1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBERS: 0-25638 (NYNEX CABLECOMMS GROUP PLC)
0-25690 (NYNEX CABLECOMMS GROUP INC.)
------------------------------------
NYNEX CABLECOMMS GROUP PLC
Incorporated under the laws of England and Wales I.R.S. Employer Identification No. 98-0151138
NYNEX CABLECOMMS GROUP INC.
Incorporated under the laws of Delaware I.R.S. Employer Identification No. 98-0151139
THE TOLWORTH TOWER, EWELL ROAD, SURBITON, SURREY KT6 7ED, UNITED KINGDOM
(44)-181-873-2000
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depository Shares evidenced by American Depository Receipts,
each representing ten Units, each Unit consisting of one Ordinary Share (par
value L0.10 per share)
of NYNEX CableComms Group PLC and one share of Common Stock (par value $0.01 per
share)
of NYNEX CableComms Group Inc.
(Title of Class)
Ordinary Shares (par value L0.10 per share) of NYNEX CableComms Group PLC
(Title of Class)
Common Stock (par value $0.01 per share) of NYNEX CableComms Group Inc.
(Title of Class)
------------------------------------
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrants on January 31, 1997 was approximately $485,096,166.
The number of shares outstanding of each of the Registrants' classes of
common stock, as of January 31, 1997:
925,976,934 Ordinary Shares of NYNEX CableComms Group PLC, L0.10 par value
925, 976,934 shares of Common Stock of NYNEX CableComms Group Inc., $0.01 par
value
(Ordinary Shares and shares of Common Stock are "stapled" and trade together as
Units.)
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
2
PART I
ITEM 1. BUSINESS
As used herein, (i) "NYNEX CableComms UK" refers to NYNEX CableComms Group
PLC and "NYNEX CableComms US" refers to NYNEX CableComms Group Inc.; (ii) "NYNEX
CableComms" refers to NYNEX CableComms UK and NYNEX CableComms US, together with
the subsidiaries and partnerships in which they have the entire or a majority
ownership interest; and (iii) the "Operating Companies" refers to those members
of NYNEX CableComms which hold the cable television and telecommunications
licenses for franchises in northern England (the "Northern Operating Companies")
and for franchises in southern England (the "Southern Operating Companies"),
collectively.
Information with respect to the number of homes covered by one or more
franchise areas is based on the most recent published UK census data (1991),
postal address files and NYNEX CableComms' estimates. There can be no assurance
that the number of homes in a franchise area has not increased or decreased
since the 1991 census was conducted. All information with respect to the number
of businesses covered by one or more franchise areas is based on a combination
of sources including Thomsons Directory, Companies House, PAF data and NYNEX
CableComms' estimates. Although believed by NYNEX CableComms to be reliable,
there can be no assurance that such data accurately reflect the actual number of
businesses in a given franchise.
INTRODUCTION
NYNEX CableComms is one of the leading integrated providers of cable
television and telecommunications services in the United Kingdom. NYNEX
CableComms is licensed to provide these services in 16 franchise areas which
cover approximately 2.7 million homes, equivalent to approximately 15% of the
total homes in the United Kingdom for which franchises had been awarded at
December 31, 1996. In addition, the franchise areas cover approximately 153,000
businesses. NYNEX CableComms' cable television and telecommunications licenses
have been granted for fixed terms (15 and 23 years, respectively). NYNEX
CableComms' cable television licenses will expire at various times commencing in
November 2004. Its telecommunications licenses are scheduled to expire at
various times commencing June 2012. NYNEX CableComms has approximately 2.3
million equity homes, making it one of the largest multiple systems operators in
the United Kingdom on the basis of the total number of equity homes in its
franchise areas. NYNEX CableComms has its principal executive office at The
Tolworth Tower, Ewell Road, Surbiton, Surrey, KT6 7ED, United Kingdom.
NYNEX CableComms UK is a public limited company incorporated in February
1995 under the laws of England and Wales, and NYNEX CableComms US is a Delaware
corporation incorporated in February 1995. In June 1995, NYNEX CableComms UK and
NYNEX CableComms US completed an initial public offering of 305 million ordinary
shares of NYNEX CableComms UK (the "NYNEX CableComms UK Ordinary Shares") and
305 million shares of common stock of NYNEX CableComms US (the "NYNEX CableComms
US Shares of Common Stock") issued as stapled units (the "NYNEX CableComms
Units"), each NYNEX CableComms Unit comprised of one NYNEX CableComms UK
Ordinary Share and one NYNEX CableComms US Share of Common Stock. Of the NYNEX
CableComms Units issued pursuant to the offering, 170,222,000 were issued as
NYNEX CableComms Units and 134,778,000 were issued as American Depositary Shares
(the "NYNEX CableComms ADSs"), each NYNEX CableComms ADS representing 10 NYNEX
CableComms Units. The NYNEX CableComms UK Ordinary Shares and the NYNEX
CableComms US Shares of Common Stock may not be traded separately and may only
be traded together as NYNEX CableComms Units on the London Stock Exchange
Limited and as NYNEX CableComms ADSs on the Nasdaq National Market. As of March
4, 1997, NYNEX Corporation ("NYNEX"), through its subsidiaries, owned
approximately 67% of the outstanding NYNEX CableComms Units.
As announced on October 22, 1996, cable and wireless plc, Bell Canada
International Inc. and NYNEX have entered into an agreement (as amended or
restated, the "Transaction Agreement") pursuant to which, subject to the
satisfaction of certain conditions precedent, the parties have agreed to combine
Mercury
2
3
Communications Limited ("Mercury"), Bell Cablemedia plc ("BCM") (as enlarged by
the acquisition of Videotron Holdings plc) and NYNEX CableComms under a new
holding company, Cable & Wireless Communications plc ("CWC"). Pursuant to the
Transaction Agreement, CWC has offered to purchase NYNEX CableComms UK Ordinary
Shares and NYNEX CableComms US Shares of Common Stock (comprised in the NYNEX
CableComms Units, including those represented by NYNEX CableComms ADSs) in
exchange for ordinary shares of CWC.
If the transactions contemplated by the Transaction Agreement are
consummated, among other things, (i) NYNEX has agreed to exchange all of its
NYNEX CableComms Units, and its indirect interests in the Operating Companies,
for ordinary shares of CWC; (ii) NYNEX CableComms will become part of the
combined CWC group and thus will be an affiliate of Mercury, which is currently
a competitor of NYNEX CableComms primarily in the business telecommunications
market; (iii) the interconnection agreements which govern the interconnection
between the telecommunications networks of NYNEX CableComms and Mercury,
discussed under "Products and Services" below, are likely to change; (iv) the
existing credit facilities of NYNEX CableComms, as discussed below under
Management's Discussion and Analysis of Financial Condition and Results of
Operations Financing of NYNEX CableComms", would have to be repaid (absent
waivers of change of control defaults) and are expected to be terminated and
replaced with a CWC credit facility; and (v) the entities identified as the
North limited partner and the South limited partner in the diagram under
"Organization" below will become indirect wholly-owned subsidiaries of CWC,
thereby providing CWC with indirect interests in the Operating Companies held
other than through NYNEX CableComms.
PRODUCTS AND SERVICES
NYNEX CableComms has developed separate marketing, pricing and sales
strategies for its residential and its business markets. While NYNEX CableComms
has approached the residential and business markets separately, there has been
significant coordination with a view to promoting NYNEX CableComms in a
consistent manner and avoiding the duplication of resources where appropriate.
THE RESIDENTIAL MARKET
NYNEX CableComms has based its strategy in respect of the residential
market on its ability to provide, market and sell its cable television and
telecommunications services on an integrated basis in innovative, competitively
priced packages and its ability to retain customers through reliability, quality
customer service and new product development.
Cable Television Services
Cable television services (excluding installation) provided NYNEX
CableComms with 41.3% of its operating revenues in 1996 compared to 45.6% in
1995. Cable television revenue is earned mainly from monthly fees for basic and
premium channels and additional outlets.
NYNEX CableComms currently offers a wide range of television programming,
including satellite, broadcast and video cassette delivered channels, and it
also offers some FM radio stations. Over 45 television channels are offered,
many of which are available 24 hours a day. In accordance with its policy of
regularly reviewing the channels provided, NYNEX CableComms adds and deletes
channels as it considers appropriate. NYNEX CableComms believes that offering a
wide range of conveniently scheduled programming and providing quality customer
service are important factors influencing a customer's decision to subscribe to
and retain cable television services. NYNEX CableComms currently obtains its
cable television programming from satellite television operators, terrestrial
broadcasters and other programming suppliers. NYNEX CableComms regularly engages
in discussions regarding the development of cooperative arrangements with other
cable operators with a view to achieving cost savings and developing programming
and additional services.
As one of the leading providers of cable television services in the United
Kingdom, NYNEX CableComms believes it is generally able to obtain favorable
terms, as compared to smaller operators, in
3
4
purchasing programming. Certain programming, such as that provided by the
British Broadcasting Corporation ("BBC") and other terrestrial broadcasters, is
available to NYNEX CableComms and other cable operators without charge.
British Sky Broadcasting Group plc ("BSkyB") is the leading supplier of
programming to direct-to-home ("DTH") satellite and cable television operators
in the United Kingdom and the exclusive supplier of certain premium programming,
including live English Premier League soccer matches and premium movie channels.
BSkyB's programming is important in attracting and retaining cable television
customers.
In the second quarter of 1995, NYNEX CableComms Limited, an indirect,
wholly-owned subsidiary of NYNEX CableComms UK and NYNEX CableComms US, and each
of the Operating Companies entered into a programming agreement with BSkyB and a
subsidiary of BSkyB (the "BSkyB Agreement") which provides for price incentives
related to, among other things, the overall number of basic customers and the
pay to basic ratio achieved by NYNEX CableComms (for an explanation of the pay
to basic ratio, see "Operating Statistics", below). The BSkyB Agreement also
provides NYNEX CableComms with access to BSkyB's Pay-Per-View services.
Concurrently with its 1996 review of BSkyB's position in the market for the
supply of pay television programming in the United Kingdom and related services
at the wholesale level, the UK Office of Fair Trading (the "OFT") expressed the
view that it considered certain provisions of the BSkyB Agreement to be
significantly anti-competitive under the UK Restrictive Trade Practices Act
1976.
In connection with its July 1996 findings that barriers to entry resulting
from BSkyB's powerful position in the wholesale pay television market raised
concerns that "although BSkyB is not acting anti-competitively, the competitive
process is being impaired", the OFT also acknowledged that amendments to the
BSkyB Agreement proposed by BSkyB and NYNEX CableComms had addressed the
competition concerns of the OFT. BSkyB and NYNEX CableComms are reviewing a
final draft of the agreement, as revised to incorporate such amendments. The
final draft was submitted to the OFT in February 1997 for confirmation that the
OFT's review is complete.
To address the anti-competitive situation, the OFT secured informal
undertakings pursuant to which BSkyB, among other things, agreed to submit a new
wholesale price list and discount structure (the "New Rate Card") to the OFT for
consultation with the cable television industry and for OFT approval. Cable
operators with existing fixed term contracts with BSkyB, such as NYNEX
CableComms, may continue under those contracts until they expire or elect to be
governed by the New Rate Card pricing and discount structure. The OFT submitted
the New Rate Card to NYNEX CableComms and the cable industry in October 1996
and, following consultation with the industry, the New Rate Card was approved by
the OFT in December 1996. NYNEX CableComms has reviewed the New Rate Card and at
present has determined to continue to operate under the BSkyB Agreement, as so
amended. NYNEX CableComms will continue to review its option to operate under
the New Rate Card.
NYNEX CableComms understands that the European Commission
Directorate-General IV Competition has informally considered the compatibility
of the BSkyB Agreement (in the form originally entered into, without giving
effect to the amendments proposed by NYNEX CableComms and BSkyB after
discussions with the OFT) with European Union competition law. NYNEX CableComms
is not aware of any final conclusion on this issue having been reached by the
Directorate-General.
NYNEX CableComms supported two pay-per-view events in 1996, and a third in
February 1997. The purchasing methods for the latter two events took two forms
dial up and impulse. Dial up pay-per-view enables customers to purchase these
services by making a telephone call. Impulse pay-per-view enables the customer
to purchase these services by using a remote control to interact directly with
the set-top box, thereby obviating the need to make a telephone call. This
service was introduced in the fourth quarter of 1996 and is available in all of
NYNEX CableComms' franchises to 91%, in the aggregate, of its cable television
customers. NYNEX CableComms is developing and plans to introduce a pay-per-view
movie service during 1997. Pay-per-view events will also continue to be offered.
4
5
NYNEX CableComms is in the process of considering the introduction of
digital television technology that would significantly increase channel
capacity. Implementation of digital services would require NYNEX CableComms to
make minor network upgrades to its broadband coaxial distribution network, to
upgrade two of its existing headend sites to digital "super" headend sites and
to replace the current set-top boxes in customers' homes. On March 7, 1997,
Telewest Communications plc ("Telewest"), BCM and NYNEX CableComms announced the
selection of NextLevel Broadband Networks Group of General Instrument
Corporation ("General Instrument") as an initial supplier of digital equipment,
with whom Telewest, BCM and NYNEX CableComms will enter into detailed
negotiations relating to the supply of transmission equipment and set-top boxes
to provide an integrated platform for the provision of digital services in cable
homes throughout the UK. Additional manufacturers of set-top boxes to be
supplied to the cable companies are expected to be identified late in 1997.
Telecommunications Services
Residential telecommunications services (excluding installation) provided
NYNEX CableComms with 46.7% of its operating revenues in 1996 compared to 42.8%
in 1995. Residential telecommunications revenue is earned from monthly charges
for calls made by customers and line rentals and from the provision of optional
features.
In common with many telecommunications companies, in addition to telephone
line installation and basic telephone service (which includes line rental, call
usage and monthly itemized billing), NYNEX CableComms offers its residential
telecommunications customers additional services, such as call waiting, caller
return, three way calling, short code dialing, call divert, call barring,
reminder call and number portability. Number portability, which was introduced
by NYNEX CableComms in all of its franchises by August 1996 and which is
expected to be available to virtually all potential customers by mid-1997,
allows customers to retain their existing telephone numbers when changing
telecommunications service providers. NYNEX CableComms also introduced special
tariffs for Internet users in October 1996. Subscribers are offered a discount
on calls to their Internet service providers.
NYNEX CableComms has its own digital switch capability in all its
franchises. Digital switches give NYNEX CableComms greater flexibility to choose
between alternative long distance carriers, to provide additional services and
to permit route diversity in the event of a network transmission failure. In
addition, digital switches enable NYNEX CableComms to switch all intra-franchise
calls between its customers, thereby avoiding the use and the associated costs
of switching provided by British Telecommunications plc ("BT"), Mercury or other
public telecommunications operators ("PTOs") with respect to such calls.
NYNEX CableComms' digital switches interconnect with the networks of BT,
Mercury and other PTOs for national and international calls, and for local calls
where only one party is a NYNEX CableComms customer. As part of NYNEX
CableComms' strategy of increasing the volume of calls switched locally and
minimizing interconnect charges to other PTOs, NYNEX CableComms may enter into
interconnect agreements with other cable operators.
Services being reviewed and developed by NYNEX CableComms include cable
modems, voice messaging service, basic rate ISDN and caller display. A cable
modem trial is being conducted in conjunction with Motorola, Inc. in the
Northern Franchises (as defined below under "Organization"), providing customers
with high speed access to the Internet. NYNEX CableComms plans to extend the
trial to further franchises during 1997.
Dual Product Packages
In November 1996, NYNEX CableComms introduced new dual product cable
television and telephony packages ("Dual Product Packages"). These Dual Product
Packages provide NYNEX CableComms' customers with a new range of cable
television packages integrated with its telephony services. These services are
priced to compete with the prices of similar products offered separately by
BSkyB and BT. They include specialized sports and movie packages as well as a
"Mini View" package and provide the customer with the additional benefit of
dealing with just one communications company. At the end of December 1996, the
total
5
6
number of subscribers for Dual Product Packages was in excess of 28,800.
Subscriptions were taken by both existing and new customers of NYNEX CableComms,
with the main areas of interest being the basic package ("Prime View") and full
service package ("Super View"), which includes both premium movie and sports
programming. Based on past experience, NYNEX CableComms believes that customers
with both cable television and telecommunications services are less likely to
terminate service than those with only cable television service.
Pricing
NYNEX CableComms regularly evaluates its pricing strategy and intends to
remain price competitive in its residential market. NYNEX CableComms believes
competitive pricing has been particularly important initially in the residential
telecommunications market as it has attempted to gain market share.
NYNEX CableComms believes that residential customers generally purchase its
telecommunications services because of anticipated cost savings. Since March
1995, NYNEX CableComms' pricing strategy has been to provide 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. NYNEX CableComms believes that this strategy has resulted in
additional revenue resulting from increased residential telecommunications
penetration rates and greater usage. Telecommunications penetration increased to
27.0% at December 31, 1996 from 24.6% at December 31, 1995 and average monthly
revenue per line increased to L19.96 in 1996 from L19.52 in 1995. Prior to March
1995, NYNEX CableComms provided residential customers with average savings of
10% to 15% on their monthly bills for line rental plus call usage combined over
BT's standard prices.
As of February 1, 1997, NYNEX CableComms' charge for the cable
television-only format ranged from L14.99 per month (for the package which does
not include the Sky Premium Channels) to L31.99 per month (for the package which
includes all Sky Premium Channels). Additional adult premium channels are
available to cable television-only customers at a monthly charge of L8.48.
Customers incur an additional administrative charge of L1 if payment is not made
by direct debit. NYNEX CableComms' cable television service includes the supply
and installation of one addressable converter box which provides service to one
television set. As of February 1, 1997, customers incur an additional monthly
charge (inclusive of value added tax ("VAT") of L3.95 for each additional
outlet.
For the basic "Prime View" Dual Product Package, NYNEX CableComms charged
L20.99 per month (inclusive of VAT), as of February 1, 1997. The cable
television component of this package consists of 40 channels, plus either one or
two local programming channels, depending on the franchise area. As of February
1, 1997, NYNEX CableComms' charges (inclusive of VAT) for the Dual Product
Packages ranged from L14.99 per month (for the package which does not include
the Sky Premium Channels) to L36.99 per month (for the package which includes
all Sky Premium Channels). NYNEX CableComms also offers a niche Dual Product
Package ("Asia View") tailored to the Asian community in the Northern franchises
and, in the Surrey and Bromley Franchises in the South. Additional premium
channels are available and additional outlets may be installed for the same
charges as for cable television-only customers. As with cable television-only
customers, customers who purchase Dual Product Packages will also incur an
additional administrative charge of L1 if payment is not made by direct debit.
In order to help build the customer base, the new Dual Product Packages
also have been competitively priced when compared to similar products offered
separately by BT and BSkyB.
THE BUSINESS MARKET
In the business market, NYNEX CableComms provides a variety of
telecommunications services, as well as commercial cable television services and
transmission facilities for closed circuit television services. During 1995 and
1996, NYNEX CableComms increased its business telecommunications marketing
activities, including the introduction of telesales marketing and a new
volume-based rental charge for business customers using central exchange
("CENTREX") services. NYNEX CableComms has based its strategy in respect of the
business market on its ability to provide, market and sell its
telecommunications services at competitive
6
7
prices and its ability to retain its customers through reliability, quality
customer service and new product development.
Business Telecommunications Services
Business telecommunications services (excluding installation) provided
NYNEX CableComms with 8.6% of its operating revenues in 1996 compared to 6.2% in
1995.
In the business market, NYNEX CableComms offers its business customers and
earns revenue from the provision of the same telecommunications services
provided to residential customers and additional services such as CENTREX,
managed fiber networks, private circuits, low speed data services, digital
access signal systems 2 ("DASS 2"), basic rate Integrated Services Digital
Network ("ISDN"), closed circuit television and commercial cable television.
Pricing
NYNEX CableComms regularly evaluates its pricing strategy and intends to
remain price competitive in its business market. In March 1995, NYNEX CableComms
introduced a pricing strategy whereby its business customers enjoy savings, on
average, of 25% over BT's standard call charges, before discounts and
promotions. NYNEX CableComms believes that the immediate reduction in tariffs
resulting from offering these enhanced savings will 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.
Since the introduction of this strategy, there has been an increase in usage.
The average monthly revenue per line increased to L49.39 in 1996 from L46.82 in
1995 and the average number of lines per business customer increased to 4.4 at
December 31, 1996 from 2.8 at December 31, 1995. Prior to March 1995, NYNEX
CableComms provided business customers with monthly savings, on average, of 10%
to 15% on combined prices charged for line rental and call usage, as compared to
the standard prices charged by BT.
INSTALLATION
Combined installation revenue for cable television services and residential
and business telecommunications services provided NYNEX CableComms with 3.4% of
its operating revenues in 1996 compared to 5.4% in 1995.
Installation services for residential cable television customers include
installation of coaxial cable from the NYNEX CableComms' network to the
customer's home, connection of the customer's television to a set-top box and
connection of other customer electronics equipment. Installation services for
residential telecommunications customers include installation of copper wire
from the NYNEX CableComms network to a master socket network termination point
in the customer's home for connection with the customer's own telecommunications
equipment. Installation services for business customers include installation of
copper cable, for small- to medium-sized businesses, or fiber cable, for medium-
to large-sized businesses, to connect business customers to the NYNEX
CableComms' network.
ORGANIZATION
NYNEX CableComms UK and NYNEX CableComms US hold 90% and 10%, respectively,
of the shares in NYNEX U.K. CableComms Holdings, Inc. ("NYNEX UK Holdings"), an
intermediate holding company indirectly holding controlling interests in the
eleven Operating Companies which hold licenses for franchises in northern
England (the "Northern Franchises") and the five Operating Companies holding
licenses for franchises in southern England (the "Southern Franchises").
NORTHERN FRANCHISES
The Northern Franchises cover approximately 1,100 square miles and comprise
11 franchise areas: Blackburn, Bolton, Bury and Rochdale, Chester and
Warrington, Macclesfield, Manchester and Salford, Oldham and Tameside,
Stockport, Stoke-on-Trent, Derby and The Wirral. As of December 31, 1996, the
7
8
Northern Franchises contained approximately 1,769,000 homes and 111,000
businesses. These franchises encompass several large metropolitan areas
including Manchester, one of the largest business communities in the United
Kingdom after London, and the primary commercial center for the north west of
England.
SOUTHERN FRANCHISES
The Southern Franchises cover approximately 590 square miles and comprise
the franchises of Bromley, North and North East Surrey, Solent, Sussex and
Wessex. As of December 31, 1996, the Southern Franchises contained approximately
843,000 homes and 42,000 businesses. The Solent, Sussex and Wessex franchises
are in popular retirement areas that have also attracted many major service
sector businesses. The towns of Bournemouth and Brighton, located in these
franchises, are both popular holiday resorts with a well developed hotel and
leisure infrastructure. Bromley is considered to be a prosperous south London
borough and North and North East Surrey is also an area where individual net
worth is higher than average for the United Kingdom.
OWNERSHIP STRUCTURE
The ownership interests of NYNEX CableComms UK and NYNEX CableComms US in
the Operating Companies are held through various wholly-owned subsidiaries and
partnerships in which NYNEX CableComms UK and NYNEX CableComms US together
exercise management control and hold the majority ownership interest. In the
aggregate, the ownership interests of NYNEX CableComms UK and NYNEX CableComms
US constitute approximately 87% of the economic interests in the Operating
Companies. These ownership interests are shown in the diagram below.
[CHART OMITTED]
- - ---------------
(1) The North limited partner and the South limited partner are affiliates of
NYNEX. NYNEX's interests in these affiliates are held by indirect
wholly-owned subsidiaries of NYNEX. Through its interests in these
affiliates, NYNEX has an interest in the Operating Companies held other than
through NYNEX CableComms UK and NYNEX CableComms US. The North limited
partner
8
9
provides loans to the North Partnership and the Northern Operating Companies
under an existing credit facility. The South limited partner provides loans
to the South Partnership and the Southern Operating Companies under a
separate existing credit facility.
(2) Wholly-owned Delaware subsidiaries of NYNEX UK Holdings constitute the North
General Partners and the South General Partners. The North General Partners
and the South General Partners own the general partner interests in the
partnerships identified as the North Partnership and the South Partnership,
respectively.
(3) NYNEX UK Limited holds preference shares in the Operating Companies through
wholly-owned non-operating limited liability companies incorporated under
the laws of England and Wales. These non-operating companies are not shown
in the diagram.
(4) The North Partnership and the South Partnership are Delaware limited
partnerships which own approximately 99% of the ordinary shares in the
Northern Operating Companies and the Southern Operating Companies,
respectively (except for the Operating Company that holds The Wirral
franchise, in which the North Partnership owns approximately 49% of the
ordinary shares, with the balance held by a North General Partner). The
remaining ordinary shares of the Northern Operating Companies are owned by
the North General Partners and the remaining ordinary shares of the Southern
Operating Companies are owned by the South General Partners and other
subsidiaries of NYNEX UK Holdings. Such holdings of ordinary shares are not
shown in the diagram.
(5) The Northern Operating Companies consist of 11 unlimited companies
incorporated under the laws of England and Wales, each of which holds
licenses for one of the Northern Franchises. The Southern Operating
Companies consist of five unlimited companies incorporated under the laws of
England and Wales, each of which holds licenses for one of the Southern
Franchises.
OPERATING STATISTICS
NYNEX CABLECOMMS
OPERATING STATISTICS
AT AND FOR THE YEAR ENDED DECEMBER 31, 1996
SOUTHERN NORTHERN TOTAL
FRANCHISES FRANCHISES 1996
---------- ---------- --------
Homes passed(1)........................................... 724,886 887,375 1,612,261
Businesses passed(2)...................................... 34,859 49,016 83,875
Total premises passed..................................... 759,745 936,391 1,696,136
CABLE TELEVISION
Homes passed and marketed(3).............................. 617,741 686,396 1,304,137
Basic customers(4)........................................ 129,133 139,386 268,519
Basic penetration rate(5)................................. 20.9% 20.3% 20.6%
Premium units(6).......................................... 268,022 305,340 573,362
Pay to basic ratio(7)..................................... 207.6% 219.1% 213.5%
Additional outlets(8)..................................... 58,115 40,525 98,640
Additional outlets to basic ratio(9)...................... 45.0% 29.1% 36.7%
Churn rate(10)............................................ 25.3% 34.4% 29.6%
Average monthly revenue per customer (11)................. L23.02 L22.61 L22.83
RESIDENTIAL TELECOMMUNICATIONS
Homes passed and marketed(3).............................. 617,741 673,747 1,291,488
Residential lines connected............................... 172,248 177,012 349,260
Penetration rate(12)...................................... 27.9% 26.3% 27.0%
Churn rate(13)............................................ 13.7% 19.6% 16.4%
Average monthly revenue per line(14)...................... L20.91 L18.86 L19.96
BUSINESS TELECOMMUNICATIONS
Businesses passed and marketed(15)........................ 30,478 30,667 61,145
Business customers(16).................................... 4,994 2,595 7,589
Business lines connected.................................. 19,356 13,931 33,287
Average number of lines per customer...................... 3.9 5.4 4.4
Churn rate(17)............................................ 12.8% 13.4% 13.0%
Average monthly revenue per line(18)...................... L48.08 L51.58 L49.39
- - ---------------
(footnotes continued on following page)
9
10
(1) Homes passed (the expression in common usage for the measurement of the
size of a cabled area) refers to the total number of homes for which
network construction has been completed for cable television and/or
telecommunications services. A home is deemed "passed" if it can be
connected to the distribution system without further extension of the
transmission lines. A home is one person living alone or a group of people
(who may not be related) living, or staying temporarily, at the same
address with common housekeeping.
(2) Businesses passed refers to the total number of businesses for which
network construction has been completed for cable television and/or
telecommunications services.
(3) Homes passed and marketed refers to the number of homes passed where
marketing has commenced.
(4) Basic customers refers to customers subscribing to NYNEX CableComms' basic
cable television services.
