1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS: 0-25638 (NYNEX CABLECOMMS GROUP PLC)
0-25690 (NYNEX CABLECOMMS GROUP INC.)
NYNEX CABLECOMMS GROUP PLC
INCORPORATED UNDER THE I.R.S. EMPLOYER IDENTIFICATION NO.
LAWS OF ENGLAND AND WALES 98-0151138
NYNEX CABLECOMMS GROUP INC.
INCORPORATED UNDER THE I.R.S. EMPLOYER IDENTIFICATION NO.
LAWS OF DELAWARE 98-0151139
THE TOLWORTH TOWER
EWELL ROAD
SURBITON
SURREY KT6 7ED
UNITED KINGDOM
(44)-181-873-2000
(Telephone number)
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 [ ]
Number of shares outstanding of each of the classes of common stock, as of July
31, 1996:
925,068,775 Ordinary Shares of NYNEX CableComms Group PLC,
pound sterling 0.10 par value
925,068,775 shares of Common Stock of NYNEX CableComms Group Inc.,
$.01 par value
(Ordinary Shares and shares of Common Stock are "stapled" and trade
together as units.)
2
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
PART 1 - FINANCIAL INFORMATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER ADS AMOUNTS) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30,
1996 1995 1996
POUND POUND
STERLING STERLING $
[NOTE B]
Operating Revenues:
Cable television 14,866 8,783 23,085
Telecommunications - residential 16,374 7,615 25,427
Telecommunications - business 3,097 967 4,809
Installation 1,192 999 1,852
-------- ------- --------
TOTAL OPERATING REVENUES 35,529 18,364 55,173
-------- ------- --------
Operating Expenses:
Programming 7,732 4,268 12,007
Telecommunications 7,157 3,470 11,114
Depreciation and amortization 12,854 8,010 19,961
Staff costs 11,114 13,134 17,259
Selling, general and administrative 12,238 14,806 19,004
-------- ------- --------
TOTAL OPERATING EXPENSES 51,095 43,688 79,345
-------- ------- --------
Operating loss (15,566) (25,324) (24,172)
-------- ------- --------
Other Income (Expense):
Interest income 838 1,482 1,301
Interest expense (4,930) (8,866) (7,656)
Minority interests 15,525 31,356 24,109
-------- ------- --------
TOTAL OTHER INCOME 11,433 23,972 17,754
-------- ------- --------
Loss before income taxes (4,133) (1,352) (6,418)
Income taxes - 4,417 -
-------- ------- --------
NET (LOSS) INCOME (4,133) 3,065 (6,418)
======== ======= ========
(LOSS) EARNINGS PER ADS (0.045) 0.003 (0.069)
======== ======= ========
ACCUMULATED DEFICIT
Beginning of period (97,689) (91,515) (151,701)
Net loss (4,133) 3,065 (6,418)
-------- ------- --------
End of Period (101,822) (88,450) (158,119)
======== ======= ========
See accompanying notes to the combined financial statements.
1
3
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT ADS AMOUNTS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1995 1996
POUND POUND $
STERLING STERLING [NOTE B]
Operating Revenues:
Cable television 29,156 16,747 45,276
Telecommunications - residential 31,181 14,944 48,420
Telecommunications - business 5,468 1,894 8,492
Installation 2,245 1,683 3,487
-------- -------- --------
TOTAL OPERATING REVENUES 68,050 35,268 105,675
-------- -------- --------
Operating Expenses:
Programming 15,522 7,995 24,105
Telecommunications 14,143 6,884 21,962
Depreciation and amortization 25,108 15,560 38,990
Staff costs 24,042 22,329 37,335
Selling, general and administrative 24,021 29,905 37,302
-------- -------- --------
TOTAL OPERATING EXPENSES 102,836 82,673 159,694
-------- -------- --------
Operating loss (34,786) (47,405) (54,019)
-------- -------- --------
Other Income (Expense):
Interest income 924 1,813 1,435
Interest expense (10,352) (11,110) (16,076)
Minority interests 30,728 43,343 47,718
-------- -------- --------
TOTAL OTHER INCOME 21,300 34,046 33,077
-------- -------- --------
Loss before income taxes (13,486) (13,359) (20,942)
Income taxes - 12,806 -
-------- -------- --------
NET LOSS (13,486) (553) (20,942)
======== ======== ========
LOSS PER ADS (0.146) (0.006) (0.226)
======== ======== ========
ACCUMULATED DEFICIT
Beginning of period (88,336) (87,897) (137,177)
Net loss (13,486) (553) (20,942)
-------- -------- --------
End of period (101,822) (88,450) (158,119)
========= ======== ========
See accompanying notes to the combined financial statements.
2
4
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)(UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1996
POUND POUND
STERLING STERLING $
[NOTE B]
ASSETS
Current assets:
Cash and temporary cash investments 4,580 9,807 7,112
Receivables (net of allowance of pound sterling 2,306
and pound sterling 1,492, respectively) 26,925 43,551 41,813
Deferred charges and other current assets 3,129 2,653 4,858
--------- --------- ---------
TOTAL CURRENT ASSETS 34,634 56,011 53,783
Property, plant and equipment, (net of accumulated
depreciation of pound sterling 86,541 and
pound sterling 62,270, respectively) 985,815 859,024 1,530,873
Goodwill, (net of accumulated amortization of
pound sterling 2,493 and pound sterling 2,138,
respectively) 25,848 26,203 40,139
Deferred finance costs , net 57,290 59,140 88,966
Other assets 1,325 1,401 2,057
--------- --------- ---------
TOTAL ASSETS 1,104,912 1,001,779 1,715,818
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 60,500 69,038 93,950
Other liabilities 43,501 46,834 67,555
--------- --------- ---------
TOTAL CURRENT LIABILITIES 104,001 115,872 161,505
Long-term debt [Note D] 283,223 125,350 439,817
Other long-term liabilities 6,221 4,970 9,659
Minority interests [Note E] 101,393 132,121 157,453
--------- --------- ---------
TOTAL LIABILITIES 494,838 378,313 768,434
--------- --------- ---------
Commitments and contingencies [Note G]
STOCKHOLDERS' EQUITY [NOTE H]
Ordinary shares - par value pound sterling 0.10 per share
(1,500 million authorized, 925.1 million issued and
outstanding) 92,507 92,500 143,654
Shares of common stock - par value $0.01 per share
(1,500 million authorized, 925.1 million issued and
outstanding) 5,763 5,763 8,949
Additional paid-in capital 613,626 613,539 952,900
Accumulated deficit (101,822) (88,336) (158,119)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 610,074 623,466 947,384
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,104,912 1,001,779 1,715,818
========= ========= =========
See accompanying notes to the combined financial statements.
3
5
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30,
1996 1995 1996
POUND POUND
STERLING STERLING $
[NOTE B]
Cash Flows From Operating Activities:
Net loss (13,486) (553) (20,942)
-------- -------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 25,108 15,560 38,990
Amortization of deferred finance costs 3,250 2,852 5,047
Provision for bad debts 2,778 1,490 4,314
Minority interest (30,728) (43,343) (47,718)
Deferred income taxes - (6,198) -
Non cash compensation costs 95 - 146
Changes in operating assets and liabilities:
Receivables 13,848 (12,358) 21,504
Deferred charges and other current assets (476) (1,222) (739)
Accounts payable 566 24,137 879
Other liabilities (3,339) 3,532 (5,183)
-------- -------- ---------
Total adjustments 11,102 (15,550) 17,240
-------- -------- ---------
NET CASH USED IN OPERATING ACTIVITIES (2,384) (16,103) (3,702)
-------- -------- ---------
Cash Flows From Investing Activities:
Capital expenditures (160,716) (195,780) (249,576)
-------- -------- --------
Other investing activities, net - 232 -
NET CASH USED IN INVESTING ACTIVITIES (160,716) (195,548) (249,576)
-------- -------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowings 157,873 - 245,161
Capital contributions - 5,320 -
Repayment of borrowings - (148,425) -
Change in other long-term liabilities - 183 -
Funding from minorities - 129,844 -
Deferred transaction and finance costs - (882) -
Loan to NYNEX Corporation - (156,889) -
Proceeds of share issue (net of pound sterling
36 million costs) - 380,177 -
Activity with minority joint venture partners - (3,119) -
-------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 157,873 206,209 245,161
-------- ------- --------
Net decrease in cash and temporary cash
investments (5,227) (5,442) (8,117)
Cash and temporary cash investments at beginning
of period 9,807 41,687 15,229
-------- -------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD 4,580 36,245 7,112
======== ======== =========
See accompanying notes to the combined financial statements.
