and
Chemical Bank as Warrant Agent (Incorporated by reference to the
Company's Registration Statement on Form S-4, File No. 333-00118)
4.3 Form of Warrant to Purchase Common Stock (included in Exhibit 4.2)
4.4 Indenture, dated as of October 1, 1993, by and between the Company and
Chemical Bank with respect to the 10-7/8% Senior Notes (Incorporated
by reference to Exhibit 4.1, Registration File No. 33-63572)
4.5 Indenture, dated as of April 20, 1995, by and between the Company and
Chemical Bank as Trustee, with respect to the 12-3/4% Senior Notes
(Incorporated by reference from the Company's Registration Statement
on Form S-4, File No. 33-92794)
4.6 Indenture, dated as of January 30, 1996, by and between the Company
and Chemical Bank as Trustee, with respect to the 11-1/2% Senior Notes
(Incorporated by reference from the Company's Registration Statement
on Form S-4, File No. 333-00118)
4.7 First Supplemental Indenture, dated as of January 22, 1996, by and
among the Company and Chemical Bank, as Trustee, with respect to the
12-3/4% Senior Notes (Incorporated by reference from the Company's
Registration Statement on Form S-4, File No. 333-00118)
4.8 First Supplemental Indenture, dated as of January 23, 1996, by and
among the Company and Chemical Bank, as Trustee, with respect to the
10-7/8% Notes (Incorporated by reference from the Company's
Registration Statement on Form S-4, File No. 333-00118)
4.9 Indenture, dated as of February 12, 1997, by and between the Company
and The Chase Manhattan Bank, as Trustee, with respect to the 10%
Senior Notes (Incorporated by reference from the Company's 1996 Form
10-K)
4.10 Indenture, dated as of March 13, 1998, by and between the Company and
The Chase Manhattan Bank, as Trustee, with respect to the 9-1/2%
Senior Notes
4.11 Indenture, dated as of March 13, 1998, by and between the Company and
The Chase Manhattan Bank, as Trustee, with respect to the 9-3/4%
Senior Deferred Coupon Notes
4.12 Indenture, dated as of March 13, 1998, by and between the Company and
The Chase Manhattan Bank, as Trustee, with respect to the 10-3/4%
Senior Deferred Coupon Notes
61
4.13 Certificate of Designation, dated February 12, 1997, with respect to
the 13% Redeemable Preferred Stock (Incorporated by reference from the
Company's 1996 Form 10-K)
4.14 Certificate of Designation, dated October 7, 1996, in respect of the
Company's Series A Preferred Stock (Incorporated by reference to the
Company's Form 8-K, filed on October 9, 1996).
4.15 Registration Rights Agreement, dated February 12, 1997, by and among
the Company and Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated with respect to the 10% Senior Notes (Incorporated by
reference from the Company's 1996 Form 10-K)
4.16 Registration Rights Agreement, dated February 12, 1997, by and among
the Company and Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated with respect to the 13% Senior Notes (Incorporated by
reference from the Company's 1996 Form 10-K)
4.17 Registration Rights Agreement, dated as of March 13, 1998, by and
among the Company and Donaldson, Lufkin & Jenrette International,
Morgan Stanley & Co. International Limited, BT Alex. Brown
International, Chase Securities Inc. and Salomon Brothers
International Limited with respect to the 9-1/2% Senior Notes
4.18 Registration Rights Agreement, dated as of March 13, 1998, by and
among the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, BT Alex. Brown
Incorporated, Chase Securities Inc. and Salomon Brothers Inc with
respect to the 9-3/4% Senior Deferred Coupon Notes
4.19 Registration Rights Agreement, dated as of March 13, 1998, by and
among the Company and Donaldson, Lufkin & Jenrette International,
Morgan Stanley & Co. International Limited, BT Alex. Brown
International, Chase Securities Inc. and Salomon Brothers
International Limited with respect to the 10-3/4% Senior Deferred
Coupon Notes
4.20 Form of Preferred Stock (Incorporated by reference from the Company's
1996 Form 10-K)
4.21 Indenture, dated as of June 12, 1996, by and between the Company and
Chemical Bank, as Trustee, with respect to the 7% Convertible Notes
(Incorporated by reference from the Company's Registration Statement
on Form S-3, File No. 333-07879)
62
4.22 Registration Rights Agreement, dated June 12, 1996, by and among the
Company and Donaldson, Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc, with respect to the 7% Convertible Notes
(Incorporated by reference from the Company's Registration Statement
on Form S-3, File No. 33-07879)
4.23 Indenture, dated as of April 20, 1995, by and among the Company and
Chemical Bank, as Trustee, with respect to the 7-1/4% Convertible
Notes (Incorporated by reference from the Company's Registration
Statement on Form S-3, File No. 333-92792)
4.24 Registration Agreement, dated April 12, 1995, by and among the Company
and Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman Sachs & Co., with respect to the 7-1/4%
Convertible Notes (Incorporated by reference from the Company's
Registration Statement on Form S-3, File No. 333-92792)
4.25 Rights Agreement entered into by the Company and Continental Stock
Transfer & Trust Company (Incorporated by reference to Exhibit 4.2,
Registration No. 33-63570)
10.1 Compensation Plan Agreements, as amended and restated effective
June 3, 1997
10.2 Form of Director and Officer Indemnity Agreement (together with a
schedule of executed Indemnity Agreements) (Incorporated by reference
from the Company's Registration Statement on Form S-4, File No.
33-92794)
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule, for the year ended December 31, 1997
27.2 Restated Financial Data Schedule, for the quarter ended September 30,
1997
27.3 Restated Financial Data Schedule, for the quarter ended June 30, 1997
27.4 Restated Financial Data Schedule, for the quarter ended March 31, 1997
27.5 Restated Financial Data Schedule, for the year ended December 31, 1996
27.6 Restated Financial Data Schedule, for the quarter ended September 30,
1996
27.7 Restated Financial Data Schedule, for the quarter ended June 30, 1996
63
27.8 Restated Financial Data Schedule, for the quarter ended March 31, 1996
99.1 Prescribed Diffusion Service License, dated July 21, 1987, issued to
British Cable Services Limited (now held by CableTel Surrey and
Hampshire Limited) for the area of West Surrey and East Hampshire,
England (Incorporated by reference to the Company's Form 8-K, filed
with the Commission on March 19, 1996)
99.2 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Clyde Cablevision (renamed CableTel Glasgow) for the area of
Inverclyde, Scotland (Incorporated by reference to the Company's Form
8-K, filed with the Commission on March 19, 1996)
99.3 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Clyde Cablevision (renamed CableTel Glasgow) for the area of
Bearsden and Milngavie, Scotland (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.4 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Clyde Cablevision (renamed CableTel Glasgow) for the area of
Paisley and Renfrew, Scotland (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.5 Prescribed Diffusion Service License, dated July 10, 1984, issued to
Clyde Cablevision (renamed CableTel Glasgow) for the area of North
Glasgow and Clydebank, Strathclyde, Scotland (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.6 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Clyde Cablevision (renamed CableTel Glasgow) for the area of
Greater Glasgow, Scotland (Incorporated by reference to the Company's
Form 8-K, filed with the Commission on March 19, 1996)
99.7 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Newport Cablevision Limited (renamed CableTel Newport) for the area
of Newport, Wales (Incorporated by reference to the Company's Form
8-K, filed with the Commission on March 19, 1996)
99.8 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Cable and Satellite Television Holdings Ltd (renamed CableTel West
Glamorgan Limited) for the area of West Glamorgan, Wales (Incorporated
by reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
64
99.9 Prescribed Diffusion Service License, dated December 3, 1990, issued
to British Cable Services Limited for the area of Cardiff and Penarth,
Wales (now held by CableTel Cardiff Limited) (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.10 Prescribed Diffusion Service License, dated December 3, 1990, issued
to Kirklees Cable (renamed CableTel Kirklees) for the area of
Huddersfield and Dewsbury, West Yorkshire, England (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.11 Prescribed Diffusion Service License, dated December 3, 1990, issued
to CableVision Communications Company of Hertfordshire Ltd (renamed
CableTel Hertfordshire Limited) for the area of Broxbourne and East
Hertfordshire, England (Incorporated by reference to the Company's
Form 8-K, filed with the Commission on March 19, 1996)
99.12 Prescribed Diffusion Service License, dated December 3, 1990, issued
to CableVision Communications Company Ltd (renamed CableTel Central
Hertfordshire Limited) for the area of Central Hertfordshire,
England(Incorporated by reference to the Company's Form 8-K, filed
with the Commission on March 19, 1996)
99.13 Prescribed Diffusion Service License, dated March 26, 1990, issued to
CableVision Bedfordshire Limited (renamed CableTel Bedfordshire Ltd.)
for the area of Luton and South Bedfordshire (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.14 Prescribed Diffusion Service License, dated December 3, 1990, issued
to CableVision North Bedfordshire Ltd (renamed CableTel North
Bedfordshire Ltd.) for the area of North Bedfordshire, England
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.15 Local Delivery Service License, dated October 2, 1995, issued to
CableTel Northern Ireland Limited for Northern Ireland (Incorporated
by reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.16 Local Delivery Service License, dated December 6, 1995, issued to
CableTel South Wales Limited for Glamorgan and Gwent, Wales
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.17 Local Delivery Service License, dated March 13, 1991, issued to
Maxwell Cable TV Limited for Pembroke Dock, Dyfed, Wales (now held by
Metro South Wales Limited) (Incorporated by reference to the Company's
Form 8-K, filed with the Commission on March 19, 1996)
65
99.18 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Camarthen, Wales (now held by Metro South
Wales Limited) (Incorporated by reference to the Company's Form 8-K,
filed with the Commission on March 19, 1996)
99.19 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Milford Haven, Wales (now held by Metro
South Wales Limited) (Incorporated by reference to the Company's Form
8-K, filed with the Commission on March 19, 1996)
99.20 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Cwmgors (Amman Valley), West Glamorgan,
Wales (Incorporated by reference to the Company's Form 8-K, filed with
the Commission on March 19, 1996)
99.21 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Ammanford, West Glamorgan, Wales
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.22 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Brecon, Gwent, Wales (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.23 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Haverfordwest, Preseli, Wales
(Incorporated by reference to the the Company's Form 8-K, filed with
the Commission on March 19, 1996)
99.24 Local Delivery Service License, dated March 15, 1991, issued to
Maxwell Cable TV Limited for Neyland, Preseli, Wales (now held by
Metro South Wales Limited) (Incorporated by reference to the Company's
Form 8-K, filed with the Commission on March 19, 1996)
99.25 License, dated January 11, 1991, issued to Cablevision Communications
the Company of Hertfordshire Ltd (renamed CableTel Hertfordshire
Limited) for the Hertford, Cheshunt and Ware (Lea Valley) cable
franchise, England (Incorporated by reference to the Company's Form
8-K, filed with the Commission on March 19, 1996)
99.26 License, dated December 8, 1990, issued to Cablevision Communications
the Company Limited for Central Hertfordshire (renamed CableTel
Central Hertfordshire Limited), England (Incorporated by reference to
the Company's Form 8-K, filed with the Commission on March 19, 1996)
66
99.27 License, dated August 23, 1989, issued to Cablevision Bedfordshire
Limited for Bedford and surrounding areas, England (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.28 License, dated January 9, 1991, issued to Cablevision North
Bedfordshire Ltd for North Bedfordshire, England (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.29 License, dated January 29, 1991, issued to Clyde Cablevision (renamed
CableTel Glasgow) for the Inverclyde Cable Franchise, Scotland
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.30 License, dated January 29, 1991, issued to Clyde Cablevision (renamed
CableTel Glasgow) for the Bearsden and Milngavie Cable Franchise,
Scotland (Incorporated by reference to the Company's Form 8-K, filed
with the Commission on March 19, 1996)
99.31 License, dated January 29, 1991, issued to Clyde Cablevision (renamed
CableTel Glasgow) for the Paisley and Renfrew Cable Franchise,
Scotland (Incorporated by reference to the Company's Form 8-K, filed
with the Commission on March 19, 1996)
99.32 License, dated June 7, 1985, issued to Clyde Cablevision Ltd (renamed
CableTel Glaswgow) for North West Glasgow and Clydebank, Scotland
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.33 License, dated January 29, 1991, issued to Clyde Cablevision (renamed
CableTel Glasgow) for the Greater Glasgow cable franchise, Scotland
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.34 License, dated October 13, 1993, issued to Insight Communications
Cardiff Limited (renamed CableTel Cardiff Limited) for Cardiff, Wales
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.35 License, dated January 22, 1991, issued to Newport Cablevision
Limited (renamed CableTel Newport), for Newport Cable franchise Wales
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.36 License, dated May 18, 1990, issued to Cable and Satellite Television
Holdings Limited (renamed CableTel West Glamorgan Limited) for West
Glamorgan, Wales (Incorporated by reference to the Company's Form 8-K,
filed with the Commission on March 19, 1996)
67
99.37 License, dated December 20, 1990, issued to Kirklees Cable (renamed
CableTel Kirklees) for the Huddersfield and Dewsbury cable franchise,
England (Incorporated by reference to the Company's Form 8-K, filed
with the Commission on March 19, 1996)
99.38 License, dated October 13, 1993, issued to Insight Communications
Guildford Limited (renamed CableTel Surrey and Hampshire Limited) for
the West Surrey/East Hampshire (Guildford) Cable Franchise, England
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.39 License, dated January 20, 1995, issued to CableTel Bedfordshire Ltd.
