1
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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 SEPTEMBER 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
October 31, 1996:
925,485,389 Ordinary Shares of NYNEX CableComms Group PLC, L0.10 par value
925,485,389 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.)
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2
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
SEPTEMBER 30,
-----------------------------------
1996 1995 1996
--------- --------- ---------
[NOTE B]
Operating Revenue:
Cable television....................................... L 15,586 L 9,615 $ 24,396
Telecommunications -- residential...................... 20,758 9,266 32,492
Telecommunications -- business......................... 3,413 1,449 5,342
Installation........................................... 1,061 1,477 1,662
--------- --------- ---------
TOTAL OPERATING REVENUES................................. 40,818 21,807 63,892
--------- --------- ---------
Operating Expenses:
Programming............................................ 8,446 5,204 13,221
Telecommunications..................................... 7,810 3,888 12,225
Depreciation and amortization.......................... 14,251 10,906 22,307
Staff costs............................................ 10,389 11,579 16,262
Selling, general and administrative.................... 12,007 11,673 18,794
--------- --------- ---------
TOTAL OPERATING EXPENSES................................. 52,903 43,250 82,809
--------- --------- ---------
Operating loss........................................... (12,085) (21,443) (18,917)
--------- --------- ---------
Other Income (Expense):
Interest income........................................ 3,630 1,375 5,682
Interest expense....................................... (5,048) (2,117) (7,901)
Minority interest...................................... 8,304 22,000 12,998
--------- --------- ---------
TOTAL OTHER INCOME....................................... 6,886 21,258 10,779
--------- --------- ---------
Loss before income taxes................................. (5,199) (185) (8,138)
Income taxes............................................. -- 2,437 --
--------- --------- ---------
NET (LOSS) INCOME........................................ (5,199) 2,252 (8,138)
========= ========= =========
(LOSS) EARNINGS PER ADS.................................. (0.056) 0.024 (0.088)
========= ========= =========
AVERAGE NUMBER OF ADS OUTSTANDING........................ 925,069 925,000 925,069
========= ========= =========
ACCUMULATED DEFICIT
Beginning of period.................................... (101,822) (88,451) (159,382)
Net (loss) income...................................... (5,199) 2,252 (8,138)
--------- --------- ---------
End of period............................................ L(107,021) L (86,199) $(167,520)
========= ========= =========
See accompanying notes to the combined financial statements.
1
3
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT ADS AMOUNTS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER
30,
-----------------------------------
1996 1995 1996
--------- --------- ---------
[NOTE B]
Operating Revenue:
Cable television....................................... L 44,742 L 26,362 $ 70,034
Telecommunications -- residential...................... 51,939 24,209 81,300
Telecommunications -- business......................... 8,881 3,344 13,902
Installation........................................... 3,306 3,159 5,175
--------- --------- ---------
TOTAL OPERATING REVENUES................................. 108,868 57,074 170,411
--------- --------- ---------
Operating Expenses:
Programming............................................ 23,968 13,199 37,517
Telecommunications..................................... 21,953 10,772 34,363
Depreciation and amortization.......................... 39,359 26,465 61,609
Staff costs............................................ 34,431 33,908 53,895
Selling, general and administrative.................... 36,028 41,578 56,394
--------- --------- ---------
TOTAL OPERATING EXPENSES................................. 155,739 125,922 243,778
--------- --------- ---------
Operating loss........................................... (46,871) (68,848) (73,367)
--------- --------- ---------
Other Income (Expense):
Interest income........................................ 4,554 3,188 7,128
Interest expense....................................... (15,400) (13,228) (24,105)
Minority interest...................................... 39,032 65,343 61,096
--------- --------- ---------
TOTAL OTHER INCOME....................................... 28,186 55,303 44,119
--------- --------- ---------
Loss before income taxes................................. (18,685) (13,545) (29,248)
Income taxes............................................. -- 15,243 --
--------- --------- ---------
NET (LOSS) INCOME........................................ (18,685) 1,698 (29,248)
========= ========= =========
(LOSS) EARNINGS PER ADS.................................. (0.202) 0.018 (0.316)
========= ========= =========
AVERAGE NUMBER OF ADS OUTSTANDING........................ 925,069 925,000 925,069
========= ========= =========
ACCUMULATED DEFICIT
Beginning of period.................................... (88,336) (87,897) (138,272)
Net (loss) income...................................... (18,685) 1,698 (29,248)
--------- --------- ---------
End of period............................................ L(107,021) L (86,199) $(167,520)
========= ========= =========
See accompanying notes to the combined financial statements.