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FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
A ORGANIZATION OF NYNEX CABLECOMMS
In February 1995, two indirect wholly owned subsidiaries of NYNEX
Corporation ("NYNEX") were incorporated: NYNEX CableComms Group PLC ("UK
CableComms"), a public limited company incorporated under the laws of
England and Wales, and NYNEX CableComms Group Inc. ("US CableComms"), a
Delaware corporation (together "the Companies"). The ordinary shares of UK
CableComms and the common stock of US CableComms may not be traded
separately and may only be traded together as Units in the form of ADSs on
the Nasdaq National Market and as Units on the London Stock Exchange. UK
CableComms and US CableComms hold 90% and 10%, respectively, of the shares
in NYNEX UK CableComms Holdings, Inc. ("UK Holdings").
UK CableComms and US CableComms collectively, and the subsidiaries and
partnerships in which they have the entire or a majority ownership
interest, are hereinafter referred to as "NYNEX CableComms".
B BASIS OF PRESENTATION
The unaudited combined financial statements have been prepared by UK
CableComms and US CableComms pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and, in the opinion of
management, include all adjustments necessary for a fair presentation of
the financial information for each period shown in accordance with
accounting principles generally accepted in the United States. Certain
information and footnote disclosures normally included in combined
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC
rules and regulations. Management believes that the disclosures made are
adequate to make the information presented not misleading. The results for
interim periods are not necessarily indicative of the results for the full
year.
The unaudited combined financial statements should be read in conjunction
with the audited combined financial statements and the notes thereto
included in the Companies' latest Annual Report and incorporated by
reference in the Companies' Form 10-K for the year ended December 31,
1995.
The unaudited combined financial statements are presented in thousands of
pounds sterling ("pound sterling"). Solely for the convenience of the
reader, the unaudited combined financial statements as at and for the
period ended June 30, 1996 have been presented in US dollars ("$") at the
rate pound sterling 1.00 = $1.5529, the Noon Buying Rate of the Federal
Reserve Bank of New York on June 28, 1996. The presentation of the US
dollar amounts should not be construed as US GAAP, or as a representation
that the pounds sterling amounts shown could be so converted into US
dollars at the rate indicated or at any other rate.
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7
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
Certain defined terms used herein are defined in the Glossary to the
Companies' latest Annual Report.
C PRINCIPLES OF COMBINATION
The unaudited combined financial statements present the financial
position, results of operations, and cash flows of NYNEX CableComms as if
the ownership structure, established on June 14, 1995, had been in
existence throughout the periods covered by these unaudited combined
financial statements.
Transactions between entities which are now part of NYNEX CableComms and
all significant intercompany accounts and transactions have been
eliminated in combination. Certain costs incurred by NYNEX have been
charged to NYNEX CableComms on a direct basis or, prior to completion of
the Combined Offering, on an allocated basis. Such costs are not
substantially different than those which NYNEX CableComms would have
incurred on a stand-alone basis.
D FINANCING OF NYNEX CABLECOMMS
At June 30, 1996, NYNEX CableComms was party to two broadly similar
financing arrangements, one for the Northern Operating Companies and one
for the Southern Operating Companies.
Under the arrangements, two entities related to NYNEX (the "North limited
partner" and the "South limited partner") provide credit facilities to the
operating companies and invest capital, through limited partnership
interests, in partnerships controlled by NYNEX CableComms. Deferred finance
costs of pound sterling 42.0 million for the Northern arrangement and pound
sterling 23.0 million for the Southern arrangement were incurred in
December 1994 and December 1993, respectively.
Credit Facilities
The credit facilities are for a maximum of pound sterling 542.5 million in
the case of the Northern Operating Companies and pound sterling 274.0
million in the case of the Southern Operating Companies. An additional
pound sterling 157.5 million is available under the North facility to
expand the network into additional franchise areas if such franchises are
acquired prior to December 31, 1998.
NYNEX CableComms has entered into two forward starting interest rate swaps
with NYNEX to reduce potential exposure to interest rate risk on floating
rate financing arrangements.
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FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
E MINORITY INTEREST
The North limited partner and the South limited partner also have limited
partnership interests in partnerships (the "North Partnership" and the
"South Partnership") controlled by NYNEX CableComms. Minority interest
reflects the limited partners' interest in the North and South
Partnerships.
The limited partners have contributed pound sterling 131.3 million and
pound sterling 80.4 million, respectively, as of June 30, 1996. The
Minority interest in the North Partnership and South Partnership was pound
sterling 43.5 million and pound sterling 57.9 million at June 30, 1996,
respectively.
Under the Agreements, NYNEX CableComms generally has an 85% interest, and
the limited partners generally have a 15% interest, in all items of
income, gain, loss, deduction or credit, except in respect of the initial
losses and profits (being specified amounts of profits or losses
calculated in accordance with US tax principles) of the relevant
Partnership.
Initial losses up to a maximum cumulative amount of pound sterling 200.0
million for the North Partnership and pound sterling 40.0 million for the
South Partnership will be allocated to the limited partners. Subsequent
losses will be wholly allocated to NYNEX CableComms until its share of the
cumulative losses of the relevant Partnership is equal to 85% of such
cumulative losses. Losses thereafter, if any, will be allocated 85% to
NYNEX CableComms and 15% to the limited partners. Initial profits will be
allocated between NYNEX CableComms and the limited partners in proportion
to the cumulative losses allocated to each partner until such losses have
been fully offset by profits. Thereafter, all profits are to be allocated
85% to NYNEX CableComms and 15% to the limited partners. Initial losses for
the South Partnership reached pound sterling 40.0 million in the first
quarter of 1996.
For the purposes of preparing the combined financial statements, the
profit or loss of the relevant Partnership is allocated between NYNEX
CableComms and the limited partners in accordance with the profit and loss
allocations set out in the relevant Agreement.
F SUPPLEMENTAL CASH FLOW INFORMATION
The following information is provided in accordance with Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows":
FOR THE SIX MONTHS
(In thousands) ENDED JUNE 30,
1996 1995
POUND POUND
STERLING STERLING
Non cash items excluded from the
Combined Statements of Cash Flows:
Property, plant and equipment acquired by
incurring directly related liabilities 54,849 24,805
====== ======
Accrued transaction and finance costs - 2,021
====== ======
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9
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
G LITIGATION AND OTHER CONTINGENCIES
Various legal actions and proceedings are pending that may affect NYNEX
CableComms. While counsel cannot give assurance as to the outcome of any
of these matters, in the opinion of the management of NYNEX CableComms,
based upon the advice of counsel, the ultimate resolution of these matters
in future periods is not expected to have a material effect on NYNEX
CableComms' financial position, operating results or cash flows.
H STOCKHOLDERS' EQUITY
The authorized capital of UK CableComms is 1.5 billion ordinary shares with
a par value of pound sterling 0.10 per share, of which 925.1 million shares
are issued, fully paid and outstanding. The authorized capital of US
CableComms is 1.5 billion shares of common stock with a par value of $.01
per share, of which 925.1 million shares are issued, fully paid and
outstanding.