for the area of South Bedfordshire, England (Incorporated by reference
to the Company's Form 8-K, filed with the Commission on March 19,
1996)
99.40 License, dated January 20, 1995, issued to CableTel North
Bedfordshire Ltd. for the area of Bedford, England (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.41 License, dated January 20, 1992, issued to Cable and Satellite
Television Holdings Limited (renamed CableTel West Glamorgan Limited)
for the area of Swansea, Neath and Port Talbot, Wales (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.42 License, dated January 20, 1995, issued to Cabletel Hertfordshire
Ltd. for the area of Hertford, Cheshunt and Ware (Lea Valley), England
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.43 License, dated January 20, 1995, issued to Cabletel Central
Hertfordshire Ltd. for the area of Central Hertfordshire, England
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.44 License, dated July 21, 1995, issued to CableTel Kirklees
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.45 License, dated June 8, 1995, issued to CableTel Bedfordshire Ltd.
(Incorporated by reference to the Company's Form 8-K, filed with the
Commission on March 19, 1996)
99.46 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Neyland, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
68
99.47 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Cwmgors, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.48 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Ammanford, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.49 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Carmarthen, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.50 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Haverfordwest, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.51 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Pembroke Dock, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.52 License, dated October 27, 1995, issued to Metro South Wales Limited
for the area of Milford Haven, Wales (Incorporated by reference to the
Company's Form 8-K, filed with the Commission on March 19, 1996)
99.53 License, dated October 27, 1995, issued to CableTel South Wales
Limited for the area of Glamorgan and Gwent, Wales (Incorporated by
reference to the Company's Form 8-K, filed with the Commission on
March 19, 1996)
99.54 License, dated January 26, 1996, issued to Cabletel South Wales
Limited, for part of the Glamorgan area (Incorporated by reference to
the Company's Form 8-K, filed with the Commission on March 19, 1996)
99.55 License, dated November 3, 1997, issued to NTL (UK) Group, Inc. for
the Provision of Radio Fixed Access Operator Services.
99.56 Agreement and Plan of Amalgamation; Undertaking of Comcast
Corporation; Undertaking of Warburg, Pincus Investors, L.P.
(Incorporated by reference to the Company's Form 8-K dated February 5,
1998)
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 26, 1998
NTL INCORPORATED
By: /s/ J. Barclay Knapp
--------------------------------------
J. Barclay Knapp
President, Chief Executive Officer
and Chief Financial Officer
(Principal Executive and Principal
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ J. Barclay Knapp President, Chief Executive )
- ------------------------- Officer and Chief Financial )
J. Barclay Knapp Officer (Principal Executive and )
Principal Financial Officer) )
)
)
)
/s/ George S. Blumenthal Chairman of the Board and )
- ------------------------- Treasurer ) March 26, 1998
George S. Blumenthal )
)
)
/s/ Gregg Gorelick Vice President-Controller )
- ------------------------- (Principal Accounting Officer) )
Gregg Gorelick )
)
)
/s/ Sidney R. Knafel Director )
- ------------------------- )
Sidney R. Knafel )
70
)
)
/s/ Ted H. McCourtney Director )
- ------------------------- )
Ted H. McCourtney )
)
)
)
/s/ Del Mintz Director )
- ------------------------- )
Del Mintz )
)
)
)
/s/ Alan J. Patricof Director ) March 26, 1998
- ------------------------- )
Alan J. Patricof )
)
)
)
/s/ Warren Potash Director )
- ------------------------- )
Warren Potash )
)
)
)
/s/ Michael S. Willner Director )
- ------------------------- )
Michael S. Willner )
71
Form 10-K - Item 14(a)(1) and (2)
NTL Incorporated and Subsidiaries
Index of Consolidated Financial Statements
and Financial Statement Schedules
The following consolidated financial statements of NTL Incorporated and
Subsidiaries are included in Item 8:
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets - December 31, 1997 and 1996................. F-3
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statement of Shareholders' Equity (Deficiency) -
Years ended December 31, 1997, 1996 and 1995.......................... F-6
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995...................................... F-7
Notes to Consolidated Financial Statements............................... F-9
The following consolidated financial statement schedules of NTL Incorporated and
Subsidiaries are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant .............. F-35
Schedule II - Valuation and Qualifying Accounts.......................... F-41
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore have been omitted.
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
NTL Incorporated
We have audited the consolidated balance sheets of NTL Incorporated and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NTL
Incorporated and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 20, 1998
F-2
NTL Incorporated and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1997 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 98,902,000 $ 445,884,000
Marketable securities 4,998,000 -
Accounts receivable - trade, less allowance for
doubtful accounts of $8,056,000 (1997) and
$3,870,000 (1996) 66,022,000 28,340,000
Other 67,232,000 66,817,000
-------------- --------------
Total current assets 237,154,000 541,041,000
Fixed assets, net 1,756,985,000 1,459,528,000
Intangible assets, net 364,479,000 392,933,000
Other assets, net of accumulated amortization
of $25,889,000 (1997) and $21,789,000 (1996) 63,021,000 61,109,000
============== ==============
Total assets $2,421,639,000 $2,454,611,000
============== ==============
F-3
NTL Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
DECEMBER 31
1997 1996
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 45,475,000 $ 57,960,000
Accrued expenses and other 181,605,000 101,228,000
Accrued construction costs 26,930,000 62,723,000
Deferred revenue 35,060,000 16,491,000
Deferred purchase price - 60,537,000
-------------- --------------
Total current liabilities 289,070,000 298,939,000
Long-term debt 2,015,057,000 1,732,168,000
Other 428,000 459,000
Commitments and contingent liabilities
Deferred income taxes 70,218,000 94,931,000
Senior redeemable exchangeable preferred stock,
$.01 par value, plus accreted dividends;
liquidation preference $107,000,000; less
unamortized discount of $3,444,000 (1997);
issued and outstanding 110,000 shares (1997)
and none (1996) 108,534,000 -
Shareholders' equity (deficiency):
Series preferred stock - $.01 par value;
authorized 2,500,000 shares; liquidation
preference $78,000,000; issued and
outstanding 780 shares (1997 and 1996) - -
Common stock - $.01 par value; authorized
100,000,000 shares; issued and outstanding
32,210,000 (1997) and 32,066,000 (1996) shares 322,000 321,000
Additional paid-in capital 538,054,000 548,647,000
Cumulative translation adjustment 117,008,000 163,141,000
(Deficit) (717,052,000) (383,995,000)
-------------- --------------
(61,668,000) 328,114,000
-------------- --------------
Total liabilities and shareholders' equity (deficiency) $2,421,639,000 $2,454,611,000
============== ==============
See accompanying notes.
F-4
NTL Incorporated and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------- -------------- --------------
REVENUES
Local telecommunications and television $ 189,407,000 $ 89,209,000 $ 24,804,000
National and international telecommunications 162,738,000 45,430,000 -
Broadcast transmission and other 130,799,000 83,618,000 -
Other telecommunications 8,831,000 10,086,000 8,937,000
-------------- -------------- --------------
491,775,000 228,343,000 33,741,000
COSTS AND EXPENSES
Operating expenses 301,644,000 144,315,000 24,415,000
Selling, general and administrative expenses 169,133,000 114,992,000 57,932,000
Franchise fees 23,587,000 13,117,000 -
Corporate expenses 18,324,000 14,899,000 14,697,000
Nonrecurring charges 20,642,000 - -
Depreciation and amortization 150,509,000 98,653,000 29,823,000
-------------- -------------- --------------
683,839,000 385,976,000 126,867,000
-------------- -------------- --------------
Operating (loss) (192,064,000) (157,633,000) (93,126,000)
OTHER INCOME (EXPENSE)
Interest and other income 28,415,000 33,634,000 21,185,000
Interest expense (202,570,000) (137,032,000) (28,379,000)
Other gains 21,497,000 - -
Foreign currency transaction gains 574,000 2,408,000 84,000
-------------- -------------- --------------
(Loss) before income taxes, minority interests
and extraordinary item (344,148,000) (258,623,000) (100,236,000)
Income tax benefit (provision) 15,591,000 (7,653,000) 2,477,000
-------------- -------------- --------------
(Loss) before minority interests and
extraordinary item (328,557,000) (266,276,000) (97,759,000)
Minority interests - 11,822,000 6,974,000
-------------- -------------- --------------
(Loss) before extraordinary item (328,557,000) (254,454,000) (90,785,000)
Loss from early extinguishment of debt (4,500,000) - -
-------------- -------------- --------------
Net (loss) $ (333,057,000) $ (254,454,000) $ (90,785,000)
============== ============== ==============
Basic and diluted net (loss) per common share:
(Loss) before extraordinary item $(10.60) $(8.20) $(3.01)
Extraordinary item (.14) - -
-------------- -------------- --------------
Net (loss) per common share $(10.74) $(8.20) $(3.01)
============== ============== ==============
See accompanying notes.