2
4
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1996
------------- ------------ -------------
UNAUDITED AUDITED UNAUDITED
[NOTE B]
ASSETS
Current assets:
Cash and temporary cash investments................. L 15,796 L 9,807 $ 24,726
Receivables (net of allowance of L2,948 and L1,492,
respectively).................................... 29,527 43,551 46,218
Deferred charges and other current assets........... 2,785 2,653 4,359
---------- ---------- ----------
TOTAL CURRENT ASSETS.................................. 48,108 56,011 75,303
Property, plant and equipment, (net of accumulated
depreciation of L100,582 and L62,270,
respectively)....................................... 1,032,187 859,024 1,615,682
Goodwill (net of accumulated amortization of L2,671
and L2,138 , respectively).......................... 25,670 26,203 40,181
Deferred finance costs, net........................... 53,384 59,140 83,562
Other assets.......................................... 1,323 1,401 2,071
---------- ---------- ----------
TOTAL ASSETS.......................................... L1,160,672 L1,001,779 $1,816,799
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... 59,358 69,038 92,913
Other current liabilities........................... 42,367 46,834 66,316
---------- ---------- ----------
TOTAL CURRENT LIABILITIES............................. 101,725 115,872 159,229
Long-term debt [Note D]............................... 357,349 125,350 559,358
Other long-term liabilities........................... 3,635 4,970 5,690
Minority interest [Note E]............................ 93,088 132,121 145,711
---------- ---------- ----------
TOTAL LIABILITIES..................................... 555,797 378,313 869,988
---------- ---------- ----------
Commitments and contingencies [Note G]
STOCKHOLDERS' EQUITY
Ordinary shares -- par value L0.10 per share (1,500
million authorized, 925.1 million issued and
outstanding)........................................ 92,507 92,500 144,801
Shares of common stock -- par value $0.01 per share
(1,500 million authorized, 925.1 million issued and
outstanding)........................................ 5,763 5,763 9,021
Additional paid-in capital............................ 613,626 613,539 960,509
Accumulated deficit................................... (107,021) (88,336) (167,520)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................ 604,875 623,466 946,811
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ L1,160,672 L1,001,779 $1,816,799
========== ========== ==========
See accompanying notes to the combined financial statements.
3
5
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER
30,
-----------------------------------
1996 1995 1996
--------- --------- ---------
[NOTE B]
Cash Flows From Operating Activities:
Net (loss) income...................................... L (18,685) L 1,698 $ (29,248)
--------- --------- ---------
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization....................... 39,359 26,465 61,608
Amortization of deferred finance costs.............. 4,875 5,011 7,631
Provision for bad debts............................. 4,879 1,717 7,637
Minority interest................................... (39,032) (65,343) (61,096)
Deferred income taxes............................... -- (9,149) --
Changes in operating assets and liabilities:
Receivables....................................... 9,146 (17,837) 14,317
Deferred charges and other current assets......... (132) (1,337) (206)
Accounts payable.................................. 495 16,077 775
Other current liabilities......................... (4,576) 7,220 (7,164)
Other -- net...................................... 95 (86) 149
--------- --------- ---------
Total adjustments........................................ 15,109 (37,262) 23,651
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES.................... (3,576) (35,564) (5,597)
--------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures................................... (222,434) (304,943) (348,175)
Loan to NYNEX Corporation.............................. -- (156,889) --
Repayment of loan by NYNEX Corporation................. -- 156,889 --
Other investing activities, net........................ -- 352 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................... (222,434) (304,591) (348,175)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowings............................... 231,999 -- 363,147
Capital contributions.................................. -- 5,320 --
Loans.................................................. -- 151,716 --
Repayment of loans..................................... -- (360,253) --
Change in other long-term liabilities.................. -- 562 --
Funding from minorities................................ -- 156,555 --
Deferred transaction and finance costs................. -- (2,752) --
Proceeds of share issue (net of L36 million costs)..... -- 380,177 --
Activity with minority joint venture partners.......... -- (3,119) --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................ 231,999 328,206 363,147
--------- --------- ---------
Net increase (decrease) in cash and temporary cash
investments............................................ 5,989 (11,949) 9,375
Cash and temporary cash investments at beginning of
period................................................. 9,807 41,687 15,351
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD..... L 15,796 L 29,738 $ 24,726
========= ========= =========
See accompanying notes to the combined financial statements.