I SUBSEQUENT EVENTS
NYNEX Corporation ("NYNEX"), the majority shareholder in NYNEX
CableComms, and Bell Atlantic Corporation ("Bell Atlantic"), have
previously announced an intention to merge.
On July 2, 1996, NYNEX and Bell Atlantic executed an amendment to their
definitive merger agreement, effecting a technical change in the
transaction structure of the merger of equals announced on April 22, 1996.
As amended, the agreement provides that a newly formed subsidiary of Bell
Atlantic will merge with and into NYNEX, thereby making NYNEX a wholly
owned subsidiary of Bell Atlantic. There is no change in the fundamental
elements of the proposed merger. The exchange ratio for shares is restated
to reflect the difference in the transaction. Each NYNEX shareholder will
receive 0.768 shares of Bell Atlantic common stock in exchange for one
share of NYNEX common stock. The purpose of the amendment to the merger
agreement is to expedite the regulatory approval process by eliminating
the need to obtain congressional approval of the merger under a 1913
District of Columbia "anti-merger" law. The merger, which is expected to
qualify as a pooling of interests for accounting purposes, is subject to a
number of conditions, including regulatory approvals, the approval of the
shareholders of both NYNEX and Bell Atlantic, and receipt of opinions that
the merger will be tax free, except, in the case of NYNEX shareholders,
for tax payable because of cash received for a fractional share and the
payment by NYNEX of certain transfer taxes on behalf of its shareholders.
The transaction is expected to close by April 1997.
It is expected that the new combined NYNEX and Bell Atlantic will
recognize recurring expense savings of approximately $600 million annually
by the third year following the consummation of the merger as a result of
consolidating operating systems and other administrative functions and
reducing management positions. Of these savings, $300 million is expected
to be achieved in the first year following the consummation of the merger
with an additional $150 million in each of the two succeeding years.
Annual capital expenditures for the new combined NYNEX and Bell Atlantic
should reflect approximately $250 to $300 million of incremental
purchasing efficiencies. As a result of the merger, the merged NYNEX and
Bell Atlantic is expected to incur certain transition and integration
charges of approximately $500 million in the first year following the
consummation of the merger. An additional $200 to $400 million in charges
are anticipated over the two succeeding years.
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10
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
Information contained above with respect to the expected financial impact
of the proposed merger is forward-looking. These statements represent
NYNEX's and Bell Atlantic's reasonable judgement with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially. Such factors include: materially adverse
changes in economic conditions in the markets served by NYNEX and Bell
Atlantic; substantial delay in the expected closing of the merger;
competition from others in the local exchange and toll service markets;
and the timing of entry and profitability of the new combined NYNEX and
Bell Atlantic in the long distance and video markets.
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11
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
RESULTS OF OPERATIONS
REVENUE
Operating revenue increased to pound sterling 35.5 million for the second
quarter of 1996 from pound sterling 18.4 million for the second quarter of 1995.
The increase is attributable primarily to an increased customer base, due to
further marketing in NYNEX CableComms' existing operational franchises as
construction of the network continues.
CABLE TELEVISION. Cable television revenue increased to pound sterling 14.9
million for the second quarter of 1996 from pound sterling 8.8 million for the
second quarter of 1995. This increase was primarily the result of an increase in
the number of basic customers and an increase in the average revenue per basic
customer. The number of basic customers increased to 226,849 at June 30, 1996
from 146,575 at June 30, 1995, while the average monthly cable television
revenue per basic customer increased to pound sterling 22.56 for the second
quarter of 1996 from pound sterling 21.23 for the second quarter of 1995. The
overall increase in average monthly cable television revenue per basic customer
is primarily attributable to a favorable increase in the pay to basic ratio. The
pay to basic ratio increased to 197.1% at June 30, 1996 from 154.9% at June 30,
1995. The increase was primarily due to the change in the packaging and pricing
structure of the premium channels in June 1995, designed to encourage customers
to purchase premium channels thereby enabling NYNEX CableComms to take advantage
of improved pricing in the BSkyB contract executed in the second quarter of
1995.
The number of cable television homes passed and marketed in NYNEX CableComms'
operating franchises increased to 1,156,658 at June 30, 1996 from 780,275 at
June 30, 1995. Penetration rates increased to 19.6% at June 30, 1996 from 18.8%
at June 30, 1995, as a higher proportion of NYNEX CableComms' potential
customers chose to purchase television services. This increase has been driven
by a number of marketing initiatives such as a "dual single service upgrade"
introduced in the last six months, a restructuring of the sales commission
policy and an emphasis on retaining customers. NYNEX CableComms' churn rate
increased to 30.6% at June 30, 1996 from 28.6% at June 30, 1995.
RESIDENTIAL TELECOMMUNICATIONS. Residential telecommunications revenue
increased to pound sterling 16.4 million for the second quarter of 1996 from
pound sterling 7.6 million for the second quarter of 1995. This increase was
primarily the result of an increase in the number of residential
telecommunications lines and an increase in the average monthly revenue per
line. The number of residential telecommunications lines increased to 296,236 at
June 30, 1996 from 152,215 at June 30, 1995.
10
12
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
The average monthly residential telecommunications revenue per line increased to
pound sterling 19.31 for the second quarter of 1996 from pound sterling 19.06
for the second quarter of 1995. When introducing price savings to the average
residential customer of 25% over British Telecommunications plc ("BT's")
standard call charges before discounts and promotions in March 1995, NYNEX
CableComms believed that the immediate reduction in revenue resulting from
offering these enhanced savings would be more than offset over time by
additional revenue resulting from increased telecommunications penetration rates
and greater usage attributable to this strategy. Both the increase in
penetration rate to 26.2% at June 30, 1996 from 22.5% at June 30, 1995 and the
increased average monthly revenue support this belief. NYNEX CableComms
believes that the increase in penetration rates is primarily attributable to its
pricing strategy and broader acceptance of its telecommunications' service as an
alternative to BT's.
The increase in the number of residential telecommunications lines reflects the
increase in the number of homes passed and marketed for residential
telecommunications services, which increased to 1,132,565 at June 30, 1996 from
676,721 at June 30, 1995. The residential telecommunications churn rate
increased to 16.8% at June 30, 1996 from 15.3% at June 30, 1995.
BUSINESS TELECOMMUNICATIONS. Business telecommunications revenue increased to
pound sterling 3.1 million for the second quarter of 1996 from pound sterling
1.0 million for the second quarter of 1995. This increase was primarily
attributable to an increase in the number of lines and the increase in the
average monthly revenue. The number of business telecommunications lines
increased to 22,025 at June 30, 1996 from 9,022 at June 30, 1995, and the
average monthly business telecommunications revenue per line increased to pound
sterling 51.23 for the second quarter of 1996 from pound sterling 42.31 for the
second quarter of 1995.
As with residential telecommunications, NYNEX CableComms believed that the
immediate reduction in revenue resulting from offering price savings over BT
would be more than offset over time by additional revenue generated from
increased take-up of business telecommunications services and greater usage
attributable to this strategy. In March 1996, business telesales was introduced
as a new sales medium for business customers, together with a new stepped
rental charge for business customers using CENTREX. These new marketing
initiatives were designed to encourage greater usage and increase average
monthly revenue per line. The upward trend in average monthly revenue per line
and the increased average number of lines per business customer to 3.7 at June
30, 1996 from 2.3 at June 30, 1995 support both the above strategies.