F-5
NTL Incorporated and Subsidiaries
Consolidated Statement of Shareholders' Equity (Deficiency)
SERIES COMMON STOCK -
PREFERRED STOCK $.01 PAR VALUE ADDITIONAL CUMULATIVE
------------------ ---------------------- PAID-IN TRANSLATION
SHARES PAR SHARES PAR CAPITAL ADJUSTMENT (DEFICIT)
-------------------------------------------------------------------------------------------
Balance, December 31, 1994 22,635,000 $ 226,000 $ 462,197,000 $ 12,867,000 $ (38,756,000)
Exercise of stock options 20,000 1,000 101,000
Stock split 7,547,000 75,000 (75,000)
Net loss for the year ended
December 31, 1995 (90,785,000)
Currency translation adjustment (6,594,000)
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 30,202,000 302,000 462,223,000 6,273,000 (129,541,000)
Exercise of stock options 396,000 4,000 1,362,000
Exercise of warrants 53,000 1,000 298,000
Issuance of warrants in connection
with consent solicitations 1,641,000
Shares issued for acquisitions 780 $ - 1,415,000 14,000 83,123,000
Net loss for the year ended
December 31, 1996 (254,454,000)
Currency translation adjustment 156,868,000
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 780 - 32,066,000 321,000 548,647,000 163,141,000 (383,995,000)
Exercise of stock options 119,000 1,000 1,532,000
Exercise of warrants 25,000 138,000
Accreted dividends on senior
redeemable exchangeable
preferred stock (11,978,000)
Accretion of discount on senior
redeemable exchangeable
preferred stock (285,000)
Net loss for the year ended
December 31, 1997 (333,057,000)
Currency translation adjustment (46,133,000)
===========================================================================================
Balance, December 31, 1997 780 $ - 32,210,000 $ 322,000 $538,054,000 $117,008,000 $(717,052,000)
===========================================================================================
See accompanying notes.
F-6
NTL Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (333,057,000) $ (254,454,000) $ (90,785,000)
Adjustment to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 150,509,000 98,653,000 29,823,000
Loss from early extinguishment of debt 4,500,000 - -
Amortization of non competition agreements 1,852,000 2,906,000 3,256,000
Provision for losses on accounts receivable 6,891,000 2,597,000 709,000
Minority interests - (11,822,000) (6,974,000)
Deferred income taxes (16,852,000) 5,063,000 -
Amortization of original issue discount 122,639,000 104,264,000 29,379,000
Other (8,148,000) 8,578,000 6,229,000
Changes in operating assets and liabilities, net
of effect from business acquisitions:
Accounts receivable (30,430,000) 10,050,000 (6,496,000)
Other current assets (6,563,000) (20,316,000) (6,749,000)
Other assets 2,303,000 (24,000) (123,000)
Accounts payable (4,615,000) (2,869,000) 20,583,000
Accrued expenses and other 74,706,000 35,691,000 9,926,000
Deferred revenue 18,994,000 278,000 1,075,000
----------------------------------------------------------
Net cash (used in) operating activities (17,271,000) (21,405,000) (10,147,000)
INVESTING ACTIVITIES
Purchase of fixed assets (503,656,000) (505,664,000) (445,550,000)
Payment of deferred purchase price (57,330,000) - -
Increase in other assets (4,322,000) (6,013,000) (3,361,000)
Acquisitions of subsidiaries and minority
interests, net of cash acquired - (332,693,000) (12,412,000)
Purchase of marketable securities (145,939,000) - -
Proceeds from sales of marketable securities 142,596,000 - -
----------------------------------------------------------
Net cash (used in) investing activities (568,651,000) (844,370,000) (461,323,000)
F-7
NTL Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings and sale of preferred
stock, net of financing costs $ 490,302,000 $1,146,190,000 $ 326,166,000
Principal payments (242,424,000) (95,283,000) (9,963,000)
Cash released from escrow - 1,600,000 2,810,000
Capital contribution from minority partner - - 12,626,000
Proceeds from borrowings from minority partner - 31,232,000 19,065,000
Proceeds from exercise of stock options and warrants 1,671,000 1,665,000 102,000
----------------------------------------------------------
Net cash provided by financing activities 249,549,000 1,085,404,000 350,806,000
Effect of exchange rate changes on cash (10,609,000) 50,972,000 1,345,000
----------------------------------------------------------
Increase (decrease) in cash and cash equivalents (346,982,000) 270,601,000 (119,319,000)
Cash and cash equivalents at beginning of year 445,884,000 175,283,000 294,602,000
----------------------------------------------------------
Cash and cash equivalents at end of year $ 98,902,000 $ 445,884,000 $ 175,283,000
==========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest exclusive
of amounts capitalized $ 72,047,000 $ 27,595,000 $ 1,735,000
Income taxes paid 1,107,000 367,000 1,695,000
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accretion of dividends and discount on senior redeemable
exchangeable preferred stock $ 12,263,000 $ - $ -
Warrants issued in connection with consent solicitations - 1,641,000 -
Common stock issued for acquisition - 34,137,000 -
Preferred stock issued for acquisition of minority interest,
including notes payable to minority partner - 49,000,000 -
Liabilities incurred in connection with acquisitions - 81,906,000 -
See accompanying notes.
F-8
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION
NTL Incorporated (the "Company"), through its subsidiaries and joint ventures,
owns and operates television and radio broadcasting, cable television, telephone
and telecommunications systems in the United Kingdom and provides long-distance
telephone service in the United States. Based on revenues and identifiable
assets, the Company's predominant lines of business are television and radio
broadcasting, cable television, telephone and telecommunications services in the
United Kingdom.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and entities where the Company's interest is greater
than 50%. Significant intercompany accounts and transactions have been
eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the current exchange rates at
the respective balance sheet dates. Statement of operations amounts have been
translated using the average exchange rates for the respective years. The gains
or losses resulting from the change in exchange rates have been reported
separately as a component of shareholders' equity (deficiency).
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $55,894,000 and
$339,249,000 at December 31, 1997 and 1996, respectively, which consisted
primarily of repurchase agreements and corporate commercial paper. At December
31, 1997 and 1996, none and $238,862,000, respectively, of such cash equivalents
were denominated in British pounds sterling.
F-9
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are carried at
fair value. Unrealized holding gains and losses on securities, net of tax, are
carried as a separate component of shareholders' equity (deficiency). The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 1997 consist of federal agency notes.
During the year ended December 31, 1997, there were no realized gains or losses
on sales of securities. All of the marketable securities as of December 31, 1997
had a contractual maturity of less than one year.
FIXED ASSETS
Fixed assets are stated at cost, which includes amounts capitalized for labor
and overhead expended in connection with the design and installation of
operating equipment. Depreciation is computed by the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are as follows:
operating equipment - 5 to 40 years and other equipment - 3 to 22.5 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and the carrying value of the asset.
INTANGIBLE ASSETS
Intangible assets include goodwill and license acquisition costs. Goodwill is
the excess of the purchase price over the fair value of net assets acquired in
business combinations accounted for as purchases. Goodwill is amortized on a
straight-line basis over the periods benefited, principally 30 years. License
acquisition costs represent the portion of purchase price allocated to the cable
television and telecommunications licenses acquired in business combinations.
License acquisition costs are amortized on a straight-line basis over the
remaining life of the license as follows: cable television license - 7 to 12
years and telecommunications license - 23 years. The Company continually reviews
the recoverability of the carrying value of these assets using the same
methodology that it uses for the evaluation of its other long-lived assets.
F-10
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets consist primarily of noncompetition agreements obtained in exchange
for the issuance of warrants to purchase an aggregate of 899,000 shares of
common stock and deferred financing costs. The noncompetition agreements were
valued at the difference between the fair market value of the common stock on
the date of grant and the exercise price of the warrants. The noncompetition
agreements are being expensed on a straight-line basis over the noncompetition
period of primarily five years. Deferred financing costs were incurred in
connection with the issuance of debt and are amortized over the term of the
related debt.
CAPITALIZED INTEREST
Interest is capitalized as a component of the cost of fixed assets constructed.
In 1997, 1996 and 1995, interest of $6,770,000, $10,294,000 and $12,183,000,
respectively, was capitalized.
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the customer.
CABLE TELEVISION SYSTEM COSTS, EXPENSES AND REVENUES
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable television, telephone and
telecommunications systems in accordance with SFAS No. 51, "Financial Reporting
by Cable Television Companies."
ADVERTISING EXPENSE
The Company expenses the cost of advertising as incurred. Advertising costs were
$31,003,000, $22,727,000 and $10,370,000 in 1997, 1996 and 1995, respectively.
NET (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share". SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. The Company adopted SFAS No. 128 for each of the three years
in the period ended December 31, 1997.
F-11
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 in the first interim
period for its fiscal year ending December 31, 1998.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company will adopt SFAS No. 131 for its fiscal year ending December
31, 1998.
4. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
NEED FOR ADDITIONAL FINANCING
The Company will require additional financing in the future. There can be no
assurance that the required financing will be obtainable on acceptable terms.
F-12
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (CONTINUED)
REQUIREMENTS TO MEET BUILD MILESTONES
The telecommunications license for each United Kingdom franchise contains
specific construction milestones. Based on current network construction
scheduling, the Company believes it will be able to satisfy its milestones in
the future, but there can be no assurance that such milestones will be met. If
the Company is unable to meet the construction milestones required by any of its
licenses and is unable to obtain modifications to the milestones, the relevant
licenses could be revoked.
CONCENTRATIONS
The Company's television and radio broadcasting business is substantially
dependent upon contracts with a small group of companies for the right to
broadcast their programming, and upon a site sharing agreement for a large
number of its transmission sites. The loss of any one of these contracts or the
site sharing agreement could have a material adverse effect on the business of
the Company.
LIMITED ACCESS TO PROGRAMMING
The Company's ability to make a competitive offering of cable television
services is dependent on the Company's ability to obtain access to programming
at a reasonable cost. There can be no assurance that the Company's current
programming will continue to be available on acceptable commercial terms or at
all.
CURRENCY RISK
To the extent that the Company obtains financing in United States dollars and
incurs construction and operating costs in British pounds sterling, it will
encounter currency exchange rate risks. In addition, the Company's revenues are
generated primarily in British pounds sterling while its interest and principal
obligations with respect to most of the Company's existing indebtedness are
payable in United States dollars. The Company has entered into an option
agreement to hedge some of the risk of exchange rate fluctuations related to
interest payments on United States dollar denominated debt.