4
6
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, each ADS comprising 10 Units. 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 ("L"). Solely for the convenience of the reader, the unaudited
combined financial statements as at and for the period ended September 30, 1996
have been presented in US dollars ("$") at the rate of L1.00 = $1.5653, the Noon
Buying Rate of the Federal Reserve Bank of New York on September 30, 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.
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.
5
7
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
D FINANCING OF NYNEX CABLECOMMS
At September 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 L42.0
million for the Northern arrangement and L23.0 million for the Southern
arrangement were incurred in December 1994 and December 1993, respectively.
Credit Facilities
The credit facilities are for a maximum of L542.5 million in the case of
the Northern Operating Companies and L274.0 million in the case of the Southern
Operating Companies. An additional L157.5 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.
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 L131.3 million and L80.4 million,
respectively, as of September 30, 1996. The Minority interest in the North
Partnership and South Partnership was L35.3 million and L57.7 million at
September 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 L200.0 million for the
North Partnership and L40.0 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 L40.0 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.
6
8
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
Non cash items excluded from the Combined Statements of Cash Flows:
Property, plant and equipment acquired by incurring directly related
liabilities....................................................... L53,778 L21,125
======= =======
Accrued transaction and finance costs................................ L -- L 151
======= =======
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 SUBSEQUENT EVENTS
ANNOUNCEMENT BY CABLE & WIRELESS, NYNEX AND BELL CANADA INTERNATIONAL
The Boards of NYNEX CableComms have taken note of the announcement of
October 22, 1996 by Cable and Wireless plc ("Cable & Wireless"), NYNEX and Bell
Canada International Inc. in respect of a conditional agreement to merge their
respective interests in Mercury Communications Limited, NYNEX CableComms and
Bell Cablemedia. If the agreement is consummated, the Boards of NYNEX CableComms
expect a general offer to be made to the shareholders of NYNEX CableComms in due
course. The Boards of NYNEX CableComms will consider the implications of the
proposed merger in the normal course and will make their views known once they
have had the opportunity to do so.
7
9
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER OF 1996 AS COMPARED WITH THIRD QUARTER OF 1995
RESULTS OF OPERATIONS
Revenue
Operating revenue increased to L40.8 million for the third quarter of 1996
from L21.8 million for the third 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 L15.6 million for
the third quarter of 1996 from L9.6 million for the third 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 242,867 at September 30, 1996 from 164,733 at
September 30, 1995, while the average monthly cable television revenue per basic
customer increased to L22.20 for the third quarter of 1996 from L20.75 for the
third 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 204.0% at September
30, 1996 from 179.4% at September 30, 1995, due to increased sales of premium
channels during the last twelve months.
The number of cable television homes passed and marketed in NYNEX
CableComms' operating franchises increased to 1,235,689 at September 30, 1996
from 872,238 at September 30, 1995. Penetration rates increased to 19.7% at
September 30, 1996 from 18.9% at September 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 introduced in
the last twelve months, a restructuring of the sales commission policy and an
emphasis on retaining customers. NYNEX CableComms' churn rate was 30.3% at
September 30, 1996 remaining the same as at September 30, 1995.
Residential telecommunications. Residential telecommunications revenue
increased to L20.8 million for the third quarter of 1996 from L9.3 million for
the third quarter of 1995. The revenue for the third quarter of 1996 has been
increased by a L1.8 million adjustment in respect of the settlement of
outstanding pricing issues with British Telecommunications plc ("BT") whereby
interconnect charges for incoming calls in previous periods have been revised.
NYNEX CableComms has also seen its telecommunications expenses decrease in the
third quarter as a result of this settlement (see below).
The increased revenue in the third quarter of 1996, in addition to the
interconnect pricing adjustment, was also the result of an increase in the
number of residential telecommunications lines, increased usage and an increase
in the average monthly revenue per line. The number of residential
telecommunications lines increased to 322,921 at September 30, 1996 from 189,764
at September 30, 1995. The average monthly residential telecommunications
revenue per line increased to L22.40 for the third quarter of 1996 from L18.19
for the third quarter of 1995. The average revenue per line for the third
quarter of 1996, excluding the L1.8 million interconnect adjustment, was L20.45.