11
13
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
The increase in the number of business telecommunications lines also resulted
from an increase in the number of businesses passed and marketed for
telecommunications services. NYNEX CableComms estimates that the number of
businesses passed and marketed for telecommunications services increased to
34,155 at June 30, 1996 from 25,073 at June 30, 1995. The business
telecommunications churn rate increased to 13.4% at June 30, 1996 from 10.3% at
June 30, 1995.
INSTALLATION. NYNEX CableComms' combined installation revenues for cable
television and residential and business telecommunications increased to pound
sterling 1.2 million for the second quarter of 1996 from pound sterling 1.0
million for the second quarter of 1995. The growth in revenue primarily
reflects the increase in business installations in the second quarter of 1996
compared to the second quarter of 1995.
OPERATING EXPENSES. Operating expenses increased to pound sterling 51.1 million
for the second quarter of 1996 from pound sterling 43.7 million for the second
quarter of 1995 as a result of the continued growth in NYNEX CableComms' network
and customer base. The components of total operating expenses are cable
television programming costs, telecommunications expenses, depreciation and
amortization, staff costs and selling, general and administrative expenses.
Total programming costs increased to pound sterling 7.7 million for the second
quarter of 1996 from pound sterling 4.3 million for the second quarter of 1995.
Total programming costs as a percentage of cable television revenue were 52% for
the second quarter of 1996 compared with 49% for the second quarter of 1995. The
increased costs are a result of introducing new channels over the last twelve
months and increased rates charged by programming providers, the costs of which
have not been passed on to NYNEX CableComms' customers. The change in the
packaging and pricing structure of the premium channels in June 1995 also
resulted in a reduced gross profit margin being achieved on premium channels.
NYNEX CableComms' programming costs have benefited in the second quarter of 1996
from the fixed term programming agreement with BSkyB signed in the second
quarter of 1995. NYNEX CableComms believes that passing an element of these
cost savings to cable television customers will stimulate demand for premium
channels, resulting in an increase in the pay to basic ratio, average monthly
revenue per customer and penetration rates, as demonstrated this quarter.
Telecommunications expenses for the second quarter of 1996 were pound sterling
7.2 million compared with pound sterling 3.5 million for the second quarter of
1995. Telecommunications expenses principally represent interconnect charges
paid to national and international carriers for NYNEX CableComms' traffic
12
14
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
over their respective networks; these costs increase as the volume of traffic
increases. As a result of the completion of installation of digital switches in
all its franchises in 1995, NYNEX CableComms has eliminated the need to pay
third parties for switching calls to other telecommunications operators. Total
telecommunications expenses as a percentage of telecommunications revenue were
37% for the second quarter of 1996 compared with 40% for the second quarter of
1995.
Depreciation and amortization increased to pound sterling 12.9 million for the
second quarter of 1996 from pound sterling 8.0 million for the second quarter of
1995. This increase is primarily related to the increase in the cost of total
property, plant and equipment to pound sterling 1,072.4 million at June 30, 1996
from pound sterling 700.6 million at June 30, 1995. Depreciation will continue
to rise as the network is built out.
Staff costs, which include salaries, wages, benefits and sales commissions,
decreased to pound sterling 11.1 million for the second quarter of 1996 from
pound sterling 13.1 million for the second quarter of 1995. The decrease is due
to a reduction in the number of NYNEX CableComms' employees as a result of the
cost-management program undertaken towards the end of 1995. The number of
employees (excluding sub-contract installers) was 2,455 full time equivalents at
June 30, 1996, compared with 2,837 at June 30, 1995.
Selling, general and administrative expenses decreased to pound sterling 12.2
million for the second quarter of 1996 from pound sterling 14.8 million for the
second quarter of 1995 as a result of the cost-management program and as the
scale of NYNEX CableComms' operations matured. Following the cost-management
program undertaken towards the end of 1995, NYNEX CableComms has continued to
realize business efficiencies. Cost improvements have been made in most areas
during the second quarter of 1996, in particular billing, data processing and
software enhancement costs, which increased significantly during the second
quarter of 1995 as the customer base continued to grow and the implementation of
NYNEX CableComms' Integrated Customer Management System ("ICMS") continued. In
addition, recruitment, training and consultancy costs have been reduced
following the cost-management program.
Total operating expenses directly attributable to the design, construction and
installation of the network are capitalized within the network and not charged
to income. These capitalized costs were pound sterling 11.5 million for the
second quarter of 1996 and pound sterling 9.3 million for the second quarter of
1995.
13
15
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
OTHER INCOME (EXPENSE)
Interest income, which primarily represents interest on bank deposits, decreased
to pound sterling 0.8 million for the second quarter of 1996 from pound sterling
1.5 million for the second quarter of 1995. Interest income arises primarily
from the investment of borrowings and capital contributions in advance of
capital expenditures and operating cash flow requirements. In 1995 additional
interest income was earned from the investment of the proceeds of the share
issuance in June 1995.
In the second quarter of 1996, interest expense decreased to pound sterling 4.9
million, net of pound sterling 2.0 million which was capitalized, from pound
sterling 8.9 million, net of pound sterling 0.3 million which was capitalized,
for the second quarter of 1995. In the second quarter of 1996, pound sterling
1.6 million of interest expense was attributable to the amortization of deferred
finance costs, compared to pound sterling 1.8 million in the second quarter of
1995. The balance of interest expense for both periods was primarily interest
paid to the North and South limited partners in respect of relevant financing
arrangements. The amount of capitalized interest relates to the level of
work-in-progress and the level of long-term debt which increased to pound
sterling 283.2 million at June 30, 1996 from pound sterling 97.1 million at June
30, 1995. In 1995, interest expense increased as a result of increased funding
during the period from the financing arrangements for the Northern Operating
Companies and the Southern Operating Companies and the reorganization of the
financing arrangements for the Southern Operating Companies on March 31, 1995.
The reorganization resulted in the reclassification of pound sterling 193.6
million from Minority Interest and Capital Contributions from NYNEX to long-term
debt; contributing to a higher interest expense in the second quarter of 1995.
At the end of June 1995 a significant portion of long-term debt was eliminated
using the proceeds of the share issuance on June 14, 1995.
The Minority interest portion of the loss for the second quarter of 1996 was
pound sterling 15.5 million compared with pound sterling 31.4 million for the
second quarter of 1995. (See Note E to the unaudited Combined Financial
Statements describing the Minority Interest in NYNEX CableComms).
INCOME TAXES
Prior to June 14, 1995, NYNEX CableComms' US corporations were included in the
NYNEX consolidated tax return and in New York State and New York City combined
income tax filings. While included in the NYNEX tax filings, NYNEX CableComms
was allocated payments in accordance with the effect its losses had on reducing
the consolidated group's taxable income. As a result of the reorganization,
which occurred immediately prior to the completion of the
14
16
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 AS COMPARED WITH SECOND QUARTER OF 1995
Combined Offering on June 14, 1995, NYNEX CableComms and its US corporations no
longer qualify to be included in the NYNEX consolidated US federal tax return or
in any state or local combined tax returns. As such, any equivalent payments
will no longer be made to NYNEX CableComms by NYNEX for any future losses
generated. For periods after June 14, 1995, NYNEX UK CableComms Holdings Inc.
and its US subsidiaries will be treated as a consolidated group of corporations
for US tax return purposes. However, neither UK CableComms nor US CableComms
will be consolidated with UK Holdings or its subsidiaries for US tax purposes.
As a result, UK CableComms and US CableComms will file their own US federal tax
returns. Therefore no tax benefit arose in the second quarter of 1996. Of the
pound sterling 4.4 million tax benefit for the second quarter of 1995, pound
sterling 3.1 million was attributable to a deferred tax credit in the quarter.