F-13
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. FIXED ASSETS
Fixed assets consists of:
DECEMBER 31
1997 1996
------------------------------------------
Operating equipment $1,612,440,000 $1,080,135,000
Other equipment 225,514,000 197,368,000
Construction-in-progress 134,795,000 305,372,000
------------------------------------------
1,972,749,000 1,582,875,000
Accumulated depreciation (215,764,000) (123,347,000)
------------------------------------------
$1,756,985,000 $1,459,528,000
==========================================
6. INTANGIBLE ASSETS
Intangible assets consists of:
DECEMBER 31
1997 1996
------------------------------------------
License acquisition costs, net
of accumulated amortization
of $46,620,000 (1997) and
$34,894,000 (1996) $123,116,000 $134,909,000
Goodwill, net of accumulated
amortization of $13,449,000
(1997) and $5,986,000 (1996) 241,363,000 258,024,000
------------------------------------------
$364,479,000 $392,933,000
==========================================
In October 1996, the Company acquired the remaining 40% interest it did not
already own in CableTel Newport in exchange for 780 shares of the Company's
Series A Preferred Stock. CableTel Newport owns and operates cable television,
telephone and telecommunications franchises in South Wales. The Series A
Preferred Stock was valued at $49,000,000, based on an appraisal as of the date
of issuance. The fair value of the net tangible assets acquired of $67,710,000
exceeded the aggregate purchase price of $49,062,000 (including costs incurred
of $62,000) by $18,648,000, which is classified as a reduction to license
acquisition costs.
In September 1996, the Company acquired the remaining 30% minority interest of
English Cable Enterprises, Inc. ("ECE") that the Company did not own, in
exchange for 1,415,000 shares of its common stock. ECE, through its
subsidiaries, owns four cable television, telephone and telecommunications
licenses in the northern suburbs of London. The value of the shares, based on
the market price on the date of issuance, of $34,137,000 plus costs incurred of
$204,000 exceeded the fair value of the net tangible assets acquired by
$28,649,000, which is classified as license acquisition costs.
F-14
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INTANGIBLE ASSETS (CONTINUED)
In May 1996, an indirect wholly-owned subsidiary of the Company, NTL Investment
Holdings Limited ("NTLIH"), acquired NTL Group Limited for payments of
approximately 204,000,000 pounds sterling at closing, 17,100,000 pounds sterling
in October 1996 and 35,000,000 pounds sterling in May 1997. NTL Group Limited
provides television and radio transmission services and a range of other
services in the broadcasting and telecommunications industries. This acquisition
has been accounted for as a purchase, and, accordingly, the net assets and
results of operations of NTL Group Limited have been included in the
consolidated financial statements from the date of acquisition. The aggregate
purchase price of 256,100,000 pounds sterling ($439,000,000) plus costs incurred
of $3,700,000 exceeded the fair value of the net tangible assets acquired by
$263,000,000, which is classified as goodwill.
The pro forma unaudited consolidated results of operations for the year ended
December 31, 1996 assuming consummation of the above mentioned transactions as
of January 1, 1996 is as follows:
Total revenue $289,638,000
Net loss (265,180,000)
Basic and diluted net loss per share (8.31)
In October 1995, CableTel South Wales Limited, a wholly-owned subsidiary of
CableTel Newport, acquired the cable television business of Metro Cable TV
Limited in South Wales ("Metro Wales"), and CableTel Central Hertfordshire
Limited, a wholly-owned subsidiary of ECE, acquired the cable television
business of Metro Cable TV Limited in Hertfordshire ("Metro Herts"), for an
aggregate consideration of $12,125,000. These acquisitions have been accounted
for as purchases, and, accordingly, the net assets and results of operations of
Metro Wales and Metro Herts have been included in the consolidated financial
statements from the date of acquisition. The aggregate purchase price exceeded
the fair value of the net tangible assets acquired by $10,167,000, which is
classified as license acquisition costs. In 1996, the Metro Wales license
acquisition costs were reduced by $565,000.
F-15
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31
1997 1996
---------------------------------------------------
10-7/8% Senior Deferred Coupon Notes
("10-7/8% Notes") (a) $ 194,959,000 $ 175,368,000
12-3/4% Series A Senior Deferred Coupon Notes
("12-3/4% Notes") (b) 209,387,000 185,043,000
11-1/2% Series B Senior Deferred Coupon Notes
("11-1/2% Notes") (c) 743,961,000 665,257,000
10% Series B Senior Notes ("10% Notes") (d) 400,000,000 -
7-1/4% Convertible Subordinated Notes
("7-1/4 Convertible Notes") (e) 191,750,000 191,750,000
7% Convertible Subordinated Notes
("7% Convertible Notes") (f) 275,000,000 275,000,000
Term Loan and Revolving Facility (g) - 239,750,000
---------------------------------------------------
$2,015,057,000 $1,732,168,000
========================== ========================
(a) In October 1993, the Company issued $212,000,000 aggregate principal amount
of 10-7/8% Senior Deferred Coupon Notes due 2003. The 10-7/8% Notes were
issued at a price to the public of 58.873% or $124,811,000. The Company
incurred $5,019,000 in fees and expenses which is included in deferred
financing costs. The original issue discount on the 10-7/8% Notes accretes
at a rate of 10-7/8%, compounded semiannually, to an aggregate principal
amount of $212,000,000 by October 15, 1998. Interest will thereafter accrue
at 10-7/8% per annum, payable semiannually beginning on April 15, 1999.
During 1997, 1996 and 1995, the Company recognized $19,591,000, $17,620,000
and $15,851,000, respectively, of the original issue discount as interest
expense.
The 10-7/8% Notes are effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of the Company's
subsidiaries. The 10-7/8% Notes may be redeemed at the Company's option, in
whole or in part, at any time on or after October 15, 1998 at 103.107% the
first year, 101.554% the second year and 100% thereafter, plus accrued and
unpaid interest to the date of redemption. The indenture governing the
10-7/8% Notes contains restrictions relating to, among other things: (i)
incurrence of additional indebtedness and issuance of preferred stock; (ii)
dividend and other payment restrictions; and (iii) mergers, consolidations
and sales of assets.
F-16
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
(b) In April 1995, the Company issued $277,803,500 aggregate principal amount
of 12-3/4% Senior Deferred Coupon Notes due 2005. The 12-3/4% Notes were
issued at a price to the public of 53.995% or $150,000,000. The Company
incurred $6,192,000 in fees and expenses in connection with the issuance of
12-3/4% Notes which is included in deferred financing costs. The original
issue discount accretes at a rate of 12-3/4%, compounded semiannually, to
an aggregate principal amount of $277,803,500 by April 15, 2000. Interest
will thereafter accrue at 12-3/4% per annum, payable semiannually beginning
on October 15, 2000. During 1997, 1996 and 1995, the Company recognized
$24,344,000, $21,515,000 and $13,528,000, respectively, of original issue
discount as interest expense.
The 12-3/4% Notes are effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of the Company's
subsidiaries, rank pari passu in right of payment with all senior unsecured
indebtedness and rank senior in right of payment to all subordinated
indebtedness of the Company. The 12-3/4% Notes may be redeemed at the
Company's option, in whole or in part, at any time on or after April 15,
2000 at 103.64% the first year, 101.82% the second year and 100%
thereafter, plus accrued and unpaid interest to the date of redemption. The
indenture governing the 12-3/4% Notes contains restrictions relating to,
among other things: (i) incurrence of additional indebtedness and issuance
of preferred stock, (ii) dividend and other payment restrictions and (iii)
mergers, consolidations and sales of assets.
(c) In January 1996, the Company issued $1,050,000,000 aggregate principal
amount of 11-1/2% Series B Senior Deferred Coupon Notes due 2006. The
11-1/2% Notes were issued at a price to investors of 57.155% of the
aggregate principal amount at maturity or $600,127,500. The Company
incurred $19,273,000 in fees and expenses in connection with the issuance
of the 11-1/2% Notes which is included in deferred financing costs. The
original issue discount accretes at a rate of 11-1/2%, compounded
semiannually, to an aggregate principal amount of $1,050,000,000 by
February 1, 2001. Interest will thereafter accrue at 11-1/2% per annum,
payable semiannually beginning on August 1, 2001. During 1997 and 1996, the
Company recognized $78,704,000 and $65,129,000 of original issue discount
as interest expense.
The 11-1/2% Notes are effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of the Company's
subsidiaries, rank pari passu in right of payment with all senior unsecured
indebtedness and rank senior in right of payment to all subordinated
indebtedness of the Company. The 11-1/2% Notes may be redeemed at the
Company's option, in whole or in part, at any time on or after February 1,
2001 at 105.75% the first year, 102.875% the second year and 100%
thereafter, plus accrued and unpaid interest to the date of redemption. The
indenture governing the 11-1/2% Notes contains restrictions relating to,
among other things: (i) incurrence of additional indebtedness and issuance
of preferred stock; (ii) dividend and other payment restrictions and (iii)
mergers, consolidations and sales of assets.
F-17
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
(d) In February 1997, the Company issued $400,000,000 aggregate principal
amount of 10% Senior Notes due 2007. The Company received net proceeds of
$389,000,000 after discounts and commissions from the issuance of the 10%
Notes. Discounts, commissions and other fees incurred of $11,885,000 are
included in deferred financing costs. The 10% Notes accrue interest at 10%
per annum, payable semiannually as of August 15, 1997.
The 10% Notes are effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of the Company's
subsidiaries. The 10% Notes may be redeemed at the Company's option, in
whole or in part, at any time on or after February 15, 2002 at a redemption
price of 105% that declines annually to 100% in 2005, in each case together
with accrued and unpaid interest to the date of redemption. The indenture
governing the 10% Notes contains restrictions relating to, among other
things: (i) incurrence of additional indebtedness and the issuance of
preferred stock, (ii) dividend and other payment restrictions and (iii)
mergers, consolidations and sales of assets.
(e) In April and May 1995, the Company issued $191,750,000 principal amount of
7-1/4% Convertible Subordinated Notes due 2005. Interest payments began on
October 15, 1995 and interest is payable every six months thereafter. The
7-1/4% Convertible Notes will mature on April 15, 2005. The 7-1/4%
Convertible Notes are unsecured obligations convertible into shares of
common stock prior to maturity at a conversion price of $27.56 per share,
subject to adjustment. There are approximately 6,958,000 shares of common
stock reserved for issuance upon the conversion of the 7-1/4% Convertible
Notes. The 7-1/4% Convertible Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after April 15, 1998, at a
redemption price of 105.08% that declines annually to 100.73% in 2004, in
each case together with accrued interest to the redemption date. The
Company incurred $6,822,000 in fees and expenses in connection with the
issuance of the 7-1/4% Convertible Notes, which is included in deferred
financing costs.
In March 1998, the Company announced that it was calling for redemption all
of the 7-1/4% Convertible Notes. The redemption date is April 20, 1998 and
the redemption price is 105.08% of the principal amount, plus accrued and
unpaid interest through the date of redemption.
(f) In June 1996, the Company issued $275,000,000 aggregate principal amount of
7% Convertible Subordinated Notes due 2008. Interest payments began on
December 15, 1996 and interest is payable every six months thereafter. The
7% Convertible Notes mature on June 15, 2008. The 7% Convertible Notes are
unsecured obligations convertible into shares of common stock prior to
maturity at a conversion price of $37.875 per share, subject to adjustment.
There are approximately 7,261,000 shares of common stock reserved for
issuance upon conversion of the 7% Convertible Notes. The 7% Convertible
Notes are redeemable, in whole or in part, at the option of the Company at
any time on or after June 15, 1999, at a redemption price of 104.9% that
declines annually to 100% in 2006, in
F-18
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
each case together with accrued and unpaid interest to the redemption date.
The Company incurred $8,616,000 in fees and expenses in connection with the
issuance of the 7% Convertible Notes, which is included in deferred
financing costs.