When introducing the pricing strategy in March 1995, offering price savings
to the average residential customer of 25% over BT's standard call charges
before discounts and promotions, 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 26.4% at September 30, 1996
from 23.8% at September 30, 1995 and from 20.8% at March 31, 1995, and the
increased average monthly revenue support this belief. NYNEX CableComms has
maintained this pricing strategy in
8
10
response to price reductions by BT and 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 1,223,040 at September 30, 1996
from 796,865 at September 30, 1995. The residential telecommunications churn
rate increased to 17.2% at September 30, 1996 from 16.4% at September 30, 1995.
Business telecommunications. Business telecommunications revenue increased
to L3.4 million for the third quarter of 1996 from L1.4 million for the third
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 24,937 at September 30, 1996 from
11,705 at September 30, 1995, and the average monthly business
telecommunications revenue per line increased to L48.79 for the third quarter of
1996 from L46.52 for the third 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. In the third quarter of 1996,
notable sales were consummated including sales with two local authorities for
five and seven year periods to supply 5,800 CENTREX lines and major data
networks, and two major sales with universities. These new marketing initiatives
were also designed to encourage greater usage and increase average monthly
revenue per line. The average monthly revenue per line has increased and the
average number of lines per business customer has increased to 3.8 at September
30, 1996 from 2.8 at September 30, 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
34,465 at September 30, 1996 from 27,618 at September 30, 1995. The business
telecommunications churn rate increased to 14.2% at September 30, 1996 from
10.0% at September 30, 1995.
Installation. NYNEX CableComms' combined installation revenues for cable
television and residential and business telecommunications were L1.1 million for
the third quarter of 1996 compared to L1.5 million for the third quarter of
1995. The decrease is a result of marketing initiatives during the third quarter
of 1996, whereby residential customers purchasing both cable television and
telecommunications services received free installation.
Operating Expenses. Operating expenses increased to L52.9 million for the
third quarter of 1996 from L43.3 million for the third 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 L8.4 million for the third quarter of
1996 from L5.2 million for the third quarter of 1995. Total programming costs as
a percentage of cable television revenue were 54% for the third quarter of 1996
and for the third quarter of 1995. In October 1996, BSkyB introduced price
increases to NYNEX CableComms. NYNEX CableComms is taking these increased costs
into account in the new packaging and pricing to be introduced in the fourth
quarter of 1996.
Telecommunications expenses for the third quarter of 1996 were L7.8 million
compared with L3.9 million for the third quarter of 1995. Expenses for the third
quarter of 1996 are stated net of a L0.2 million favorable adjustment in respect
of the settlement of outstanding pricing issues with BT whereby interconnect
charges in previous periods have been reduced. 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
9
11
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 32% for the third quarter of 1996 compared with 36% for the third quarter
of 1995.
Depreciation and amortization increased to L14.3 million for the third
quarter of 1996 from L10.9 million for the third quarter of 1995. This increase
is primarily related to the increase in the cost of total property, plant and
equipment to L1,132.8 million at September 30, 1996 from L806.3 million at
September 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 L10.4 million for the third quarter of 1996 from L11.6 million for
the third 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 2,454 full time equivalents at September 30, 1996,
compared with 2,955 at September 30, 1995.
Selling, general and administrative expenses increased to only L12.0
million for the third quarter of 1996 from L11.7 million for the third quarter
of 1995 despite the 87% increase in revenue in the same period. Following the
cost-management program undertaken towards the end of 1995, NYNEX CableComms has
continued to realize business efficiencies.
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 L15.0 million for the third
quarter of 1996 and L11.5 million for the third quarter of 1995.
OTHER INCOME (EXPENSE)
Interest income, which primarily represents interest on bank deposits and
affiliated company balances, increased to L3.6 million for the third quarter of
1996 from L1.4 million for the third 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 and from balances
due from NYNEX and its affiliates. In the third quarter of 1996, NYNEX
CableComms benefited from interest income of L1.7 million received from
affiliated companies in respect of certain balances outstanding during 1996.