FOREIGN EXCHANGE
All of NYNEX CableComms' revenues are denominated in pounds sterling. Although
the majority of NYNEX CableComms' operating expenses are incurred in pounds
sterling, NYNEX CableComms purchases certain of its network materials, equipment
and the services of seconded NYNEX employees in US dollars. During the second
quarters of 1996 and 1995, NYNEX CableComms did not experience significant gains
or losses as a result of fluctuations in the exchange rate of currencies. To
date, NYNEX CableComms has not used foreign currency hedging instruments to
reduce its exposure to foreign exchange fluctuations.
15
17
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
RESULTS OF OPERATIONS
REVENUE
Operating revenue increased to pound sterling 68.1 million for the first six
months of 1996 from pound sterling 35.3 million for the first six months of
1995. The increase is attributable primarily to an increased customer base, due
to further marketing in NYNEX CableComms' existing operational franchises as
construction of the network continues.
CABLE TELEVISION. Cable television revenue increased to pound sterling 29.2
million for the first six months of 1996 from pound sterling 16.7 million for
the first six months of 1995. This increase was primarily the result of an
increase in the number of basic customers and an increase in the average revenue
per basic customer. The number of basic customers increased to 226,849 at June
30, 1996 from 146,575 at June 30, 1995, while the average monthly cable
television revenue per basic customer increased to pound sterling 22.95 for the
first six months of 1996 from pound sterling 21.25 for the first six months of
1995. The overall increase in average monthly cable television revenue per
basic customer is primarily attributable to a favorable increase in the pay to
basic ratio. The pay to basic ratio increased to 197.1% at June 30, 1996 from
154.9% at June 30, 1995. The increase was primarily due to the change in the
packaging and pricing structure of the premium channels in June 1995, designed
to encourage customers to purchase premium channels thereby enabling NYNEX
CableComms to take advantage of improved pricing in the BSkyB contract executed
in the second quarter of 1996.
The number of cable television homes passed and marketed in NYNEX CableComms'
operating franchises increased to 1,156,658 at June 30, 1996 from 780,275 at
June 30, 1995. Penetration rates increased to 19.6% at June 30, 1996 from 18.8%
at June 30, 1995, as a higher proportion of NYNEX CableComms' potential
customers chose to purchase television services. This increase has been driven
by a number of marketing initiatives such as a "dual single service upgrade"
introduced in the last six months, a restructuring of the sales commission
policy and an emphasis on retaining customers. NYNEX CableComms' churn rate
increased to 30.6% at June 30, 1996 from 28.6% at June 30, 1995.
During the first quarter of 1996, NYNEX CableComms transmitted its first
Pay-Per-View event. 35,287 of NYNEX CableComms' customers subscribed to the
program (representing approximately 17.9% of the customer base at December 31,
1995), which generated revenue of pound sterling 0.3 million.
16
18
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
RESIDENTIAL TELECOMMUNICATIONS. Residential telecommunications revenue
increased to pound sterling 31.2 million for the first six months of 1996 from
pound sterling 14.9 million for the first six months of 1995. This increase was
primarily the result of an increase in the number of residential
telecommunications lines which was partially offset by a decrease in the average
revenue per line resulting from NYNEX CableComms' introduction of an aggressive
pricing strategy in March 1995, whereby NYNEX CableComms provides its average
residential customer with savings of 25% on monthly bills for line rental and
call charges combined over BT's standard prices, before discounts and
promotions. The number of residential telecommunications lines increased to
296,236 at June 30, 1996 from 152,215 at June 30, 1995, while the average
monthly residential telecommunications revenue per line decreased to pound
sterling 19.49 for the first six months of 1996 from pound sterling 20.74 for
the first six months of 1995. When introducing the price reductions, NYNEX
CableComms believed that the immediate reduction in revenue resulting from
offering these enhanced savings would be more than offset over time by
additional revenue resulting from increased telecommunications penetration rates
and greater usage attributable to this strategy. Both the increase in
penetration and an upward trend in usage support this belief, as does the
increased average monthly revenue for the second quarter of 1996 compared to the
second quarter of 1995.
The increase in the number of residential telecommunications lines reflects the
increase in the number of homes passed and marketed for residential
telecommunications services, which increased to 1,132,565 at June 30, 1996 from
676,721 at June 30, 1995. Penetration rates increased to 26.2% at June 30, 1996
from 22.5% at June 30, 1995. NYNEX CableComms believes that the increase in
penetration rates is primarily attributable to its pricing strategy and broader
acceptance of its telecommunications' service as an alternative to BT's. The
residential telecommunications churn rate increased to 16.8% at June 30, 1996
from 15.3% at June 30, 1995.
BUSINESS TELECOMMUNICATIONS. Business telecommunications revenue increased to
pound sterling 5.5 million for the first six months of 1996 from pound
sterling 1.9 million for the first six months of 1995. This increase was
primarily attributable to an increase in the number of business lines, and an
increase in the average monthly revenue. The number of business
telecommunications lines increased to 22,025 at June 30, 1996 from 9,022 at June
30, 1995, and the average monthly business telecommunications revenue per line
increased to pound sterling 50.41 for the first six months of 1996 from pound
sterling 46.73 for the first six months of 1995.
As with residential telecommunications, NYNEX CableComms believed that the
immediate reduction in revenue resulting from offering price savings over BT
would be more than offset over time by additional revenue generated from
increased take-up of business
17
19
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
telecommunications services and greater usage attributable to this strategy. In
March 1996, business telesales was introduced as a new sales medium for business
customers, together with a new stepped rental charge for business customers
using CENTREX. These new marketing initiatives were designed to encourage
greater usage and increase average monthly revenue per line. The upward trend in
average monthly revenue per line and the increased average number of lines per
business customer to 3.7 at June 30, 1996 from 2.3 at June 30, 1995 support both
the above strategies.
The increase in the number of business telecommunications lines also resulted
from an increase in the number of businesses passed and marketed for
telecommunications services. NYNEX CableComms estimates that the number of
businesses passed and marketed for telecommunications services increased to
34,155 at June 30, 1996 from 25,073 at June 30, 1995. The business
telecommunications churn rate increased to 13.4% at June 30, 1996 from 10.3% at
June 30, 1995.
INSTALLATION. NYNEX CableComms' combined installation revenues for cable
television and residential and business telecommunications increased to pound
sterling 2.2 million for the first six months of 1996 from pound sterling 1.7
million for the first six months of 1995. This growth in revenue reflects the
ongoing construction of NYNEX CableComms' network and the corresponding
expansion of its customer base.
OPERATING EXPENSES. Operating expenses increased to pound sterling 102.8
million for the first six months of 1996 from pound sterling 82.7 million for
the first six months of 1995 as a result of the continued growth in NYNEX
CableComms' network and customer base. The components of total operating
expenses are cable television programming costs, telecommunications expenses,
depreciation and amortization, staff costs and selling, general and
administrative expenses.
Total programming costs increased to pound sterling 15.5 million for the first
six months of 1996 from pound sterling 8.0 million for the first six months of
1995. Total programming costs as a percentage of cable television revenue were
53% for the first six months of 1996 compared with 48% for the first six months
of 1995. The increased costs are a result of introducing new channels over the
last twelve months and increased rates charged by programming providers, the
costs of which have not been passed on to NYNEX CableComms' customers. The
change in the packaging and pricing structure of the premium channels in June
1995 also resulted in a reduced gross profit margin being achieved on premium
channels. NYNEX CableComms' programming costs have benefited in the second
quarter of 1996 from the fixed term programming agreement with BSkyB signed in
the second quarter of 1995. NYNEX CableComms believes that passing an element
of these cost savings to cable television customers will stimulate demand for
premium channels, resulting in
18
20
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
an increase in the pay to basic ratio, average monthly revenue per customer and
penetration rates, as demonstrated in the first six months of 1996 compared to
the same period in 1995.