(5) The cable television basic penetration rate represents (i) the total number
of basic cable television customers on the given date, divided by (ii) the
total number of homes passed and marketed for cable television on such
date, expressed as a percentage.
(6) Premium unit refers to the number of premium programming services
(channels) subscribed for on the given date.
(7) The pay to basic ratio represents (i) the total number of cable television
premium units subscribed for on the given date, divided by (ii) the total
number of basic customers on such date, expressed as a percentage.
(8) NYNEX CableComms' basic package provides each customer with an outlet to
connect one television. Additional outlets represents the aggregate number
of additional outlets for additional televisions on the given date.
(9) Additional outlets to basic ratio represents (i) the aggregate number of
additional outlets for television on the given date, divided by (ii) the
total number of basic customers on such date, expressed as a percentage.
(10) Cable television churn rate represents (i) the total number of cable
television customers who terminated basic service or whose service was
terminated by NYNEX CableComms in the preceding twelve month period,
divided by (ii) the average number of basic cable television customers in
such period, expressed as a percentage.
(11) Average monthly revenue per cable television customer excludes installation
revenue and VAT and represents (i) the cable television revenue for the
given period divided by the number of months in such period, divided by
(ii) the average number of basic cable television customers in such period.
(12) Residential telecommunications penetration rate represents (i) the total
number of residential telecommunications lines on the given date, divided
by (ii) the total number of homes passed and marketed for
telecommunications on such date, expressed as a percentage.
(13) Residential telecommunications churn rate represents (i) the total number
of residential telecommunications lines terminated by customers or NYNEX
CableComms in the preceding twelve month period, divided by (ii) the
average number of residential telecommunications lines in such period,
expressed as a percentage.
(14) Average monthly revenue per residential telecommunications line excludes
installation revenue and VAT and represents (i) the total residential
telecommunications revenue for the given period divided by the number of
months in such period, divided by (ii) the average number of residential
telecommunications lines in such period.
(15) Businesses passed and marketed refers to the number of businesses passed
where marketing has commenced.
(16) Business customers refers to businesses to which NYNEX CableComms provides
some or all of their telecommunications requirements.
(17) Business telecommunications churn rate represents (i) the total number of
business telecommunications lines terminated by customers or NYNEX
CableComms in the preceding twelve month period, divided by (ii) the
average number of business telecommunications lines in such period,
expressed as a percentage.
(18) Average monthly revenue per business telecommunications line excludes
installation revenue and VAT and represents (i) the total business
telecommunications revenue for the given period divided by the number of
months in such period, divided by (ii) the average number of business
telecommunications lines in such period.
NYNEX CABLECOMMS
OPERATING STATISTICS
AT AND FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 1993
-------- -------- ------- -------
Homes passed*....................................... 1,612,261 1,201,471 673,048 358,304
Businesses passed*.................................. 83,875 51,761 24,492 8,703
Total premises passed............................... 1,696,136 1,253,232 697,540 367,007
CABLE TELEVISION
Homes passed and marketed*.......................... 1,304,137 994,917 624,091 333,988
10
11
1996 1995 1994 1993
-------- -------- ------- -------
Basic customers*.................................... 268,519 197,004 121,968 62,804
Basic penetration rate*............................. 20.6% 19.8% 19.5% 18.8%
Premium units*...................................... 573,362 412,408 190,545 104,836
Pay to basic ratio*................................. 213.5% 209.3% 156.2% 166.9%
Additional outlets*................................. 98,640 71,985 44,931 19,131
Additional outlets to basic ratio*.................. 36.7% 36.5% 36.8% 30.5%
Churn rate*......................................... 29.6% 29.4% 31.1% 33.1%
Average monthly revenue per customer*............... L22.83 L21.59 L19.67 L20.23
RESIDENTIAL TELECOMMUNICATIONS
Homes passed and marketed*.......................... 1,291,488 945,802 501,031 240,726
Residential lines connected......................... 349,260 232,551 98,954 44,518
Penetration rate*................................... 27.0% 24.6% 19.8% 18.5%
Churn rate*......................................... 16.4% 17.5% 15.8% 13.3%
Average monthly revenue per line*................... L19.96 L19.52 L21.81 L19.72
BUSINESS TELECOMMUNICATIONS
Businesses passed and marketed*..................... 61,145 30,450 20,193 8,703
Business customers*................................. 7,589 5,133 3,548 1,292
Business lines connected............................ 33,287 14,260 5,311 1,890
Average number of lines per customer................ 4.4 2.8 1.5 1.5
Churn rate*......................................... 13.0% 11.9% 7.2%(1) n/a
Average monthly revenue per line*................... L49.39 L46.82 L53.45 L55.33
- - ---------------
* For the definition of these terms, see the notes to the table "Operating
Statistics (Unaudited), at and for the year ended December 31, 1996" above.
(1) Prior to June 30, 1994, separate statistics for business telecommunications
churn rates were not maintained by NYNEX CableComms. The 1994 business
telecommunications churn rate is for the six months ended December 31, 1994.
THE NETWORK
NYNEX CableComms is designing and constructing a broadband (high capacity)
network within its franchise areas which will enable it to deliver a wide range
of cable television and telecommunications services to its customers and which
NYNEX CableComms believes will enable it to deliver more advanced services as
they become available in the future. One of NYNEX CableComms' principal business
strategies has been to design and construct its network at the lowest possible
life cycle cost (that is, the initial construction cost plus ongoing operating
and maintenance costs). NYNEX CableComms began construction of the first of its
franchise areas in September 1991 and has been providing both cable television
and telecommunications services in all of its franchise areas since August 1995.
NYNEX CableComms plans to construct the network to a further 340,958 premises in
1997, which will result in the completion of 71% of its build by the end of the
year, in full compliance with its license requirements.
Each of NYNEX CableComms' telecommunications licenses prescribes build
obligations ("milestones") that require NYNEX CableComms to construct its
network in any franchise area to pass a specified number of premises within
prescribed time periods. NYNEX CableComms, on a limited number of occasions, has
not met individual franchise milestones; however, NYNEX CableComms has on each
occasion sought and received appropriate milestone modifications from the Office
of Telecommunications ("Oftel"). NYNEX CableComms is currently in compliance
with its milestone requirements.
11
12
The following table sets forth NYNEX CableComms' actual annual build and
actual cumulative build for 1991 to 1996, its proposed annual build and its
proposed cumulative build for 1997 to 2000 and its aggregate milestones for the
period 1991 to 2000.
FRANCHISE MILESTONES
NUMBER OF PREMISES (IN THOUSANDS)
--------------------------------------------------------------------------------------
ACTUAL PROPOSED
-------------------------------------------------- --------------------------------
FRANCHISE GROUP 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
- - ---------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NORTHERN FRANCHISES
Annual build.......... -- -- 94 161 360 322 284 305 308 47
Cumulative build...... -- -- 94 255 615 937 1,220 1,525 1,833 1,880
License requirement... 10 43 57 194 553 895 1,208 1,473 1,646 1,679
SOUTHERN FRANCHISES
Annual build.......... 16 93 164 169 196 121 57 35 32 1
Cumulative build...... 16 109 273 450 638 759 817 852 884 885
License requirement... -- 32 186 348 534 715 785 820 820 820
TOTAL
Annual build.......... 16 93 258 330 556 443 341 340 340 48
Cumulative build...... 16 109 367 697 1,253 1,696 2,037 2,377 2,717 2,765
License requirement... 10 75 243 542 1,087 1,610 1,993 2,293 2,466 2,499
NYNEX CableComms' ability to meet its proposed annual build and proposed
cumulative build for the period 1997 to 2000 is dependent on a number of factors
and assumptions that NYNEX CableComms believes are reasonable under the
circumstances. Such factors include, among others, the continuing availability
of adequate funding, the continuing availability of experienced civil
contractors on reasonable terms, maintaining a satisfactory relationship with
local governments, the results of its operations during this period and the
continuing customer acceptance of cable television and telecommunications
services from cable operators. There can be no assurance that NYNEX CableComms
will, however, be able to meet its annual build or cumulative build targets or
that NYNEX CableComms will not alter such targets in response to changes in the
foregoing factors or other developments, some of which may be outside the
control of NYNEX CableComms. NYNEX CableComms regularly reviews its build
program and may from time to time revise its proposed annual and cumulative
build targets for future years. The actual build for 1996 and the proposed build
for 1997 to 2000 set forth above are lower than previously proposed by NYNEX
CableComms. NYNEX CableComms currently believes that it will exceed the
milestones set forth above, but there can be no assurance that such milestones
will in fact be met. If individual franchise milestones are not met, Oftel may
take enforcement action which if not complied with could result in the
revocation of the applicable telecommunications license by the Department of
Trade and Industry.
CONSTRUCTION COSTS
Construction of an integrated cable television and telecommunications
network is capital intensive, requiring substantial investment for (i) network
costs, such as construction (designing, trenching and laying underground ducts),
plant and network electronics for cable television and telecommunications
services, (ii) customer costs, such as converters, customer electronics and
installation of cable from the network to the customer's home and (iii) other
costs, such as headend equipment, switching equipment, land and buildings,
computers and capitalization of network development costs and labor.
NYNEX CableComms constructs its network so that revenues are generated from
the completed portions of the network while the remaining areas are being built.
NYNEX CableComms generally does not incur the cost of bringing cable from the
curbside duct to the home unless and until a customer elects to subscribe for
service. NYNEX CableComms' construction costs per meter increased from 1992 to
1994 as did its construction costs per home from 1993 to 1994 partly due to
early installation of plant and equipment which benefitted the whole network and
not just those homes which were connected, such as the Manchester
12
13
Fiber Ring (a fiber optic loop which interconnects and services all of the
Northern Franchises), the National Operations Centre (a computerized operations
facility located in the North and North East Surrey franchise which performs
surveillance, analysis, fault detection and correction and provisioning for all
elements of NYNEX CableComms' network throughout the United Kingdom) and
switches for 11 franchises. Switches for the remaining franchises were
constructed and placed into service in 1995. In addition, the rapid growth in
the rate of construction during such period caused NYNEX CableComms to accept
short term contracts at higher costs than previously experienced.
Beginning in 1994, NYNEX CableComms entered into longer term construction
contracts to achieve, among other things, lower construction costs per meter in
ensuing years. A new materials procurement procedure was also implemented to
obtain savings by focusing efforts on high priority product groups.
The following table provides summary information regarding construction
costs for NYNEX CableComms' franchises for the twelve month periods ended
December 31, 1992, 1993, 1994, 1995 and 1996.
1992 1993 1994 1995 1996
--------- ---------- ---------- ---------- ----------
Construction Costs
Construction costs per
meter(1).................. L31 L42 L49 L43 L45
Connection costs(2)......... L4,571,000 L8,780,000 L14,935,000 L27,915,997 L27,410,503
Headend facility costs(3)... L7,407,000 L14,199,000 L23,652,000 L31,861,495 L27,418,999
- - ---------------
(1) Construction costs include design, trenching, ducting, ground
reinstatements, cable activation, labor costs and capitalized overheads.
(2) Connection costs consist of all costs relating to the connection of
customers from the distribution point at the public highway to connection
points within customers' homes but exclude the cost of cable television
equipment within customers' homes (converter boxes) for the given period.
(3) Headend facility costs consist of switching equipment and transmission
equipment as well as cable television equipment and related expenses for the
given period.
CUSTOMER SERVICE
NYNEX CableComms recognizes that providing quality customer service is an
important part of attracting and retaining customers. Residential customer
service is handled primarily by its two customer call centers located in the
Greater Manchester area and Brighton serving both the Northern Franchises and
the Southern Franchises. Business customer service for all NYNEX CableComms
business customers is handled by separate service centers located in Portsmouth
and, for certain larger business accounts, Hersham.
An important element of NYNEX CableComms' customer service is its
Integrated Customer Management System ("ICMS") software package developed by IBM
and licensed to NYNEX CableComms. The ICMS package enables NYNEX CableComms to
manage both telecommunications and cable television services. ICMS has a
customer service-based architecture which allows customers to have all services
with NYNEX CableComms tracked through one customer record and allows the
customer to receive a consolidated bill for all NYNEX CableComms services. The
principal advantage for customer management is that all customer services are
held with the single customer record. For each customer, ICMS can identify and
track field engineer visits to customer premises for installing new equipment,
fixing customer faults and disconnecting customers. In addition, ICMS provides
NYNEX CableComms with the ability to handle billing for more sophisticated cable
television and telecommunications services, such as IPPV and number portability.
Each customer service representative participates in training programs
before handling customer inquiries to ensure familiarity with NYNEX CableComms'
services and policies. In addition, the customer service department is organized
so that residential and business customers can call only one number each and,
using voice response technology, be routed to the person who can best answer
their service, billing and repair questions.
NYNEX CableComms initiates customer service in a franchise area even prior
to construction of the network. NYNEX CableComms' representatives communicate
with prospective residential and business customers in an area targeted for
construction to explain the construction process and the services NYNEX
13
14
CableComms provides. NYNEX CableComms makes representatives available to handle
residents' questions and complaints that arise during construction. Construction
crews take all reasonable steps to minimize the disruption caused during
construction and to appropriately restore the roadway, footpaths and other areas
affected by the construction. NYNEX CableComms makes an effort to contact
customers shortly after initial installation to address any service concerns or
problems.
NYNEX CableComms seeks to provide customers with prompt service and repair.
For its business customers, NYNEX CableComms aims to respond to problems
affecting service within four hours. For residential customers, NYNEX CableComms
recently introduced a customer service guarantee scheme in all of its franchise
areas. The scheme offers residential customers compensation payments where a
claim is made (in the form of credits on their bills) in the event certain
customer service commitments are not met, such as delays in the installation of
telephone and cable television services and the repair of faults, disconnection
in error and failure to maintain appointments.
NYNEX CableComms encourages residential customers to pay bills by direct
debit, which it believes is an easier means of payment for the customer than
writing checks each month. NYNEX CableComms has also introduced alternate
payment mechanisms including the use of payment agents and debit card
facilities. The introduction of the new Dual Product Packages also provides
customers with the convenience of dealing with only one company, and receiving
only one bill, for all cable and telecommunications services.
An important measure of customer satisfaction is the "churn" rate among
customers. "Churn", generally, is the number of customers who terminate service
or whose service is terminated by NYNEX CableComms, expressed as a percentage of
the total number of customers for such service. A customer may terminate service
on thirty days written notice to NYNEX CableComms and may do so without penalty
on or after the end of a twelve month period. NYNEX CableComms may terminate a
customer's service at any time in specified circumstances including where the
customer fails to pay for the service. NYNEX CableComms' churn rates for its
cable television, residential telecommunications and business telecommunications
services were 29.6%, 16.4% and 13.0%, respectively, in 1996, compared with
29.4%, 17.5% and 11.9%, respectively, in 1995. See "Operating Statistics".
COMPETITION AND REGULATORY ISSUES
NYNEX CableComms' cable television and telecommunications services compete
with various other operators using a variety of technologies, including many
companies with substantially greater resources and longer operating histories
than NYNEX CableComms.
RESIDENTIAL COMPETITION
In the residential market NYNEX CableComms competes for customers against
terrestrial broadcast stations, DTH satellite television services, video
cassette rentals and sales and satellite master antenna television ("SMATV")
systems, among others, in its cable television business and against BT and other
public telephone operators ("PTOs") in its telecommunications business. NYNEX
CableComms believes that it has a competitive advantage in both markets as a
result of its ability to provide cable television and telecommunications
services on an integrated basis. Specifically, NYNEX CableComms' ability to
provide both services (i) enables it to offer Dual Product Packages and other
incentives that encourage customers to subscribe to multiple products and
services and (ii) provides two revenue sources through which NYNEX CableComms
can recover the costs of constructing and operating its network. Other factors
affecting competition in the residential market are discussed below.
Cable Television Competition
As a result of the current policy of the Independent Television Commission
("ITC") of granting only one cable television license within any franchise area,
NYNEX CableComms does not compete for customers with other cable operators
within its franchise areas. NYNEX CableComms does however compete with direct
reception of terrestrial broadcasts and DTH satellite and SMATV systems. NYNEX
CableComms may in the future also compete with Video-on-Demand ("VOD")
programming and other entertainment services provided by PTOs. Near
Video-on-Demand ("NVOD") and VOD services, which may be provided
14
15
by NYNEX CableComms in the future, also will compete to varying degrees with
other communications media, including home video and cinema.
- - - Terrestrial Broadcast. Among the most popular channels in the United
Kingdom are the four national channels offered by the three main
terrestrial broadcast networks -- BBC (BBC1 and BBC2), ITV and Channel 4.
NYNEX CableComms believes that terrestrial broadcast television benefits
from its historical position as the leading source of home entertainment in
the United Kingdom. However, the cable and satellite channels are gradually
increasing their share of weekly viewing in households subscribing to
multichannel services. A fifth national channel is being launched in the
first quarter of 1997.
While the four national television channels in the United Kingdom have a
reputation for high quality programming, research indicates that audiences
have a preference for a wider variety of television programming. NYNEX
CableComms believes that as the range and quality of programming on cable
television continues to improve so should the size of its audience. Some
terrestrial broadcasters are already, or may become, contributors to the
cable and satellite programming market as a means of protecting total
market share. Since 1992, the BBC has had an equity stake in and has been
providing programming to UK Gold, a cable and satellite channel. In 1996
both Carlton Communications Plc ("Carlton") and Granada Group plc
("Granada") launched channels into the satellite programming market. In
addition, the BBC, Carlton, and Granada are all planning to provide
programming to digital television service providers, including cable,
satellite and terrestrial television.
NYNEX CableComms believes that its primary competitive advantages over
terrestrial broadcast television are (i) significantly more programming
options, (ii) exclusive programming, (iii) improved television reception in
some areas, (iv) access in the future to interactive entertainment and
information services, (v) the ability in the future to offer more targeted
advertising opportunities and (vi) the opportunity to provide a
multi-channel television service bundled with telephony through innovative
packaging and pricing.
- - - DTH Satellite. Unlike the US market, satellite television is the
established multichannel service distributor in the United Kingdom. NYNEX
CableComms' most significant competitor in providing multichannel service
is BSkyB which offers DTH satellite television services. BSkyB is also the
major supplier of premium programming to the UK cable television industry.
NYNEX CableComms believes that a principal competitive advantage of DTH
satellite television service has been its generally lower monthly service
charges for basic and premium programming services when compared to monthly
charges for cable television services, which are generally inclusive of
equipment rental.
Based on current technology, cable television can offer a range of local,
regional and national channels and can upgrade capacity more easily than
satellite delivery. This capability has enabled NYNEX CableComms to offer
additional channels and advanced services, such as IPPV. Cable operators
can transmit video cassette delivered or compact disc delivered programming
at relatively low cost, allowing a much broader range of niche programming
to be transmitted on their networks. In the near future, digitalization
will allow DTH subscribers to receive additional channels, which are likely
to include additional Pay-Per-View and interactive services, such as home
banking and shopping channels. Development of these channels by DTH
satellite providers will depend on their having digital satellite
transponders and will also require the installation of new satellite
receiver equipment at the customer's home.
Although NYNEX CableComms expects DTH satellite to continue to provide
significant competition in the future, NYNEX CableComms believes that cable
television has a number of competitive advantages over DTH satellite
service, including: (i) the significant initial costs for the purchase of a
dish and related equipment for DTH service compared with the initial costs
for connection of cable television, (ii) the perception that satellite
dishes are unsightly, (iii) the requirement for an unobstructed line of
sight between the satellite and the dish for satellite services which can
be problematic in densely populated areas, (iv) the quality of reception of
cable television as opposed to satellite reception which can be
15
16
affected by weather conditions, (v) the ability of cable viewers to watch
different channels on different television sets in one home if additional
outlets are taken while most satellite viewers cannot watch different
channels on different sets in a home without significant additional
expense, (vi) the ability of cable networks to offer telecommunications
services and in the future to offer interactive and integrated
entertainment, telecommunications and information services in addition to
standard non-interactive television programming, (vii) the general absence
of local programming on DTH satellite services and (viii) installation of
satellite dishes may require compliance with zoning ordinances.
NYNEX CableComms' Dual Product Packages also help it to compete with
competitors providing DTH satellite services alone. BSkyB has sought to
market telecommunications services on behalf of BT, which would have
enabled BSkyB's customers to earn additional discounts on BT's residential
telecommunications volume discount plans. BT terminated this arrangement as
a result of license enforcement action by Oftel.
- - - Video Cassette Rentals and Sales. The principal competitive advantages of
cable television over video cassette rentals and sales are, with respect to
rentals, convenience in the elimination of the need for customers to leave
their homes to collect and return the video cassette. Although video
cassette rentals and sales provide the customer with more flexibility in
selecting specific programming and the timing of delivery of such
programming, this advantage will be reduced by the introduction of IPPV
service and could be further reduced if and when NVOD and VOD services are
introduced.
- - - PTOs. A variety of VOD delivery systems are under development. Currently,
no VOD service is commercially available from any PTO, although BT has
experimented with a copper-based technology and undertook a pilot program
for NVOD service to the homes of a small number of BT employees. However,
NYNEX CableComms believes that existing technology does not permit BT and
other national PTOs to offer a high quality VOD service to a large number
of customers in a cost-effective manner. In addition to offering VOD, BT
may become a significant competitor in the multichannel television market
once it is allowed to broadcast entertainment services. Currently BT is
prevented from providing broadcast entertainment nationally or carrying
these services over its own network until 2001 (and then only if the
Director General of Oftel determines that the change is likely to lead to
more effective competition), although the restriction on carriage is to be
reviewed in 1998. In October 1995, the Labour Party proposed allowing BT
entry to the entertainment market earlier than previously envisaged in
return for BT providing free connection to the Internet to schools,
hospitals and libraries. Although in later statements the Labour Party has
moved away from this position, there can be no assurance that BT will not
be allowed an accelerated entry to the entertainment market, particularly
if there is a change of government. BT is, however, not restricted from
acquiring holders of cable television franchises or from applying in its
own right for cable television licenses covering unfranchised areas,
subject to the above-mentioned restriction on the use of its network. If
the restrictions on broadcast entertainment were lifted, NYNEX CableComms
believes that substantial investment by BT would be necessary before it
could provide broadcast video entertainment over its existing network
unless significant developments are made in digital compression or other
technologies.
- - - SMATV. The low cost of dishes for medium- and high-powered satellites is
encouraging the development of mini cable systems on individual apartment
buildings, known as SMATV systems. Since 1991, any SMATV system covering
1,000 homes or less has not required a cable television license and a cable
television system that covers only one building or two adjacent buildings
is permitted to operate pursuant to an existing telecommunications license.
The current regulatory policy gives cable operators a right of first
refusal to provide a similar or superior service at a reasonable price
before a new SMATV system will be permitted to begin operations. However,
this policy could change at any time. At present, NYNEX CableComms believes
that SMATV systems present only limited competition.
- - - Other Cable Operators. Although cable television operators in the United
Kingdom generally cooperate on a variety of technical, programming and
marketing matters, the operators do compete for the award of new
franchises, the purchase of existing franchises and new sources of capital.
Certain cable television operators competing for new franchises may have
greater financial resources or other advantages over NYNEX CableComms which
may increase their likelihood of obtaining desirable franchises.
16
17
- - - New Technologies. The extent to which new media and technologies compete
with cable television systems in the future cannot be predicted. Such media
or technologies may become dominant in the future and render cable
television systems less profitable or even obsolete. Digital converter
boxes are currently being deployed in the United States. When similar
digital technology is deployed successfully in the United Kingdom, it will
enable NYNEX CableComms, as well as its terrestrial broadcast and digital
DTH satellite competitors, to increase significantly the number of channels
they are able to offer to their customers. On January 31, 1997, two bids,
for the three full Digital Terrestrial Television ("DTT") multiplexes
available, were received by the Independent Television Commission. The
bidders were British Digital Broadcasting ("BDB"), a consortium of BSkyB,
Carlton and Granada, and Digital Television Network, backed by
International CableTel and the US Cable and Communications Group. Along
with the multiplexes already reserved for the BBC and ITV and a further
half multiplex for which S4C, the Welsh broadcaster has applied, it is
expected that approximately 25-30 channels of DTT will be available in the
second half of 1998. An increase in the number of channels offered by
terrestrial broadcast and DTH satellite competitors at competitive costs
could reduce NYNEX CableComms' competitiveness.
Telecommunications Competition
BT, formerly the sole national PTO in the United Kingdom, is a substantial
competitor in the residential telecommunications market with approximately 95%
of the market. BT has an established market presence, fully built networks and
resources substantially greater than those of NYNEX CableComms.
NYNEX CableComms' ability to gain market share from BT depends in large
part on its ability to charge lower prices than BT. Currently BT is not
permitted to charge different amounts for the same service in different local
geographic areas and accordingly is unable to lower prices selectively in
particular geographic areas in response to competition from NYNEX CableComms and
other cable telecommunications operators. While cable telecommunications
operators may at some point be required to provide services within a particular
franchise area on a similarly non-discriminatory basis, they currently have no
obligation to provide such services on the same terms in other franchise areas
within the United Kingdom. Consequently, cable telecommunications operators are
able to set prices in accordance with local market conditions. BT is currently
required to provide voice telecommunications services and certain other services
to every person in the United Kingdom who may reasonably request such services.
Cable telecommunications operators assume similar obligations only if the
Director General of Oftel determines that they have become a "well established
operator" within the relevant market (i.e. part or all of the area within which
the operator provides telecommunications but not cable television services).
NYNEX CableComms is not currently regarded as a "well established operator" for
these purposes. A consultation paper on future arrangements for universal
service was published in February 1997.
NYNEX CableComms believes that residential customers generally purchase its
telecommunications services because of anticipated cost savings. Since March
1995, NYNEX CableComms' pricing strategy has been to provide its average
residential customer with savings of 25% on monthly bills for line rental and
bill charges combined over BT's standard prices, before discounts and
promotions. NYNEX CableComms believes that this strategy has resulted in
additional revenue resulting from increased residential telecommunications
penetration rates and greater usage. Telecommunications penetration increased to
27.0% at December 31, 1996 from 24.6% at December 31, 1995 and average monthly
revenue per line increased to L19.96 in 1996 from L19.52 in 1995. Prior to March
1995, NYNEX CableComms provided residential customers with average savings of
10% to 15% on their monthly bills for line rental plus call usage combined over
BT's standard prices.
BT currently is subject to a retail price regulation in respect of
approximately 65% of its revenues. On October 1, 1996, Oftel modified BT's
license to implement new retail price controls commencing from August 1997 and
introduced a license condition that enables Oftel to address anti-competitive
agreements and abuse of dominant position (the "Fair Trading Condition"). The
new price control will expire on August 1, 2001 and is set at the Retail Price
Index ("RPI") -- 4.5% on the bottom 80% of residential customers as measured by
telecommunications expenditure. Small business customers will be subject to a
cap limiting increases in line rental to RPI (with no percentage adjustment) and
will have access to the same reduction in
17
18
call prices as residential customers. Oftel has stated that this will be the
last retail price control imposed on BT. In 1996, BT brought proceedings against
Oftel challenging the Fair Trading Condition. The court ruled that Oftel was
acting within its authority. On March 4, 1997, Oftel published guidelines on its
planned method of enforcement of the Fair Trading Condition. Cable
telecommunications operators currently are not subject to such price controls in
respect of any telecommunications services.
Oftel has issued a number of proposals that appear to indicate that it
intends to stimulate an even more competitive telecommunications market within
the United Kingdom. See "Other Regulatory Matters " below.
BT is required by its license to allow other operators (including cable
telecommunications operators) to interconnect with BT's network and the terms of
this interconnection are closely reviewed by Oftel. Oftel is consulting on
proposals for a framework for the regulation of pricing of BT's interconnect
charges planned for implementation on October 1, 1997. BT now offers a published
Standard Interconnection agreement to other operators. In the past, BT has
benefited from certain structural advantages, such as an inability for customers
to retain their existing telephone number when switching from BT. In 1996, Oftel
required BT to offer telephone number portability. NYNEX CableComms introduced
telephone number portability in all of its franchises by August 1996, and
expects to make it available to virtually all potential customers by mid-1997.