In the third quarter of 1996, interest expense increased to L5.0 million,
net of L1.9 million which was capitalized, from L2.1 million, net of L0.6
million which was capitalized for the third quarter of 1995. As the level of
long-term debt rose to L357.3 million at September 30, 1996 from L37.0 million
at September 30, 1995, interest paid to the North and South limited partners in
respect of relevant financing arrangements increased. At the end of September
1995 a significant proportion of long-term debt had been eliminated using the
proceeds of the share issuance on June 14, 1995.
The Minority interest portion of the loss for the third quarter of 1996 was
L8.3 million compared with L22.0 million for the third quarter of 1995. (See
Note E to the unaudited Combined Financial Statements describing the Minority
interest in NYNEX CableComms). The decrease is due to smaller losses and the
completion of the initial loss allocation to the South limited partner occurring
in the first quarter of 1996.
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
Combined Offering on June 14, 1995, NYNEX CableComms and its US corporations do
not 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
10
12
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 third quarter of
1996. The tax benefit for the third quarter of 1995 included a L2.9 million
benefit in respect of a deferred tax credit in the quarter and a provision of
L0.5 million for tax payable on interest earned.
FOREIGN EXCHANGE
All of NYNEX CableComms' revenue is 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
third 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.
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13
NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST NINE MONTHS 1996 AS COMPARED TO FIRST NINE MONTHS OF 1995
RESULTS OF OPERATIONS
Revenue
Operating revenue increased to L108.9 million for the first nine months of
1996 from L57.1 million for the first nine 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 L44.7 million for
the first nine months of 1996 from L26.4 million for the first nine 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 242,867 at September 30, 1996 from
164,733 at September 30, 1995, while the average monthly cable television
revenue per basic customer increased to L22.69 for the first nine months of 1996
from L21.06 for the first nine 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 204.0% at September 30, 1996 from 179.4% at September 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, and
increased sales of premium channels during the last twelve months.
The number of cable television homes passed and marketed in NYNEX
CableComms' operating franchises increased to 1,235,689 at September 30, 1996
from 872,238 at September 30, 1995. Penetration rates increased to 19.7% at
September 30, 1996 from 18.9% at September 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 introduced in
the last twelve months, a restructuring of the sales commission policy and an
emphasis on retaining customers. NYNEX CableComms' churn rate was 30.3% at
September 30, 1996 remaining the same as at September 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 L0.3 million.
Residential telecommunications. Residential telecommunications revenue
increased to L51.9 million for the first nine months of 1996 from L24.2 million
for the first nine months of 1995. The revenue for the first nine months of 1996
has been increased by a L1.8 million adjustment in respect of the settlement of
outstanding pricing issues BT whereby interconnect charges for incoming calls in
previous periods have been revised. NYNEX CableComms has also seen its
telecommunications expenses decrease in the first nine months of 1996 as a
result of this settlement (see below).
The increase in revenue in the first nine months of 1996, in addition to
the interconnect pricing adjustment in the third quarter of 1996, was also the
result of an increased number of residential telecommunications lines, increased
usage and an increase in the average monthly revenue per line. The number of
residential telecommunications lines increased to 322,921 at September 30, 1996
from 189,764 at September 30, 1995, while the average monthly residential
telecommunications revenue per line increased to L20.56 for the first nine
months of 1996 from L19.68 for the first nine months of 1995, the average
revenue per line excluding the interconnect adjustment was L19.85. When
introducing the pricing strategy in March 1995,
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14
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. The increase in penetration, an
upward trend in usage and an increase in the average revenue per line support
this belief.
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 1,223,040 at September 30, 1996
from 796,865 at September 30, 1995. Penetration rates increased to 26.4% at
September 30, 1996 from 23.8% at September 30, 1995. NYNEX CableComms has
maintained this pricing strategy in response to price reductions by BT and
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
17.2% at September 30, 1996 from 16.4% at September 30, 1995.