(g) To finance a substantial portion of the purchase price for NTL Group
Limited, NTLIH obtained from a syndicate of lenders senior secured loan
facilities (the "NTLIH Facility") of a maximum principal amount of
165,000,000 pounds sterling comprised of: (i) a long-term loan facility of
140,000,000 pounds sterling and (ii) a revolving credit facility of
25,000,000 pounds sterling. One of the Lenders also made available to NTLIH
a secured loan facility of 60,000,000 pounds sterling (the "Bridge
Facility") to finance the remainder of the payment due at closing and
acquisition costs and expenses due at closing. Loans under the NTLIH
Facility incurred interest at an annual rate equal to LIBOR plus a margin
that varied from 0.75% per annum to 1.75% per annum, based on certain
financial ratios of NTLIH and certain of its subsidiaries. Interest was
payable either monthly, quarterly or semiannually, at the option of NTLIH.
The effective interest rate on the NTLIH Facility at December 31, 1996 was
7.972%. The Bridge Facility was repaid in full in August 1996. In October
1997, the principal and accrued interest outstanding under the NTLIH
Facility of 140,138,000 pounds sterling ($231,466,000) was repaid using
cash on hand.
In 1997, NTL (UK) Group, Inc., a wholly-owned subsidiary of the Company, which
is the holding company for the United Kingdom operations and the parent company
of NTLIH, and NTLIH entered into an agreement with The Chase Manhattan Bank
pursuant to which Chase has agreed to fully underwrite a 555,000,000 pounds
sterling, eight-year term loan facility with an initial four-year revolving
period. By April 14, 1999, Chase's commitment will be reduced to no less than
480,000,000 pounds sterling or such greater amount as is necessary to ensure
that the Company's United Kingdom operations remain fully funded by reference to
an agreed business plan. The facility will be used to finance capital
expenditures and working capital for the Company's United Kingdom operations,
including its local broadband, national telecommunications and national digital
television networks. A portion of the facility (75,000,000 pounds sterling) is
conditional upon the execution of contracts to provide digital television
transmission services to certain third parties. Chase has provided a portion of
the 555,000,000 pounds sterling facility in the form of a 350,000,000 pounds
sterling facility to the Company on the same terms as to restrictions,
covenants, guarantees and security as the 555,000,000 pounds sterling facility.
As of March 20, 1998, 10,000,000 pounds sterling ($16,517,000) is outstanding
under the 350,000,000 pounds sterling facility. The principal amount outstanding
under the 350,000,000 pounds sterling facility is required to be repaid on
December 31, 2005. Interest is payable either monthly, quarterly or
semi-annually, at the option of NTLIH, at LIBOR plus, at a maximum, 2.25% per
annum. The commitment fee is .375% per annum on the unutilized portion of the
350,000,000 pounds sterling facility and is payable quarterly in arrears. The
facility is secured by first fixed and floating charges over all present and
future assets and undertakings of the United Kingdom group. The facility
F-19
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
contains customary financial covenants, and certain restrictions relating to,
among other things: (i) incurrence of additional indebtedness or guarantees,
(ii) investments, acquisitions and mergers and (iii) dividend and other payment
restrictions. In the absence of a default, the facility generally permits
payments to the Company to pay interest and principal of existing indebtedness
of the Company. At December 31, 1997, restricted net assets were approximately
$1,861,000,000.
In March 1998, the Company issued 125,000,000 pounds sterling aggregate
principal amount of 9-1/2% Senior Notes due 2008 (the "Sterling Senior Notes"),
300,000,000 pounds sterling aggregate principal amount of 10-3/4% Senior
Deferred Coupon Notes due 2008 (the "Sterling Deferred Coupon Notes") and
$1,300,000,000 aggregate principal amount of 9-3/4% Senior Deferred Coupon Notes
due 2008 (the "Dollar Deferred Coupon Notes") (together the "New Notes"). The
Sterling Senior Notes, Sterling Deferred Coupon Notes and the Dollar Deferred
Coupon Notes were issued at a price to the public of 99.67% or 124,588,000
pounds sterling, 58.62% or 175,860,000 pounds sterling and 61.724% or
$802,412,000, respectively. The Company received net proceeds of 121,161,000
pounds sterling, 170,584,000 pounds sterling and $778,340,000, after discounts
and commissions, from the issuance of the Sterling Senior Notes, the Sterling
Deferred Coupon Notes and the Dollar Deferred Coupon Notes, respectively.
The original issue discount of the Sterling Deferred Coupon Notes accretes at a
rate of 10-3/4%, compounded semiannually, to an aggregate principal amount of
300,000,000 pounds sterling by April 1, 2003. The original issue discount of the
Dollar Deferred Coupon Notes accretes at a rate of 9-3/4%, compounded
semiannually, to an aggregate principal amount of $1,300,000,000 by April 1,
2003. Interest on each of the Sterling Deferred Coupon Notes and the Dollar
Deferred Coupon Notes will thereafter accrue at 10-3/4% per annum and 9-3/4% per
annum, respectively, payable semiannually, beginning on October 1, 2003. The
Sterling Senior Notes accrue interest at 9-1/2% per annum, payable semiannually,
beginning on October 1, 1998.
The New Notes are effectively subordinated to all existing and future
indebtedness and other liabilities and commitments of the Company's
subsidiaries, rank pari passu in right of payment with each other and with all
senior unsecured indebtedness of the Company and rank senior in right of payment
to all subordinated indebtedness of the Company.
The New Notes may be redeemed at the Company's option, in whole or in part, at
any time on or after April 1, 2003, at a redemption price of 104-3/4% to
105-3/8% that declines annually to 100% in 2006, in each case together with
accrued and unpaid interest to the date of redemption.
The indentures governing the New Notes contain restrictions relating to, among
other things: (i) incurrence of additional indebtedness and the issuance of
preferred stock, (ii) dividend and other payment restrictions and (iii) mergers,
consolidations and sales of assets.
F-20
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REDEEMABLE PREFERRED STOCK
In February 1997, the Company issued $100,000,000 of its 13% Senior Redeemable
Exchangeable Preferred Stock (the "Redeemable Preferred Stock"). The Company
received net proceeds of $96,625,000 after discounts and commissions from the
issuance of the Redeemable Preferred Stock. Discounts, commissions and other
fees incurred of $3,729,000 were recorded as unamortized discount at issuance.
Of the 2,500,000 authorized shares of Series Preferred Stock, 100,000 shares of
Redeemable Preferred Stock were issued. Dividends accrue at 13% per annum ($130
per share) and are payable quarterly in arrears as of May 15, 1997. Dividends,
whether or not earned or declared, will accrue without interest until declared
and paid, which declaration may be for all or part of the accrued dividends.
Dividends accruing on or prior to February 15, 2004 may, at the option of the
Company, be paid in cash, by the issuance of additional Redeemable Preferred
Stock or in any combination of the foregoing. As of December 31, 1997, the
Company has accrued $11,978,000 for dividends and has issued approximately
10,000 shares for $10,187,000 of such accrued dividends. The Redeemable
Preferred Stock may be redeemed, at the Company's option, in whole or in part,
at any time on or after February 15, 2002 at a redemption price of 106.5% of the
liquidation preference of $1,000 per share that declines annually to 100% in
2005, in each case together with accrued and unpaid dividends to the redemption
date. The Redeemable Preferred Stock is subject to mandatory redemption on
February 15, 2009. On any scheduled dividend payment date, the Company may, at
its option, exchange all of the shares of Redeemable Preferred Stock then
outstanding for the Company's 13% Subordinated Exchange Debentures due 2009 (the
"Subordinated Debentures").
The Subordinated Debentures, if issued, will bear interest at a rate of 13% per
annum, payable semiannually in arrears on February 15 and August 15 of each year
commencing with the first such date to occur after the date of exchange.
Interest accruing on or prior to February 15, 2004 may, at the option of the
Company, be paid in cash, by the issuance of additional Subordinated Debentures
or in any combination of the foregoing. The Subordinated Debentures will be
redeemable, at the Company's option, in whole or in part, on or after February
15, 2002 at a redemption price of 106.5% that declines annually to 100% in 2005,
in each case together with accrued and unpaid interest to the redemption date.
9. NONRECURRING CHARGES INCLUDING RESTRUCTURING CHARGES
Nonrecurring charges of $20,642,000 in 1997 include deferred costs written-off
of $5,013,000 and restructuring costs of $15,629,000. The deferred costs
written-off relate to the Company's unsuccessful bid for United Kingdom digital
terrestrial television multiplex licenses. Restructuring costs relate to the
Company's announcement in September 1997 of a reorganization of certain of its
operations. The Company is consolidating the Customer Operations departments
that serve its three franchise areas in England into one department, and is
consolidating certain operations and management groups within the Broadcast
Services division,
F-21
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. NONRECURRING CHARGES INCLUDING RESTRUCTURING CHARGES (CONTINUED)
as well as certain other consolidations or cessations of activities. This charge
consisted of employee severance and related costs of $6,726,000 for
approximately 280 employees to be terminated, lease exit costs of $6,539,000 and
penalties of $2,364,000 associated with the cancellation of contractual
obligations. As of December 31, 1997, $5,441,000 of the provision has been used.
10. OTHER GAINS
Other gains of $21,497,000 in 1997 include a legal settlement of $10,000,000 and
a gain on the sale of fixed assets of $11,497,000. In October 1997, following
the U.S. District Court's decision to dismiss the Company's complaint against
LeGroupe Videotron Ltee and its subsidiary, the Company entered into a
Settlement Agreement dismissing the Company's complaint in exchange for a
payment of $10,000,000. In December 1997, a U.S. subsidiary of the Company sold
its fixed and other assets utilized in its microwave transmission service
business and recognized a gain of $11,497,000.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------
Current:
Federal $ - $ - $ (181,000)
State and local 1,261,000 344,000 167,000
Foreign - 2,246,000 (2,463,000)
---------------------------------------------------
Total current 1,261,000 2,590,000 (2,477,000)
---------------------------------------------------
Deferred:
Federal - - -
State and local - - -
Foreign (16,852,000) 5,063,000 -
---------------------------------------------------
Total deferred (16,852,000) 5,063,000 -
---------------------------------------------------
$(15,591,000) $7,653,000 $(2,477,000)
===================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for
F-22
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
income tax purposes. Significant components of the deferred tax liabilities and
assets are as follows:
DECEMBER 31
1997 1996
---------------------------------
Deferred tax liabilities:
Fixed assets $ 68,380,000 $ 78,433,000
Depreciation and amortization - 30,623,000
Other 4,894,000 6,018,000
---------------------------------
Total deferred tax liabilities 73,274,000 115,074,000
Deferred tax assets:
Net operating losses 107,208,000 99,227,000
Net deferred interest expense 94,689,000 51,770,000
Depreciation and amortization 16,935,000 -
Other 18,164,000 10,396,000
---------------------------------
Total deferred tax assets 236,996,000 161,393,000
Valuation allowance for deferred
tax assets (233,940,000) (141,250,000)
---------------------------------
Net deferred tax assets 3,056,000 20,143,000
---------------------------------
Net deferred tax liabilities $ 70,218,000 $ 94,931,000
=================================
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $56,000,000 for U.S. federal income tax purposes that expire as
follows: $500,000 in 2008, $1,100,000 in 2009, $21,000,000 in 2010, $27,700,000
in 2011 and $5,700,000 in 2012. The Company also has United Kingdom net
operating loss carryforwards of approximately $290,000,000 which have no
expiration date. Pursuant to United Kingdom law, these losses are only available
to offset income of the separate entity that generated the loss.