An advantage that cable television and telecommunications operators have
with respect to interconnection has been their ability to utilize, at a lower
cost than utilizing BT's network, the networks of other PTOs such as Mercury.
Mercury's long distance and international interconnect rates have historically
been less than those charged by BT enabling NYNEX CableComms to pass the benefit
on to consumers at the retail level. At present, the only way in which a
residential BT customer can choose to route calls over Mercury's network is by
dialing a special access code or by purchasing a telephone with which, by
pressing a special button, it is possible to select the Mercury network in
preference to the BT network. The Director General of Oftel has conducted a
study as to whether the introduction of an "equal access" policy would be
appropriate (whereby all operators of local telecommunications systems would
eventually have to offer access to the trunk systems of BT, Mercury and any
other PTOs without discrimination among those systems). Oftel's policy would
require operators with at least a 25% share of the local telecommunications
market to provide equal access. Oftel's study concluded that the costs of
introducing equal access exceeded any benefits that may arise, and that Oftel
would not be inclined to introduce equal access. However, there can be no
assurance that equal access will not be introduced by the Director General of
Oftel at some stage in the future and will not adversely affect (i) the cable
television and telecommunications operators' ability to market their
telecommunications services or (ii) their margin on usage charges for trunk and
international calls. The European Commission is currently considering the issue
of equal access and it is possible that decisions taken in this forum may have
an impact on the United Kingdom regulatory environment.
Other telecommunications providers could make it more difficult for NYNEX
CableComms to increase its share of the residential telecommunications market.
For example, IONICA L3 Limited ("IONICA"), a provider of telecommunications via
a fixed link radio network, entered the residential telecommunications market in
March 1996 in selected areas (although it does not operate in any NYNEX
CableComms franchise areas). AT&T Communications (UK) Ltd. ("AT&T UK") was
awarded a national PTO license in December 1994 and announced an intention to
enter both the business and residential markets. In addition, the United Kingdom
government has pursued a policy of promoting the development of wireless
telecommunications and has granted operating licenses to a number of operators
that have constructed mobile networks.
NYNEX CableComms competes with mobile networks such as those provided by
Telecom Securicor Cellular Radio Limited (marketed under the name "Cellnet") and
Vodafone Group Plc, and with personal communications networks such as those
provided by C&W and US West (marketed under the name "one2one") and Microtel
Logic Limited (marketed under the name "Orange"). Mobile service could become a
competitive threat to fixed networks, particularly if call charges are reduced
further on the mobile networks. Further advances in wireless technology may also
result in the ability to use high bandwidth to provide interactive services
similar to those proposed by Liberty Communications, which has been issued a
license to convey entertainment services.
18
19
BUSINESS COMPETITION
NYNEX CableComms competes primarily with BT in providing business
telecommunications services. It also competes with Mercury, Energis
Communications Limited ("Energis") and with other companies that have been
granted telecommunications licenses, such as NorWeb plc, a regional electricity
company in the area covered by the Northern Franchises. In the future, NYNEX
CableComms may compete with additional entrants to the business markets. Both BT
and Mercury are substantial competitors with an established market presence.
Energis has carried out the construction of a national broadband network along
existing power pylons to provide telecommunications services.
In March 1995, NYNEX CableComms introduced a new pricing strategy whereby
its business customers enjoy savings, on average, of 25% over BT's standard call
charges, before discounts and promotions. As with residential
telecommunications, NYNEX CableComms believes that the immediate reduction in
tariffs resulting from offering these enhanced savings will 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.
Since the introduction of this strategy, there has been an increase in usage.
The average monthly revenue per line increased to L49.39 in 1996 from L46.82 in
1995 and the average number of lines per business customer increased to 4.4 at
December 31, 1996 from 2.8 at December 31, 1995. Prior to March 1995, NYNEX
CableComms provided business customers with monthly savings, on average, of 10%
to 15% on combined prices charged for line rental and call usage, as compared to
the standard prices charged by BT.
With respect to quality, NYNEX CableComms believes that the transmission
provided by its advanced fiber network, together with customer service provided
by its National Operations Centre, allow NYNEX CableComms to provide a wide
range of sophisticated and reliable services to its customers. See "Business --
Service" above.
NYNEX CableComms believes that by owning its digital switches it can more
effectively compete by providing its telecommunications services at lower prices
and by offering more services and pricing options to its customers than it could
offer if it utilized third party switches. As in the residential market, NYNEX
CableComms believes that its ability to compete with BT in the business market
has been improved by the addition of telephone number portability in the United
Kingdom.
REGULATORY MATTERS
The operation of cable television and telecommunications services in the UK
is regulated under both the Telecommunications Act 1984 ( the
"Telecommunications Act") and the Broadcasting Act 1990, as amended by the
Broadcasting Act 1996 (the "Broadcasting Act"), which followed the Cable and
Broadcasting Act 1984 (the "Cable and Broadcasting Act"). The operation of cable
television and telecommunications services in UK requires two principal
licenses: (i) a license issued either under the Cable and Broadcasting Act
(prior to 1991) or under the Broadcasting Act (since 1991), which permits the
holder to provide cable television services within a specific franchise area,
and (ii) a telecommunications license issued under the Telecommunications Act,
which allows the holder to install and operate the physical network necessary to
provide cable television and telecommunications services. The ITC is responsible
for granting and enforcing cable television licenses. The DTI is responsible for
granting telecommunications licenses and Oftel is responsible for regulating the
operations of such licenses. In addition, if an operator utilizes microwave
distribution systems as part of its network, such operator is required to hold a
license under the Wireless Telegraphy Acts of 1949-1967.
Each of the 16 Operating Companies holds a cable television license and a
telecommunications license. The Operating Companies' cable television licenses
will expire at various times commencing in November 2004. The telecommunications
licenses held by the Operating Companies are for 23 year periods and are
scheduled to expire at various times commencing June 2012.
OTHER REGULATORY MATTERS
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. BT's license was modified in
19
20
July 1996 to incorporate a condition which supports implementation of number
portability and, on January 6, 1997, the Director General of Oftel determined
the charges BT can levy on other operators in order to effect number
portability. In May 1996, NYNEX CableComms became the first company in the
United Kingdom to introduce a commercial number portability service on a trial
basis in the Derby franchise. In August 1996 the service was available in all
NYNEX CableComms' franchise areas and in mid-1997 the service is expected to be
available to virtually all potential customers.
INTERNATIONAL FACILITIES -- LIBERALISATION. On June 6, 1996, following
examination of the responses to the March 1996 consultation document that
proposed the licensing of additional facilities-based operators in the
international call market, the UK Government announced the liberalization of
international facilities on all international routes. Previously, only BT and
Mercury were licensed to own and operate international facilities from the
United Kingdom. On December 19, 1996, 44 new international facilities operator
licences were granted. A further licence was granted in January 1997.
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 proposals, which would allow BT to price its services to
other service providers at standard retail prices less the avoidable costs of
serving such providers and ensure that service providers can compete on an equal
basis with BT's own services provision businesses. Oftel's final statement in
this area was published at the end of February 1997.
OFT DECISION IN BSKYB REVIEW. During the second quarter of 1995, NYNEX
CableComms Limited, an indirect wholly-owned subsidiary of NYNEX CableComms UK
and NYNEX CableComms US, and each of the Operating Companies entered into a
programming agreement with BSkyB and a subsidiary of BSkyB (the "BSkyB
Agreement") which provides for price incentives related to, among other things,
the overall number of basic customers and the pay to basic ratio achieved by
NYNEX CableComms. The BSkyB Agreement also provides NYNEX CableComms with access
to BSkyB's Pay-Per-View services.
Concurrently with its 1996 review of BSkyB's position in the market for the
supply of pay television programming in the United Kingdom and related services
at the wholesale level, the UK Office of Fair Trading (the "OFT") expressed the
view that it considered certain provisions of the BSkyB Agreement to be
significantly anti-competitive under the UK Restrictive Trade Practices Act
1976.
In connection with its July 1996 findings that barriers to entry resulting
from BSkyB's powerful position in the wholesale pay television market raised
concerns that "although BSkyB is not acting anti-competitively, the competitive
process is being impaired", the OFT also acknowledged that amendments to the
BSkyB Agreement proposed by BSkyB and NYNEX CableComms had addressed the
competition concerns of the OFT. BSkyB and NYNEX CableComms are reviewing a
final draft of the agreement, as revised to incorporate such amendments. The
final draft was submitted to the OFT in February 1997 for confirmation that the
OFT's review is complete.
To address the anti-competitive situation, the OFT secured informal
undertakings pursuant to which BSkyB, among other things, agreed to submit a new
wholesale price list and discount structure, the New Rate Card, to the OFT for
consultation with the cable television industry and for OFT approval. Cable
operators with existing fixed term contracts with BSkyB, such as NYNEX
CableComms, may continue under those contracts until they expire or elect to be
governed by the New Rate Card pricing and discount structure. The OFT submitted
the New Rate Card to NYNEX CableComms and the cable industry in October 1996
and, following consultation with the industry, the New Rate Card was approved by
the OFT in December 1996. NYNEX CableComms has reviewed the New Rate Card and at
present has determined to continue to operate under the BSkyB Agreement, as so
amended. NYNEX CableComms will continue to review its option to operate under
the New Rate Card.
NYNEX CableComms understands that the European Commission Directorate
General IV has informally considered the compatibility of the BSkyB Agreement
(in the form originally entered into, without giving effect to the amendments
proposed by NYNEX CableComms and BSkyB after discussions with the OFT) with
European Union competition law. NYNEX CableComms is not aware of any final
conclusion on this issue having been reached by the Directorate General.
20
21
BROADCASTING ACT. On July 25, 1996, the Broadcasting Act 1996, which
amended the Broadcasting Act 1990, introduced a number of changes to UK
broadcasting policy. The primary change was the creation of a framework for the
licensing of digital terrestrial broadcasters (both multiplex service and
digital program services) and modifications to cross-media ownership rules. The
Broadcasting Standards Council and the Broadcasting Complaints Commission were
also merged.
Other changes relevant to NYNEX CableComms' business interests include the
specification of a list of events that cannot be broadcast exclusively by
pay-television operators and specification of the "must carry" requirements for
cable operators in a digital environment.
MODIFICATIONS TO THE UK TELEPHONE NUMBERING SCHEME. In September 1996,
Oftel released a consultation document that proposes a number of changes to the
UK telephone 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. Oftel's final proposals, addressing the recommendations
in their initial consultation, was published in January 1997.
DIGITAL CONDITIONAL ACCESS. On December 17, 1996, the Department of Trade
and Industry proposed regulations to Parliament to implement the European
Commission Digital Television Directive. A key aspect of the regulations, which
came into effect on January 7, 1997, is the regulation of conditional access
services for digital television. Conditional access services and systems that
limit the reception of pay television programs and other services to those
customers that have paid for the service. The regulations will be enforced by
the Director General of Oftel through the telecommunications licensing regime
and are intended to ensure that all broadcasters have access to conditional
access services on a non-discriminatory basis. Importantly for NYNEX CableComms,
they also ensure that cable operators have the ability to transcontrol the
broadcaster's digital signals, thus enabling the cable operator to manage the
way in which services are presented to their customers.
DIGITAL TERRESTRIAL TELEVISION ("DTT"). Implementing legislation put in
place by the Broadcasting Act 1996, the ITC invited applications for licenses
for the operation of DTT services. By the closing date of January 31, 1997,
multiplex license applications for the three full multiplex licences available
were received from two consortia: British Digital Broadcasting (a consortium of
BSkyB, Carlton Communications Plc and Granada Group Plc with program services
provided by BBC), and Digital Television Network (owned by international
CableTel). An application for further half multiplex available was received from
S4C, the Welsh broadcaster. The ITC is expected to award the licenses in Spring
1997 with the service operational by Spring of 1998.
As the third multichannel delivery platform to enter the UK market (after
cable and satellite) initial market share gain is expected to start slowly. This
should provide NYNEX CableComms sufficient time to continue the construction of
its broadband network and retain its position as the leading multichannel
television provider in its franchise areas.
NYNEX CableComms also expects that the arrival of DTT services will
stimulate the overall market for multichannel TV through increased customer
awareness of the multichannel product. This should have a positive effect on all
service providers including cable operators such as NYNEX CableComms. While DTT
will increase the choice of multichannel providers for some customers, it has
limited geographical coverage and limited channel capacity. Initially, NYNEX
CableComms expects that many DTT customers will take only the "free to air"
services.
RESEARCH AND DEVELOPMENT
NYNEX CableComms' research and development policy involves the analysis of
technological developments affecting its cable television and telecommunications
business. NYNEX CableComms conducts research and development activities
utilizing internal capabilities, resources provided by NYNEX and resources
provided by equipment suppliers. The technical support provided by NYNEX
includes assistance to NYNEX CableComms with respect to specific research and
development projects undertaken. The cost of research and development activities
is not material to NYNEX CableComms' financial position or operating results.
21
22
EMPLOYEES
The number of employees was 2,631 (taking into account that a number of
employees are part time, this is the notional equivalent of 2,557 full time
employees) at December 31, 1996, comprising 638 employees in residential sales,
97 employees in business sales, 47 employees in sales administration, 45
employees in marketing, 1,095 employees in customer operations and support, 72
employees in finance, 73 employees in corporate communications, 430 employees in
network development, 49 employees in information systems, 49 employees in human
resources, 10 employees in legal and regulatory services and 23 employees (and 3
non-executive directors who are not employees) in the president's department.
None of these employees is covered by collective bargaining agreements. The
average number of persons employed by NYNEX CableComms during the years ended
December 31, 1994, 1995 and 1996 was 1,919, 2,854 and 2,546, respectively.
ITEM 2. PROPERTIES
NYNEX CableComms leases or owns various real estate property in its
franchise areas in the United Kingdom used as administrative and sales offices,
operations centers, warehouses and cable television and telecommunications
equipment sites. NYNEX CableComms owns freehold property comprising an aggregate
of approximately 195,000 square feet of buildings and leases an aggregate of
approximately 381,000 square feet of buildings. Expiring leases may be renewed
or replaced by other leases or replaced with freehold interests, as required by
business needs, in the normal course of business.
ITEM 3. LEGAL PROCEEDINGS
NYNEX CableComms has not been involved in any legal proceedings which have
had, or may have, a material adverse effect on NYNEX CableComms' financial
position or operating results, nor are any such proceedings pending or, to the
best of NYNEX CableComms' knowledge, threatened against NYNEX CableComms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
22
23
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY FINANCIAL DATA
As of January 31, 1997 the number of holders of record of ADRs was
approximately 33 and the number of holders of record of NYNEX CableComms Units
was approximately 4,984. The NYNEX CableComms Units are quoted on the London
Stock Exchange. NYNEX CableComms ADSs are quoted on the Nasdaq National Market.
MARKET PRICE DATA
The following table sets forth, for the periods indicated, (i) the reported
high and low middle market quotations for NYNEX CableComms Units based on the
Daily Official List of the London Stock Exchange, and (ii) the reported high and
low sales prices of NYNEX CableComms ADSs on the Nasdaq National Market, derived
from National Association of Securities Dealers, Inc. ("NASD") records.
LONDON STOCK NASDAQ NATIONAL
EXCHANGE MARKET
----------------- -----------------
PENCE PER US DOLLAR PER
NYNEX CABLECOMMS NYNEX CABLECOMMS
UNIT(1) ADS(1)
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
Calendar 1995
First Quarter....................................... N/A N/A N/A N/A
Second Quarter...................................... 139.00 123.50 22 1/4 19 1/4
Third Quarter....................................... 147.00 116.50 23 18
Fourth Quarter...................................... 143.50 112.00 22 5/8 17 3/8
Calendar 1996
First Quarter....................................... 113.00 85.50 17 13
Second Quarter...................................... 126.00 104.00 19 1/4 15 7/8
Third Quarter....................................... 109.50 87.00 17 1/8 13 1/4
Fourth Quarter...................................... 119.50 87.50 19 5/8 13 7/8
- - ---------------
(1) NYNEX CableComms Units were listed on the London Stock Exchange on June 14,
1995 and, NYNEX CableComms ADSs became eligible for trading through the
Nasdaq National Market on June 9, 1995.
GEOGRAPHICAL ANALYSIS OF ORDINARY SHAREHOLDERS
As at January 31, 1997, and February 13, 1996 respectively it was estimated
that the NYNEX CableComms Units and NYNEX CableComms ADSs were beneficially held
in the geographic areas shown below:
1997 1996
----- -----
Geographic areas
US...................................................................... 71.5% 77.0%
UK...................................................................... 28.0% 22.0%
Rest of world........................................................... 0.5% 0.5%
Shareholder analysis
NYNEX Corporation....................................................... 67.0% 67.0%
UK Institutional........................................................ 28.0% 21.0%
US Institutional........................................................ 4.0% 10.0%
UK private.............................................................. 0.5% 1.0%
Other................................................................... 0.5% 1.0%
The following discussion briefly describes certain UK tax aspects of the
acquisition, ownership and disposition of NYNEX CableComms Units and NYNEX
CableComms Units represented by NYNEX CableComms ADSs by a beneficial owner
thereof who is a citizen or resident of the US, a corporation
23
24
organized under the laws of the US or any person who is otherwise subject to US
federal income tax on a net basis with respect to worldwide income (a "US
Holder"). The discussion of UK tax aspects is based upon current law and UK
Inland Revenue practice, and applicable regulations and rulings, as in effect on
the date hereof. It is also based, in part, on representations of the Depositary
and assumes that each obligation under the Deposit Agreement and any related
agreement will be performed in accordance with its terms.
This summary does not address the UK tax consequences to a US Holder (i)
who is resident (or, in the case of an individual, ordinarily resident) in the
UK for UK tax purposes, (ii) whose holding of NYNEX CableComms Units or NYNEX
CableComms ADSs is effectively connected with a permanent establishment in the
UK through which such US Holder carries on business activities or, in the case
of an individual who performs independent personal services, with a fixed base
situated in the UK, (iii) that is a corporation which is an investment or
holding company, 25% or more of the capital of which is owned, directly or
indirectly, by persons who are not individuals resident in or citizens of the
US, or (iv) that is a corporation which alone or collectively with one or more
associated companies controls, directly or indirectly, 10% or more of NYNEX
CableComms. For purposes of this description, an "Eligible US Holder" means any
US Holder other than a person described in this paragraph.
For purposes of the US/UK double taxation convention relating to income and
capital gains (the "Treaty") as well as the Internal Revenue Code of 1986, as
amended (the "US Internal Revenue Code"), US Holders of NYNEX CableComms ADSs
will be treated as the owners of the NYNEX CableComms UK Ordinary Shares and
NYNEX CableComms US Shares of Common Stock which are paired as NYNEX CableComms
Units represented by the ADSs. Accordingly, except as noted, the UK tax
consequences discussed below apply equally to US Holders of NYNEX CableComms
ADSs and NYNEX CableComms Units.
An Eligible US Holder will generally be entitled under the Treaty to
receive from the UK Inland Revenue, in respect of a cash dividend paid by either
NYNEX CableComms UK or NYNEX CableComms US (together, the "Companies") a payment
(a "Treaty Payment") equal to the amount of the tax credit associated with the
dividend (equal to 25% of the dividend) reduced by 15% of the sum of the
dividend and the tax credit. For example, an Eligible US Holder who receives a
dividend payment of L80 would be entitled to a Treaty Payment of L5 (i.e., the
tax credit of L20 reduced by L15 being 15% of the sum of L80 and L20) resulting
in a total receipt (before applicable US taxes) of L85.
Entitlement to a Treaty Payment will not arise if a dividend is paid as a
foreign income dividend (to which no tax credit attaches). The Companies have no
present intention to pay any dividend as a foreign income dividend.
Whether US Holders who are resident in countries other than the US are
entitled to a tax credit in respect of dividends depends in general upon the
provisions of such conventions or agreements, if any, as may exist between such
countries and the UK.
Under section 812 of the Income and Corporation Taxes Act 1988, the UK
Treasury has power in certain circumstances to deny the payment of Advanced
Corporation Tax refunds under the UK's double tax conventions to a US company if
it or an associated company has a qualifying presence in a country which
operates a unitary system of corporate taxation. These provisions come into
force only if the UK Treasury so determines by statutory instrument. No such
instrument has yet been made.
An Eligible US Holder will not be liable for UK tax on capital gains
realized on the disposal of NYNEX CableComms Units or NYNEX CableComms ADSs
unless such Eligible US Holder carries on a trade, profession or vocation in the
UK through a branch or agency and the NYNEX CableComms Units or NYNEX CableComms
ADSs are or have been used, held or acquired for the purposes of such trade,
profession or vocation or such branch or agency.
The surrender of NYNEX CableComms ADSs in exchange for the deposited NYNEX
CableComms Units represented thereby will not be a taxable event for the
purposes of UK corporation tax or UK capital gains tax. Accordingly, Eligible US
Holders will not recognize any gain or loss for such purposes upon such
surrender.
24
25
An Eligible US Holder will generally recognize gain or loss for US federal
income tax purposes upon disposal of NYNEX CableComms Units or NYNEX CableComms
ADSs, subject to applicable rules and exceptions set forth in the US Internal
Revenue Code.
The surrender of NYNEX CableComms ADSs in exchange for the deposited NYNEX
CableComms Units represented thereby will not be a taxable event for US federal
income tax purposes. Accordingly, no taxable gain or loss will be recognized for
such purposes upon such surrender.
An Eligible US Holder of NYNEX CableComms Units or NYNEX CableComms ADSs
will be exempt from the 31% US backup withholding tax with respect to proceeds
of a sale, exchange or redemption of such NYNEX CableComms Units or NYNEX
CableComms ADSs if such US Holder (i) is a corporation or other exempt recipient
and, if required, demonstrates its status as such, or (ii) provides to a paying
agent or a broker, as the case may be, a US taxpayer identification number and
otherwise complies with any applicable backup withholding requirements.
Neither NYNEX CableComms UK nor NYNEX CableComms US has ever paid a
dividend and neither anticipates paying any dividends in the foreseeable future.
NYNEX CableComms expects to retain any earnings generated from its operations
for use in its business.
ITEM 6. SELECTED COMBINED FINANCIAL DATA
The financial statements of NYNEX CableComms have been prepared on a
combined basis as if NYNEX CableComms UK and NYNEX CableComms US were a single
entity. The following selected financial data as of December 31, 1995 and 1996
and for the years ended December 31, 1994, 1995 and 1996 have been derived from
the Combined Financial Statements of NYNEX CableComms which have been prepared
in accordance with US GAAP and audited by Coopers & Lybrand L.L.P. and which are
included herein on pages F-1 to F-7. The following selected financial data as of
December 31, 1993 and 1994 and for the years ended December 31, 1992 and 1993
have been derived from the audited financial statements of NYNEX CableComms
which are not included herein. The following selected financial data as of
December 31, 1992 has been derived from the unaudited financial statements of
NYNEX CableComms which are not included herein. The selected financial data set
forth below should be read in conjunction with, and are qualified by reference
to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements of NYNEX CableComms and the
notes thereto included herein on pages F-1 to F-21.
FIVE YEAR FINANCIAL HISTORY
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
L L L L L
(IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
Operating revenues................... 151,241 85,019 41,015 18,255 3,625
Operating loss....................... (60,049) (79,878) (67,753) (29,015) (10,067)
Net loss............................. (22,845) (439) (49,521) (22,830) (9,759)
Net loss per ADS..................... (0.247) (0.005) -- -- --
Pro forma net loss per ADS(1)........ -- -- (0.535) (0.247) --
Property, plant and equipment, net... 1,098,119 859,024 485,917 209,707 67,699
Total assets......................... 1,248,887 1,001,779 616,439 289,286 79,116
Long-term debt....................... 447,649 125,350 52,000 -- --
Minority interest.................... 76,575 132,121 165,527 -- --
Stockholders' equity................. 601,286 623,466 291,399 222,133 59,594
Cash dividends....................... -- -- -- -- --
- - ---------------
(1) Pro forma net loss per ADS is unaudited and has been calculated as if the
92,500,000 ADSs issued on June 14, 1995 had been in existence throughout
1994 and 1993.
25
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROPOSED COMBINATION
Cable and Wireless plc, Bell Canada International Inc. and NYNEX have
entered into a Transaction Agreement pursuant to which, subject to the
satisfaction of certain conditions precedent, the parties have agreed to combine
Mercury Communications Limited, Bell Cablemedia plc (as enlarged by the
acquisition of Videotron Holdings plc), NYNEX CableComms UK and NYNEX CableComms
US under a new holding company, Cable & Wireless Communications plc ("CWC").
Pursuant to the Transaction Agreement, CWC has offered to purchase NYNEX
CableComms UK Ordinary Shares and NYNEX US Shares of Common Stock (comprised in
the NYNEX CableComms Units, including those represented by NYNEX CableComms
ADSs) in exchange for ordinary shares of CWC. If the transactions contemplated
by the Transaction Agreement are consummated, among other things, NYNEX
CableComms will become a part of the combined CWC group, its existing credit
facilities discussed below under "Financing of NYNEX CableComms" would have to
be repaid (absent waivers or change of control defaults) and are expected to be
terminated and replaced with a CWC credit facility, and other changes may occur
in relation to its income taxes, capital resources and liquidity and in its
regulatory position and future prospects. The possibility of these future
changes should be taken into account when reviewing "Income taxes", "Capital
resources and liquidity", "Financing of NYNEX CableComms" and "Cash flows and
liquidity" below.
OVERVIEW
NYNEX CableComms is designing and constructing a broadband (high capacity)
network within its franchise areas which enables it to deliver a wide range of
cable television and telecommunications services to its customers and which
NYNEX CableComms believes will enable it to deliver more advanced services as
they become available in the future. NYNEX CableComms began construction of the
first of its 16 franchises in September 1991 and has been providing both cable
television and telecommunications services in all of its franchises since August
1995.
NYNEX CableComms is constructing its network to exceed license requirements
in order to maximize revenue and, in the longer term, cash flows. NYNEX
CableComms presently anticipates completing 71% of its network construction in
its existing franchises by the end of 1997, with substantial completion
anticipated by the end of 1999; however, NYNEX CableComms regularly reviews its
build program and may from time to time revise its proposed build targets for
future years.
NYNEX CableComms earns revenue in both the residential and business markets
for cable television and telecommunications services. Revenue in the residential
market is generated from the provision of both cable television and
telecommunications services. Cable television revenue is earned mainly from
monthly fees for the basic and premium channels and additional outlets.
Residential telecommunications revenue is earned from monthly charges for calls
made by customers and line rental and from the provision of optional features.
Revenue in the business market is earned almost exclusively from the provision
of telecommunications services, although NYNEX CableComms does provide a
commercial cable television service and facilities for closed circuit television
services. Business telecommunications services generate revenue from the same
telecommunications services provided to residential customers and additional
services such as CENTREX, managed fiber networks, private circuits, DASS 2,
ISDN, closed circuit television and commercial cable television.
NYNEX CableComms' recorded revenues and operating costs since December 31,
1996 have been consistent with its expectations.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In each of the years ended December 31, 1996, 1995 and 1994, NYNEX
CableComms experienced significant increases in its customer base and revenue.
Such increases were mainly attributable to sales and marketing activity and
continuing network construction.
26
27
In 1995 and 1994 NYNEX CableComms experienced significant increases in
operating expenses. In 1996 operating expenses have increased but staff costs
and selling, general and administrative expenses have broadly remained the same
as in 1995, as NYNEX CableComms has realized business efficiencies and
stringently controlled these expenses. Operating revenue increased 78% to L151.2
million for 1996 from L85.0 million for 1995, and increased 107% in 1995 from
L41.0 million for 1994. These increases were attributable primarily to an
increased customer base, marketing activity and continuing construction of the
network. The increase in 1995 over 1994 is also attributable to the introduction
of telecommunications services in certain Northern Franchises beginning in 1995,
where during 1994 only cable television services had been available.