Business telecommunications. Business telecommunications revenue increased
to L8.9 million for the first nine months of 1996 from L3.3 million for the
first nine 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, in addition to the consummation of some notable sales in the third
quarter of 1996. The number of business telecommunications lines increased to
24,937 at September 30, 1996 from 11,705 at September 30, 1995, and the average
monthly business telecommunications revenue per line increased to L49.80 for the
first nine months of 1996 from L46.64 for the first nine 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 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 also designed to encourage greater usage and increase average monthly
revenue per line. The average monthly revenue per line has increased and the
average number of lines per business customer has increased to 3.8 at September
30, 1996 from 2.8 at September 30, 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
34,465 at September 30, 1996 from 27,618 at September 30, 1995. The business
telecommunications churn rate increased to 14.2% at September 30, 1996 from
10.0% at September 30, 1995.
Installation. NYNEX CableComms' combined installation revenue for cable
television and residential and business telecommunications increased to L3.3
million for the first nine months of 1996 from L3.2 million for the first nine
months of 1995. Marketing initiatives during the second and third quarter of
1996, whereby residential customers taking both cable television and
telecommunications services received free installation, had the result of
slowing down the rate of growth in installation revenue during the first nine
months of 1996.
Operating Expenses. Operating expenses increased to L155.7 million for the
first nine months of 1996 from L125.9 million for the first nine 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 L24.0 million for the first nine
months of 1996 from L13.2 million for the first nine months of 1995. Total
programming costs as a percentage of cable television revenue were 54% for the
first nine months of 1996 compared with 50% for the first nine 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 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 and third
quarters of 1996 from the fixed term
13
15
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 in the first nine months of 1996 compared to
the same period in 1995. In October 1996, BSkyB introduced price increases to
NYNEX CableComms. The company is taking these increased costs into account in
the new packaging and pricing to be introduced in the fourth quarter of 1996.
Telecommunications expenses for the first nine months of 1996 were L22.0
million compared with L10.8 million for the first nine 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 36% of telecommunications revenue for the first
nine months of 1996 compared with 39% for the first nine 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 L39.4 million for the first nine
months of 1996 from L26.5 million for the first nine months of 1995. This
increase is primarily related to the increase in the cost of total property,
plant and equipment to L1,132.8 million at September 30, 1996 from L806.3
million at September 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 L34.4 million for the first nine months of 1996 from L33.9 million
for the first nine months of 1995. Staff costs increased partially as a result
of annual pay increases made in the second quarter of 1996. 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 2,454 full time
equivalents at September 30, 1996, compared with 2,955 at September 30, 1995.
Selling, general and administrative expenses decreased to L36.0 million for
the first nine months of 1996 from L41.6 million for the first nine 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
nine months of 1996, in particular billing, data processing and software
enhancement costs, which increased significantly during the first nine months of
1995 as the customer base continued to 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 nine months of 1996.
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 L37.5 million for the first nine
months of 1996 and L32.9 million for the first nine months of 1995.
OTHER INCOME (EXPENSE)
Interest income, which primarily represents interest on bank deposits and
affiliated company balances, increased to L4.6 million for the first nine months
of 1996 from L3.2 million for the first nine 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 and from
balances due from NYNEX and its affiliates. In the third quarter of 1996, NYNEX
CableComms benefited from interest income of L1.7 million received from
affiliated companies in respect of certain balances outstanding during 1996.
14
16
In the first nine months of 1996, interest expense increased to L15.4
million, net of L4.4 million which was capitalized, from L13.2 million, net of
L1.2 million which was capitalized, for the first nine months of 1995. The
amount of capitalized interest relates to the level of work-in-progress, and the
level of long-term debt which increased to L357.3 million at September 30, 1996
from L37.0 million at September 30, 1995. In the first nine months of 1996, L6.4
million of interest expense was attributable to the amortization of deferred
finance costs, compared to L5.0 million in the first nine 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 Minority interest portion of the loss for the first nine months of 1996
was L39.0 million compared with L65.3 million for the first nine months of 1995.
(See Note E to the unaudited Combined Financial Statements describing the
Minority Interest in NYNEX CableComms). The decrease is due to smaller losses
and the completion of the initial loss allocation to the South limited partner
occurring in the first quarter of 1996.
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
Combined Offering on June 14, 1995, NYNEX CableComms and its US corporations do
not 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 nine months of 1996. The
L15.2 million tax benefit for the first nine months of 1995 included a L9.1
million deferred tax credit in the period and a provision of L0.9 million for
tax payable on interest earned. The balance was primarily attributable to losses
in the period.
FOREIGN EXCHANGE
All of NYNEX CableComms' revenue is 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 nine 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 1.0 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 L1.0
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 nine months of 1996,
capital expenditures were L222.4 million.