Telecommunications expenses for the first six months of 1996 were pound sterling
14.1 million compared with pound sterling 6.9 million for the first six months
of 1995. Telecommunications expenses principally represent interconnect charges
paid to national and international carriers for NYNEX CableComms' traffic over
their respective networks; these costs increase as the volume of traffic
increases. As a result of the completion of installation of digital switches in
all its franchises in 1995, NYNEX CableComms has eliminated the need to pay
third parties for switching calls to other telecommunications operators.
Telecommunications expenses were 39% of telecommunications revenue for the first
six months of 1996 compared with 41% for the first six months of 1995, this was
achieved despite reductions in the average revenue per line following the
adoption of the pricing strategy in March 1995.
Depreciation and amortization increased to pound sterling 25.1 million for the
first six months of 1996 from pound sterling 15.6 million for the first six
months of 1995. This increase is primarily related to the increase in the cost
of total property, plant and equipment to pound sterling 1,072.4 million at June
30, 1996 from pound sterling 700.6 million at June 30, 1995. Depreciation will
continue to rise as the network is built out.
Staff costs, which include salaries, wages, benefits and sales commissions,
increased to pound sterling 24.0 million for the first six months of 1996 from
pound sterling 22.3 million for the first six months of 1995. Staff costs
increased partially as a result of annual basic pay increases made in the second
quarter of 1996 and rising sales commissions as more customers purchase NYNEX
CableComms' cable services. These additional costs were off-set by reductions in
costs as staff numbers have reduced. The staff costs in the first quarter of
1996 also included one-time payments made to employees leaving NYNEX CableComms
in the first quarter of 1996. Until February 1996, the number of employees
(excluding sub-contract installers) was 2,863. Following the cost-management
program undertaken towards the end of 1995, the number of employees (excluding
subcontract installers), was 2,455 full time equivalents at June 30, 1996,
compared with 2,837 at June 30, 1995.
Selling, general and administrative expenses decreased to pound sterling 24.0
million for the first six months of 1996 from pound sterling 29.9 million for
the first six months of 1995 as a result of the cost-management program and as
the scale of NYNEX CableComms' operations matured. Following the cost-management
program undertaken towards the end of 1995, NYNEX CableComms continued to make
business efficiencies. Cost improvements have been made in most areas during the
first six months of 1996, in particular billing, data processing and software
enhancement costs, which increased significantly during the first six months of
1995 as the customer base continued to
19
21
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
grow and the implementation of NYNEX CableComms' Integrated Customer Management
System ("ICMS") continued. In the final quarter of 1995, revisions to the
agreement associated with the cost of development of ICMS were negotiated, the
benefits of which have been seen in the first six months of 1996. In addition,
recruitment, training and consultant costs have been reduced following the
cost-management program.
Total operating expenses directly attributable to the design, construction and
installation of the network are capitalized within the network and not charged
to income. These capitalized costs were pound sterling 22.4 million for the
first six months of 1996 and pound sterling 19.0 million for the first six
months of 1995.
OTHER INCOME (EXPENSE)
Interest income, which primarily represents interest on bank deposits decreased
to pound sterling 0.9 million for the first six months of 1996 from pound
sterling 1.8 million for the first six months of 1995. Interest income arises
primarily from the investment of borrowings and capital contributions in advance
of capital expenditures and operating cash flow requirements. In 1995 additional
interest income was earned from the investment of the proceeds of the share
issuance in June 1995.
In the first six months of 1996, interest expense decreased to pound sterling
10.4 million, net of pound sterling 2.4 million which was capitalized, from
pound sterling 11.1 million, net of pound sterling 0.6 million which was
capitalized, for the first six months of 1995. In the first six months of 1996,
pound sterling 3.2 million of interest expense was attributable to the
amortization of deferred finance costs, compared to pound sterling 2.9 million
in the first six months of 1995. The balance of interest expense for both
periods was primarily interest paid to the North and South limited partners in
respect of relevant financing arrangements. The amount of capitalized interest
relates to the level of work-in-progress and the level of long-term debt which
increased to pound sterling 283.2 million at June 30, 1996 from pound sterling
97.1 million at June 30, 1995. At the end of June 1995 a significant portion of
long-term debt was eliminated using the proceeds of the share issuance on June
14, 1995.
The Minority interest portion of the loss for the first six months of 1996 was
pound sterling 30.7 million compared with pound sterling 43.3 million for the
first six months of 1995. (See Note E to the unaudited Combined Financial
Statements describing the Minority Interest in NYNEX CableComms).
INCOME TAXES
Prior to June 14, 1995, NYNEX CableComms' US corporations were included in the
NYNEX consolidated tax return and in New York State and New York City combined
income tax filings.
20
22
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
While included in the NYNEX tax filings, NYNEX CableComms was allocated payments
in accordance with the effect its losses had on reducing the consolidated
group's taxable income. As a result of the reorganization, which occurred
immediately prior to the completion of the Combined Offering on June 14, 1995,
NYNEX CableComms and its US corporations no longer qualify to be included in the
NYNEX consolidated US federal tax return or in any state or local combined tax
returns. As such, any equivalent payments will no longer be made to NYNEX
CableComms by NYNEX for any future losses generated. For periods after June 14,
1995, NYNEX UK CableComms Holdings Inc. and its US subsidiaries will be treated
as a consolidated group of corporations for US tax return purposes. However,
neither UK CableComms nor US CableComms will be consolidated with UK Holdings or
its subsidiaries for US tax purposes. As a result, UK CableComms and US
CableComms will file their own US federal tax returns. Therefore no tax benefit
arose in the first six months of 1996. Of the pound sterling 12.8 million tax
benefit for the first six months of 1995, pound sterling 6.2 million was
attributable to a deferred tax credit in the period. The balance was primarily
attributable to losses in the period.
FOREIGN EXCHANGE
All of NYNEX CableComms' revenues are denominated in pounds sterling. Although
the majority of NYNEX CableComms' operating expenses are incurred in pounds
sterling, NYNEX CableComms purchases certain of its network materials,
equipment and the services of seconded NYNEX employees in US dollars. During
the first six months of 1996 and 1995, NYNEX CableComms did not experience
significant gains or losses as a result of fluctuations in the exchange rate of
currencies. To date, NYNEX CableComms has not used foreign currency hedging
instruments to reduce its exposure to foreign exchange fluctuations.
CAPITAL RESOURCES, CASH FLOWS AND LIQUIDITY
Significant additional capital expenditures are required to construct the
remaining portions of NYNEX CableComms' network. Under the terms of current
licenses, NYNEX CableComms is required to construct cable television systems
passing an additional 1.1 million premises by the end of 2000, in accordance
with a series of prescribed intermediate milestones for each of its franchises.
NYNEX CableComms expects to have significant capital requirements for the
foreseeable future, expecting to make capital expenditures of approximately
pound sterling 1.0 billion over the three-year period beginning January 1, 1996.
By the end of this three year period, NYNEX CableComms intends to have largely
completed network construction in its existing franchises. During the first six
months of 1996, capital expenditures were pound sterling 160.7 million.
21
23
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
FINANCING OF NYNEX CABLECOMMS
At June 30, 1996, NYNEX CableComms had available pound sterling 533.3 million of
undrawn debt facilities, which are available subject to NYNEX CableComms passing
a certain number of homes. In addition, NYNEX has entered into a credit
facility with NYNEX CableComms to make available a credit facility of pound
sterling 200.0 million. NYNEX CableComms may make drawings under this facility
at any time after June 1, 1996 and amounts borrowed may remain outstanding until
1998. No drawings have been made on this facility.
The financing of NYNEX CableComms is described in Notes D and E to the unaudited
Combined Financial Statements. The North limited partner has contributed pound
sterling 131.3 million and pound sterling 110.0 million to the North Partnership
at June 30, 1996 and 1995, respectively, and has provided a further pound
sterling 197.1 million and pound sterling 91.7 million in financing to the
Northern Operating Companies under the North Credit Facility at those dates,
respectively. The South limited partner has contributed pound sterling 80.4
million and pound sterling 69.8 million to the South Partnership at June 30,
1996 and 1995, respectively, and has provided a further pound sterling 86.1
million and pound sterling 5.4 million in financing to the Southern Operating
Companies under the South Credit Facility at those dates, respectively.