Cable television
Cable television revenue increased 61% to L62.4 million for 1996 from L38.7
million for 1995, and increased 94% in 1995 from L20.0 million for 1994. These
increases were primarily the result of an increase in the number of basic
customers and the average revenue per basic customer. The number of basic
customers increased 36% to 268,519 at December 31, 1996 from 197,004 at December
31, 1995 and increased 62% in 1995 from 121,968 at December 31, 1994. The
average monthly cable television revenue per basic customer increased to L22.83
in 1996 from L21.59 in 1995, and from L19.67 in 1994. The overall increase in
average monthly revenue in 1996 was primarily attributable to an increase in the
pay to basic ratio and the introduction of Pay-Per-View cable television
services. The increase in 1995 was primarily attributable to a L1 per month
increase in the basic programing package which was implemented in late November
1994, together with an increase in the pay to basic ratio.
The number of homes passed and marketed in NYNEX CableComms' operating
franchises increased 31% to 1,304,137 at December 31, 1996 from 994,917 at
December 31, 1995, and increased 59% in 1995 from 624,091 at December 31, 1994.
Penetration rates increased to 20.6% at December 31, 1996 from 19.8% at December
31, 1995, and from 19.5% at December 31, 1994, as a higher proportion of NYNEX
CableComms' potential customers chose to purchase cable television services
during both periods. NYNEX CableComms believes that the increase in penetration
in 1996 was driven by a number of marketing initiatives introduced in 1996, a
restructuring of the sales commission policy and a greater emphasis on retaining
customers. NYNEX CableComms' churn rate increased slightly to 29.6% at December
31, 1996 from 29.4% at December 31, 1995 and decreased from 31.1% at December
31, 1994. The pay to basic ratio increased to 213.5% at December 31, 1996 from
209.3% at December 31, 1995 and from 156.2% at December 31, 1994. The increases
in the pay to basic ratio in 1996 and 1995 were 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 and thereby
enabling NYNEX CableComms to take advantage of improved pricing in the BSkyB
Agreement, which was entered into in the second quarter of 1995, and increased
sales of premium channels since the second quarter of 1995.
Residential telecommunications
Residential telecommunications revenue increased 94% to L70.6 million for
1996 from L36.4 million for 1995, and increased 123% in 1995 from L16.3 million
for 1994. These increases were primarily the result of an increase in the number
of residential telecommunications lines and increased usage. The number of
residential telecommunications lines increased 50% to 349,260 at December 31,
1996 from 232,551 at December 31, 1995, and increased 135% in 1995 from 98,954
at December 31, 1994. The average monthly residential telecommunications revenue
per line increased to L19.96 for 1996 from L19.52 for 1995 and decreased from
L21.81 for 1994. The reduction in telephone tariffs in March 1995 was the basis
of a new pricing strategy of offering savings to the average residential
customer of 25% on monthly bills for line rentals and call charges over BT's
standard call prices combined before discounts and promotions. The increase in
residential telecommunications penetration rate to 27.0% at December 31, 1996
from 24.6% at December 31, 1995, and from 19.8% at December 31, 1994 and the
increased average monthly revenue per line in 1996, despite further tariff
reductions in 1996, support this strategy. NYNEX CableComms has maintained this
pricing strategy with the introduction of additional price reductions in
response to price reductions by BT made during 1996 and 1995. The increase in
average monthly revenue per line in 1996 over 1995 is due primarily to increased
27
28
usage attributable to the pricing strategy. The decrease in average monthly
revenue per line in 1995 over 1994 reflected NYNEX CableComms' adoption of the
new pricing strategy from March 1995. Prior to March 1995, NYNEX CableComms
provided residential customers with monthly savings of 10% to 15% on their
monthly bills for line rental and call usage combined over BT's standard prices.
The increase in the number of residential telecommunications lines reflects
to a large degree the increase in the number of homes passed and marketed for
residential telecommunications services, which increased 37% to 1,291,488 at
December 31, 1996 from 945,802 at December 31, 1995, and increased 89% in 1995
from 501,031 at December 31, 1994. The residential telecommunication churn rate
fell to 16.4% at December 31, 1996 from 17.5% at December 31, 1995, having risen
from 15.8% at December 31, 1994.
Business telecommunications
Business telecommunications revenue increased 147% to L13.1 million for
1996 from L5.3 million for 1995, and increased 121% in 1995 from L2.4 million
for 1994. These increases were primarily attributable to increases in the number
of lines, as well as, in 1996, to increases in the average monthly revenue per
line. The number of business telecommunications lines increased 133% to 33,287
at December 31, 1996 from 14,260 at December 31, 1995, and increased 168% in
1995 from 5,311 at December 31, 1994. The increase in the number of business
telecommunications lines resulted from an increase in the number of businesses
passed and marketed for business telecommunications services, which increased
101% to 61,145 at December 31, 1996, from 30,450 at December 31, 1995 and
increased 51% in 1995 from 20,193 at December 31, 1994. The average monthly
business telecommunications revenue per line increased to L49.39 in 1996 from
L46.82 in 1995, having decreased from L53.45 in 1994 as a result of NYNEX
CableComms' pricing strategy introduced in March 1995, to offer savings to its
business customers on average of 25% compared to BT's standard call charges
before discounts and promotions. As with residential telecommunications, NYNEX
CableComms believed that the immediate reduction in tariffs would be more than
offset over time by additional revenue generated from increased purchase of
business telecommunications services and greater usage attributable to this
strategy. In March 1996, telesales marketing was introduced, together with a new
volume-based 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 decrease in average monthly
telecommunications revenue per line in 1995 was primarily due to the
introduction of the pricing strategy in March 1995 and the introduction of
CENTREX lines, which had not been marketed during 1994. NYNEX CableComms had
installed 8,458 CENTREX lines at December 31, 1996, as compared to 2,188 CENTREX
lines at December 31, 1995. In 1996, notable sales of business
telecommunications services were completed, including major sales to local
government authorities, and universities and medical centers. Although a higher
proportion of the customer's business generally is won as a result of
undertaking a CENTREX installation, CENTREX lines tend to generate less revenue
per line than single business lines and, therefore, while increasing overall
revenue, have the effect of diluting average monthly telecommunications revenue
per line.
The average number of lines per business customer increased 57% to 4.4 at
December 31, 1996 from 2.8 at December 31, 1995, and increased 87% in 1995 from
1.5 at December 31, 1994, reflecting primarily the increased number of CENTREX
lines. The business telecommunications churn rate increased to 13.0% at December
31, 1996 from 11.9% at December 31, 1995. The churn rate for the second half of
1994 was 7.2%. NYNEX CableComms did not keep statistics for its business
telecommunications churn rate until June 1994.
Installation
NYNEX CableComms' combined installation revenue for cable television and
residential and business telecommunications increased 13% to L5.2 million for
1996 from L4.6 million for 1995, and increased 100% in 1995 from L2.3 million in
1994. This growth in revenue reflects the continuing network construction and
the corresponding increase in its customer base. The rate of growth in
installation revenue from 1994 through 1995 and 1996 broadly reflects the
installation activity levels.
28
29
OPERATING EXPENSES
Operating expenses increased 28% to L211.3 million in 1996 from L164.9
million in 1995, and increased 52% in 1995 from L108.8 million in 1994 as a
result of the continuing network construction and increase in the customer base.
The components of operating expenses are programming costs, telecommunications
expenses, depreciation and amortization, staff costs and selling, general and
administrative expenses.
Total programming costs as a percentage of cable television revenues were
55% in 1996 compared with 50% for 1995 and 48% for 1994. The increases were a
result of the introduction of new channels and an increase in prices charged by
programming suppliers. In the fourth quarter of 1996, NYNEX CableComms
introduced new packaging and pricing which took into account some of the
programing providers' increased prices. The change in the packaging and pricing
structure of the premium channels in June 1995, designed to encourage customers
to take additional premium channels, resulted in reduced gross profit margins on
premium channels in 1996 and 1995.
Telecommunications expenses principally reflect interconnect charges paid
to national and international carriers for NYNEX CableComms' traffic over their
networks. As a result of the completion of the installation of digital switches
in all its franchises in 1995, NYNEX CableComms has eliminated the need to pay
third parties for switching intra-franchise calls between its customers and has
reduced the cost of switching calls to other telecommunications operators.
Telecommunications expenses for 1996 were stated net of a L2.8 million favorable
adjustment in respect of the settlement of outstanding pricing issues whereby
interconnect charges in previous periods were reduced. Telecommunications
expenses for 1996 were 31% of telecommunications revenues, compared with 39% in
1995 and 42% in 1994. This was achieved despite the introduction of the new
pricing strategy in March 1995.
Depreciation and amortization increased 64% to L54.5 million for 1996 from
L33.2 million for 1995, and increased 74% in 1995 from L19.1 million for 1994.
These increases are primarily related to the increase in the cost of total
property, plant and equipment to L1,213.3 million at December 31, 1996 from
L921.3 million at December 31, 1995 and from L514.8 million at December 31,
1994. Depreciation will continue to rise as the network is built out.
Staff costs, which include salaries, wages, benefits and sales commissions,
decreased to L45.9 million in 1996 from L46.0 million for 1995, and increased
50% in 1995 from L30.6 million for 1994. The number of employees (excluding
subcontract installers) has decreased 11% to 2,557 full time equivalents at
December 31, 1996 from 2,884 at December 31, 1995, and increased 17% in 1995
from 2,456 at December 31, 1994. NYNEX CableComms developed a cost-management
program toward the end of 1995, the purpose of which was to ensure that NYNEX
CableComms has the correct cost base required to support the growth of its
business. The program was implemented at the beginning of 1996. The decrease in
staff costs in 1996 was primarily as a result of a reduction in the number of
employees in accordance with the cost management program. Staff costs in 1995
increased as a result of the growth of NYNEX CableComms' business operations
during 1994.
Selling, general and administrative expenses were L50.1 million for each of
1996 and 1995, having increased from L41.4 million for 1994. Following the cost
management program implemented at the beginning of 1996, NYNEX CableComms has
continued to realize business efficiencies and to stringently control expenses.
As a result, the expenses in 1996 have remained constant with those in 1995
despite a 78% increase in revenue compared to 1995. The increase in 1995 over
1994 reflected the increase of both construction levels and the customer base
over and above that of the comparable periods.
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 L38.7 million for 1996, L41.6 million
for 1995 and L30.7 million for 1994.
OTHER INCOME (EXPENSE)
Interest income primarily arises from the investment of proceeds of debt
and equity in advance of capital expenditures and operating cash flow
requirements and from balances due from NYNEX and its affiliates.
29
30
Interest income increased 20% to L4.9 million for 1996 from L4.1 million for
1995, and increased 193% in 1995 from L1.4 million for 1994.
In 1996, interest expense increased to L23.2 million, net of L6.0 million
that was capitalized. In 1995, interest expense increased to L16.0 million, net
of L2.8 million that was capitalized, from L0.3 million, net of L0.2 million
that was capitalized, in 1994. Of the increased amounts in 1996 and 1995, L6.5
million was attributable to the amortization of deferred finance costs.
Substantially all of the balance of the increased amounts of interest expense
represents interest paid to the North and South limited partners under their
respective financing arrangements for increased levels of borrowings. See
"Financing of NYNEX CableComms".
Deferred financing costs of L65.0 million were incurred in implementing the
financing arrangements for the Northern Operating Companies and the Southern
Operating Companies, L42.0 million of these costs being incurred in December
1994 and L23.0 million in December 1993. Of these deferred financing costs,
L25.3 million were incurred in entering two forward interest rate swaps to
protect NYNEX CableComms from future fluctuations in interest rates, L18.3
million of these costs being incurred in December 1994 and L7.0 million in
December 1993. See Note G to the combined financial statements of NYNEX
CableComms. Prior to the reorganization of the financing arrangements for the
Southern Operating Companies on March 31, 1995, the L23.0 million of deferred
finance costs in respect of these arrangements were offset against Minority
interest. Interest expense increased in 1995 primarily due to the increased
level of funding during the period from the financing arrangements for the
Northern Operating Companies and the Southern Operating Companies. In addition,
the reorganization of the financing arrangements for the Southern Operating
Companies on March 31, 1995 resulted in the reclassification of L193.6 million
from Minority interest and Capital contributions from NYNEX to Long-term debt.
Minority interest reflects the South limited partner's interest in the
South Partnership and the North limited partner's interest in the North
Partnership. See Note F to the combined financial statements of NYNEX
CableComms. For the purpose of the combined financial statements, each limited
partner's interest is represented by capital contributed, adjusted to reflect
the appropriate amortization of transaction costs and appropriate loss and
profit allocations. The partnership percentages are the basis for allocations of
all items of losses and profits, except in respect of initial losses and
profits. Initial losses up to a maximum cumulative amount of L200.0 million in
the case of the North Partnership and L40.0 million in the case of the South
Partnership will be allocated to the North limited partner and the South limited
partner, respectively. After that, losses will be allocated to NYNEX CableComms
up to the point that NYNEX CableComms' share of cumulative losses reaches 85%.
At that point, any further losses will be allocated 15% to the relevant limited
partner and 85% to NYNEX CableComms. Thereafter, initial profits will be
allocated in proportion to the initial losses previously so allocated to each
relevant partner until such initial losses have been fully offset by profits.
The Minority interest portion of the loss for 1996 was L55.5 million compared
with L72.8 million for 1995 and L(3.8) million in 1994. The decrease in 1996 is
due to both smaller losses and the completion of the initial loss allocation to
the South limited partner occurring in the first quarter of 1996. The increase
in 1995 was due to the increasing level of losses being incurred by NYNEX
CableComms' operations and implementation of the financing arrangements and the
initial loss allocation arrangements described above for the Northern Operating
Companies in December 1994, together with the changes in the financing
arrangements and the initial loss allocation arrangements described above for
the Southern Operating Companies in March 1995.
INCOME TAXES
Prior to June 14, 1995, NYNEX CableComms' US corporations were included in
the NYNEX consolidated federal income tax return and in New York State and New
York City combined income tax filings. While included in the NYNEX tax filings,
NYNEX CableComms' US corporations were allocated payments in accordance with the
effect their 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 initial public offering of NYNEX CableComms UK and NYNEX
CableComms US on June 14, 1995, NYNEX CableComms and its US corporations do not
qualify to be included in the NYNEX consolidated US federal
30
31
income tax return or in any state or local combined tax returns. As a result,
for tax periods after June 14, 1995 equivalent payments have not been made to
NYNEX CableComms by NYNEX for any further losses generated and NYNEX UK Holdings
and its US subsidiaries have been treated as a consolidated group of
corporations for US tax return purposes. However, neither NYNEX CableComms UK
nor NYNEX CableComms US has been consolidated with NYNEX UK Holdings or its
subsidiaries for US tax purposes. As a result, NYNEX CableComms UK and NYNEX
CableComms US will file their own US federal tax returns separately from NYNEX
UK Holdings.
For the reasons stated above, NYNEX CableComms recorded no net tax benefit
in 1996. The deferred tax benefits arising from the 1996 net loss have been
offset by a valuation allowance because, based primarily upon historical
operating losses, it is considered more likely than not that such benefits will
not be realizable. NYNEX CableComms recorded net tax benefits of L18.6 million
and L20.9 million for 1995 and 1994, respectively. The tax benefit for 1995
included a L12.8 million benefit in respect of the reversal of a deferred tax
liability and a provision of L1.1 million for tax payable on interest earned.
The balance of the tax benefit for 1995 was attributable to the payment due from
NYNEX for the US tax losses which were used to offset taxable income of other
NYNEX companies in the period from January 1 to June 14, 1995.
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
1996, 1995 and 1994, 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 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 0.8 million premises by the end of 2000, in accordance
with a series of prescribed intermediate milestones for each of its franchises.
NYNEX CableComms currently plans to make capital expenditures of approximately
L300.0 million for each of the three years from January 1, 1997 through to the
substantial completion of the construction of the network in its existing
franchises during 1999. NYNEX CableComms has sufficient financing in place to
fund its capital expenditures through to June 1998; after this period additional
funding will be required. In 1996, capital expenditure was L289.9 million,
compared to L392.4 million in 1995.
FINANCING OF NYNEX CABLECOMMS
Financing arrangements
At December 31, 1996, the Operating Companies and various partnerships
controlled by NYNEX CableComms UK and NYNEX CableComms US were parties to two
financing arrangements, one for the Northern Operating Companies and one for the
Southern Operating Companies.
Under these financing arrangements, which are described in Notes E and F to
the combined financial statements of NYNEX CableComms, an entity related to
NYNEX (the "North limited partner", which is not part of NYNEX CableComms)
provides funding to the North Partnership and to the Northern Operating
Companies (which are part of NYNEX CableComms) with the proceeds of capital
contributions received from members of the North limited partner. These capital
contributions are invested as capital contributions to the North Partnership or
as loans to either the North Partnership or the Northern Operating Companies.
Under an existing credit facility (the "North Credit Facility") the Northern
Operating Companies and the North Partnership, collectively, may, subject to
certain conditions, borrow up to a maximum of L542.5 million from the North
limited partner and an additional L157.5 million to expand the network into
additional franchise areas if such franchises are acquired prior to December 31,
1998.
31
32
Under a broadly similar financing arrangement, another entity related to
NYNEX (the "South limited partner," which is not part of NYNEX CableComms)
provides funding to the South Partnership and to the Southern Operating
Companies (which are part of NYNEX CableComms) with the proceeds of capital
contributions received from members of the South limited partner. These capital
contributions are invested as capital contributions to the South Partnership or
as loans to either the South Partnership or the Southern Operating Companies.
Under an existing credit facility (the "South Credit Facility") the Southern
Operating Companies and the South Partnership, collectively, may, subject to
certain conditions, borrow up to a maximum of L274.0 million from the South
limited partner.
At December 31, 1996, NYNEX CableComms had available L368.8 million of
undrawn credit facilities under the North and South Credit Facilities, which are
available subject to NYNEX CableComms passing a certain number of homes.
NYNEX CableComms has entered into two forward starting interest rate swaps
with NYNEX to reduce potential exposure to interest rate risks inherent in the
financing arrangements for the Northern Operating Companies and Southern
Operating Companies. In addition, NYNEX CableComms has entered into two
agreements with NYNEX to reduce the notional amount of the interest rate swaps
at NYNEX CableComms' option. NYNEX CableComms has only limited involvement with
derivative financial instruments and does not use them for trading purposes. See
Note G to the combined financial statements of NYNEX CableComms.
The businesses and operations of the North and South limited partners are
managed and controlled by wholly-owned subsidiaries of NYNEX and, as such, the
North and South limited partners are included in NYNEX's consolidated financial
statements.
The North limited partner had contributed L131.3 million to the North
Partnership at December 31, 1996 and 1995, and had provided a further L292.9
million and L96.5 million in financing to the Northern Operating Companies under
the North Credit Facility at December 31, 1996 and 1995, respectively. The North
Partnership had not made any borrowings under the North Credit Facility at
December 31, 1996 or 1995.
The South limited partner had contributed L80.4 million to the South
Partnership at December 31, 1996 and 1995 and had provided a further L154.8
million and L28.9 million in financing to the Southern Operating Companies under
the South Credit Facility at December 31, 1996 and 1995, respectively. The South
Partnership had not made any borrowings under the South Credit Facility at
December 31, 1996 or 1995.
NYNEX financing facility
NYNEX has entered into a further credit facility directly with NYNEX
CableComms to make available up to L200.0 million (the "NYNEX Facility") to be
borrowed at NYNEX CableComms' option at an interest rate of three month Sterling
LIBOR plus 4.0%. NYNEX CableComms may make drawings under this facility at any
time after June 1, 1996 and before May 31, 1997. Any amounts borrowed under the
facility are to be repaid in full by May 31, 1998. The entire L200.0 million is
currently available under this facility.
CASH FLOWS AND LIQUIDITY
NYNEX CableComms had net cash used in operating activities of L27.9 million
for 1996, L61.2 million for 1995 and L17.9 million for 1994. The decrease in
1996 is primarily due to a reduction in operating losses before interest, tax,
depreciation and amortization in 1996 compared to 1995. The increase in 1995
reflected increased operating losses before interest, tax, depreciation and
amortization and additional working capital requirements to fund the increasing
customer base compared to 1994.
Net cash used in investing activities was L288.7 for 1996, L392.2 million
for 1995 and L263.5 million for 1994. These included expenditures for
constructing the network and associated capital expenditures of L289.9 million
for 1996, L392.4 million for 1995 and L263.2 million for 1994.
32
33
Net cash provided by financing activities was L322.2 million for 1996,
L421.5 million for 1995 and L293.5 million for 1994. Capital contributions by
NYNEX to NYNEX CableComms ceased on March 31, 1995 when the financing
arrangements for the Southern Operating Companies were reorganized. After this
date all funding by NYNEX has been made through the North and South limited
partners. During 1995 NYNEX made capital contributions of L5.3 million compared
to L118.8 million during 1994. The minority interest joint venture that was in
place prior to March 1995, contributed L174.5 million in 1994, of which L3.1
million was repaid in 1995.
The Northern Operating Companies and Southern Operating Companies together
had additional borrowings of L322.3 million, L245.2 million and L52.0 million
under the North Credit Facility and the South Credit Facility during 1996, 1995
and 1994, respectively. NYNEX CableComms made no repayments of borrowings during
1996. A repayment of borrowings of L360.3 million was made during 1995 in order
to make the most effective use of the proceeds of the initial public offering in
June 1995 (as described below).
There were no capital contributions made by the North and South limited
partners to the North Partnership and South Partnership during 1996. During
1995, the North and South limited partners made capital contributions of L156.6
million to the North Partnership and the South Partnership. In the second
quarter of 1995, NYNEX CableComms issued 305 million NYNEX CableComms Units in
an initial public offering for L380.2 million of net proceeds. The capital
contributions, together with substantially all of the net proceeds of the share
issuance, were contributed to the Northern Operating Companies and Southern
Operating Companies to finance their operations and repay the majority of the
long-term debt made available to them by the North and South limited partners in
1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following combined financial statements of the Companies and their
subsidiaries are attached to this Annual Report on Form 10-K following the
signature page:
PAGE
-----
Report of management.............................................. F-2
Report of independent accountants................................. F-3
Combined statement of operations.................................. F-4
Combined balance sheets........................................... F-5
Combined statements of changes in stockholders' equity............ F-6
Combined statements of cash flows................................. F-7
Notes to combined financial statements............................ F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
(A) DIRECTORS
Certain members of senior management of the Companies have the title
"Executive director" which, under the practice of NYNEX CableComms, is generally
equivalent to that of an Executive Officer under US practice and does not
connote a position on the Boards of Directors.
Set forth below is information with respect to those individuals who are
currently Directors and Executive directors of NYNEX CableComms UK and NYNEX
CableComms US or, in respect of the individuals listed after Graham L.
Robertson, who are Executive directors of NYNEX CableComms Limited, an indirect
wholly-owned subsidiary of NYNEX CableComms UK and NYNEX CableComms US.
Substantially all of the management, operations and other business functions of
NYNEX CableComms are carried out by NYNEX CableComms Limited.
POSITION WITH NYNEX CABLECOMMS UK AND NYNEX
CABLECOMMS US AND/OR
NAME AGE NATIONALITY NYNEX CABLECOMMS LIMITED
- - ---------------------------- --- ----------- -----------------------------------------------
John F. Killian 42 US President and Chief Executive Officer, Director
Nicholas P. Mearing-Smith 47 UK Chief Financial Officer(1), Director
Sir Michael Checkland 60 UK Director
John L. Rennocks 51 UK Director
Sir Bryan Carsberg 58 UK Director
Richard W. Blackburn 54 US Chairman, Director
Robert T. Anderson 50 US Director
Jeffrey A. Bowden 50 US Director
Mel Meskin 52 US Director
Paul H. Repp 40 US Executive director -- Chief Legal and
Regulatory Officer and Company Secretary
Graham L. Robertson 41 UK Executive director -- Treasurer and Controller
and Acting Chief Financial Officer
Colin I. Chadwick 48 UK Executive director -- Information Systems
John N. Doherty 32 US Acting Executive director -- Residential
Marketing and Strategic Development
Carl Grose 40 UK Executive director -- Residential Sales
Edward L. Hatch 52 US Executive director -- Merger Planning
John J. McHale 54 US Executive director -- Business Markets
Allen J.M. Saunders 46 UK Executive director -- Corporate Communications
Michael T. Schieck 49 US Executive director -- Customer Operations
Michael W. Stevenson 50 UK Executive director -- Human Resources
Patrick W. Welsh III 47 US Executive director -- Network Development
- - ---------------
(1) Mr. Mearing-Smith delegated his duties of Chief Financial Officer effective
January 30, 1997 but remains as a Director.
John F. Killian has been President and Chief Executive Officer since
January 1, 1996 and a Director of the Companies since their incorporation in
February 1995. He was the Chief Operating Officer of the Companies from February
1995 through December 1995. From March 1992 until February 1995, Mr. Killian
served as Vice President -- Massachusetts of New England Telephone and Telegraph
Company ("New England Telephone"), a subsidiary of NYNEX. From January 1991 to
March 1992, he was General Manager of Operations of New England Telephone and
from April 1987 to December 1990 he served as Vice President -- Rhode Island of
New England Telephone. Age 42.
34
35
Nicholas P. Mearing-Smith has been the Chief Financial Officer and a
Director of the Companies since their incorporation in February 1995. In January
1997, Mr. Mearing-Smith was designated as Finance Director of Cable & Wireless
Communications and delegated his duties as Chief Financial Officer of the
Companies. Since May 1993, he has been Chief Financial Officer and Executive
Director of NYNEX CableComms Limited, a wholly owned subsidiary of the
Companies. From September 1991 until May 1993, he was Executive Group Director
of NYNEX CableComms Limited. From July 1989 to September 1991, Mr. Mearing-Smith
was Chairman of Britannia Cablesystems Limited, a telecommunications company. He
is a Fellow of the Institute of Chartered Accountants in England and Wales, an
Associate Member of the Institute of Taxation and a Member of The Securities
Institute. Age 47.
Sir Michael Checkland has been a Director of the Companies since April
1995. Between February 1993 and April 1995, Sir Michael Checkland pursued
activities associated with a number of senior positions he has held and
continues to hold on educational, artistic and charitable organisations. He
served as Director General of the British Broadcasting Corporation (the "BBC"),
the British state-owned broadcaster, from February 1987 to February 1993. Age
60.
John L. Rennocks has been the deputy Chairman of the Companies since July
1996 and has been a Director of the Companies since April 1995. He has also been
Executive Director Finance of British Steel Plc since July 1996. Previously he
was Executive Director of Finance of PowerGen plc ("PowerGen"), an electricity
supply business, from March 1990 to July 1996. Since 1990, Mr. Rennocks has
served as a Director of the Electricity Supply Industry Pensions Company Limited
which oversees pension fund management for all major UK electric power companies
that are members of the Electricity Pension Scheme. Mr. Rennocks has also served
as a Director of Kleinwort European Privatisation Investment Trust plc since
January 1994, and since April 1995 he has served as a Director of Biocompatibles
International plc, a medical equipment company. Mr. Rennocks is a fellow of the
Institute of Chartered Accountants in England and Wales. Age 51.
Sir Bryan Carsberg has been a Director of the Companies since July 1996. He
has also been Secretary General of the International Accounting Standards
Committee from May 1995 to the present. He previously held public office as
Director General of Telecommunications from 1984 to 1992, when he became
Director General of Fair Trading, a position he held until May 1995; Professor
of Accounting at London School of Economics; Assistant Director of US Financial
Accounting Standards Board; Deputy Chairman of UK Accounting Standards Board.
Presented with Chartered Accountants Founding Society's Centenary Award in
recognition of services to society through his work at Oftel and with the Bleau
Award for work in the field of telecommunications. Age 58.