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FINANCING OF NYNEX CABLECOMMS
At September 30, 1996, NYNEX CableComms had available L459.2 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 L200.0 million.
NYNEX CableComms may make drawings under this facility at any time after June 1,
1996 and before May 31, 1997, 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 L131.3 million to the North Partnership at September 30, 1996 and
1995, respectively, and has provided a further L223.7 million and L31.6 million
in financing to the Northern Operating Companies under the North Credit Facility
at those dates, respectively. The South limited partner has contributed L80.4
million to the South Partnership at September 30, 1996 and 1995, respectively,
and has provided a further L133.6 million and L5.4 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 L3.6 million
and L35.6 million for the first nine months of 1996 and 1995, respectively. The
decrease is primarily due to a smaller operating loss for the first nine months
of 1996 compared to the first nine months of 1995.
Net cash used in investing activities was L222.4 million and L304.6 million
for the first nine months of 1996 and 1995, respectively, resulting from
expenditures on network construction and associated capital expenditures.
Net cash provided by financing activities was L232.0 million and L328.2
million for the first nine months of 1996 and 1995, respectively. In the first
nine months of 1995, NYNEX made capital contributions of L5.3 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 nine months of 1996.
During the first nine months of 1996, the Northern Operating Companies and
Southern Operating Companies borrowed L232.0 million under the credit facilities
which are detailed in Note D to the unaudited Combined Financial Statements.
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. By August 1, 1996 the product had been
made available in all NYNEX CableComms' franchise areas.
(ii) Price Control Review
On October 1, 1996, the Office of Telecommunications ("OFTEL") modified
BT's license to implement a new regime of retail price control commencing from
August 1, 1997 and introduced a license condition that enables OFTEL effectively
to address anti-competitive behavior ("the Fair Trading Condition"). The new
price control will be in place for four years and is set at RPI -- 4.5% on the
bottom 80% of residential customers as measured by telecommunications
expenditure. Small business customers will be subject to a cap
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18
limiting increases in line rental to RPI + 0% and will have access to the same
reduction in call prices as residential customers. OFTEL has stated that this
will be the last retail price control. BT has judicially challenged the Fair
Trading Condition to examine whether OFTEL had the authority to include this
condition under the Telecommunications Act 1984. OFTEL will soon consult on
their proposals for a wholesale price cap on BT's interconnect charges also
planned for implementation by August 1997.
(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 DTI have received the first group of license
applications, and a consultation on the form of the license has now commenced.
Additional international facilities operators should be licensed before the end
of 1996.
(iv) 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 are expected to be distributed for
consultation before the end of 1996.
(v) OFT decision in BSkyB review
In findings published on July 24, 1996, the UK Office of Fair Trading
("OFT") 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.
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 secured new informal undertakings
pursuant to which BSkyB agreed (a) to submit a proposed new wholesale price list
and discount structure (the "New Rate Card") to the OFT 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 they expire or opt for the New Rate Card pricing and
discount structure. NYNEX CableComms' contract with BSkyB continues until June
30, 1999, and the parties have agreed to meet on or about January 1, 1999 to
negotiate the extension of the agreement for a further four years and two
months.
In connection with its BSkyB review announcement, the OFT also formally
recognized 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.
The OFT submitted the proposed New Rate Card to NYNEX CableComms and the
cable industry on October 4, 1996. NYNEX CableComms is currently reviewing the
New Rate Card and will participate in the consultation through submission of
comments to the OFT during the fourth quarter of 1996.
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(vi) Broadcasting Bill
On July 25, 1996, the Broadcasting Bill received Royal Assent, becoming the
Broadcasting Act 1996. The Act introduces a number of changes to the UK
Broadcasting Policy. The primary changes are the licensing of digital
terrestrial broadcasters, modifications to cross-media ownership rules and the
merging of the Broadcasting Standards Council and the Broadcasting Complaints
Commission.
Other changes relevant to NYNEX CableComms' business interests include the
specification of a list of events that cannot be exclusively broadcast by pay-TV
operators and specification of the "must carry" requirements for cable operators
in a digital environment.