The reconciliation of income taxes computed at U.S. federal statutory rates to
income tax expense is as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
Provision (benefit) at
federal statutory rate (35%) $(120,452,000) $(90,518,000) $(35,083,000)
Add (deduct):
State and local income tax,
net of federal benefit 820,000 224,000 109,000
Foreign losses with no benefit 59,804,000 44,610,000 6,699,000
Amortization of goodwill and
license acquisition costs 3,925,000 4,031,000 3,696,000
U.S. losses with no benefit 40,312,000 49,184,000 22,507,000
Other - 122,000 (405,000)
---------------------------------------------
$ (15,591,000) $7,653,000 $(2,477,000)
=============================================
F-23
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
Long-term debt: The fair values of the 10-7/8% Notes, the 12-3/4% Notes,
the 11-1/2% Notes, the 10% Notes, the 7-1/4% Convertible Notes and the 7%
Convertible Notes are based on the quoted market price. The fair value of
the Term Loan and Revolving Facility is estimated using discounted cash
flow analysis, based on the Company's incremental borrowing rate for
similar types of borrowing arrangements.
Redeemable Preferred Stock: The fair value is based on the quoted market
price.
The carrying amounts and fair values of the Company's financial instruments are
as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- ----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------------------------
Cash and cash equivalents $ 98,902,000 $ 98,902,000 $ 445,884,000 $ 445,884,000
Long-term debt:
10-7/8% Notes 194,959,000 199,810,000 175,368,000 179,140,000
12-3/4% Notes 209,387,000 230,577,000 185,043,000 202,797,000
11-1/2% Notes 743,961,000 819,000,000 665,257,000 714,000,000
10% Notes 400,000,000 422,000,000 - -
7-1/4% Convertible Notes 191,750,000 212,843,000 191,750,000 206,611,000
7% Convertible Notes 275,000,000 264,688,000 275,000,000 251,625,000
Term Loan and Revolving Facility - - 239,750,000 239,750,000
Redeemable Preferred Stock 108,534,000 121,846,000 - -
13. RELATED PARTY TRANSACTIONS
On July 25, 1990, Cellular Communications, Inc. ("CCI") and AirTouch
Communications, Inc. ("AirTouch") entered into a Merger and Joint Venture
Agreement, as amended as of December 14, 1990. In connection with this
agreement, on July 31, 1991, CCI distributed to its shareholders the stock of
the Company.
F-24
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
Through August 1996, CCI provided management, financial and legal services to
the Company. Amounts charged to the Company included direct costs where
identifiable, and indirect costs allocated utilizing direct labor hours as
reported by the common officers and employees of CCI and the Company. For the
years ended December 31, 1996 and 1995, CCI charged $1,194,000, and $1,644,000,
respectively, which is included in corporate expenses. In August 1996, upon the
merger of CCI with AirTouch, the Company commenced providing management,
financial, legal and technical services to Cellular Communications
International, Inc. ("CCII") and CoreComm Incorporated ("CoreComm"). In 1996,
the Company charged CCII and CoreComm $351,000 and $200,000, respectively, which
included direct costs where identifiable and allocated corporate overhead based
upon the amount of time incurred on CCII and CoreComm business by the common
officers and employees of the Company, CCII and CoreComm. These charges reduced
corporate expenses in 1996.
In January 1997, the Company, CoreComm and CCII agreed to a change in the
Company's fee for the provision of services. In 1997, the Company charged
CoreComm and CCII $1,492,000 and $871,000, respectively, for direct costs where
identifiable and a fixed percentage of its corporate overhead. These charges
reduced corporate expenses. In the opinion of management of the Company, the
allocation methods are reasonable.
As of December 31, 1997 and 1996, the Company had receivables of $69,000 and
$586,000 from CCII and $71,000 and $102,000 from CoreComm, respectively.
In 1993, the Company entered into a consulting agreement with Insight
Communications Company, L.P. ("Insight U.S."), under which Insight U.S. provided
advice and assistance to the Company with respect to its cable television,
telephone and telecommunications operations in the United Kingdom. Two members
of the Company's Board of Directors are partners in Insight U.S. Pursuant to the
consulting agreement, which had a term of three years, the Company paid Insight
U.S. a fee of $50,000 per month for the first year, $40,000 per month for the
second year and $30,000 per month for the third year. The fees for the years
ended December 31, 1996 and 1995 of $270,000 and $450,000, respectively, are
included in corporate expenses.
F-25
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------
Numerator:
Loss before extraordinary item $(328,557,000) $(254,454,000) $(90,785,000)
Preferred stock dividend (11,978,000) - -
--------------------------------------------------------------
(340,535,000) (254,454,000) (90,785,000)
Extraordinary item (4,500,000) - -
--------------------------------------------------------------
Loss available to common shareholders $(345,035,000) $(254,454,000) $(90,785,000)
--------------------------------------------------------------
Denominator for basic net loss
per common share 32,117,000 31,041,000 30,190,000
Effect of dilutive securities - - -
--------------------------------------------------------------
Denominator for diluted net loss
per common share 32,117,000 31,041,000 30,190,000
--------------------------------------------------------------
Basic and diluted net loss per common share:
Loss before extraordinary item $(10.60) $(8.20) $(3.01)
Extraordinary item (.14) - -
--------------------------------------------------------------
Net (loss) $(10.74) $(8.20) $(3.01)
==============================================================
Stock options, warrants and convertible securities are excluded from the
calculation of net loss per common share as their effect would be antidilutive.
15. SHAREHOLDERS' EQUITY (DEFICIENCY)
STOCK SPLIT
On July 25, 1995, the Company declared a 4-for-3 stock split by way of stock
dividend, which was paid on August 11, 1995. All common stock data in the
Consolidated Financial Statements give effect to the stock split.
SERIES PREFERRED STOCK
In October 1996, the Board of Directors created and authorized for issuance
2,000 shares of 5% Non-Voting Convertible Preferred Stock, Series A ("Series A
Preferred Stock"), of which 780 shares were issued in connection with the
CableTel Newport acquisition. Each share of Series A Preferred Stock has a
stated value of $100,000, subject to certain exceptions. The holders of
F-26
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Series A Preferred Stock are entitled to receive cumulative dividends beginning
in October 2001 at the rate of 5% of the stated value, payable semi-annually in
arrears, subject to certain exceptions. Dividends may be paid, in the sole
discretion of the Board of Directors, in cash, in common stock or in additional
shares of Series A Preferred Stock. The Company has the right, exercisable at
any time, to redeem all or some of the Series A Preferred Stock at a price equal
to the aggregate stated value of the shares to be redeemed, together with all
accrued and unpaid dividends, in cash or in shares of common stock (based on the
average market price of the common stock, as defined). The holder of Series A
Preferred Stock has the right to convert shares of Series A Preferred Stock into
common stock equal to the aggregate stated value of Series A Preferred Stock
divided by the greater of (a) $40.00 or (b) the average market price of the
common stock, as defined. The Series A Preferred Stock has a liquidation
preference equal to the stated value per share plus accrued and unpaid
dividends.
WARRANTS
In 1993, the Company issued warrants to purchase an aggregate of approximately
899,000 shares of common stock at an initial exercise price of $8.35 per share
in connection with certain noncompetition agreements. The exercise price
decreased to $6.96 per share in the second year after the grant and to $5.57 per
share thereafter. The warrants were valued at $13,193,000, the difference
between the fair market value of the common stock on the date of grant and $5.57
per share. The warrants expire in 2000.
In 1996, pursuant to the terms of the consent solicitations to the holders of
the 10-7/8% Notes and to the holders of the 12-3/4% Notes to gain consent to
modify certain indenture provisions, the Company paid an aggregate of $3,592,000
in consent payments and issued warrants to purchase 164,000 shares of common
stock at an exercise price of $23.78 per share in lieu of additional consent
payments of $1,641,000. The warrants expire in 2006.
SHAREHOLDER RIGHTS PLAN
The Rights Agreement provides that one Right will be issued with each share of
common stock issued on or after October 13, 1993. The Rights are exercisable
upon the occurrence of certain potential takeover events and will expire in
October 2003 unless previously redeemed by the Company. When exercisable, each
Right entitles the owner to purchase from the Company one one-hundredth of a
share of Series A Junior Participating Preferred Stock ("Rights Preferred
Stock") at a purchase price of $100.
F-27
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The Rights Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment of $.01 per share and will be entitled to an aggregate dividend
of 100 times the dividend, if any, declared per share of common stock. In the
event of liquidation, the holders of Rights Preferred Stock will be entitled to
a minimum preferential liquidation payment of $1 per share and will be entitled
to an aggregate payment of 100 times the payment made per share of common stock.
Each share of Rights Preferred Stock will have 100 votes and will vote together
with the common stock. In the event of any merger, consolidation or other
transaction in which shares of common stock are changed or exchanged, each share
of Rights Preferred Stock will be entitled to receive 100 times the amount
received per share of common stock. These rights are protected by customary
antidilution provisions.
There are 2,500,000 authorized shares of Series Preferred Stock of which
1,000,000 shares are designated Rights Preferred Stock.
STOCK OPTIONS
There are 2,164,000 shares of common stock reserved for issuance under the OCOM
Corporation (a wholly-owned subsidiary of the Company) 1991 Stock Option Plan.
The plan provides that incentive stock options ("ISOs") be granted at the fair
market value of OCOM's common stock on the date of grant, and nonqualified stock
options ("NQSOs") be granted at not less than 85% of the fair market value of
OCOM's common stock on the date of grant. Options are exercisable as to 20% of
the shares subject thereto on the date of grant and become exercisable as to an
additional 20% of the shares subject thereto on each January 1 thereafter, while
the optionee remains an employee of the Company. Options will expire ten years
after the date of the grant.
There are 6,653,000 shares of common stock reserved for issuance under the NTL
Incorporated 1993 Stock Option Plan. The exercise price of an ISO may not be
less than 100% of the fair market value of the Company's common stock on the
date of grant, and the exercise price of a NQSO may not be less than 85% of the
fair market value of the Company's common stock on the date of grant. Options
are exercisable as to 20% of the shares subject thereto on the date of grant and
become exercisable as to an additional 20% of the shares subject thereto on each
January 1 thereafter, while the optionee remains an employee of the Company.
Options will expire ten years after the date of the grant.
There are 100,000 shares of common stock reserved for issuance under the OCOM
Corporation Non-Employee Director Stock Option Plan. The plan provides that all
options be granted at the fair market value of OCOM's common stock on the date
of grant, and options will expire ten years after the date of the grant. Options
are exercisable as to 20% of the shares subject thereto on the date of grant and
become exercisable as to an additional 20% of the shares subject thereto on each
subsequent anniversary of the grant date, while the optionee remains a director
of the Company. Options will expire ten years after the date of the grant.