Richard W. Blackburn has been Chairman and a Director of the Companies
since their incorporation in February 1995. He has been the President and Group
Executive Director of NYNEX Worldwide Services Group, Inc., a subsidiary of
NYNEX ("NYNEX WSG"), since January 1995 and has served as a director of that
company since 1991. In his present position with NYNEX WSG, Mr. Blackburn is
responsible for directing all activities of its operating units, including
TelecomAsia and Gibraltar NYNEX Communications Limited. He is also responsible
for directing the activities of NYNEX Mobile Communications Company and NYNEX
Information Resources Company, and for overseeing NYNEX Network Systems Company,
a subsidiary of NYNEX ("NYNEX Network Systems"), in FLAG, Limited and STET
Hellas, S.A., a wireless network business in Greece. From June 1993 to December
1994, he held the position of Senior Vice President and Chief Operating Officer
of NYNEX WSG. From June 1991 to June 1993, Mr. Blackburn was Senior Vice
President and General Counsel of NYNEX WSG. From October 1981 to May 1991, Mr.
Blackburn was Vice President and General Counsel of New England Telephone. Age
54.
Robert T. Anderson has been a Director of the Companies since their
incorporation in February 1995. Also in February 1995, Mr. Anderson was
appointed to his current position as Vice President, Business Development and
President of NYNEX Network Systems Company. From June 1991 to February 1995, he
was Managing Director of Regulatory Planning for NYNEX Network Systems and was
responsible for all regulatory planning and compliance in New York and
Connecticut. From October 1989 to June 1991, Mr. Anderson was Managing Director,
Regulatory Planning of NYNEX where he oversaw the development
35
36
of rate filings and the company's business plan. He currently serves as NYNEX's
representative on the New York State Telephone Association Board of Directors.
Age 50.
Jeffrey A. Bowden has been a Director of the Companies since their
incorporation in February 1995. Since September 1994, he has been Vice President
for Strategy and Corporate Assurance of NYNEX. In this capacity, he directs the
development of NYNEX's overall corporate strategy and advises senior management
on mergers and acquisitions and measurement of performance of NYNEX and its
business units. From December 1988 to September 1994, Mr. Bowden was Vice
President and Director of The Boston Consulting Group, Inc., a
telecommunications consulting business where he founded and directed the
telecommunications practice. Age 50.
Mel Meskin has been a Director of the Companies since July 1996. Since June
1996 he has also been Vice President -- Financial Operations and Comptroller of
NYNEX. From January 1995 through May 1996 he was Vice President and Chief
Financial Officer -- NYNEX Telecommunications Group. From February 1994 to
December 1994 he was Vice President -- Finance and Treasurer for New York
Telephone. From May 1992 to January 1994 he was Vice President -- Strategy,
Planning and Support of the NYNEX Worldwide Services Group. From June 1991 to
May 1992 he was Vice President and Comptroller of NYNEX. Prior to June 1991 he
held a variety of senior management positions at NYNEX. He is a member of the
Board of Directors of NYNEX Credit Company, NYNEX Asset Management Company,
Council of Senior Centers and Services of New York City and the Post Graduate
Center for Mental Health. Age 52.
(B) EXECUTIVE DIRECTORS
John F. Killian -- see information provided above.
Nicholas P. Mearing-Smith -- see information provided above.
Paul H. Repp has been Executive director -- Chief Legal and Regulatory
Officer and Company Secretary of the Companies, since January 8, 1996. This
appointment brought responsibility for regulatory affairs and interconnect in
addition to the responsibilities of his previous role as Executive director --
Chief Legal Officer and Company Secretary, which he had held since the
Companies' incorporation in February 1995. Previously, he held the same position
with NYNEX CableComms Limited from June 1993 to February 1995 and has been a
Director of NYNEX CableComms Limited since December 1993. Between May 1988 and
June 1993, Mr. Repp was Vice President, General Counsel and Secretary of NYNEX
Credit Company, the financial services subsidiary of NYNEX.
Graham L. Robertson has been Executive director -- Treasurer and Controller
of the Companies since their incorporation in February 1995. In January 1997,
Mr. Robertson was appointed Acting Chief Financial Officer of the Companies and
continued his duties as Assistant Treasurer -- International for NYNEX, and
Managing Director for NYNEX Trade Finance Company which commenced in November
1996. Since May 1993, he has also served as Executive director -- Treasurer of
NYNEX CableComms Limited. From October 1992 to April 1993, Mr. Robertson was
General Manager of the North and North East Surrey franchise with NYNEX
CableComms Limited. From September 1991 to September 1992 he was director of
Finance and Accounting of NYNEX CableComms Limited. Mr. Robertson was Finance
director and Company Secretary of Britannia Cablesystems from December 1990
until NYNEX CableComms' acquisition of Britannia Cablesystems in September 1991.
Colin I. Chadwick has been Executive director -- Information Systems of
NYNEX CableComms Limited since June 1994. From September 1990 until May 1994,
Mr. Chadwick was a General Manager of the Information Systems Division of Sony
Broadcast and Communications Ltd., a broadcasting and communications business.
John Doherty has been Acting Executive director -- Residential Marketing
and Strategic Development of NYNEX CableComms Limited since January 1997.
Previously, from March 1994 to January 1997, he held the position of Head of
Strategic Development with the responsibilities of developing the Companies'
strategic plan and overall business development. From March 1990 to February
1994, Mr. Doherty served as Associate director -- Corporate Planning for NYNEX.
36
37
Carl Grose has been Executive director -- Residential Sales for NYNEX
CableComms Limited since January 8, 1996. This appointment brought national
responsibility for direct sales, telesales, retentions and sales administration.
Mr. Grose held the position of Executive director -- Operations (North) from
November 1993 to January 7, 1996. He joined NYNEX CableComms Limited as General
Manager of the Solent franchise in February 1992. From December 1989 until
February 1992, he was Managing Director of National Technical Services with The
Bricom Group, an industrial service business.
Edward L. Hatch has been Executive director -- Merger Planning since
January 1997. He held the position of Executive director -- Network Development,
Residential Marketing and Programming of NYNEX CableComms Limited from January
1996 to December 1996. On joining NYNEX CableComms in July 1994, Mr. Hatch was
Executive director -- Network Development. Prior to joining NYNEX CableComms
Limited in July 1994, Mr. Hatch was Managing Director of Operations of New
England Telephone. From January 1993 to June 1994, he was General Manager of
Labor Relations of New England Telephone. From 1991 to 1992, Mr. Hatch was
General Manager of Operations of New England Telephone. From 1989 to 1991, he
served as Managing Director of Customer Services of New England Telephone.
John J. McHale has been Executive director -- Business Sales of NYNEX
CableComms Limited since January 8, 1996. Previously he held the position of
Executive director -- Business Markets with NYNEX CableComms Limited from
January 1994 to January 1996. From January 1988 to December 1993, Mr. McHale was
Branch Division Manager for NYNEX Systems Marketing, a subsidiary of NYNEX, in
the US.
Allen J.M. Saunders has been Executive director -- Corporate Communications
of NYNEX CableComms Limited since March 1995. From January 1994 to February
1995, Mr. Saunders was director of Corporate Communications and from August 1993
to January 1994 served as Head of Communications of NYNEX CableComms Limited.
From May 1992 to August 1993, he was Associate director -- Quality of NYNEX
CableComms Limited and from September 1991 to May 1992, he was General Manager
of the Wessex franchise with NYNEX CableComms Limited.
Michael T. Schieck was appointed Executive director -- Customer Operations
of NYNEX CableComms Limited effective January 8, 1996. This appointment brought
responsibility for installations, repairs and maintenance, customer service and
collections in addition to the responsibilities of his previous role as
Executive director -- Operations Support of NYNEX CableComms Limited which he
had held since November 1993. From January 1992 to November 1993, Mr. Schieck
was employed by NYNEX and was responsible for development of the network plan
implemented by NYNEX in the US. From January 1991 to January 1992, he was
Managing Director of Engineering of New York Telephone, a subsidiary of NYNEX.
From October 1989 to January 1991, he was General Manager of Suffolk County for
New York Telephone.
Michael W. Stevenson has been Executive director -- Human Resources of
NYNEX CableComms Limited since August 1994. From January 1994 to August 1994,
Mr. Stevenson was Personnel director of NYNEX CableComms Limited. From April
1993 to December 1993, he was General Manager of the South East region of NYNEX
CableComms Limited. Mr. Stevenson joined NYNEX CableComms Limited in September
1992 as General Manager of the Bromley franchise. From January 1988 to April
1992, he was the General Manager of the central and southern regions of RAC
Motoring Services, a motoring services business. Between May 1992 and August
1992 he was acting as a consultant.
Patrick Welsh III has been Executive director -- Network Development since
January 1997. Mr. Welsh joined NYNEX CableComms in May 1994 as Head of Design
and Construction for the Southern franchisees. In August 1995 he became General
Manager -- Integrated Network Planning and in June 1996 assumed responsibility
for delivering integrated technical plans for the telecommunications and cable
television network and for developing and overseeing the company's capital
investment strategy. Prior to joining NYNEX CableComms, he was Director of
Integrated Planning and Capital Investment for the state of New York from
February 1992 to May 1994, with New York Telephone.
37
38
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each member of the Boards of Directors and each Executive Director of the
Companies who is subject to Section 16 of the Exchange Act is required to report
to the SEC by a specified date his or her beneficial ownership of or
transactions in the Companies' securities. Reports received by the Companies
indicate that all such members of the Boards of Directors and all such executive
directors have filed all requisite reports with the SEC on a timely basis during
or with respect to 1996.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each of the non-executive independent Directors receives L22,000 annually
plus L1,000 for each meeting attended. The position of Deputy Chairman (if any)
receives an additional L5,000 annually. All Directors are reimbursed for
reasonable expenses incurred in the performance of their duties as Directors.
Directors who are executive Directors of the Companies and NYNEX-appointed
Directors do not receive compensation in connection with their services as
Directors.
The compensation packages of the executive Directors and other senior
executives of the Companies are determined by the Remuneration Committees. The
total fees for all of the Directors of each of the Boards, in their capacity as
Directors (therefore excluding any remuneration payable to executive Directors
for their services pursuant to any service agreement entered into with the
Companies or their subsidiaries), may not exceed L500,000 per annum in respect
of both the NYNEX CableComms UK Board and NYNEX CableComms US Board unless the
relevant shareholders, by a majority vote of such shareholders, authorize a
greater amount. Directors may be paid their reasonable expenses incurred in
attending meetings of the Boards (or Committees thereof) and of the
shareholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Remuneration Committees are responsible for reviewing, monitoring and
approving all compensation decisions affecting the Companies' Executive
Officers. The Remuneration Committees endeavor to have the entire remuneration
paid to Executive Officers be consistent with the Companies' interest in
providing market competitive compensation opportunities, reflective of its
pay-for-performance philosophy, and supportive of its short term and long term
business mission. The Remuneration Committees will continue to actively monitor
the effectiveness of the Companies' Executive Officer compensation plans and
assess the appropriateness of executive pay levels to assure prudent use of the
Companies' resources. For the year ending December 31, 1996, the Remuneration
Committees were comprised of Sir Michael Checkland (Chairman), Robert T.
Anderson, Richard W. Blackburn, Sir Bryan Carsberg and John L. Rennocks.
No member of the Remuneration Committees was an officer or employee of the
Companies during the year ended December 31, 1996, or at any prior time. In
addition, there are no transactions, relationships or indebtedness for which
disclosure is required under the rules of the SEC with respect to any member of
the Remuneration Committees.
DESCRIPTION OF EXECUTIVE OFFICER COMPENSATION POLICIES AND EMPLOYEE CONTRACTS
Details of the compensation packages for Executive directors are given
below. Information on the individual positions of the executive Directors and
each non-executive Director is also included. Copies of executive Directors' and
non-executive Directors' employment contracts and agreements, together with
documentation supporting the various plans, are available for inspection by
shareholders at the Companies' registered office.
SALARY AND BENEFITS
Basic salary levels and the provision of benefits which include car, death,
disability, housing, enhanced pension and medical benefits are reviewed by the
Remuneration Committees each year. In conducting the annual review, the
Remuneration Committees may take the advice of independent consultants and
undertake
38
39
external surveys. Increases in salaries and benefits reflect the performance of
the Companies and, separately, of the individual Executive directors.
ANNUAL AND LONGER-TERM INCENTIVE PLANS
a) Target Setting
Financial targets are agreed annually by the Boards through a systematic
planning and budgeting review process. These targets are reviewed by the
Remuneration Committees to ensure they are appropriate for use as yardsticks in
judging performance of the Companies and the individual.
b) Annual Bonus
Each Executive director of the Companies is eligible to be considered to
receive an annual bonus which is determined by the Remuneration Committees,
depending on performance against company and personal objectives.
SHARE OPTION AND RELATED SCHEMES
Mr. Mearing-Smith is eligible to participate in the Employee Share Option
Plan and the SAYE Plan. He did not, however, participate in the grants under the
Employee Share Option Plan which took place after completion of the initial
public offering (and has not participated in the SAYE plan).
RETIREMENT BENEFITS
Mr. Killian is a member of the NYNEX Management Pension Plan. Benefits for
management employees under this plan are based on a modified career average pay.
Contributions are made, to the extent of permissible deductions under the
provisions of the US Internal Revenue Code, to an irrevocable trust for the sole
benefit of pension plan participants. Mr. Mearing-Smith is entitled to have an
annual pension contribution from NYNEX CableComms Limited, equivalent to 13.5%
of basic salary, paid to a personal pension arrangement nominated by him.
EXECUTIVE DIRECTORS' SERVICE AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Each of the Executive directors have entered into agreements with the
Companies and with NYNEX CableComms Limited under which the Executive directors
are employed by NYNEX CableComms Limited, such agreements are continuing unless
and until terminated on three months' notice by either party.
Pursuant to their employment agreements, Messrs. Killian and Mearing-Smith
were awarded a right in 1995 (an "Allocation Right") to acquire Units (68,710
and 91,613, respectively, having an aggregate value of $150,000 and $200,000,
respectively), for no payment on the vesting date. In addition Messrs. Killian
and Mearing-Smith were awarded on January 2, 1996 a further Allocation Right to
acquire Units (122,982 and 56,936, respectively, having an aggregate value of
$216,000 and $100,000, respectively), for no payment on the vesting date. As
NYNEX CableComms Limited is not in a position to procure the grant of Units,
NYNEX CableComms UK and NYNEX CableComms US are joined as parties to the
employment agreements.
The Allocation Right and further Allocation Right vested on December 31,
1996. The Units were issued in January 1997.
Prior to joining NYNEX CableComms Limited, Mr. Killian was employed by
various companies within NYNEX. Under the terms of an Assignment Letter, he is
employed by NYNEX WSG, an indirect, wholly-owned subsidiary of NYNEX, for the
purpose only of ensuring that he retains certain benefits under the NYNEX
benefit plans. Mr. Killian's compensation is paid to him by NYNEX WSG and NYNEX
CableComms Limited has agreed, pursuant to a Secondment Agreement, to reimburse
NYNEX WSG in respect of the full cost including the costs of bonuses, foreign
service premium and benefits of paying Mr. Killian. Both Mr. Killian and NYNEX
WSG have agreed that he should perform duties solely for
39
40
NYNEX CableComms Limited or any of its associated companies during the term of
the Secondment Agreement (in addition to his services as a Director of each of
the Companies).
Effective October 1, 1996, the Assignment Letter was amended to permit Mr.
Killian to participate in the NYNEX 1987 Restricted Stock Award Plan. Mr.
Killian was awarded 3,589 restricted shares of common
stock of NYNEX at the time, plus the right to dividends reinvested in restricted
stock (the "Retention Award").
The Retention Award shall be forfeited to NYNEX if Mr. Killian voluntary
separates from NYNEX without the consent of the Chairman and Chief Executive
Officer of NYNEX or if Mr. Killian is terminated by NYNEX for cause. If Mr.
Killian were to transfer between NYNEX affiliates, such transfer would not be
treated as a termination of employment and the Retention Award would remain as
currently in place. The Retention Award will not be forfeited, however, if Mr.
Killian voluntary separates from service with NYNEX with the consent of the
Chairman and Chief Executive Officer of NYNEX, if the Companies cease to be
affiliates of NYNEX for any reason, or if he is terminated without cause or dies
or becomes disabled. Notwithstanding Mr. Killian's entitlement to keep the
Retention Award, the Retention Award is not transferable at any time prior to
his death or disability.
If Mr. Killian were to have met the requirements discussed above for a
Retention Award, his Retention Award, calculated as of December 31, 1996, would
have been 3,635 restricted shares of common stock of NYNEX.
NYNEX maintains the NYNEX Executive Severance Pay Plan and pursuant thereto
enters into Executive Retention Agreements with certain officers of NYNEX and
its subsidiaries. The purpose of the Severance Pay Plan and the Executive
Retention Agreements is to enable NYNEX and its subsidiaries to remain
competitive in attracting and retaining the best executive talent. The Executive
Retention Agreements provide certain senior employees with certain benefits upon
termination of employment under specified conditions.
Effective October 1, 1996, Mr. Killian, NYNEX CableComms Limited and the
Companies amended his Service Agreement to provide him with a severance amount
(the "Severance Amount") which is substantially equivalent to the amount to
which he would have been entitled had he entered into an Executive Retention
Agreement pursuant to the NYNEX Executive Severance Pay Plan.
Mr. Killian's Severance Amount, which is payable as discussed in the next
paragraph, would equal the sum of (i) the monetary value, calculated as of the
date of termination, of his Retention Award (defined above) and (ii) $225,000
(which represents one year's salary) plus interest accrued based upon the
earnings of the Global Balanced Fund investment option of the NYNEX Savings Plan
for Salaried Employees (and in no event less than $225,000).
Mr. Killian's Severance Amount is payable if (i) he voluntary separates
from employment with NYNEX CableComms Limited with the consent of the
Remuneration Committees, (ii) NYNEX CableComms Limited terminates his employment
upon three months' notice in accordance with his Service Agreement, or (iii) he
dies or becomes disabled. The Severance Amount is not payable if (i) he
voluntary separates from employment with NYNEX CableComms Limited without the
consent of the Remuneration Committees, (ii) NYNEX CableComms Limited terminates
his employment without notice for cause or (iii) within sixty days after leaving
the employment of NYNEX CableComms Limited, he is employed or offered employment
by NYNEX, the Companies, any of their respective 100% or majority-owned
subsidiaries or partnerships, any successor to any of the aforementioned, or any
acquirer of NYNEX CableComms Limited or any of its affiliates. The Severance
Payment may be reduced to the extent the payment would be subject to an excise
tax, as an "excess parachute payment", under Section 4999 of the US Internal
Revenue Code.
If Mr. Killian were to have met the requirements discussed above for a
Severance Amount, his Severance Amount, calculated as of December 31, 1996,
would have been $420,336 in cash.
40
41
NYNEX CABLECOMMS ARRANGEMENTS
In the light of the transactions contemplated by the Transaction Agreement,
the Companies have entered into agreements with certain employees of the
Companies, including each of the Executive directors of the Companies. The
agreements provide for the payment by the Companies of a loyalty bonus (the
"Loyalty Bonus") upon successful completion of the transactions or upon
confirmation that the transactions will not proceed; provided that such payee is
an employee of NYNEX CableComms or a successor company on such date. The Loyalty
Bonus is within the discretion of the President and Chief Executive Officer who,
in consultation with the Chairman, will make a recommendation, subject to review
by the Remuneration Committees, based on the employee's performance and
contribution to the Companies.
In addition, the agreements provide for payment by the Companies of a
severance payment (the "Severance Payment") in the event of a dismissal of the
employee by reason of redundancy (within the meaning of UK employment law) as a
result of completion of the transactions. The Severance Payment is not available
to secondees of NYNEX, including Messrs Repp, Schieck and Hatch.
For Executive directors, the agreements provide for a Loyalty Bonus of up
to 60% of base salary and a Severance Payment of twelve months compensation,
including three months in lieu of notice pay and nine months basic pay. As a
Director of the Companies, Mr. Mearing-Smith's eligibility to receive the
Loyalty Bonus and the Severance Payment was subject to clearance by the Panel on
Takeovers and Mergers, which clearance has been obtained.
Based on their current levels of compensation, the maximum Loyalty Bonuses
for Messrs. Repp, Mearing-Smith, Schieck and Hatch under the agreements
described above would be $95,160, $138,696, $77,940 and $78,240, respectively,
and the Severance Payment for Mr. Mearing-Smith under the agreements described
above would be $251,432.
Other Benefits
Mr. Killian entered into an agreement with NYNEX, effective June 14, 1995,
which provides that he will retain certain benefits under NYNEX's employee
pensions and other benefit plans relating to his respective prior service with
NYNEX.
Executive directors and most other senior employees receive a car or car
allowance and health benefits provided by the Companies. During 1996 Mr. Killian
also received benefits under miscellaneous NYNEX Group benefit plans.
41
42
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation awarded to, earned by or
paid to the Chief Executive Officer of the Companies and each of the four other
most highly compensated Executive Officers. Except as noted below, all such
compensation for 1996 was paid by NYNEX CableComms Limited, which provides
substantially all of the management, operations and other business functions.
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------- ---------------------------------
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING LTIP OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($) ($)
- - -------------------------------- ---- ------- ------- ------------ ---------- ---------- ------- ------------
JOHN F. KILLIAN(1)
President and Chief Executive
Officer....................... 1996 225,000 243,400 157,604(2) 216,000(3) -0- 28,507 (4) 372,599(5)
1995 179,398 68,160 223,389(6) 150,000(7) -0- 24,456 (4) 34,661(8)
PAUL H. REPP(9)
Executive director, Chief
Legal
and Regulatory Officer and
Company Secretary............. 1996 152,600 58,600 255,493(10) -0- 7,690 -0- 62,708(11)
1995 146,600 53,800 214,234(12) -0- -0- -0- 28,740(13)
NICHOLAS MEARING-SMITH(14)
Chief Financial Officer....... 1996 231,161 67,800 3,082(15) 100,000(3) -0- -0- 31,771(16)
1995 183,324 60,644 9,742(17) 200,000(7) -0- -0- 1,298,769(18)
MICHAEL T. SCHIECK(19)
Executive director, Customer
Operations Support............ 1996 121,567 47,500 190,468(20) -0- 1,120 -0- 52,492(21)
1995 115,175 34,600 175,692(22) -0- -0- -0- 22,911(23)
EDWARD L. HATCH(24)
Executive director, Merger
Planning...................... 1996 118,633 48,700 176,821(25) -0- 1,120 -0- 51,442(26)
1995 113,000 37,600 157,263(27) -0- -0- -0- 23,141(28)
- - ---------------
(1) Mr. Killian was a secondee to the Companies from an affiliate of NYNEX and
consequently received his compensation from such affiliate, which was
reimbursed by NYNEX CableComms Limited.
(2) Mr. Killian's "Other Annual Compensation" for 1996 consists of $95,969 in
respect of housing expenses, $11,790 in respect of automobile expenses,
$6,678 in respect of travel expenses, $37,935 in respect of school fees,
$1,979 in respect of accountancy fees and consultancy, $600 in telephone
allowances and $2,653 in dividend equivalents paid pursuant to the Senior
Management Long Term Incentive Plan of NYNEX.
(3) In 1996, Messrs. Killian and Mearing-Smith were awarded the right to
acquire for no payment on the vesting date 122,982 and 56,936 NYNEX
CableComms Units, respectively, with a value of $216,000 and $100,000,
respectively, from NYNEX CableComms, pursuant to their employment
contracts. These rights vested on December 31, 1996.
(4) Mr. Killian's LTIP payouts were received under NYNEX's Senior Management
and Executive Long Term Incentive Plans.
(5) Mr. Killian's "All Other Compensation" for 1996 consists of $254,090 in
respect of special foreign service payment, $67,965 in respect of foreign
service premiums and other expatriate compensation; contributions by NYNEX
to the NYNEX tax qualified savings plan, the NYNEX non-qualified savings
plan and the NYNEX Executive Retirement Account of $6,503, $5,672 and
$35,450, respectively; and the amount of the dollar benefit for 1996
projected on an actuarial basis which represents the excess of the amount
needed to fund the death benefit under the split-dollar life insurance
policy of $2,919.
(6) Mr. Killian's "Other Annual Compensation" for 1995 consists of $114,675 in
respect of additional income taxes resulting from his secondment to the
Companies, $59,734 in respect of housing expenses, $7,948 in respect of
automobile expenses, $5,489 in respect of travel expenses and $31,539 in
respect of school fees and $4,004 in dividend equivalents paid pursuant to
the Senior Management Long Term Incentive Plan of NYNEX.
(7) In 1995, Messrs. Killian and Mearing-Smith were awarded the right to
acquire for no payment on the vesting date 68,710 and 91,613 NYNEX
CableComms Units, respectively with a value of $150,000 and $200,000,
respectively, following the successful completion of the Combined Offering,
pursuant to their employment contracts. These rights vested on December 31,
1996.
(8) Mr. Killian's "All Other Compensation" for 1995 consists of $22,294 in
respect of foreign service premiums and other expatriate compensation;
contributions by NYNEX to the NYNEX tax qualified saving plan and NYNEX
non-qualified savings plan of $6,355 and $3,920, respectively; and the
amount of the dollar benefit for 1995 projected on an actuarial basis which
represents the excess of the amount needed to fund the death benefit under
the split-dollar life insurance policy of $2,092.
42
43
(9) Mr. Repp was a secondee to the Companies from an affiliate of NYNEX and
consequently received his compensation from such affiliate, which was
reimbursed by NYNEX CableComms Limited.
(10) Mr. Repp's "Other Annual Compensation" for 1996 consists of $163,904 in
respect of additional income taxes resulting from his secondment to the
Companies, $69,368 in respect of housing expenses, $9,294 in respect of
automobile expenses, $3,101 in respect of travel expenses, $8,726 in
respect of school fees, $500 in respect of accountancy fees and $600 in
telephone allowances.
(11) Mr. Repp's "All Other Compensation" for 1996 consists of $56,135 in respect
of Mr. Repp's foreign service premiums and other expatriate compensation
and $6,573 in contributions by NYNEX to the NYNEX tax qualified savings
plan.
(12) Mr. Repp's "Other Annual Compensation" for 1995 consists of $142,268 in
respect of additional income taxes resulting from his secondment to the
Companies, $62,949 in respect of housing expenses, $8,938 in respect of
automobile expenses and $79 in respect of other miscellaneous benefits.
(13) Mr. Repp's "All Other Compensation" for 1995 consists of $21,990 in respect
of Mr. Repp's foreign service premiums and other expatriate compensation
and $6,750 in contributions by NYNEX to the NYNEX tax qualified savings
plan.
(14) Payments to Mr Mearing-Smith were made in pounds sterling, but are
presented in this table in US dollars based on an exchange rate of $1.7123
to L1.00, the Noon Buying Rate on December 31, 1996.
(15) Mr. Mearing-Smith's "Other Annual Compensation" for 1996 consists of $3,082
in respect of automobile expenses.
(16) Mr. Mearing-Smith's "All Other Compensation" for 1996 consists of $31,207
in respect of pension benefits and $565 in respect of insurance benefit
premiums.
(17) Mr. Mearing-Smith's "Other Annual Compensation" for 1995 consists of $9,742
in respect of automobile expenses.
(18) Mr. Mearing-Smith's "All Other Compensation" for 1995 consists of $24,747
in respect of pension benefits, $716 in respect of insurance benefit
premiums and $683,540 in cash and approximately $589,766 in Units issued to
Mr. Mearing-Smith, under an agreement with respect to the acquisition from
him of interests in certain franchises.
(19) Mr. Schieck was a secondee to the Companies from an affiliate of NYNEX and
consequently received his compensation from such affiliate, which was
reimbursed by NYNEX CableComms Limited.
(20) Mr. Schieck's "Other Annual Compensation" for 1996 consists of $106,790 in
respect of additional income taxes resulting from his secondment to the
Companies, $64,826 of housing expenses, $9,875 in respect of travel
expenses, $8,297 in respect of automobile expenses, $500 in respect of
accountancy fees and $180 telephone allowance.
(21) Mr. Schieck's "All Other Compensation" for 1996 consists of $46,319 in
respect of foreign service premiums and other expatriate compensation and
$6,173 in contributions by NYNEX to the NYNEX tax qualified savings plan.
(22) Mr. Schieck's "Other Annual Compensation" for 1995 consists of $99,622 in
respect of additional income taxes resulting from his secondment to the
Companies, $60,750 of housing expenses, $7,299 in respect of travel
expenses, $8,021 in respect of automobile expenses.