(vii)Modifications to the UK Telephone Numbering Scheme
In September 1996, OFTEL released a consultation document that proposes a
number of changes to the UK numbering scheme. OFTEL's proposals include
standardization of the number ranges used for mobile, part-paid and premium rate
services, as well as arrangements to address the expected exhaustion of number
ranges in certain cities by the year 2000. These proposals are expected to be
finalized by the end of 1996.
SUBSEQUENT EVENTS
(i) New bundled packages
NYNEX CableComms believes that a new approach is required to increase
penetration and on October 22, 1996, announced the introduction of "bundled"
cable television and telephony packages. These packages will provide customers
with a new range of cable television choices and telephony services at
competitive prices. They will include specialist sports and movie packages as
well as a "mini-basic" package which will all be priced to compete with the
prices from BSkyB and BT combined, and will offer the customer the additional
benefit of dealing with just one communications company.
(ii) Announcement by Cable & Wireless, NYNEX and Bell Canada International
The Boards of NYNEX CableComms have taken note of the announcement of
October 22, 1996 by Cable and Wireless, NYNEX and Bell Canada International Inc.
in respect of a conditional agreement to merge their respective interests in
Mercury Communications Limited, NYNEX CableComms and Bell Cablemedia. If the
agreement is consummated, the Boards of NYNEX CableComms expect that a general
offer will be made to the shareholders of NYNEX CableComms in due course. The
Boards of NYNEX CableComms will consider the implications of the proposed merger
in the normal course and will make their views known once they have had the
opportunity to do so.
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NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
OPERATING STATISTICS -- THIRD QUARTER 1995
The following tables summarize information set out in Management's
Discussion and Analysis of Financial Condition and Results of Operations:
NET ADDITIONS
----------------------------------------------------------------
3 MONTHS TO 3 MONTHS TO 9 MONTHS TO 9 MONTHS TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
CABLE TELEVISION:
Homes passed and marketed................ 79,031 91,963 240,772 248,147
Cable television customers............... 16,018 18,158 45,863 42,765
RESIDENTIAL TELECOMMUNICATIONS:
Homes passed and marketed................ 90,475 120,144 277,238 295,834
Residential lines connected.............. 26,685 37,549 90,370 90,810
BUSINESS TELECOMMUNICATIONS:
Business lines connected................. 2,912 2,683 10,677 6,394
CUMULATIVE
-----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
TOTAL TOTAL TOTAL
------------- ------------- -------------
Homes passed......................................... 1,574,673 1,066,329 1,201,471
Businesses passed.................................... 76,828 40,755 51,761
--------- --------- ---------
Total premises passed................................ 1,651,501 1,107,084 1,253,232
========= ========= =========
CABLE TELEVISION:
Homes passed and marketed............................ 1,235,689 872,238 994,917
Average monthly revenue per customer................. L22.69 L21.06 L21.59
Basic customers...................................... 242,867 164,733 197,004
Penetration rate..................................... 19.7% 18.9% 19.8%
Premium units to basic ratio......................... 204.0% 179.4% 209.3%
Churn rate........................................... 30.3% 30.3% 29.4%
RESIDENTIAL TELECOMMUNICATIONS:
Homes passed and marketed............................ 1,223,040 796,865 945,802
Average monthly revenue per customer................. L20.56 L19.68 L19.52
Residential lines connected.......................... 322,921 189,764 232,551
Penetration rate..................................... 26.4% 23.8% 24.6%
Churn rate........................................... 17.2% 16.4% 17.5%
BUSINESS TELECOMMUNICATIONS:
Businesses passed and marketed....................... 34,465 27,618 30,450
Average monthly revenue per customer................. L49.80 L46.64 L46.82
Business lines connected............................. 24,937 11,705 14,260
Average number of lines per customer................. 3.8 2.8 2.8
Churn rate........................................... 14.2% 10.0% 11.9%
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NYNEX CABLECOMMS GROUP PLC AND
NYNEX CABLECOMMS GROUP INC.
PART II -- OTHER INFORMATION
ITEM 5 OTHER INFORMATION
None
ITEM 6(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.
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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 officer thereunto duly authorized.
NYNEX CABLECOMMS GROUP PLC
(Registrant)
Nicholas Mearing-Smith
Date: November 6, 1996 Chief Financial Officer
NYNEX CABLECOMMS GROUP INC.
(Registrant)
Nicholas Mearing-Smith
Date: November 6, 1996 Chief Financial Officer
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