CASH FLOWS AND LIQUIDITY
NYNEX CableComms had net cash used in operating activities of pound sterling 2.4
million and pound sterling 16.1 million for the first six months of 1996 and
1995, respectively.
Net cash used in investing activities was pound sterling 160.7 million and pound
sterling 195.5 million for the first six months of 1996 and 1995, respectively,
for expenditures on constructing the network and associated capital
expenditures.
Net cash provided by financing activities was pound sterling 157.9 million and
pound sterling 206.2 million for the first six months of 1996 and 1995,
respectively. In the first six months of 1995, NYNEX made capital contributions
of pound sterling 5.3 million to NYNEX CableComms. Capital contributions by
NYNEX to NYNEX CableComms ceased on March 31, 1995 when the financing
arrangements for the South were reorganized. After this date, all funding by
NYNEX has been through the North and the South limited partners. No capital
contributions were made by the North and South limited partners during the first
six months of 1996.
During the first six months of 1996, the Northern Operating Companies and
Southern Operating Companies borrowed pound sterling 157.9 million under the
credit facilities which are detailed in Note D to the unaudited Combined
Financial Statements.
22
24
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
OTHER MATTERS
REGULATORY ISSUES
(I) NUMBER PORTABILITY
Number portability allows customers to retain their telephone number when
changing telephone operators. Previously customers using NYNEX CableComms' or
any other cable operator's telecommunications service had to change their
telephone number. On May 22, 1996, NYNEX CableComms became the first company
in the UK to launch a commercial number portability service. The franchise
chosen for release of the product was Derby. The remainder of the NYNEX
franchises are expected to have number portability in place in the third
quarter of 1996.
(II) PRICE CONTROL REVIEW
Since December 1995, the Office of Telecommunications ("OFTEL"), has been
consulting on the BT retail price control to replace the current retail price
index (RPI) minus 7.5% regime that will expire on July 31, 1997. OFTEL is also
seeking to install a new interconnect regime based on long run incremental
costs. On June 3, 1996, OFTEL announced its final proposal for BT's retail
price cap. This is a four year cap, commencing on August 1, 1997, set at
RPI-4.5% on the bottom 80% of residential customers by telecommunications
expenditure. Small business customers will be subject to a cap limiting
increases in line rentals to RPI+0% and with access to the same reductions in
call price charges as for residential customers. OFTEL has stated that this
will be the last retail price control. A final decision on the network cap has
been delayed until early 1997 to allow more work to be performed on the
incremental cost base. Modifications to BT's license putting into affect the
proposed changes, as well as a condition that enables OFTEL to effectively
address anti-competitive behavior, were presented to the BT Board on July 18,
1996. These received acceptance by BT, with certain substantive alterations.
OFTEL are now undertaking a further statutory consultation on the proposed
alterations. Provided there are no further changes, BT's licence will be
modified by the end of the third quarter of 1996.
23
25
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
(III) INTERNATIONAL CONSULTATION
In March 1996, the Department of Trade and Industry (DTI) released a
consultative document that proposed the licensing of additional facilities-based
operators in the international call market. On June 9, 1996, following
examination of the responses to the consultation document, the UK Government
announced the liberalization of international facilities on all country routes.
Previously, only BT and Mercury were licensed to own and operate international
facilities from the UK. The first group of license applications have been
submitted to the DTI and a consultation on the form of the license is due to
commence in the third quarter 1996. Additional international facilities
operators should be licensed before the end of 1996.
(IV) REVIEW OF MERCURY LICENSE
In December 1995, OFTEL consulted on proposals for changes to the Public
Telephone Operator license of Mercury Communications Limited which would give
Mercury greater freedom to compete. On June 25, 1996, Mercury's license was
modified effecting OFTEL's proposed changes.
(V) COMPETITION IN TELECOMMUNICATIONS SERVICES
In February 1996, OFTEL introduced a consultation document outlining proposals
for the encouragement of the provision of enhanced services across
telecommunications networks. In June 1996, OFTEL published its final proposals,
which allow BT to price its services to other service providers at standard
retail prices less the avoidable costs of serving such providers. The BT
license modifications implementing the changes will form a part of the
resolution of the Price Control Review proposals presented to BT in the third
quarter of 1996.
24
26
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
(VI) OFT DECISION IN BSKYB REVIEW.
The UK Office of Fair Trading ("OFT") has completed its comprehensive review of
BSkyB's position in the pay TV market and the supply in the UK of programming
and related services at the wholesale level.
In findings published on July 24, 1996, the OFT concluded, among other things,
that barriers to entry resulting from BSkyB's powerful position in the
wholesale pay TV market raise concerns that "although BSkyB is not acting
anti-competitively, the competitive process is being impaired".
To address the situation, the OFT has secured new informal undertakings
pursuant to which BSkyB has agreed (a) to submit a proposed new wholesale price
list and discount structure (the New Rate Card) to the OFT by July 31, 1996 for
consultation with the cable industry and OFT approval; (b) to permit
flexibility to cable operators, for which variable prices will be set forth in
the New Rate Card, to purchase BSkyB's Basic Channels which can be provided on
an unbundled basis to a range of between 80 and 100 percent of a cable
operator's subscriber base; and (c) to limit the number and nature of so-called
"Bonus" Channels that can be linked to the purchase of other channels. Sixty
days after approval by the OFT, BSkyB's wholesale pricing to cable operators
without existing fixed term contracts must be in accordance with the New Rate
Card. Cable operators with existing fixed term contracts with BSkyB, such as
NYNEX CableComms, may continue under those contracts until their expiry or opt
for the New Rate Card pricing and discount structure.
In connection with its BSkyB review announcement, the OFT also formally
recognised that the programming agreement entered into by NYNEX CableComms and
BSkyB during the second quarter of 1995, which it had been reviewing under the
UK Restrictive Trade Practices Act 1976, has been amended to address the
competition concerns of the OFT.
SUBSEQUENT EVENTS
NYNEX Corporation ("NYNEX"), the majority shareholder in NYNEX CableComms, and
Bell Atlantic Corporation ("Bell Atlantic"), have previously announced an
intention to merge.
On July 2, 1996, NYNEX and Bell Atlantic executed an amendment to their
definitive merger agreement, effecting a technical change in the transaction
structure of the merger of equals announced on April 22, 1996. As amended, the
agreement provides that a newly formed subsidiary of Bell Atlantic will merge
with and into NYNEX, thereby making NYNEX a wholly
25
27
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 AS COMPARED TO FIRST SIX MONTHS OF 1995
owned subsidiary of Bell Atlantic. There is no change in the fundamental
elements of the proposed merger. The exchange ratio for shares is restated to
reflect the difference in the transaction. Each NYNEX shareholder will receive
0.768 shares of Bell Atlantic common stock in exchange for one share of NYNEX
common stock. The purpose of the amendment to the merger agreement is to
expedite the regulatory approval process by eliminating the need to obtain
congressional approval of the merger under a 1913 District of Columbia
"anti-merger" law. The merger, which is expected to qualify as a pooling of
interests for accounting purposes, is subject to a number of conditions,
including regulatory approvals, the approval of the shareholders of both NYNEX
and Bell Atlantic, and receipt of opinions that the merger will be tax free,
except, in the case of NYNEX shareholders, for tax payable because of cash
received for a fractional share and the payment by NYNEX of certain transfer
taxes on behalf of its shareholders. The transaction is expected to close by
April 1997.