(23) Mr. Schieck's "All Other Compensation" for 1995 consists of $17,276 in
respect of foreign service premiums and other expatriate compensation and
$5,635 in contributions by NYNEX to the NYNEX tax qualified savings plan.
(24) Mr. Hatch was a secondee to the Companies from an affiliate of NYNEX and
consequently received his compensation from such affiliate, which was
reimbursed by NYNEX CableComms Limited.
(25) Mr. Hatch's "Other Annual Compensation" for 1996 consists of $89,367 in
respect of additional income taxes resulting from his secondment to the
Companies, $74,056 of housing expenses, $8,297 in respect of automobile
expenses, $4,001 in respect of travel expenses, $500 in respect of
accountancy fees and $600 telephone allowance.
(26) Mr. Hatch's "All Other Compensation" for 1996 consists of $45,106 in
respect of foreign service premiums and other expatriate compensation and
$6,336 in contributions by NYNEX to the NYNEX Tax Qualified Savings Plan.
(27) Mr. Hatch's "Other Annual Compensation" for 1995 consists of $86,236 in
respect of additional income taxes resulting from his secondment to the
Companies, $58,431 of housing expenses, $8,021 in respect of automobile
expenses, $4,575 in respect of travel expenses.
(28) Mr. Hatch's "All Other Compensation" for 1995 consists of $16,950 in
respect of foreign service premiums and other expatriate compensation and
$6,191 in contributions by NYNEX to the NYNEX Tax Qualified Savings Plan.
43
44
OPTION GRANTS IN FISCAL YEAR 1996
The following table contains information concerning the grant of options on
shares of Common Stock of NYNEX under the NYNEX 1995 Stock Option Plan and NYNEX
1992 Management Stock Option Plan to the named Executive Officer during 1996.
NUMBER OF
SECURITIES % OF TOTAL GRANT DATE
UNDERLYING OPTIONS GRANTED EXERCISE OR PRESENT
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION VALUE
NAME OF INDIVIDUAL (#)(1) IN 1996 ($/SHARE)(2) DATE(3) ($)(3)(4)
- - ------------------------------ --------------- --------------- ----------- ---------- ----------
John F. Killian............... 0 0 0 0 0
Paul H. Repp.................. 7,690 0.21 50.69 1/11/06 43,600
Edward L. Hatch*.............. 1,120 0.01 50.69 1/11/06 8,254
Michael T. Schieck*........... 1,120 0.01 50.69 1/11/06 8,254
- - ---------------
* NYNEX 1992 Management Stock Option Plan.
(1) The date of grant for options subject to this footnote is January 11, 1996.
(2) The exercise price of the options is equal to the fair market value of
shares of Common Stock of NYNEX on the date of grant of the options. The
exercise price may be paid in cash or by tendering already owned shares of
Common Stock of NYNEX with a fair market value on the date of exercise
equal to the exercise price. For exercises where shares of Common Stock of
NYNEX have been tendered in payment of the exercise price, a new grant of
options will be made equal to the number of shares tendered. A grant made
under these circumstances will have an exercise price equal to the fair
market value on the date of such exercise and grant.
(3) Options expire ten years from date of grant or, in case of retirement, on
the fifth anniversary date of cessation of employment. Options become
one-third exercisable one year after the date of grant, two-thirds
exercisable two years after the date of grant, and fully exercisable three
years after the date of grant. To the extent not already exercisable, the
options become fully exercisable in the event of a "change of control", as
defined in the NYNEX 1996 Stock Option Plan.
(4) As permitted by SEC rules, the Black-Scholes method of option valuation has
been used to determine grant date present value. The assumptions used in
the Black-Scholes option valuation calculation are: estimated future annual
stock price volatility of 0.153; risk-free rate of return of 5.96%; and
estimated future dividend yield of 4.66%. NYNEX does not advocate or
necessarily agree that the Black-Scholes method or any other method
permitted by the SEC can properly determine the valued of an option.
However, no gain to the optionees is possible without an increase in the
stock price. Thus a zero increase or decrease in stock price, compared to
the exercise price, will not produce any gain for the optionee.
AGGREGATED OPTION EXERCISE IN FISCAL YEAR 1996 AND 1996 FY-END OPTION VALUES
The following table shows information with respect to the named Executive
Officer concerning the exercise of options to purchase shares of Common Stock of
NYNEX during 1996 and unexercised stock options held as of the end of 1996.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT 1996 FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END 1996 FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME OF INDIVIDUAL BY EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------- --------------- ------------ ----------- ------------- ----------- -------------
John F. Killian.......... 2,566 34,704 10,845 1,285 72,445 11,488
Edward L. Hatch.......... 0 0 1,120 1,120 13,300 0
Paul H. Repp............. 0 0 280 7,690 2,870 0
Michael T. Schieck....... 0 0 280 1,120 2,870 0
- - ---------------
44
45
(1) Amounts reflect potential gains on outstanding options based upon the
December 31, 1996 average stock price of $48.82.
NYNEX MANAGEMENT PENSION PLAN
NYNEX maintains the NYNEX Management Pension Plan, a non-contributory
pension plan which covers all management employees, including Messrs. Hatch,
Repp and Schieck. The normal retirement age under this plan is 65; however,
retirement before age 65 can be elected under certain conditions.
The following table sets forth the highest estimated annual retirement
benefits payable to persons in the specified compensation and years of service
classifications upon retirement at normal retirement age under the NYNEX
Management Pension Plan:
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------
REMUNERATION 15 20 25 30 35
- - --------------------------------------- ------- ------- ------- ------- -------
$200,000............................. $36,000 $48,000 $60,000 $72,000 $84,000
300,000............................. 36,000 48,000 60,000 72,000 84,000
400,000............................. 36,000 48,000 60,000 72,000 84,000
500,000............................. 36,000 48,000 60,000 72,000 84,000
600,000............................. 36,000 48,000 60,000 72,000 84,000
700,000............................. 36,000 48,000 60,000 72,000 84,000
800,000............................. 36,000 48,000 60,000 72,000 84,000
- - ---------------
Note: Benefits shown in this table may be further limited under the US Internal
Revenue Code.
Under the NYNEX Management Pension Plan, annual pensions are computed on a
straight-life annuity basis and are not reduced for Social Security or other
offset amounts except in cases where a joint or survivor annuity is selected.
Participants receive a pension based on an adjusted career income times 1.6%.
The adjusted career income is the average annual compensation from January 1,
1986 to December 31, 1990 times net credited service through December 31, 1990;
plus actual compensation from January 1, 1991 until last day of service.
The US Internal Revenue Code limits the benefits which may be paid from a
tax-qualified retirement plan. As permitted by the Employee Retirement Income
Security Act of 1974, NYNEX has a non-qualified pension plan to provide for the
full payment of the pension when the pension amounts exceed tax-qualified
limits. The pension amounts that exceed tax-qualified limits will be accounted
for by NYNEX as operating expense.
The compensation covered by the NYNEX Management Pension Plan includes
compensation that would fall under the categories of "Salary" and "Bonus" in the
Summary Compensation Table shown above. The years of service of Messrs. Hatch,
Repp and Schieck are 27, 14 and 30, respectively. If Messrs. Hatch, Repp and
Schieck continue in their present positions and retire at the normal retirement
age of 65, the estimated annual pension amounts payable under the NYNEX
Management Pension Plan would be $76,515, $102,446 and $89,364, respectively.
Mr. Killian will receive a benefit under the NYNEX Management Pension Plan
described above except that Mr. Killian will not be eligible to receive any
benefits on average compensation over $150,000. Mr. Killian is not eligible for
the non qualified pension plan described above which provides for pension
amounts exceeding US Internal Revenue Code tax-qualified limits.
Mr. Killian will receive a pension based upon average compensation up to
$150,000 multiplied by 1.6%. Average compensation is determined as five-year
average base pay for the period January 1, 1986 to December 31, 1990, times
years of service on December 31, 1990, plus all future base pay.
45
46
In 1995, NYNEX terminated its supplemental executive defined benefit
non-qualified pension plan and replaced it with a defined contribution plan
which applies to Mr. Killian only (among the Executive Officers named in the
Summary Compensation Table). The annual company contribution to the defined
contribution plan is determined as 25% of base salary that exceeds $150,000,
plus 25% of bonus. This amount is included in the "All Other Compensation"
column of the Summary Compensation Table.
The compensation covered by the NYNEX Management Pension Plan includes
compensation that would fall under the category of "Salary" in the Summary
Compensation Table. Mr. Killian has 17 years of service. If Mr. Killian
continues in the employment of NYNEX at his present level of compensation and
retires at the normal retirement age of 65, his estimated annual pension amount
payable under the NYNEX Management Pension Plan would be $98,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth, as of January 31, 1997, certain information
regarding the beneficial ownership (within the meaning of Rule 13d-3(d) (1)
under the Exchange Act) of the Units by the owners of 5% or more of the Units.
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP % OF CLASS
- - ------------------------------ --------------------------------------- ---------- ----------
NYNEX CableComms Units........ NYNEX Corporation 620,000,000 67.0
1095 Avenue of the Americas,
New York, New York 10036, USA
NYNEX CableComms Units........ Mercury Asset Management 65,295,000 7.1
33 King William Street, EC4R 9AS
Pursuant to the NYNEX CableComms UK Articles and the NYNEX CableComms US
Certificate, NYNEX has the right to appoint a number of Directors ("NYNEX
Appointees") to each of the Boards of the Companies based on the percentage
voting power of, in the case of NYNEX CableComms UK, all issued NYNEX CableComms
UK Ordinary Shares and, in the case of NYNEX CableComms US, all outstanding
NYNEX CableComms US Shares of Common Stock, directly or indirectly controlled by
NYNEX. In addition, NYNEX has the right to remove and replace the NYNEX
Appointees and such NYNEX Appointees do not stand for election by the
shareholders. NYNEX currently has indirect control of approximately 67% of the
outstanding NYNEX CableComms Units (comprising equal percentages of the issued
NYNEX CableComms UK Ordinary Shares and NYNEX CableComms US Shares of Common
Stock) and therefore, in accordance with the NYNEX CableComms UK Articles and
the NYNEX CableComms US Certificate NYNEX is currently entitled to appoint four
of the nine current Directors of each of the Boards. Control over the
appointment of Directors in effect gives NYNEX, through the vote of such
Directors, a veto power with respect to any actions by the Boards that require
the approval of a two-thirds vote of the Directors. This two-thirds vote
requirement applies to certain important acts of the Boards, such as the
acquisition or disposal of any business outside the ordinary course of business,
the approval of the annual budget, the approval of borrowings above L10 million,
the appointment of any new Director (other than NYNEX Appointees) and the
appointment and removal of certain Executive directors.
NYNEX has the right to vote with the other shareholders in the election of
Directors for each of the remaining seats on each Board. Because NYNEX owns a
majority of the outstanding NYNEX CableComms Units, NYNEX has sufficient voting
power to elect Directors to all of the remaining seats. However, the London
Stock Exchange requires, and the constitutional documents of the Companies
provide, that at all times a majority of the Directors must be independent of
NYNEX ("Independent Directors"). In a relationship agreement with the Companies
(the "NYNEX Relationship Agreement"), NYNEX has, among other things, confirmed
its intention to vote the NYNEX CableComms UK Ordinary Shares and the NYNEX
CableComms US Shares of Common Stock beneficially owned by it in a manner to
ensure, so far as
46
47
it is able by the exercise of such voting rights, that a majority of each Board
is composed of Independent Directors for London Stock Exchange purposes.
Currently the Boards of the Companies consist of four NYNEX Appointees and
five Independent Directors.
Shareholdings of the Companies' Directors and Executive directors can be
found below.
(b) Security Ownership of Management
Certain members of senior management of the Companies have the title
"Executive director" which under UK practice, is generally equivalent to that of
an executive officer under US practice and does not connote a position on the
Boards of Directors.
THE COMPANIES
The following table sets forth, as of January 31, 1997, beneficial
ownership (as defined in Rule 13d-3(d)(1) under the Exchange Act) of the NYNEX
CableComms Units by each Director, named Executive director and all Directors
and Executive directors (as a group), including NYNEX CableComms Units which
they had the right within 60 days to acquire pursuant to the exercise of options
to purchase NYNEX CableComms Units.
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP PERCENT(1)
- - ---------------- ---------------------------------------------------- ---------- ----------
NYNEX CableComms
Units........... Robert Anderson -- Director -0- -0-
Richard Blackburn -- Director -0- -0-
Jeffrey Bowden -- Director -0- -0-
Sir Bryan Carsberg -- Director -0- -0-
Sir Michael Checkland -- Director -0- -0-
John Killian -- President and Chief Executive 191,692 *
Officer, Director
Nicholas Mearing-Smith -- Chief Financial 418,955 *
Officer(2), Director
Mel Meskin -- Director -0- -0-
John Rennocks -- Director -0- -0-
Edward Hatch -- Executive director -- Merger -0- -0-
Planning
Paul Repp -- Chief Legal and Regulatory Officer and -0- -0-
Company Secretary
Michael Schieck -- Executive director -- Customer -0- -0-
Operations Support
All Directors and Executive directors (as a group) 610,647 *
- - ---------------
(1) An interest of less than 1% is represented by an asterisk.
(2) Mr. Mearing-Smith delegated his duties as Chief Financial Officer of the
Companies effective January 30, 1997, but remains as a Director.
47
48
NYNEX
The following table sets forth as of January 31, 1997, for each Director,
each named Executive director and all Directors and Executive directors (as a
group), their beneficial ownership (as defined in Rule 13d-3(d)(1) under the
Exchange Act) shares of Common Stock of NYNEX including shares of Common Stock
of NYNEX which they had the right within 60 days to acquire pursuant to the
exercise of options granted by NYNEX, plus the number of shares of Common Stock
of NYNEX held on January 31, 1997 by the trustee of the NYNEX Corporation
Savings Plan for Salaried Employees ("Savings Plan") for their accounts.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) CLASS(3)
- - ---------------- -------------------------------------------------- --------------- ----------
Common Stock.... Robert Anderson -- Director 52,365 *
Richard Blackburn -- Director 74,887 *
Jeffrey Bowden -- Director 84,078 *
Sir Bryan Carsberg -- Director -0- -0-
Sir Michael Checkland -- Director -0- -0-
John Killian -- President and Chief Executive 18,745 *
Officers, Director
Nicholas Mearing-Smith -- Chief Financial -0- -0-
Officer(4), Director
Mel Meskin -- Director 70,593 *
John Rennocks -- Director -0- -0-
Edward Hatch -- Executive director -- Merger 2,911
Planning
Paul Repp -- Chief Legal and Regulatory Officer 4,139 *
and Company Secretary
Michael Schieck -- Executive director -- Customer 1,615 *
Operations Support
All Directors and Executive directors (as a group) 314,020 *
- - ---------------
(1) The number of shares held in the Savings Plan included in the numbers shown
above are as follows: Richard Blackburn, 12,348; John Killian, 2,848; Robert
Anderson, 1,178; Jeffrey Bowden, 323; Mel Meskin, 1,192; Paul Repp, 1,205;
Michael Schieck, 735 and Edward Hatch, 975. The number of shares of
restricted stock granted under the NYNEX 1987 Restricted Stock Award Plan
included in the numbers shown above are as follows: Richard Blackburn,
6,571; John Killian, 3,635; Robert Anderson, 3,895; Jeffrey Bowden, 5,866
and Mel Meskin, 5,624. (These shares include dividends that have been
reinvested in additional restricted shares.)
(2) The numbers of shares which the named persons had the right within 60 days
to acquire beneficial ownership pursuant to the exercise of options granted
by NYNEX included in the numbers shown above are as follows: Richard
Blackburn, 47,118; John Killian, 9,597; Robert Anderson, 43,991; Jeffrey
Bowden, 66,157; Mel Meskin, 59,338; Paul Repp, 2,844; Michael Schieck, 840
and Edward Hatch, 1,680. In addition, at the time of the completion of the
proposed merger of NYNEX and Bell Atlantic Corporation ("Bell Atlantic")
(see "Changes in Control" below), while not exercisable within 60 days,
stock options for the following number of shares will become exercisable for
the following persons and for all Executive directors as a group: Richard
Blackburn, 113,519; Robert Anderson, 52,784; Jeffrey Bowden, 115,576; Mel
Meskin, 63,906; Paul Repp, 12,641; Michael Schieck, 560; Edward Hatch, 560
and all Executive directors as a group, 360,906.
(3) An interest of less than 1% is represented by an asterisk.
(4) Mr. Mearing-Smith delegated his duties as Chief Financial Officer of the
Companies effective January 30, 1997, but remains as a Director.
(c) Changes in Control
As announced on October 22, 1996, Cable and Wireless plc, Bell Canada
International Inc. and NYNEX have entered into the Transaction Agreement
pursuant to which, subject to the satisfaction of certain conditions precedent,
the parties have agreed to combine Mercury, BCM (as enlarged by the acquisition
of Videotron Holdings Plc) and NYNEX CableComms under a new holding company,
CWC. Pursuant to the Transaction Agreement, CWC has offered to purchase NYNEX
CableComms UK Ordinary Shares and NYNEX CableComms US Shares of Common Stock
(represented by NYNEX CableComms Units and
48
49
NYNEX CableComms ADSs) in exchange for ordinary shares of CWC ("the NYNEX
CableComms Offers").
If the transactions contemplated by the Transaction Agreement are
consummated, among other things, (i) NYNEX will exchange all of its NYNEX
CableComms Units, and its indirect interests in the Operating Companies, for
ordinary shares of CWC; (ii) NYNEX CableComms will become part of the combined
CWC group and thus will be an affiliate of Mercury, which is currently a
competitor of NYNEX CableComms primarily in the business telecommunications
market; and (iii) the entities identified as the North limited partner and the
South limited partner in the diagram under "Organization" in Item 1 above will
become indirect wholly-owned subsidiaries of CWC, thereby providing CWC with
indirect interests in the Operating Companies held other than through NYNEX
CableComms. For a more complete discussion of the Transaction Agreement, see
"Business -- Introduction" in Item 1 above.
Options under NYNEX CableComms' Employee Share Option Plan are exercisable
within a limited period in the event of a take-over of NYNEX CableComms UK or
NYNEX CableComms US and will in certain circumstances lapse if not so exercised,
but may, with the agreement of the acquiring company, be exchanged for options
over the acquiring company's shares. The holders of options will, upon the NYNEX
CableComms Offers becoming unconditional, be entitled to exercise their options
and deal with their NYNEX CableComms Units pursuant to the NYNEX Cablecomms
Offers on the same basis as other holders of NYNEX CableComms Units.
NYNEX has entered into an Amended and Restated Agreement and Plan of Merger
dated as of April 21, 1996, as amended as of July 2, 1996, with Bell Atlantic,
pursuant to which a wholly-owned subsidiary of Bell Atlantic will merge with and
into NYNEX and NYNEX will become a wholly-owned subsidiary of Bell Atlantic. In
the merger, each shareholder of NYNEX will receive 0.768 shares of Bell Atlantic
common stock in exchange for one share of NYNEX Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective on June 14 1995, the Companies and NYNEX CableComms Limited, an
indirect wholly-owned subsidiary of the Companies which provides substantially
all the management, operations and other business functions for the Companies,
entered into a trademark agreement with NYNEX under which the Companies and
NYNEX CableComms Limited are required to pay L4.0 million per annum for 5 years
for use of the "NYNEX" name.
Effective on June 14, 1995, the Companies and NYNEX CableComms Limited
entered into a services and technology sharing agreement with NYNEX pursuant to
which NYNEX provides certain services to the Companies and NYNEX CableComms
Limited. This agreement covers both the scope and method of calculation of the
cost of such services. The level of charges under this agreement is intended to
arrive at arm's length transaction costs. Payments to NYNEX under the services
agreement totalled L5.0 million and L2.6 million for 1996 and 1995,
respectively.
The Companies and NYNEX CableComms Limited also entered into a secondment
agreement dated May 15, 1995 with NYNEX which provides that NYNEX will, subject
to certain conditions, second employees to the Companies and their subsidiaries
upon the request of the Companies. The Companies have agreed to reimburse NYNEX
for all costs NYNEX incurs in respect of any employees so seconded. Currently,
11 of the senior management of NYNEX CableComms Limited are on secondment from
NYNEX, including Messrs. Hatch, Doherty, McHale, Repp, Schieck and Welsh who are
Executive directors of NYNEX CableComms Limited. Mr. Repp is also a Director of
NYNEX CableComms Limited. Under this agreement, NYNEX was reimbursed by the
Companies in the aggregate of L1.6 million and L2.7 million for such secondees
during 1996 and 1995, respectively.
The Companies and Mr. Mearing-Smith (the Chief Financial Officer and
Director of the Companies, who delegated his duties as Chief Financial Officer
as of January 30, 1997) were party to an agreement which terminated Mr.
Mearing-Smith's right of first refusal and right to deferred consideration with
respect to his interest in certain franchises purchased by the Companies in
exchange for consideration which consisted of
49
50
grants of NYNEX CableComms Units and cash approximately equal in value to the
deferred consideration. Under the agreement, Mr. Mearing-Smith received L440,000
in cash in 1995 and 270,406 NYNEX CableComms Units in 1996.
Approximately 67% of the outstanding Units of the Companies is held by a
wholly-owned subsidiary of NYNEX. The Companies, through various wholly-owned
subsidiaries and two partnerships in which they exercise management control and
hold a majority interest, control the exercise of all the voting rights in the
16 companies that hold the licenses in the Companies' franchise areas (the
"Operating Companies"). Other wholly-owned subsidiaries of NYNEX have direct and
indirect equity interests in lenders to the Operating Companies and indirect
equity interests in the Operating Companies separate from NYNEX's interest as a
shareholder of the Companies. This includes indirect equity interests in the two
limited partnerships (the "North Partnership" and the "South Partnership") which
own substantially all of the ordinary shares of the Operating Companies. The
lenders to the Operating Companies hold (in addition to loans to the Operating
Companies) limited partnership interests in the North Partnership and the South
Partnership. Under the partnership agreements the limited partners generally
have a 15% interest in all items of income, gain, loss deduction or credit,
except in respect of 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 in the
case of the North Partnership and L40.0 million in the case of the South
Partnership will be allocated to the limited partners. After that, losses will
be allocated to the Companies up to the point that their share of the cumulative
losses of the relevant partnership reaches 85%. At that point any further losses
will be allocated 85% to the Companies and 15% to the limited partners. Initial
profits will be allocated between the Companies 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 the Companies and 15% to the limited partners. Initial losses for the
South Partnership reached L40.0 million in the first quarter of 1996. Initial
losses for the North Partnership have not yet reached L200 million.
For the purposes of preparing the combined financial statements, the profit
or loss of the relevant partnership is allocated between the Companies and the
limited partners in accordance with the profit and loss allocations set out in
the relevant partnership agreement.
The limited partners have contributed L211.7 million to the North
Partnership and the South Partnership as of both December 31, 1996 and December
31, 1995. Minority interests of the limited partners in the North Partnership
and South Partnership were L18.8 million and L57.8 million, respectively, at
December 31, 1996 and L76.2 million and L55.9 million, respectively, at December
31, 1995.
The North and South Partnerships are included in the Companies' US GAAP
combined financial statements. The limited partners are entitled to
distributions only if declared and their capital contributions in the North and
South Partnerships, respectively, are reflected in the Companies' US GAAP
combined financial statements under "Minority interest". The revolving loans
from the limited partners to the Northern and Southern Operating Companies are
reflected in the Companies' US GAAP combined financial statements under
"Long-term debt".
The Northern Operating Companies borrowed L292.9 million and L96.5 million
under the revolving credit facilities from the limited partners at December 31,
1996 and 1995, respectively. The Southern Operating Companies borrowed L154.8
million and L28.9 million under the revolving credit facilities from the limited
partners at December 31, 1996 and 1995, respectively. Neither the North
Partnership nor the South Partnership had made any borrowings under the
revolving credit facilities from the limited partners at December 31, 1996 and
1995.
Interest and fees paid to the lenders under the revolving credit facilities
for the years ended December 31, 1996 and December 31, 1995, aggregated L14.6
million and L6.5 million, respectively, for the Northern Operating Companies and
L7.5 million and L8.7 million, respectively, for the Southern Operating
Companies.
The revolving loans are unsecured obligations of the Operating Companies.
However, the Companies have pledged their interests in the North and South
Partnerships as collateral for repayment of the Northern
50
51
Operating Companies' and Southern Operating Companies' revolving loans,
respectively, and significant restrictions exist on the rights of the Operating
Companies to encumber any assets or incur any additional indebtedness.
The Companies have certain rights to purchase the equity interests held by
the limited partners in the North Partnership and South Partnership. The
purchase option provides for the acquisition of these equity interests at a
price equal to fair market value, but in no event less than the unrecovered
investment of the limited partners. Under certain circumstances, following the
occurrence of certain adverse events, the failure to purchase the limited
partner's interest could result in a liquidation of the North Partnership and
South Partnership.
The Operating Companies have entered into two forward sterling interest
rate swaps to reduce potential exposure to interest rate risks inherent in the
financing arrangements for Northern Operating Companies and Southern Operating
Companies. Under the interest rate swaps, the Companies agreed to exchange with
NYNEX, on a quarterly basis, the difference between fixed-rate (9.15% for the
Northern financing arrangement and 7.02% for the Southern financing arrangement)
and floating-rate three month Sterling LIBOR interest amounts calculated by
reference to an agreed notional principal amount. The notional principal amounts
of the swaps are L700.0 million and L273.7 million for swaps entered into on
December 31, 1994 and December 31, 1993, respectively. The net effect of the
interest rate swap is to fix the net cash outflow of the Companies to 9.15% and
7.02% of the appropriate financing arrangement. In order to correspond to the
underlying financing arrangements for the Northern Operating Companies and
Southern Operating Companies, the effective date of the swaps is the first
payment date after the earlier of five years from commencement of the
arrangements or the date all completion requirements are met, and expire by
December 31, 2004 and 2003, respectively.
In addition, the Operating Companies have entered into two agreements with
NYNEX to reduce the notional amount of the interest rate swaps at the Operating
Companies' option. The notional amount may be reduced at any time, and from time
to time, in whole or in part, without any penalty or additional payments. The
effective dates and expiration dates of these options are the same as the swap
transactions. The Operating Companies paid premiums of L18.3 million and L7.0
million in respect of the Northern and Southern financing arrangements,
respectively, which are being amortised over the life of the options.
NYNEX has entered into the credit facility with NYNEX CableComms to make
available up to L200 million (the "NYNEX Facility"). NYNEX CableComms may make
drawings under the NYNEX Facility at any time before May 31, 1998. Amounts
borrowed are to be paid in full by May 31, 1998. The rate of interest applicable
to amounts drawn under the NYNEX Facility is three month sterling LIBOR plus 4%.
NYNEX CableComms paid NYNEX a fee of L375,000 during 1996 for NYNEX commitment
to provide the NYNEX Facility. No drawings have yet been made on the NYNEX
Facility.
NYNEX has entered into an agreement with the Companies whereby it has
agreed to indemnify the Companies for certain US and UK tax liabilities of NYNEX
and its affiliates (including the affiliates that were transferred to the
Companies as part of a reorganization of NYNEX's cable television and
telecommunications operations in the UK effected immediately prior to the
initial public offering) arising from or attributable to periods prior to the
completion of the initial public offering.
Prior to June 14, 1995, NYNEX CableComms' US corporations were included in
the NYNEX consolidated federal income tax return and in New York State and New
York City combined income tax filings. While included in the NYNEX tax filings,
NYNEX CableComms' US corporations were allocated payments in accordance with the
effect their 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 NYNEX CableComms' initial public offering, the Companies and
their 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 the Companies by NYNEX for any
future losses generated. For periods after June 14, 1995, NYNEX UK Holdings and
its US subsidiaries will be treated as a consolidated group of corporations for
US tax return purposes. However, neither NYNEX CableComms UK nor NYNEX
CableComms US will be consolidated with NYNEX UK Holdings or its subsidiaries
for US tax
51
52
purposes. As a result, NYNEX CableComms UK and NYNEX CableComms US will file
their own US federal tax returns separately from NYNEX UK Holdings.