F-28
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
There are 320,000 shares of common stock reserved for issuance under the NTL
Incorporated 1993 Non-Employee Director Stock Option Plan. Under the terms of
this plan, options will be granted to members of the Board of Directors who are
not employees of the Company or any of its affiliates. The plan provides that
all options be granted at the fair market value of the Company's common stock on
the date of grant, and options will expire ten years after the date of the
grant. Options are exercisable as to 20% of the shares subject thereto on the
date of grant and become exercisable as to an additional 20% of the shares
subject thereto on each subsequent anniversary of the grant date while the
optionee remains a director of the Company. Options will expire ten years after
the date of the grant.
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995: risk-free interest rates of 5.89%, 6.56%
and 6.61%, respectively, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of .276, .255 and .255, respectively,
and a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Following is the
Company's pro forma information:
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------
Pro forma net (loss) $(343,850,000) $(261,245,000) $(93,688,000)
Basic and diluted pro
forma net (loss) per share $(11.08) $(8.42) $(3.10)
F-29
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended December 31, follows:
1997 1996 1995
----------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------------------------------------------------------------------
Outstanding-beginning of year 6,738,000 $ 14.10 5,934,000 $11.04 4,795,000 $8.09
Granted 1,571,000 23.97 1,390,000 25.94 1,164,000 23.07
Exercised (119,000) 12.85 (396,000) 3.44 (21,000) 4.78
Forfeited (33,000) 23.78 (190,000) 27.39 (4,000) 17.50
--------- --------- ---------
Outstanding-end of year 8,157,000 $15.98 6,738,000 $14.10 5,934,000 $11.04
========= ========= =========
Exercisable at end of year 5,663,000 $12.39 4,258,000 $10.71 3,410,000 $ 8.22
========= ========= =========
Weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1997, 1996 and 1995 is $12.74, $13.98 and
$12.47, respectively.
The following table summarizes the status of the stock options outstanding and
exercisable at December 31, 1997:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ------------------- ----------------------------------------------- ---------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OF CONTRACTUAL EXERCISE OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------- ----------------------------------------------- ---------------------------------
$0.19 to $0.56 77,000 3.6 Years $0.245 77,000 $0.245
$0.73 to $1.12 150,000 3.6 Years $0.745 150,000 $0.745
$1.53 to $2.69 356,000 3.6 Years $2.157 356,000 $2.157
$3.09 to $4.50 75,000 4.4 Years $3.230 75,000 $3.230
$8.81 to $14.63 3,312,000 5.4 Years $8.873 3,305,000 $8.861
$15.19 to $22.88 1,498,000 7.4 Years $21.685 882,000 $21.659
$23.06 to $32.38 2,689,000 8.9 Years $25.038 818,000 $25.213
- ------------------- ----------------------------------------------- ---------------------------------
Total 8,157,000 5,663,000
=================== =============================================== =================================
The Company has 25,309,000 shares of its common stock reserved for issuance upon
the exercise of warrants and stock options and the conversion of debt and
preferred stock.
F-30
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. EMPLOYEE BENEFIT PLANS
Certain subsidiaries of NTL Group Limited operate a defined benefit pension
plan in the United Kingdom. The assets of the Plan are held separately from
those of NTL Group Limited and are invested in specialized portfolios under the
management of an investment group. The pension cost is calculated using the
attained age method. The Company's policy is to fund amounts to the defined
benefit plan necessary to comply with the funding requirements as prescribed by
the laws and regulations in the United Kingdom. The change in the projected
benefit obligation in 1997 is due to the change in actuarial assumptions used.
The components of net pension costs are as follows:
YEAR ENDED DECEMBER 31
1997 1996
--------------------------------------------
Service cost $ 10,693,000 $7,997,000
Interest cost 12,765,000 11,679,000
Actual return on plan assets (30,852,000) (16,103,000)
Net amortization and deferral 17,327,000 4,241,000
--------------------------------------------
$ 9,933,000 $7,814,000
============================================
The funded status (assets exceed accumulated benefits) of the plan is as
follows:
DECEMBER 31
1997 1996
---------------------------------------
Accumulated benefit obligation:
Vested $178,828,000 $148,809,000
Nonvested - -
---------------------------------------
$178,828,000 $148,809,000
=======================================
Fair value of plan assets,
principally U.K. equity securities $195,226,000 $166,195,000
Projected benefit obligation 204,340,000 170,795,000
---------------------------------------
Excess of projected benefit obligation over assets (9,114,000) (4,600,000)
Unrecognized net transition obligation 10,203,000 11,541,000
Unrecognized net gain (1,065,000) (5,098,000)
---------------------------------------
Prepaid pension cost $ 24,000 $1,843,000
=======================================
Actuarial assumptions:
Weighted average discount rate 7.25% 8.25%
Weighted average rate of compensation increase 8.00% 8.00%
Expected long-term rate of return on plan assets 9.00% 9.50%
F-31
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. LEASES
Leases for buildings, office space and equipment extend through 2031. Total
rental expense for the years ended December 31, 1997, 1996 and 1995 under
operating leases was $20,674,000, $14,886,000 and $2,607,000, respectively.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1997 are as follows:
Year ended December 31:
1998 $21,169,000
1999 20,933,000
2000 20,572,000
2001 20,235,000
2002 16,352,000
Thereafter 82,420,000
------------
$181,681,000
============
18. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, the Company was committed to pay approximately
$78,000,000 for equipment and services.
The Company has licenses issued by the United Kingdom Department of Trade and
Industry ("DTI") and the United Kingdom Independent Television Commission
("ITC") for its cable television, telephone and telecommunications business. The
initial terms of the Company's licenses was 23 years for the DTI licenses and 15
years for the ITC licenses. The Company's licenses expire in 2008 to 2016 for
the DTI licenses and 1999 to 2005 for the ITC licenses. The DTI requires a fixed
annual renewal fee of 2,500 pounds sterling ($4,200) per license. The ITC
requires an annual license fee ranging from 1,300 pounds sterling ($2,200) to
7,900 pounds sterling ($13,100) per license based on the number of homes in the
licensed area, which is subject to adjustment annually. The Company's license
fees in 1997 were $316,000.
In addition, the Company was awarded certain newly issued licenses by the ITC in
1995. Pursuant to the terms of the local delivery license ("LDL") for Northern
Ireland granted to a wholly-owned subsidiary of the Company, the Company is
required to make annual cash payments to the ITC for fifteen years commencing in
January 1997 in the amount of approximately 14,400,000 pounds sterling
($23,800,000) (subject to adjustments for inflation). Such payments are in
addition to the percentages of qualifying revenue already set by the ITC of 0%
for the first ten years and 2% for the last five years of the fifteen year
license. The Company paid $23,587,000 in 1997.
F-32
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Pursuant to the terms of the LDL for Glamorgan and Gwent, Wales granted to a
wholly-owned subsidiary of the Company, the Company is required to make annual
cash payments to the ITC for fifteen years, commencing in the first full
calendar year after the start of operations, in the amount of 104,188 pounds
sterling ($172,000). Such payments are in addition to the percentages of
qualifying revenue already set by the ITC of 0% for the first five years, 2% for
the second five years and 4% for the last five years of the fifteen-year
license.
A significant portion of NTL Group Limited's revenues is attributable to the
provision of television and radio transmission and distribution services and the
provision of telecommunications services. In the United Kingdom, the provision
of such services is governed by the Telecommunications Act and The Wireless
Telegraphy Act 1949. NTL Group Limited holds five licenses under the
Telecommunications Act. The initial terms of these licenses were 10 or 25 years.
These licenses expire in 2002 to 2021. NTL Group Limited holds a number of
Wireless Telegraphy Act licenses which continue in force primarily from year to
year unless revoked or unless any of the license fees are not paid. The Company
paid $3,447,000 in 1997 in connection with these licenses.
The Company is involved in, or has been involved in, certain disputes and
litigation arising in the ordinary course of its business, including claims
involving contractual disputes and claims for damages to property and personal
injury resulting from the construction of the Company's networks and the
maintenance and servicing of the Company's transmission masts. None of these
matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
19. INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
The Company operates its long distance telephone and microwave transmission
business in the United States and its television and radio broadcasting, cable
television, telephone and telecommunications businesses in the United Kingdom.
The Company acquired its national and international telecom segment and its
broadcast transmission and other segment in 1996. Identifiable corporate assets
consist primarily of cash and cash equivalents. The industry segments and
geographic area information as of and for the years ended December 31, 1997,
1996 and 1995 are as follows:
F-33
NTL Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)
Long
Distance
Telephone Local National Broadcast
and Telecom and Transmission
Microwave and International and
Transmission Television Telecom Other Corporate Consolidated
--------------------------------------------------------------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31, 1997
Total revenues $ 8,831 $ 189,407 $162,738 $ 130,799 $ - $ 491,775
Operating income (loss) (1,207) (208,815) (5,327) 42,652 (19,367) (192,064)
Depreciation and amortization 2,368 103,704 17,454 20,328 6,655 150,509
Identifiable assets 27,623 1,579,044 350,704 358,302 105,966 2,421,639
Fixed asset additions 1,541 333,037 101,088 38,984 156 474,806
YEAR ENDED DECEMBER 31, 1996
Total revenues $ 10,086 $ 89,209 $ 45,430 $ 83,618 $ - $ 228,343
Operating income (loss) 773 (164,108) (7,774) 26,376 (12,900) (157,633)
Depreciation and amortization 2,744 69,200 8,601 13,152 4,956 98,653
Identifiable assets 15,660 1,655,759 220,764 412,989 149,439 2,454,611
Fixed asset additions 552 478,761 38,812 26,056 1,894 546,075
YEAR ENDED DECEMBER 31, 1995
Total revenues $ 8,937 $ 24,804 $ - $ - $ - $ 33,741
Operating (loss) (4,531) (76,161) - - (12,434) (93,126)
Depreciation and amortization 2,729 25,650 - - 1,444 29,823
Identifiable assets 15,774 892,935 - - 101,960 1,010,669
Fixed asset additions 1,557 473,795 - - - 475,352
20. SUBSEQUENT EVENT
In February 1998, the Company entered into an agreement and plan of amalgamation
(the "Agreement") with Comcast UK Cable Partners Limited ("Partners"). Under the
Agreement, Partners' shareholders will receive 0.3745 shares of the Company's
Common Stock for each share of Partners Common Stock. Based on the closing price
of the Company's Common Stock on the date of the Agreement, the transaction is
valued at approximately $600,000,000. The Agreement contains provisions such
that if the purchase price per Partners share falls below $10.00, Partners has
the right to terminate the transaction, subject to the Company's right to adjust
the exchange ratio such that Partners' shareholders would receive $10.00 for
each Partners share. Under certain circumstances, the consideration payable to
Partners' shareholders may be adjusted based on the proceeds of the potential
exercise of certain rights of first refusal with respect to Partners' interests
in the London and Birmingham franchises. Completion of the transaction is
subject to a number of closing conditions including regulatory approvals,
shareholder approvals and consents from the holders of the Company's and
Partners' debt.