It is expected that the new combined NYNEX and Bell Atlantic will recognize
recurring expense savings of approximately $600 million annually by the third
year following the consummation of the merger as a result of consolidating
operating systems and other administrative functions and reducing management
positions. Of these savings, $300 million is expected to be achieved in the
first year following the consummation of the merger with an additional $150
million in each of the two succeeding years. Annual capital expenditures for
the new combined NYNEX and Bell Atlantic should reflect approximately $250 to
$300 million of incremental purchasing efficiencies. As a result of the merger,
the merged NYNEX and Bell Atlantic is expected to incur certain transition and
integration charges of approximately $500 million in the first year following
the consummation of the merger. An additional $200 to $400 million in charges
are anticipated over the two succeeding years.
Information contained above with respect to the expected financial impact of
the proposed merger is forward-looking. These statements represent NYNEX's and
Bell Atlantic's reasonable judgement with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially. Such factors include: materially adverse changes in economic
conditions in the markets served by NYNEX and Bell Atlantic; substantial delay
in the expected closing of the merger; competition from others in the local
exchange and toll service markets; and the timing of entry and profitability of
the new combined NYNEX and Bell Atlantic in the long distance and video
markets.
26
28
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
OPERATING STATISTICS - SECOND QUARTER 1995
(UNAUDITED)
THE FOLLOWING TABLE SUMMARIZES INFORMATION SET OUT IN MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
NET ADDITIONS
3 MONTHS TO 3 MONTHS TO 6 MONTHS TO 6 MONTHS TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
CABLE TELEVISION:
Homes passed and marketed 84,402 92,352 161,741 156,184
Cable television customers 15,238 16,198 29,845 24,607
RESIDENTIAL TELECOMMUNICATIONS:
Homes passed and marketed 98,621 116,032 186,763 175,690
Residential lines connected 28,001 35,601 63,685 53,261
BUSINESS TELECOMMUNICATIONS:
Business lines connected 3,859 2,544 7,765 3,711
CUMULATIVE
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995 1995
TOTAL TOTAL TOTAL
Homes passed 1,491,591 879,420 1,201,471
Businesses passed 68,297 31,917 51,761
--------- ------- ---------
Total premises passed 1,559,888 911,337 1,253,232
========= ======= =========
CABLE TELEVISION:
Homes passed and marketed 1,156,658 780,275 994,917
Average monthly revenue per customer pound sterling 22.95 pound sterling 21.25 pound sterling 21.59
Basic customers 226,849 146,575 197,004
Penetration rate 19.6% 18.8% 19.8%
Pay to basic ratio 197.1% 154.9% 209.3%
Churn rate 30.6% 28.6% 29.4%
RESIDENTIAL TELECOMMUNICATIONS:
Homes passed and marketed 1,132,565 676,721 945,802
Average monthly revenue per customer pound sterling 19.49 pound sterling 20.74 pound sterling 19.52
Residential lines connected 296,236 152,215 232,551
Penetration rate 26.2% 22.5% 24.6%
Churn rate 16.8% 15.3% 17.5%
BUSINESS TELECOMMUNICATIONS:
Businesses passed and marketed 34,155 25,073 30,450
Average monthly revenue per customer pound sterling 50.41 pound sterling 46.73 pound sterling 46.82
Business lines connected 22,025 9,022 14,260
Average number of lines per customer 3.7 2.3 2.8
27
29
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NYNEX CableComms Group PLC ("UK CableComms")
The Annual General Meeting of shareholders of UK CableComms, was
held on May 8, 1996. The Directors' Report and Accounts for the
year ended December 31, 1995 were received and adopted by the
indicated votes:
% of Shares Voted
-----------------
For: 669,443,783 shares 99.98
Against: 10,464 shares -
Abstain: 118,506 shares 0.02
The re-appointment of Coopers & Lybrand as UK auditors and Coopers
& Lybrand L.L.P. as US auditors and authorization for the Directors
to fix their remuneration were ratified by the indicated votes:
% of Shares Voted
-----------------
For: 669,439,800 shares 9.98
Against: 127,332 shares 0.02
Abstain: 5,621 shares -
The following directors were re-elected to the Board by the
indicated votes:
For %* Withheld %*
--- ---- -------- ----
John F. Killian 669,535,710 99.99 37,043 0.01
Nicholas Mearing-Smith 669,536,565 99.99 36,188 0.01
Sir Michael Checkland 669,528,084 99.99 44,669 0.01
John Rennocks 669,535,171 99.99 37,582 0.01
*% of shares voted
28
30
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
The following Directors had terms of office as Directors continuing
after the date of the Annual General Meeting:
Richard W. Blackburn Jeffrey A. Bowden
Robert T. Anderson Alan Z. Senter
The Directors were generally and unconditionally authorized to
exercize all or any powers of the Company to allot relevant
securities (within the meaning of Section 80 of the Companies Act
1985) up to an aggregate nominal amount of 30,833,333 in
substitution for previous authorities, except to the extent
utilized at the date of this Resolution, by the indicated votes:
% of Shares Voted
-----------------
For: 669,469,955 99.99
Against: 85,592 0.01
Abstain: 17,206 -
The Directors were authorized to allot additional securities under
certain circumstances without further shareholder approval, by the
indicated votes:
% of Shares Voted
-----------------
For: 669,456,039 99.99
Against: 94,882 0.01
Abstain: 21,832 -
No shareholders presented any proposals at the Meeting.
NYNEX CableComms Group Inc. ("US CableComms")
The Annual Meeting of shareholders of US CableComms was held on May
8, 1996.
The re-appointment of Coopers & Lybrand as UK auditors and Coopers
& Lybrand L.L.P. as US auditors and authorization for the directors
to fix their remuneration were ratified by the indicated votes:
% of Shares Voted
-----------------
For 677,474,019 99.98
Against: 130,390 0.02
Abstain: 6,350 -
29
31
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
The following Directors were re-elected to the Board by the
indicated votes:
For %* Withheld %*
--- ---- -------- ----
John F. Killian 677,571,917 99.99 38,842 0.01
Nicholas Mearing-Smith 677,573,282 99.99 37,477 0.01
Sir Michael Checkland 677,565,437 99.99 45,322 0.01
John Rennocks 677,573,378 99.99 37,381 0.01
*% of shares voted
The following Directors had terms of office as Directors continuing
after the date of the Annual Meeting:
Richard W. Blackburn Jeffrey A. Bowden
Robert T. Anderson Alan Z. Senter
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER
10.1 Standard Interconnect Agreement dated May 13, 1996 between
British Telecommunications plc ("BT") and NYNEX CableComms
Derby. (Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants.)
10.2 Transition Agreement dated May 13, 1996 between BT and NYNEX
CableComms Bolton. ( Identical agreements have been entered
into between BT and fifteen other affiliates of the
Registrants.)
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the registrant during the
quarter for which this report is filed.
30
32
FORM 10-Q
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned officers thereunto duly authorized.
NYNEX CABLECOMMS GROUP PLC
---------------------------
(Registrant)
Nicholas Mearing-Smith
Date: August 7, 1996 Chief Financial Officer
NYNEX CABLECOMMS GROUP INC.
---------------------------
(Registrant)
Nicholas Mearing-Smith
Date: August 7, 1996 Chief Financial Officer
31
33
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Standard Interconnect Agreement dated May 13, 1996 between
British Telecommunications plc ("BT") and NYNEX CableComms
Derby. (Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants.)
10.2 Transition Agreement dated May 13, 1996 between BT and NYNEX
CableComms Bolton. ( Identical agreements have been entered
into between BT and fifteen other affiliates of the
Registrants.)
27 Financial Data Schedule