On May 15, 1995, the Companies and NYNEX entered into a registration rights
agreement pursuant to which, subject to compliance with London Stock Exchange
requirements and subject to certain other exceptions, NYNEX has the right, at
its own expense, (i) to require the Companies to include all or any portion of
the NYNEX CableComms Units beneficially owned by NYNEX or its affiliates in any
registered offering by any the Companies in the United States (or in any
prospectus for the offering and sale to the public in the United Kingdom) and
(ii) for ten years beginning one year after the initial public offering, to
cause the Companies on up to two separate occasions to file a registration
statement for an offering in the United States and to take such other action to
facilitate an offering and sale in the United Kingdom.
52
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K
(1) Combined Financial Statements
The following combined financial statements of the Companies and their
subsidiaries are attached to this Annual Report on Form 10-K following the
signature page:
PAGE
-----
Report of management.............................................. F-2
Report of independent accountants................................. F-3
Combined statement of operations.................................. F-4
Combined balance sheets........................................... F-5
Combined statements of changes in stockholders' equity............ F-6
Combined statements of cash flows................................. F-7
Notes to combined financial statements............................ F-8
(2) Combined Financial Statement Schedules
Combined financial statement schedules have been omitted because the
required information is contained in the combined financial statements and notes
thereto or because such schedules are not required or applicable.
(3) EXHIBITS.
Exhibits on file with the Securities and Exchange Commission (the "SEC"),
as identified in parentheses below, are incorporated herein by reference as
exhibits hereto.
EXHIBIT NUMBER
- - --------------
2.1 -- Reorganisation Agreement, dated May 15, 1995, between NYNEX Corporation, NYNEX
Worldwide Services Group, Inc., NYNEX Network Systems Company, NYNEX
CableComms Group PLC, NYNEX CableComms Group Inc. and NYNEX UK CableComms
Holdings, Inc. (incorporated herein by reference to Exhibit 2.1 to the
Companies' Annual Report on Form 10-K for the year ended December 31, 1995).
3.1 -- Memorandum of Association of NYNEX CableComms Group PLC (incorporated herein
by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement
on Form S-1 relating to the registration of American Depository Shares, each
representing ten Units, each Unit consisting of One Ordinary Share of NYNEX
CableComms Group PLC and one share of Common Stock of NYNEX CableComms Group
Inc. filed with the SEC on February 27, 1995, (File No. 33-89776) (the "Form
S-1 Registration Statement").
3.2 -- Articles of Association of NYNEX CableComms Group PLC (incorporated herein by
reference to Exhibit 3.2 to Amendment No. 5 to the Form S-1 Registration
Statement).
3.3 -- Restated Certificate of Incorporation of NYNEX CableComms Group Inc.
(incorporated herein by reference to Exhibit 3.3 to Amendment No. 5 to the
Form S-1 Registration Statement).
3.4 -- By-Laws of NYNEX CableComms Group Inc. as amended through May 10, 1995
(incorporated herein by reference to Exhibit 3.4 to Amendment No. 5 to the
Form S-1 Registration Statement).
53
54
EXHIBIT NUMBER
- - --------------
3.5 -- Inter-Company Agreement, dated May 15, 1995, between NYNEX CableComms Group
PLC and NYNEX CableComms Group Inc. (incorporated herein by reference to
Exhibit 3.5 to the Companies' Annual Report on Form 10-K for the year ended
December 31, 1995).
4.1 -- Deposit Agreement, dated as of June 8, 1995, among NYNEX CableComms Group PLC,
NYNEX CableComms Group Inc. and The Bank of New York, as Depository, and
Owners and Beneficial Owners of American Depository Receipts issued
thereunder. (incorporated herein by reference to Exhibit 4.1 to the Companies'
Annual Report on Form 10-K for the year ended December 31, 1995).
4.2 -- Relationship Agreement, dated May 15, 1995, among NYNEX Corporation, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 4.2 to the Companies' Annual Report on Form 10-K for the
year ended December 31, 1995).
4.2(a) -- Amendment to the Relationship Agreement, dated June 8, 1995, among NYNEX
Corporation, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.
(incorporated herein by reference to Exhibit 4.2(a) to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).
4.3 -- Registration Rights Agreement, dated as of May 15, 1995, among NYNEX
Corporation, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.
(incorporated herein by reference to Exhibit 4.3 to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).
10.1 -- North CableComms Participation Agreement, dated as of December 19, 1994, by
and among North CableComms L.L.C., NYNEX North CableComms Holdings, Inc.,
NYNEX North CableComms Management, Inc., NYNEX Wirral Company, NYNEX
CableComms Limited, North CableComms L.P. and each of the Companies (as
defined therein) (incorporated herein by reference to Exhibit 10.1 to the Form
S-1 Registration Statement).(1)
10.1(a) -- First Amendment to North CableComms Participation Agreement, dated as of April
14, 1995, by and among North CableComms L.L.C., NYNEX North CableComms
Holdings, Inc., NYNEX North CableComms Management, Inc., NYNEX Wirral Company,
NYNEX CableComms Limited, North CableComms L.P. and each of the Companies (as
defined therein) (incorporated herein by reference to Exhibit 10.1(a) to
Amendment No. 4 to the Form S-1 Registration Statement).
10.2 -- North CableComms L.P. Second Amended and Restated Agreement of Limited
Partnership, dated as of December 19, 1994, by and among, NYNEX North
CableComms Management, Inc., NYNEX North CableComms Holdings, Inc., NYNEX
Wirral Company and North CableComms L.L.C. (incorporated herein by reference
to Exhibit 10.2 to the Form S-1 Registration Statement).
10.3 -- North CableComms L.L.C. Amended and Restated Company Agreement, dated as of
December 19, 1994, by and among North CableComms Management, Inc., North
CableComms Holdings, Inc. and Winston Investors L.L.C. (incorporated herein by
reference to Exhibit 10.3 to the Form S-1 Registration Statement).(1)
10.3(a) -- First Amendment to North CableComms L.L.C. Amended and Restated Company Agree-
ment, dated as of April 14, 1995, by and among North CableComms Management,
Inc., North CableComms Holdings, Inc. and Winston Investors L.L.C.
(incorporated herein by reference to Exhibit 10.3(a) to Amendment No. 4 to the
Form S-1 Registration Statement).(1)
- - ---------------
(1) Confidential treatment for certain portions of this document has been
granted by the Securities and Exchange Commission.
54
55
EXHIBIT NUMBER
- - --------------
10.3(b) -- Second Amendment to North CableComms L.L.C. Amended and Restated Company
Agreement, dated as of November 3, 1995, by and among North CableComms
Holdings, Inc., North CableComms Management, Inc. and Winston Investors L.L.C.
(incorporated herein by reference to Exhibit 10.3(b) to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).(1)
10.4 -- Master Agreement, dated as of December 19, 1994, by and among NYNEX
Corporation and NYNEX CableComms Wirral, NYNEX CableComms East Lancashire,
NYNEX CableComms Stockport, NYNEX CableComms Macclesfield, NYNEX CableComms
Greater Manchester, NYNEX CableComms Derby, NYNEX CableComms Bolton, NYNEX
CableComms Bury and Rochdale, NYNEX CableComms Oldham and Tameside, NYNEX
CableComms Cheshire and NYNEX CableComms Staffordshire (incorporated herein by
reference to Exhibit 10.5 to the Form S-1 Registration Statement).
10.5 -- Secondment Agreement, dated May 15, 1995, among NYNEX Corporation, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 10.5 to the Companies' Annual Report on Form 10-K for the
year ended December 31, 1995).
10.6 -- Subscription and Shareholders Agreement, dated January 30, 1995, by and among
Videotron Corporation Limited, United Artists Communications (London South)
Limited, Cable London Plc, ELT Acquisition Company Limited, NYNEX CableComms
Limited, The Cable Corporation Limited, London Interconnect Limited,
Independent Cable Sales Limited, London Interconnect PPV Limited and London
Interconnect Network Limited (incorporated herein by reference to Exhibit 10.9
to the Form S-1 Registration Statement).
10.7 -- Participation Agreement, dated as of March 31, 1995, by and among South
CableComms L.L.C., NYNEX South CableComms Holdings, Inc., NYNEX South
CableComms Management, Inc., NYNEX CableComms Limited, South CableComms L.P.
and each of the Companies (as defined therein) (incorporated herein by
reference to Exhibit 10.10 to Amendment No. 2 to the Form S-1 Registration
Statement).(1)
10.8 -- South CableComms L.P. Second Amended and Restated Agreement of Limited
Partnership, dated as of March 31, 1995, among NYNEX South CableComms
Holdings, Inc., Chartwell Investors, L.P. and South CableComms L.L.C.
(incorporated herein by reference to Exhibit 10.11 to Amendment No. 2 to the
Form S-1 Registration Statement).
10.9 -- South CableComms L.L.C. Amended and Restated Company Agreement, dated as of
March 31, 1995, by and among South CableComms Management, Inc., South
CableComms Holdings, Inc. and Chartwell Investors L.P. (incorporated herein by
reference to Exhibit 10.12 to Amendment No. 2 to the Form S-1 Registration
Statement).(1)
10.9(a) -- First Amendment to South CableComms L.L.C. Amended and Restated Company Agree-
ment, dated as of November 3, 1995 by and among South CableComms Management,
Inc., South CableComms Holdings, Inc. and Chartwell Investors L.P.
(incorporated herein by reference to Exhibit 10.9(a) to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).(1)
10.10 -- Master Agreement, dated as of March 31, 1995, by and among NYNEX Corporation
and NYNEX CableComms Bromley, NYNEX CableComms Solent, NYNEX CableComms
Surrey, NYNEX CableComms Sussex and NYNEX CableComms Wessex (incorporated
herein by reference to Exhibit 10.13 to Amendment No. 2 to the Form S-1
Registration Statement).
- - ---------------
(1) Confidential treatment for certain portions of this document has been
granted by the Securities and Exchange Commission.
55
56
EXHIBIT NUMBER
- - --------------
10.11 -- 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.) (Incorporated herein by reference to Exhibit 10.1 to the
Form 10-Q for the period ended June 30, 1996).
10.11(a) -- Letter Agreement on Interconnect Charges dated July 19, 1996 between BT and
NYNEX CableComms Bolton. (Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants).
10.11(b) -- Letter Agreement on Interconnect Charges dated July 19, 1996 between BT and
NYNEX CableComms Bolton. (Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants).
10.11(c) -- Letter Agreement on Review of certain aspects of the Interconnect Agreement
dated July 19, 1996 between BT and NYNEX CableComms Bolton. (Identical
agreements have been entered into between BT and fifteen other affiliates of
the Registrants).
10.11(d) -- Letter Agreement on Interconnect Charges dated July 19, 1996 between BT and
NYNEX CableComms Bolton. (Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants).
10.11(e) -- 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.) (Incorporated herein by reference to
Exhibit 10.1 to the Form 10-Q for the period ended June 30, 1996).
10.11(f) -- Letter Agreement on conveyancing termination rate dated June 13, 1996, between
BT and NYNEX CableComms Bolton. (Identical agreements have been entered into
between BT and fifteen other affiliates of the Registrants).
10.11(g) -- Letter Agreement on Interconnect Charges dated December 19, 1996, between BT,
the Operating Companies and NYNEX CableComms Limited.
10.12 -- Interconnection Agreement, dated November 11, 1996, between Mercury
Communications Limited and NYNEX CableComms Limited.
10.12(a) -- Agreement settling payment for backdated claims relating to Interconnect
Charges ("Interconnect") dated November 11, 1996, between Mercury
Communications Limited and NYNEX CableComms Limited.
10.12(b) -- Agreement dated November 11, 1996 between Mercury Communications Limited and
NYNEX CableComms Limited regarding mobile charges.
10.12(c) -- Amendment to Interconnection Agreement, dated February 11, 1997 between
Mercury Communications Limited and NYNEX CableComms Limited.
10.13 -- Agreement for Systems Integration, dated December 2, 1994, between NYNEX
CableComms Limited and IBM United Kingdom Limited (incorporated herein by
reference to Exhibit 10.16(a) to Amendment No. 1 to the Form S-1 Registration
Statement).
10.14 -- ICMS Software Maintenance Agreement, dated December 2, 1994, between NYNEX
CableComms Limited and IBM United Kingdom Limited (incorporated herein by
reference to Exhibit 10.16(b) to Amendment No. 1 to the Form S-1 Registration
Statement).
10.15 -- Software Charging Agreement, dated December 29, 1995, between IBM United
Kingdom Financial Services Limited and NYNEX CableComms Limited. (incorporated
herein by reference to Exhibit 10.15 to the Companies' Annual Report on Form
10-K for the year ended December 31, 1995).
56
57
EXHIBIT NUMBER
- - --------------
10.17 -- Service Agreement, dated May 15, 1995, among NYNEX CableComms Limited, John F.
Killian, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc. (incor-
porated herein by reference to Exhibit 10.17 to the Companies' Annual Report
on Form 10-K for the year ended December 31, 1995).*
10.17(a) -- Agreement, dated December 7, 1995, between NYNEX CableComms Limited, John F.
Killian, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc. amending
the terms of the Service Agreement between the same parties. (incorporated
herein by reference to Exhibit 10.17(a) to the Companies' Annual Report on
Form 10-K for the year ended December 31, 1995).*
10.17(b) -- Agreement, dated October 1, 1996, between NYNEX CableComms Limited, John F.
Killian, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc. amending
the terms of the Service Agreement between the same parties.*
10.18 -- Service Agreement, dated May 15, 1995, between NYNEX CableComms Limited,
Nicholas P. Mearing-Smith, NYNEX CableComms Group PLC and NYNEX CableComms
Group Inc. (incorporated herein by reference to Exhibit 10.18 to the
Companies' Annual Report on Form 10-K for the year ended December 31, 1995).*
10.20 -- Secondment Agreement, dated May 15, 1995, between NYNEX CableComms Limited and
NYNEX Worldwide Services Group, Inc. with respect to John F. Killian.
(incorporated herein by reference to Exhibit 10.20 to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).*
10.20(a) -- First Amendment to Secondment Agreement, dated December 7, 1995, between NYNEX
CableComms Limited and NYNEX Worldwide Services Group, Inc. with respect to
John F. Killian. (incorporated herein by reference to Exhibit 10.20(a) to the
Companies' Annual Report on Form 10-K for the year ended December 31, 1995).*
10.20(b) -- Second Amendment to Secondment Agreement, dated October 1, 1996, between NYNEX
CableComms Limited and NYNEX Worldwide Services Group, Inc. with respect to
John F. Killian.*
10.21 -- Letter of Appointment, dated May 3, 1995, among Richard W. Blackburn, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (Substantially identical
agreements have been entered into for Robert T. Anderson and Jeffrey A.
Bowden). (incorporated herein by reference to Exhibit 10.21 to the Companies'
Annual Report on Form 10-K for the year ended December 31, 1995).*
10.22 -- Letter of Appointment, dated May 3, 1995, among John L. Rennocks, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 10.22 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).*
10.22(a) -- Amendment to Letter of Appointment, dated July 11, 1996, among John L.
Rennocks, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.*
10.23 -- Letter of Appointment, dated May 3, 1995, among Sir Christopher Bland, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 10.23 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).*
10.24 -- Letter of Appointment, dated May 3, 1995, among Sir Michael Checkland, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 10.24 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).*
- - ---------------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
57
58
EXHIBIT NUMBER
- - --------------
10.25 -- Letter Agreement, dated April 26, 1995, among NYNEX UK Telephone and Cable TV
Holding Company Limited, NYNEX CableComms Group PLC, NYNEX CableComms Group
Inc., Nicholas P. Mearing-Smith and Peter Lynch. (incorporated herein by
reference to Exhibit 10.25 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).
10.26 -- Tax Indemnity Agreement, dated May 15, 1995, among NYNEX Corporation, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. (incorporated herein by
reference to Exhibit 10.26 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).
10.27 -- Contract of Employment, dated May 20, 1992, between NYNEX CableComms Limited
and Graham L. Robertson as amended March 21, 1995 (incorporated herein by
reference to Exhibit 10.26 to Amendment No. 3 to the Form S-1 Registration
Statement).*
10.28 -- Contract of Employment, dated March 23, 1994, between NYNEX CableComms Limited
and Colin I. Chadwick (incorporated herein by reference to Exhibit 10.27 to
Amendment No. 3 to the Form S-1 Registration Statement).*
10.29 -- Contract of Employment, dated February 20, 1992, between NYNEX CableComms
Limited and Carl Grose as amended January 26, 1995. (incorporated herein by
reference to Exhibit 10.29 to the Companies' Annual Report on Form 10-K for
the year ended December 31, 1995).*
10.31 -- Contract of Employment dated September 8, 1992 between NYNEX CableComms
Limited and Michael W. Stevenson as amended November 8, 1993 (incorporated
herein by reference to Exhibit 10.33 to Amendment No. 3 to the Form S-1
Registration Statement).*
10.32 -- Cable Programme Partners-1 Limited Partnership Agreement ("CPP-1 Agreement"),
dated October 16, 1992, among TCI Cable Programme Partners, Inc., Comcast UK
Programming Limited, U.S. West Cable Programming Corporation, Southwestern
Bell International Programming Inc., NYNEX Programming Subsidiary Company and
Cable Programme Partners (1) Limited (incorporated herein by reference to
Exhibit 10.34(a) to Amendment No. 3 to the Form S-1 Registration Statement).
10.33 -- Amendment No. 1 to CPP-1 Agreement, dated as of October 16, 1992 and made as
of December 12, 1994, among the parties to the CPP-1 Agreement and CableTel
Programming, Inc. (incorporated herein by reference to Exhibit 10.34(b) to
Amendment No. 4 to the Form S-1 Registration Statement).
10.34 -- Amendment No. 2 to CPP-1 Agreement, dated as of October 16, 1992 and made as
of December 12, 1994, among the parties to the CPP-1 Agreement and CableTel
Programming, Inc. (incorporated herein by reference to Exhibit 10.34(c) to
Amendment No. 4 to the Form S-1 Registration Statement).
10.35 -- Services and Technology Sharing Agreement, dated May 15, 1995, among NYNEX
Corporation, NYNEX CableComms Limited, NYNEX CableComms Group PLC and NYNEX
CableComms Group Inc. (incorporated herein by reference to Exhibit 10.35 to
the Companies' Annual Report on Form 10-K for the year ended December 31,
1995).
10.35(a) -- Amendment to Services and Technology Sharing Agreement, dated June 8, 1995,
among NYNEX Corporation, NYNEX CableComms Limited, NYNEX CableComms Group PLC
and NYNEX CableComms Group Inc. (incorporated herein by reference to Exhibit
10.35(a) to the Companies' Annual Report on Form 10-K for the year ended
December 31, 1995).
- - ---------------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
58
59
EXHIBIT NUMBER
- - --------------
10.36 -- Trademark License Agreement, dated May 15, 1995, among NYNEX Corporation,
NYNEX CableComms Limited, NYNEX CableComms Group PLC and NYNEX CableComms
Group Inc. (incorporated herein by reference to Exhibit 10.36 to the
Companies' Annual Report on Form 10-K for the year ended December 31, 1995).
10.37 -- Facility Agreement, dated May 15, 1995, between NYNEX UK CableComms Holdings,
Inc. and NYNEX Corporation. (incorporated herein by reference to Exhibit 10.37
to the Companies' Annual Report on Form 10-K for the year ended December 31,
1995).
10.37(a) -- Supplemental Facility Agreement amending the Facility Agreement dated March ,
1996, between NYNEX UK CableComms Holdings, Inc. and NYNEX Corporation.
10.39 -- Assignment Letter, dated May 3, 1995, among NYNEX Corporation, NYNEX Worldwide
Services Group, Inc. and John F. Killian. (incorporated herein by reference to
Exhibit 10.39 to the Companies' Annual Report on Form 10-K for the year ended
December 31, 1995).*
10.39(a) -- First Amendment to Assignment Letter, dated as of December 7, 1995, among
NYNEX Corporation, NYNEX Worldwide Services Group, Inc. and John F. Killian.
(incorporated herein by reference to Exhibit 10.39 to the Companies' Annual
Report on Form 10-K for the year ended December 31, 1995).*
10.39(b) -- Second Amendment to Assignment Letter, dated October 1, 1996, among NYNEX
Corporation, NYNEX Worldwide Services Group, Inc. and John F. Killian.*
10.44 -- Standard Cable Operators Agreement entered into on April 30, 1995 and signed
on May 4, 1995 among British Sky Broadcasting Limited, British Sky
Broadcasting Group PLC, NYNEX CableComms Limited and NYNEX CableComms Group
PLC and NYNEX CableComms Group Inc. (incorporated herein by reference to
Exhibit 10.40 to Amendment No. 6 to the Form S-1 Registration Statement).(1)
10.44(a) -- Letter Agreement amending Programming dated July 28, 1995 between British Sky
Broadcasting Limited, British Sky Broadcasting Group PLC, NYNEX CableComms
Limited and the Operating Companies.
10.45 -- Letter of Appointment, dated July 11, 1996, among Sir Bryan Carsberg, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc.*
10.46 -- Letter of Appointment, dated July 11, 1996, among Mel Meskin, NYNEX CableComms
Group PLC and NYNEX CableComms Group Inc.*
10.47 -- Letter of Termination, dated April 16, 1996, among Jeff Henry, NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc.*
10.48 -- Loyalty Bonus and Severance Terms Letter, dated December 13, 1996, among Carl
Grose, NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.*
10.49 -- Form of Loyalty Bonus and Severance Terms Letter, dated December 13, 1996,
among the named Executive director, NYNEX CableComms Group PLC and NYNEX
CableComms Group Inc. (Substantially identical agreements have been entered
into for Colin I. Chadwick, John Doherty, Edward L. Hatch, John J. McHale,
Paul H. Repp, Graham L. Robertson, Allen J.M. Saunders, Michael T. Schieck,
Michael W. Stevenson and Patrick Welsh III).*
10.50 -- Loyalty Bonus and Severance Terms Letter, dated December 13, 1996, among
Nicholas P. Mearing-Smith, NYNEX CableComms Group PLC and NYNEX CableComms
Group Inc.*
- - ---------------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
(1) Confidential treatment for certain portions of this document has been
granted by the Securities and Exchange Commission.
59
60
EXHIBIT NUMBER
- - --------------
21 -- Subsidiaries of the Registrants (incorporated herein by reference to Exhibit
21 to Amendment No. 5 to the Form S-1 Registration Statement).
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Registrants during the fourth
quarter of 1996.
- - ---------------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
(1) Confidential treatment for certain portions of this document has been
granted by the Securities and Exchange Commission.
60
61
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
NYNEX CABLECOMMS GROUP PLC
/s/ JOHN F. KILLIAN
------------------------------------
John F. Killian
President and Chief Executive Officer
Date: March 21, 1997
NYNEX CABLECOMMS GROUP INC.
/s/ JOHN F. KILLIAN
------------------------------------
John F. Killian
President and Chief Executive Officer
Date: March 21, 1997
61
62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.
NYNEX CABLECOMMS GROUP PLC
(Registrant)
Principal Executive Officer: /s/ JOHN F. KILLIAN
John F. Killian --------------------------------------------
President and Chief Executive
Officer and Director
Principal Financial and Accounting Officer:
/s/ GRAHAM L. ROBERTSON
Graham L. Robertson --------------------------------------------
Acting Chief Financial Officer
Directors:
Robert Anderson*
Richard Blackburn*
Jeffrey Bowden*
Sir Bryan Carsberg* *By /s/ JOHN F. KILLIAN
Sir Michael Checkland* John F. Killian, as attorney-in-fact
John Rennocks*
March 21, 1997
62
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.
NYNEX CABLECOMMS GROUP INC.
(Registrant)
Principal Executive Officer: /s/ JOHN F. KILLIAN
John F. Killian --------------------------------------------
President and Chief Executive Officer
and Director
Principal Financial and Accounting Officer:
Graham L. Robertson /s/ GRAHAM L. ROBERTSON
--------------------------------------------
Acting Chief Financial Officer
Directors:
Robert Anderson*
Richard Blackburn*
Jeffrey Bowden*
Sir Bryan Carsberg*
Sir Michael Checkland*
John Rennocks*
*By: /s/ JOHN F. KILLIAN
John F. Killian, as
attorney-in-fact
March 21, 1997
63
64
ANNUAL REPORT AND FINANCIAL STATEMENTS PREPARED
IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP")
PAGE
------
Report of management.............................................. F-2
Report of independent accountants................................. F-3
Combined statements of operations................................. F-4
Combined balance sheets........................................... F-5
Combined statements of changes in stockholders' equity............ F-6
Combined statements of cash flows................................. F-7
Notes to combined financial statements............................ F-8
F-1
65
REPORT OF MANAGEMENT
Management of NYNEX CableComms UK and NYNEX CableComms US (together with
their subsidiaries "NYNEX CableComms") has the responsibility for preparing the
accompanying combined financial statements and for their integrity and
objectivity. The statements were prepared in accordance with United States
generally accepted accounting principles, which require management to make
estimates and assumptions that affect reported amounts. Actual results could
differ from those estimates. In management's opinion, the combined financial
statements are fairly presented. Management also prepared the other information
in this report and is responsible for its accuracy and consistency with the
combined financial statements.
The combined financial statements have been audited by Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), independent accountants. Management has made
available to Coopers & Lybrand all of NYNEX CableComms' financial records and
related data, as well as the minutes of stockholders' and Directors' meetings.
Furthermore, management believes that all representations made to Coopers &
Lybrand during its audit were valid and appropriate.
Management of NYNEX CableComms has established and maintains an internal
control structure that is designed to provide reasonable assurance as to the
integrity and reliability of the combined financial statements, the protection
of assets from unauthorized use or disposition, and the prevention and detection
of fraudulent financial reporting. The concept of reasonable assurance
recognizes that the cost of the internal control structure should not exceed the
benefits to be derived. The internal control structure provides for appropriate
division of responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the financial
reporting process. Management monitors the internal control structure for
compliance, considers recommendations for improvement from both the internal
auditors and Coopers & Lybrand, and updates such policies and procedures as
necessary. Monitoring includes an internal auditing function to independently
assess the effectiveness of the internal controls and recommend possible
improvements thereto. Management believes that the internal control structure of
NYNEX CableComms is adequate to accomplish the objectives discussed herein.
The Audit Committees of the Boards of Directors, which are comprised of
Directors who are not employees, meet periodically with management, the internal
auditors and Coopers & Lybrand to review the manner in which they are performing
their responsibilities and to discuss matters relating to auditing, internal
controls and financial reporting. Both the internal auditors and Coopers &
Lybrand periodically meet privately with the Audit Committees and have access to
the Audit Committees at any time.
Management also recognizes its responsibility for conducting NYNEX
CableComms' activities under the highest standards of personal and corporate
conduct. This responsibility is accomplished by fostering a strong ethical
climate as characterized in the NYNEX Corporation ("NYNEX") Code of Business
Conduct, adopted throughout NYNEX CableComms. The Code of Business Conduct
addresses, among other things, standards of personal conduct, potential
conflicts of interest, compliance with all domestic and foreign laws,
accountability for NYNEX CableComms' property, and the confidentiality of
proprietary information.