F-34
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets
DECEMBER 31
1997 1996
-------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,421,000 $ 101,555,000
Marketable securities 4,998,000 -
Other 8,804,000 1,008,000
-------------------------------------
Total current assets 60,223,000 102,563,000
Office improvements and equipment, net of accumulated
depreciation of $555,000 (1997) and $191,000 (1996) 1,551,000 1,759,000
Investments in and loans to subsidiaries 1,970,114,000 1,672,695,000
Deferred financing costs, net of accumulated amortization of
$13,141,000 (1997) and $6,850,000 (1996) 50,771,000 45,132,000
Other assets, net of accumulated amortization
of $11,803,000 (1997) and $9,952,000 (1996) 1,540,000 4,597,000
-------------------------------------
Total assets $2,084,199,000 $1,826,746,000
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities $ 22,276,000 $ 6,214,000
Long-term debt 2,015,057,000 1,492,418,000
Senior redeemable exchangeable preferred stock 108,534,000 -
Shareholders' equity (deficiency):
Series preferred stock - -
Common stock 322,000 321,000
Additional paid-in capital 538,054,000 548,647,000
Cumulative translation adjustment 117,008,000 163,141,000
(Deficit) (717,052,000) (383,995,000)
-------------------------------------
(61,668,000) 328,114,000
-------------------------------------
Total liabilities and shareholders' equity (deficiency) $2,084,199,000 $1,826,746,000
=====================================
See accompanying notes.
F-35
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant (continued)
Condensed Statements of Operations
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
COSTS AND EXPENSES
Corporate expenses $ 12,811,000 $ 14,144,000 $ 14,697,000
Depreciation and amortization 6,655,000 4,954,000 1,445,000
--------------------------------------------------------
Operating (loss) (19,466,000) (19,098,000) (16,142,000)
OTHER INCOME (EXPENSE)
Interest and other income 4,490,000 5,017,000 7,470,000
Interest expense (191,124,000) (128,755,000) (39,033,000)
Other gain 10,000,000 - -
Foreign currency transaction gains (losses) (2,221,000) 1,376,000 (23,000)
--------------------------------------------------------
(Loss) before income taxes and equity in net
(loss) of subsidiaries (198,321,000) (141,460,000) (47,728,000)
Income tax (provision) (1,083,000) (193,000) -
--------------------------------------------------------
(Loss) before equity in net (loss) of subsidiaries (199,404,000) (141,653,000) (47,728,000)
Equity in net (loss) of subsidiaries (133,653,000) (112,801,000) (43,057,000)
--------------------------------------------------------
Net (loss) $(333,057,000) $(254,454,000) $(90,785,000)
========================================================
See accompanying notes.
F-36
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant (continued)
Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
Net cash (used in) operating activities $ (55,467,000) $ (28,152,000) $ (10,448,000)
INVESTING ACTIVITIES
Purchase of office improvements and equipment (156,000) (1,891,000) -
Purchase of marketable securities (145,939,000) - -
Proceeds from sales of marketable securities 142,596,000 - -
Increase in investments in and loans to subsidiaries (436,046,000) (955,652,000) (337,120,000)
-----------------------------------------------------------
Net cash (used in) investing activities (439,545,000) (957,543,000) (337,120,000)
FINANCING ACTIVITIES
Proceeds from borrowings and sale of preferred stock,
net of financing costs 484,340,000 842,820,000 328,731,000
Proceeds from exercise of stock options and warrants 1,671,000 1,665,000 102,000
-----------------------------------------------------------
Net cash provided by financing activities 486,011,000 844,485,000 328,833,000
Effect of exchange rate changes on cash (46,133,000) 156,868,000 (6,594,000)
-----------------------------------------------------------
Increase (decrease) in cash and cash equivalents (55,134,000) 15,658,000 (25,329,000)
Cash and cash equivalents at beginning of year 101,555,000 85,897,000 111,226,000
-----------------------------------------------------------
Cash and cash equivalents at end of year $ 46,421,000 $ 101,555,000 $ 85,897,000
===========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 53,485,000 $ 23,687,000 $ -
Income taxes paid - 193,000 -
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accretion of dividends and discount on senior
redeemable exchangeable preferred stock $ 12,263,000 $ - $ -
Warrants issued in connection with consent
solicitations - 1,641,000 -
Common stock issued for acquisition - 34,137,000 -
Preferred stock issued for acquisition of minority
interest, including notes payable to minority partner - 49,000,000 -
Liabilities incurred in connection with acquisitions - 81,906,000 -
See accompanying notes.
F-37
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
1. BASIS OF PRESENTATION
In the NTL Incorporated condensed financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in the undistributed earnings of
the subsidiaries since the date of acquisition. The Company's share of net loss
of its unconsolidated subsidiaries is included in consolidated net loss using
the equity method of accounting. The condensed financial statements should be
read in conjunction with the Company's consolidated financial statements.
2. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31
1997 1996
--------------------------------------
10-7/8% Senior Deferred Coupon Notes
("10-7/8% Notes") (a) $ 194,959,000 $ 175,368,000
12-3/4% Series A Senior Deferred Coupon Notes
("12-3/4% Notes") (b) 209,387,000 185,043,000
11-1/2% Series B Senior Deferred Coupon Notes
("11-1/2% Notes") (c) 743,961,000 665,257,000
10% Series B Senior Notes ("10% Notes") (d) 400,000,000 -
7-1/4% Convertible Subordinated Notes
("7-1/4 Convertible Notes") (e) 191,750,000 191,750,000
7% Convertible Subordinated Notes
("7% Convertible Notes") (f) 275,000,000 275,000,000
--------------------------------------
$2,015,057,000 $1,492,418,000
======================================
(a) In October 1993, the Company issued $212,000,000 aggregate principal amount
of 10-7/8% Senior Deferred Coupon Notes due 2003. The 10-7/8% Notes were
issued at a price to the public of 58.873% or $124,811,000.
(b) In April 1995, the Company issued $277,803,500 aggregate principal amount
of 12-3/4% Senior Deferred Coupon Notes due 2005. The 12-3/4% Notes were
issued at a price to the public of 53.995% or $150,000,000.
(c) In January 1996, the Company issued $1,050,000,000 aggregate principal
amount of 11-1/2% Series B Senior Deferred Coupon Notes due 2006. The
11-1/2% Notes were issued at a price to investors of 57.155% of the
aggregate principal amount at maturity or $600,127,500.
F-38
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements (continued)
2. LONG-TERM DEBT (CONTINUED)
(d) In February 1997, the Company issued $400,000,000 aggregate principal
amount of 10% Senior Notes due 2007.
(e) In April and May 1995, the Company issued $191,750,000 principal amount of
7-1/4% Convertible Subordinated Notes due 2005. Interest payments began on
October 15, 1995 and interest is payable every six months thereafter. The
7-1/4% Convertible Notes will mature on April 15, 2005.
In March 1998, the Company announced that it was calling for redemption all
of the 7-1/4% Convertible Notes. The redemption date is April 20, 1998 and
the redemption price is 105.08% of the principal amount, plus accrued and
unpaid interest through the date of redemption.
(f) In June 1996, the Company issued $275,000,000 aggregate principal amount of
7% Convertible Subordinated Notes due 2008. Interest payments began on
December 15, 1996 and interest is payable every six months thereafter. The
7% Convertible Notes mature on June 15, 2008.
In March 1998, the Company issued 125,000,000 pounds sterling aggregate
principal amount of 9-1/2% Senior Notes due 2008 (the "Sterling Senior Notes"),
300,000,000 pounds sterling aggregate principal amount of 10-3/4% Senior
Deferred Coupon Notes due 2008 (the "Sterling Deferred Coupon Notes") and
$1,300,000,000 aggregate principal amount of 9-3/4% Senior Deferred Coupon Notes
due 2008 (the "Dollar Deferred Coupon Notes"). The Sterling Senior Notes,
Sterling Deferred Coupon Notes and the Dollar Deferred Coupon Notes were issued
at a price to the public of 99.67% or 124,588,000 pounds sterling, 58.62% or
175,860,000 pounds sterling and 61.724% or $802,412,000, respectively.
3. REDEEMABLE PREFERRED STOCK
In February 1997, the Company issued $100,000,000 of its 13% Senior Redeemable
Exchangeable Preferred Stock (the "Redeemable Preferred Stock"). The Company
received net proceeds of $96,625,000 after discounts and commissions from the
issuance of the Redeemable Preferred Stock. Discounts, commissions and other
fees incurred of $3,729,000 were recorded as unamortized discount at issuance.
Of the 2,500,000 authorized shares of Series Preferred Stock, 100,000 shares of
Redeemable Preferred Stock were issued. Dividends accrue at 13% per annum ($130
per share) and are payable quarterly in arrears as of May 15, 1997. Dividends,
whether or not earned or declared, will accrue without interest until declared
and paid, which declaration may be for all or part of
F-39
NTL Incorporated
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements (continued)
3. REDEEMABLE PREFERRED STOCK (CONTINUED)
the accrued dividends. Dividends accruing on or prior to February 15, 2004 may,
at the option of the Company, be paid in cash, by the issuance of additional
Redeemable Preferred Stock or in any combination of the foregoing. As of
December 31, 1997, the Company has accrued $11,978,000 for dividends and has
issued approximately 10,000 shares for $10,187,000 of such accrued dividends.
The Redeemable Preferred Stock is subject to mandatory redemption on February
15, 2009. On any scheduled dividend payment date, the Company may, at its
option, exchange all of the shares of Redeemable Preferred Stock then
outstanding for the Company's 13% Subordinated Exchange Debentures due 2009.
4. LEASES
Leases for office space extend through 2004. Total rental expense for the years
ended December 31, 1997, 1996 and 1995 under operating leases was $503,000,
$220,000 and $22,000, respectively.
Future minimum lease payments under noncancellable operating leases as of
December 31, 1997 are as follows:
Year ended December 31:
1998 $ 565,000
1999 475,000
2000 462,000
2001 462,000
2002 462,000
Thereafter 924,000
----------
$3,350,000
==========
5. OTHER GAIN
In October 1997, following the U.S. District Court's decision to dismiss the
Company's complaint against LeGroupe Videotron Ltee and its subsidiary, the
Company entered into a Settlement Agreement dismissing the Company's complaint
in exchange for a payment of $10,000,000.
6. OTHER
No cash dividends were paid to the registrant by subsidiaries in any of the last
three years.
F-40
NTL Incorporated and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
--------------------------
(2)
(1) CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Allowance for doubtful accounts
$3,870,000 $6,891,000 $ - $(2,705,000)(a) $8,056,000
==================================================================================
Year ended December 31, 1996:
Allowance for doubtful accounts
$ 767,000 $2,597,000 $ - $ 506,000 (b) $3,870,000
==================================================================================
Year ended December 31, 1995:
Allowance for doubtful accounts
$ 22,000 $ 709,000 $ - $ 36,000 (c) $ 767,000
==================================================================================
(a) Uncollectible accounts written-off, net of recoveries of $2,604,000 and
$101,000 foreign currency translation adjustments.
(b) Uncollectible accounts written-off, net of recoveries of $645,000, offset
by $804,000 allowance for doubtful accounts as of acquisition date of
purchased subsidiary and $347,000 foreign currency translation adjustments.
(c) Recoveries of accounts previously written-off, net of uncollectible
accounts written-off of $49,000 less $13,000 foreign currency translation
adjustments.
F-41