JOHN F KILLIAN
President and Chief Executive Officer
F-2
66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Boards of Directors of NYNEX CableComms Group PLC and
NYNEX CableComms Group Inc.:
We have audited the accompanying combined balance sheets of NYNEX
CableComms Group PLC and NYNEX CableComms Group Inc. and their subsidiaries
("NYNEX CableComms") as of December 31, 1996 and 1995, and the related combined
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 (shown on pages
F-4 through F-21). These combined financial statements are the responsibility of
NYNEX CableComms' management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the combined financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall combined financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of NYNEX
CableComms as of December 31, 1996 and 1995 and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles in
the United States.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019-6013
March 19, 1997
F-3
67
COMBINED STATEMENTS OF OPERATIONS
OF NYNEX CABLECOMMS GROUP PLC AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
NOTE 1996 1995 1994 1996
---- -------- -------- -------- --------
L L L $
[NOTE B]
IN THOUSANDS (EXCEPT PER ADS AMOUNTS)
Operating revenue:
Cable television.......................... 62,413 38,728 20,002 106,870
Telecommunications -- residential......... 70,597 36,414 16,291 120,883
Telecommunications -- business............ 13,070 5,250 2,395 22,380
Installation.............................. 5,161 4,627 2,327 8,837
-------- -------- -------- --------
Total operating revenue..................... 151,241 85,019 41,015 258,970
-------- -------- -------- --------
Operating expenses:
Programming............................... 34,484 19,302 9,682 59,047
Telecommunications........................ 26,353 16,412 7,941 45,124
Depreciation and amortization............. 54,465 33,153 19,098 93,260
Staff costs............................... 45,888 45,954 30,614 78,574
Selling, general and administrative....... 50,100 50,076 41,433 85,787
-------- -------- -------- --------
Total operating expenses.................... 211,290 164,897 108,768 361,792
-------- -------- -------- --------
Operating loss.............................. (60,049) (79,878) (67,753) (102,822)
-------- -------- -------- --------
Other Income (expense):
Interest income........................... 4,889 4,059 1,355 8,371
Interest expense.......................... (23,229) (16,006) (339) (39,775)
Minority interest......................... F 55,544 72,795 (3,784) 95,108
Other..................................... -- -- 94 --
-------- -------- -------- --------
Total other income (expense)................ 37,204 60,848 (2,674) 63,704
-------- -------- -------- --------
Loss before income taxes.................... (22,845) (19,030) (70,427) (39,118)
Income taxes................................ C -- 18,591 20,906 --
-------- -------- -------- --------
Net loss.................................... (22,845) (439) (49,521) (39,118)
======== ======== ======== ========
Net loss per ADS............................ B (0.247) (0.005) (0.423)
======== ======== ========
ADSs outstanding............................ 92,549 92,500 92,549
======== ======== ========
See accompanying notes to combined financial statements.
F-4
68
COMBINED BALANCE SHEETS
OF NYNEX CABLECOMMS GROUP PLC AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES
DECEMBER 31,
--------------------------------
1996 1995 1996
NOTE -------- -------- --------
----- L L $
[NOTE B]
IN THOUSANDS (EXCEPT PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and temporary cash investments................ 15,430 9,807 26,421
Receivables, net of allowance of L3,536 and L1,492 M
at December 31, 1996 and 1995, respectively..... 53,041 43,551 90,822
Prepaid expenses................................... 3,273 2,653 5,604
-------- -------- --------
Total current assets................................. 71,744 56,011 122,847
Property, plant and equipment, net................... D 1,098,119 859,024 1,880,309
Goodwill, net of accumulated amortization of L2,848
and L2,138 at December 31, 1996 and 1995,
respectively....................................... 25,493 26,203 43,652
Deferred finance costs, net.......................... E 52,148 59,140 89,293
Other assets......................................... 1,383 1,401 2,368
-------- -------- --------
Total assets......................................... 1,248,887 1,001,779 2,138,469
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... 62,990 69,038 107,858
Other current liabilities.......................... M 51,715 46,834 88,551
-------- -------- --------
Total current liabilities............................ 114,705 115,872 196,409
Long-term debt....................................... E 447,649 125,350 766,509
Other long-term liabilities.......................... 8,670 4,970 14,846
Minority interest.................................... F 76,577 132,121 131,123
-------- -------- --------
Total liabilities.................................... 647,601 378,313 1,108,887
-------- -------- --------
Commitments and contingencies G,J,N
STOCKHOLDERS' EQUITY
Ordinary shares -- par value L0.10 per share (1,500
million authorized, 925.5 million issued and
outstanding)....................................... 92,549 92,500 158,472
Shares of common stock -- par value $0.01 per share
(1,500 million authorized, 925.5 million issued and
outstanding)....................................... 5,766 5,763 9,873
Additional paid-in capital........................... 614,152 613,539 1,051,612
Accumulated deficit.................................. (111,181) (88,336) (190,375)
-------- -------- --------
Total stockholders' equity........................... 601,286 623,466 1,029,582
-------- -------- --------
Total liabilities and stockholders' equity........... 1,248,887 1,001,779 2,138,469
======== ======== ========
See accompanying notes to combined financial statements.
F-5
69
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
OF NYNEX CABLECOMMS GROUP PLC AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES
ORDINARY
SHARES AND ADDITIONAL TOTAL
CAPITAL ACCUMULATED SHARES OF PAID-IN STOCKHOLDERS'
CONTRIBUTIONS DEFICIT COMMON STOCK CAPITAL EQUITY
------------- ----------- ------------ ---------- ------------
L L L L L
IN THOUSANDS
Balance, December 31, 1993....... 260,509 (38,376) -- -- 222,133
Capital contributions from
NYNEX.......................... 118,787 -- -- -- 118,787
Net loss......................... -- (49,521) -- -- (49,521)
-------- -------- ------ ------- -------
Balance, December 31, 1994....... 379,296 (87,897) -- -- 291,399
Capital contributions from NYNEX
during first quarter 1995...... 5,320 -- -- -- 5,320
Distribution of long-term loans
to NYNEX for subsequent
contribution to South limited
partner........................ (52,991) -- -- -- (52,991)
Issue of ordinary shares......... -- -- 92,500 97,588 190,088
Issue of shares of common
stock.......................... -- -- 5,763 184,326 190,089
Reclassification of NYNEX capital
contribution................... (331,625) -- -- 331,625 --
Net loss......................... -- (439) -- -- (439)
-------- -------- ------ ------- -------
Balance, December 31, 1995....... -- (88,336) 98,263 613,539 623,466
Issue of ordinary shares......... -- -- 49 550 599
Issue of shares of common
stock.......................... -- -- 3 63 66
Net loss......................... -- (22,845) -- -- (22,845)
-------- -------- ------ ------- -------
Balance, December 31, 1996....... -- (111,181) 98,315 614,152 601,286
======== ======== ====== ======= =======
See accompanying notes to combined financial statements
F-6
70
COMBINED STATEMENTS OF CASH FLOWS
OF NYNEX CABLECOMMS GROUP PLC AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1996
-------- -------- --------
1996 L L $
--------
L
[NOTE B]
IN THOUSANDS
Cash flows from operating activities:
Net loss........................................ (22,845) (439) (49,521) (39,118)
-------- -------- -------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 54,465 33,153 19,098 93,260
Amortization of deferred finance costs....... 6,500 6,637 -- 11,130
Provision for bad debts...................... 7,175 2,985 885 12,286
Minority interest............................ (55,544) (72,795) 3,784 (95,108)
Deferred income taxes........................ -- (12,754) 5,818 --
Gain on sale of capital assets............... (771) -- -- (1,320)
Changes in operating assets and liabilities:
Receivables................................ (16,665) (33,909) (7,313) (28,535)
Prepaid expenses........................... (620) (1,340) (135) (1,061)
Accounts payable........................... (2,320) (4,346) 3,214 (3,973)
Other current liabilities.................. 2,740 21,576 6,221 4,691
-------- -------- -------- --------
Total adjustments............................... (5,040) (60,793) 31,572 (8,630)
-------- -------- -------- --------
Net cash used in operating activities............. (27,885) (61,232) (17,949) (47,748)
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (289,915) (392,417) (263,243) (496,421)
Sale of capital assets.......................... 1,199 -- -- 2,053
Loan to NYNEX................................... -- (156,889) -- --
Repayment of loan by NYNEX...................... -- 156,889 -- --
Other investing activities, net................. -- 258 (296) --
-------- -------- -------- --------
Net cash used in investing activities............. (288,716) (392,159) (263,539) (494,368)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings........................ 322,298 245,190 52,000 551,871
Payments made on capital leases................. (1,017) -- -- (1,741)
Change in other long-term liabilities........... 943 544 418 1,614
Repayment of borrowings......................... -- (360,253) -- --
Capital contributions........................... -- 5,320 118,787 --
Activity with minority joint venture partners... -- (3,119) 174,458 --
Funding from minorities......................... -- 156,555 -- --
Deferred transaction and finance costs.......... -- (2,903) (52,179) --
Proceeds of share issue (net of L36 million
costs)....................................... -- 380,177 -- --
-------- -------- -------- --------
Net cash provided by financing activities......... 322,224 421,511 293,484 551,744
-------- -------- -------- --------
Net increase (decrease) in cash and temporary cash
investments..................................... 5,623 (31,880) 11,996 9,628
Cash and temporary cash investments at beginning
of year......................................... 9,807 41,687 29,691 16,793
-------- -------- -------- --------
Cash and temporary cash investments at end of
year............................................ 15,430 9,807 41,687 26,421
======== ======== ======== ========
See accompanying notes to combined financial statements
F-7
71
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES
A ORGANIZATION AND HISTORY OF NYNEX CABLECOMMS
NYNEX CableComms is a provider of both cable television and
telecommunications services in the United Kingdom.
In February 1995, two indirect wholly owned subsidiaries of NYNEX were
incorporated: NYNEX CableComms UK, a public limited company incorporated under
the laws of England and Wales, and NYNEX CableComms US, a Delaware corporation.
On June 14, 1995 NYNEX CableComms UK and NYNEX CableComms US completed the
Combined Offering in which 305 million ordinary shares of NYNEX CableComms UK
and 305 million shares of common stock of NYNEX CableComms US were issued
together as Units comprising one ordinary share and one share of common stock.
Of the 305 million Units issued, 170,222,000 were issued as Units at a price of
137p per Unit and 134,778,000 Units were issued as ADSs at a price of $21.81 per
ADS, each ADS comprising 10 Units.
Immediately prior to the completion of the Combined Offering, NYNEX
reorganized its shareholdings and partnership interests in the Companies and
partnerships that represented its cable television and telecommunications
business in the United Kingdom (the "Predecessor Businesses"), contributing them
to NYNEX CableComms UK and NYNEX CableComms US. In consideration the Companies
issued Units to a subsidiary of NYNEX, bringing NYNEX's indirect holdings in the
Companies to 620 million Units. NYNEX CableComms UK and NYNEX CableComms US then
contributed the Predecessor Businesses to NYNEX UK Holdings. The shares of NYNEX
UK Holdings are held 90% by NYNEX CableComms UK and 10% by NYNEX CableComms US.
During 1996, a further 485,389 Units were issued for nil consideration to
two former employees of NYNEX CableComms and to Nicholas Mearing-Smith, Chief
Financial Officer, pursuant to agreements entered into at the time of the
Combined Offering.
Cable & Wireless plc, Bell Canada International Inc. and NYNEX have entered
into an agreement (as amended or restated, the "Agreement") pursuant to which,
subject to the satisfaction of certain conditions precedent, the parties have
agreed to combine Mercury Communications Limited, Bell Cablemedia plc (as
enlarged by the acquisition of Videotron Holdings plc) and NYNEX CableComms
under a new holding company, Cable & Wireless Communications plc ("CWC").
Pursuant to the Agreement, CWC has offered to purchase NYNEX CableComms UK
Ordinary Shares and NYNEX CableComms US Shares of Common Stock (including shares
represented by NYNEX CableComms ADSs) in exchange for CWC ordinary shares. If
the transactions contemplated by the Agreement are consummated, among other
things, NYNEX CableComms will become a part of the combined CWC group and its
existing credit facilities would have to be repaid (absent waivers of change of
control defaults) and are expected to be terminated and replaced with a CWC
credit facility.
B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to the previous years' combined
financial statements in order to conform to the current year's format.
F-8
72
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
The combined financial statements are presented in pounds sterling ("L").
Solely for the convenience of the reader, the combined financial statements as
of and for the year ended December 31, 1996 have been presented in US dollars
("$") at the rate of L1.00 = $1.7123, the Noon Buying Rate of the Federal
Reserve Bank of New York on December 31, 1996. The presentation of the US dollar
amounts should not be construed 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.
Principles of combination
The combined financial statements present the financial position, results
of operations, and cash flows of NYNEX CableComms as if the ownership structure
described above had been in existence throughout the three-year period ended
December 31, 1996.
The historical results of the Predecessor Businesses have been included in
the combined financial statements from the date they were formed or came under
the control of NYNEX. The combined financial statements include the historical
results of each entity. 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 prior to the
Combined Offering have been charged to NYNEX CableComms prior to the Combined
Offering on a direct or allocated basis. Such costs are not substantially
different from those which NYNEX CableComms would have incurred on a stand-alone
basis.
Accumulated deficit in the combined balance sheets represents all profits
and losses since inception of the Predecessor Businesses.
Cash and temporary cash investments
Temporary cash investments, which are considered cash equivalents for cash
flow reporting purposes, are liquid investments with maturities of three months
or less and are stated at cost.
Investments
Investments in affiliated companies, representing investments in which
NYNEX CableComms' ownership interest is between 20% and 50%, are accounted for
using the equity method. Investments in which the ownership interest is less
than 20% are accounted for using the cost method and approximate fair value.
Investments are included in Other assets.
Franchise costs
Costs of successful franchise applications are capitalized and amortized
over the life of the franchise license and included in Other assets. Costs of
unsuccessful franchise applications are charged to expense.
Goodwill
Goodwill arising from the acquisition of companies holding the right to
construct and operate cable television and telecommunications networks
represents the excess of cost over the fair value of net assets acquired.
Goodwill is amortized on a straight-line basis over 40 years, the estimated
useful life of the network. Goodwill that is not expected to be recoverable
based on undiscounted cash flow analyses is accounted for as an impairment of
value. No such impairment has occurred.
Property, plant and equipment
Property, plant and equipment is stated at cost. Cost includes materials,
direct labor and overhead expenses directly attributable to the design,
construction and installation of NYNEX CableComms' cable
F-9
73
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
television and telecommunications network. Interest on borrowings to finance
network construction is capitalized to the extent that it is incurred during the
construction period.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. After a portion of the network is fully constructed and
released to sales, NYNEX CableComms commences depreciation of that part of the
network, at the earlier of (i) three months after that release, and (ii) when
customer levels reach 10% of total possible customers for that part of the
network.
Deferred finance costs
Costs of financing arrangements are capitalized and amortized over the
periods of the related financing arrangements on a straight-line basis.
Interest rate derivatives
NYNEX CableComms manages certain exposures to interest rate fluctuations
through interest rate swaps and instruments similar to options. Premiums paid
for option-type instruments are capitalized and amortized to interest expense
over the term of the option. Unamortized premiums are included in Deferred
finance costs. Gains and losses related to swaps and options used as hedges are
deferred and recognized in income when the hedged transaction occurs.
Revenue recognition
Cable television charges and telecommunications line rental charges are
billed in advance and recognized when earned. Other telecommunications revenues
are recognized as services are provided. Residential and business installation
revenues are recognized in full upon installation to the extent of direct
selling costs incurred. Revenue from the sale of managed fiber network is
recognized upon completion of that network.
Pre-operating costs
Costs incurred between the time a franchise license is awarded and
connection of the first customer are charged to expense as incurred.
Advertising and promotion costs
Advertising and promotion costs are expensed as incurred, and amounted to
L9.5 million, L7.3 million and L4.6 million for the years ended December 31,
1996, 1995 and 1994, respectively.
Computer software costs
The cost of computer software acquired or developed for internal use is
expensed as incurred. Initial right-to-use fees for switching equipment,
including initial operating system and initial application software costs, are
capitalized and amortized over 5 years. Software updates and maintenance costs
are expensed as incurred.
Income taxes
NYNEX CableComms follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No.
109 requires that deferred tax assets and liabilities be measured based on the
enacted tax rates that will be in effect in the periods in which temporary
differences are expected to reverse.
F-10
74
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
Foreign currencies
Transactions denominated in foreign currencies are translated into pounds
sterling using the rate of exchange in effect on the date of the transaction.
Assets and liabilities denominated in foreign currencies are translated using
the rate of exchange in effect on the balance sheet date. Exchange gains or
losses resulting from transactions in foreign currencies are included in results
of operations.
Minority interest
Minority interest represents the interests of third parties in partnerships
in which NYNEX CableComms has a controlling interest.
Minority interest is the net amount of capital contributed to the
partnerships by the minority partners, adjusted by their share of allocated
losses or profits arising since the inception of the partnerships, as calculated
in accordance with the respective partnership agreement.
Prior to the reorganization of the South financing arrangement on March 31,
1995 (see Note E) and the introduction of the limited partner in the South,
Minority interest included the unamortized balance of deferred transaction costs
including interest rate derivative costs.
Long-lived assets
Effective January 1, 1996, NYNEX CableComms adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of". SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable. Adoption of
SFAS No. 121 did not have a material effect on NYNEX CableComms' results of
operations, cash flows or financial position as NYNEX CableComms' previous
policy was similar, in all material aspects, to SFAS No. 121.
Net loss per ADS
Net loss per ADS is based on the weighted average number of ADSs
outstanding during the period and ADS equivalents outstanding during the period,
computed in accordance with the treasury stock method.
C INCOME TAXES
The components of the income tax benefit (expense) are as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1996
-------- -------- --------
1996 L L $
--------
L
(IN THOUSANDS)
US TAXATION
Federal:
Current tax expense............................. -- (505) -- --
Current -- receipt for US tax losses utilized by
NYNEX........................................ -- 6,600 25,539 --
Deferred -- net................................. -- 12,754 (5,818) --
-------- -------- -------- --------
-- 18,849 19,721 --
State and local, net of federal benefit......... -- 385 1,185 --
UK TAXATION
Current tax expense............................. -- (643) -- --
-------- -------- -------- --------
Total............................................. -- 18,591 20,906 --
======== ======== ======== ========
F-11
75
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
The US and UK tax expense in 1995 represents the tax payable on the
interest earned from investing cash received from the proceeds of the issuance
of shares in June 1995.
A reconciliation between the US federal income tax benefit (expense)
computed at the statutory rate of 35% and the effective tax benefit is as
follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1996
-------- -------- --------
1996 L L $
--------
L
(IN THOUSANDS)
Federal income tax benefit computed at statutory
rate................................................ 7,995 6,660 24,649 13,690
State and local income taxes (net of federal tax
benefit)............................................ -- 385 1,185 --
Valuation allowance................................... (8,245) 8,120 (3,779) (14,118)
Reversal of deferred tax liability.................... -- 12,754 -- --
Adjustment to federal income tax benefit for foreign
non-consolidated members............................ 477 (8,969) (292) 817
Other................................................. (227) 284 (857) (389)
UK current tax expense................................ -- (643) -- --
-------- -------- -------- --------
Total tax benefit..................................... -- 18,591 20,906 --
======== ======== ======== ========
The components of deferred tax assets and liabilities are as follows:
1996 1995
---------------------- ----------------------
LIABILITIES ASSETS LIABILITIES
----------- -------- -----------
ASSETS L L L
--------
L
(IN THOUSANDS)
US deferred tax assets due to:
Pre operating costs................................... 1,340 -- -- --
Depreciation and amortization......................... -- 10,279 -- --
Other................................................. 208 375 -- --
US net operating loss carry forward................... 19,032 -- 1,681 --
-------- ----------- -------- -----------
20,580 10,654 1,681 --
Valuation allowance................................... (9,926) -- (1,681) --
-------- ----------- -------- -----------
10,654 10,654 -- --
-------- ----------- -------- -----------
Net deferred tax liabilities.......................... -- -- -- --
======== ======== ======== ========
At December 31, 1996 there is also a deferred tax asset in relation to UK
operating losses carried forward of L70.5 million (1995: L70.3 million). A full
valuation allowance has been provided against this amount.
At December 31, 1996, the NYNEX UK Holdings consolidated group has US net
operating losses ("NOLs") available for carry forward of approximately L54.0
million (1995: L7.0 million). These NOLs will start to expire on December 31,
2010 because under US tax law, the NOLs have a fifteen year carry forward
period.
Prior to June 14, 1995 NYNEX CableComms' US corporations were included in
the NYNEX consolidated federal income tax return and in New York State and New
York City combined income tax filings. While included in the NYNEX tax filings,
NYNEX CableComms' US corporations were allocated payments in accordance with the
effect their 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 NYNEX CableComms' initial public 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
F-12
76
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
returns. As a result, for tax periods after June 14, 1995, equivalent payments
have not been made to NYNEX CableComms by NYNEX for any further losses generated
and NYNEX UK Holdings and its US subsidiaries have been treated as a
consolidated group of corporations for US tax return purposes. However, neither
NYNEX CableComms UK nor NYNEX CableComms US have been consolidated with NYNEX UK
Holdings, or its subsidiaries for US tax purposes. As a result, NYNEX CableComms
UK and NYNEX CableComms US will file their own US federal tax returns separately
from NYNEX UK Holdings.
D PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net, are as follows:
DECEMBER 31, ESTIMATED
-------------------- USEFUL
1996 1995 LIVES
-------- -------- -----------
L L
(IN THOUSANDS)
Network.................................................. 661,458 464,337 40 years
Cable.................................................... 95,182 74,295 15-20 years
Electronic equipment..................................... 304,415 211,622 5-10 years
Buildings and leasehold improvements..................... 37,694 35,097 25 years
Other.................................................... 50,789 41,559 4-5 years
-------- --------
Total depreciable property, plant and equipment.......... 1,149,538 826,910
Less: accumulated depreciation........................... (115,154) (62,270)
-------- --------
1,034,384 764,640
Land..................................................... 1,262 1,189
Plant under construction and other....................... 62,473 93,195
-------- --------
Total property, plant and equipment, net................. 1,098,119 859,024
======== ========
E FINANCING OF NYNEX CABLECOMMS
Financing arrangements
At December 31, 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 "limited
partners") provide credit facilities to the Operating Companies and invest
capital, through limited partnership interests, in partnerships controlled by
NYNEX CableComms. Deferred finance costs of L23.0 million for the Southern
arrangement and L42.0 million for the North arrangement were incurred in
December 1993 and December 1994, 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
financing arrangement to expand the network into additional franchise areas if
such franchises are acquired prior to December 31, 1998.
The facilities are in the form of revolving loans which require interest
only payments. Interest accrues at a fluctuating rate based on Sterling London
InterBank Offered Rate ("LIBOR") plus a margin, which was 1.2% at December 31,
1996 and 1995 for the North financing arrangement and 1.5% at December 31, 1996
and 1995 for the South financing arrangement. The revolving loans are expected
to convert to term loans on
F-13
77
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
December 31, 1998, for the South financing arrangement and December 31, 1999 for
the North financing arrangement requiring quarterly repayments of principal
thereafter.
NYNEX CableComms has entered into two forward sterling interest rate swaps
with NYNEX to reduce potential exposure to interest rate risk on floating rate
financing arrangements (See Note G).
Limited partnership interests
In addition to providing credit facilities to the Northern and Southern
Operating Companies, the limited partners also have limited partnership
interests in partnerships (the "North Partnership" and the "South Partnership")
controlled by NYNEX CableComms. Under the partnership agreements the limited
partners generally have a 15% interest in all items of income, gain, loss
deduction or credit. Further details of these interests are set out in Note F.
The North and South Partnerships are included in the combined financial
statements. The limited partners are entitled to distributions if declared and
their capital contributions in the North and South Partnerships are reflected in
Minority interest. The revolving loans from the limited partners to the Northern
and Southern Operating Companies are reflected in Long-term debt.
NYNEX financing facility
NYNEX has entered into a further credit facility directly with NYNEX
CableComms to make available up to L200.0 million (the "NYNEX Facility") to be
borrowed at NYNEX CableComms' option at an interest rate of 3 month Sterling
LIBOR plus 4.0%. NYNEX CableComms may make drawings under this facility at any
time before May 31, 1997. Any amounts borrowed under the facility are to be
repaid in full by May 31, 1998. No drawings have yet been made on this facility.
Guarantees from NYNEX
NYNEX provides guarantees to those parties unrelated to NYNEX who are
members of the limited partners (the "Third Parties") on the performance of its
subsidiaries, and completion guarantees for the first five years of the
agreements that require a specified number of homes to be passed. If the
construction program does not meet certain tests (including, but not limited to,
certain financial ratios and franchise license compliance), the completion
guarantee will necessitate payments to be made to the Third Parties by NYNEX.
NYNEX also provides indemnifications to these entities, among others, in respect
of certain liabilities, including all liability, loss or damage incurred as a
result of any breach of the agreements set forth, and tax indemnifications
relating to events prior to the creation of the North and South Partnerships and
the North and South limited partners.
Covenants and securities
The revolving loans are unsecured obligations of the Operating Companies.
However, NYNEX CableComms has pledged its interests in the North and South
Partnerships as collateral for repayment of the North and South revolving loans,
respectively, and significant restrictions exist on the rights of the Operating
Companies to encumber any assets or incur any additional indebtedness. The North
and South Partnerships hold substantially all of the ordinary share capital of
the Operating Companies.
Purchase option
The Companies have certain rights to purchase the equity interests held by
the limited partners. The purchase option provides for the acquisition of these
equity interests at a price equal to fair market value, but in no event less
than the unrecovered investment of the limited partners. Under certain
circumstances,
F-14
78
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
following the occurrence of certain adverse events, the failure to purchase the
limited partner's interest could result in a liquidation of the North and South
Partnerships.
Interest on borrowings
Interest on borrowings to finance network construction is capitalized to
the extent that it is incurred during the construction period. Interest costs
amounted to L29.2 million, L18.8 million and L0.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively, of which L6.0 million, L2.8
million and L0.2 million was capitalized, respectively.
F MINORITY INTEREST
Minority interest reflects the limited partners' interest in the North and
South Partnerships (see Note E).
The limited partners have contributed L211.7 million as of December 31,
1996 and 1995. The Minority interest in the North Partnership and South
Partnership was L18.8 million and L57.8 million at December 31, 1996,
respectively, and L76.2 million and L55.9 million at December 31, 1995,
respectively.
Under the agreements, NYNEX CableComms generally has an 85% interest, and
the limited partners generally have a 15% interest, in 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. The North and South Partnerships
generally have an 85% interest in the North and South Operating Companies,
respectively.
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. Initial
losses for the North Partnership have not yet reached L200.0 million.
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.
G FINANCIAL INSTRUMENTS
Interest rate derivatives
NYNEX CableComms has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks.
Off-balance-sheet risk and concentrations of credit risk
NYNEX CableComms has entered into two forward sterling interest rate swaps
with NYNEX to reduce potential exposure to interest rate risks inherent in the
North and South financing arrangements. Under the interest rate swaps, NYNEX
CableComms agreed to exchange with NYNEX, on a quarterly basis, the difference
between fixed-rate (9.15% for the North and 7.02% for the South) and
floatingrate 3 month Sterling LIBOR interest amounts calculated by reference to
an agreed notional principal amount. The notional principal amounts of the swaps
are L700.0 million and L273.7 million for swaps entered into on December 31,
1994 and December 31, 1993, respectively. The net effect of the interest rate
swaps is to fix the
F-15
79
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
net cash outflow of NYNEX CableComms with respect to 3 month Sterling LIBOR to
9.15% and 7.02% of the appropriate financing arrangement. In order to correspond
to the underlying financing arrangements for the North and the South, the
effective date of the swaps is the first payment date after January 1, 2000 for
the North and January 1, 1999 for the South. The swaps expire by December 31,
2004 and 2003, respectively.
In addition, NYNEX CableComms has entered into two agreements with NYNEX to
reduce the notional amount of the interest rate swaps at NYNEX CableComms'
option. The notional amount may be reduced at any time, and periodically in
whole or in part, without any penalty or additional payments. The effective
dates and expiration dates of these options are the same as the swap
transactions. NYNEX CableComms paid premiums of L18.3 million and L7.0 million,
in respect of the North and South financing arrangements, respectively, which
are being amortized over the life of the options.
Both the interest rate swaps and the options are marked to market with
gains and losses deferred until the effective date, at which time deferred gains
or losses will be amortized over the remaining term. Gains deferred in respect
of these two instruments were L2.4 million and L2.9 million at December 31,
1996, and 1995 respectively, and losses deferred were L8.8 million and L5.9
million at December 31, 1996 and 1995 respectively.
These transactions primarily involve risk associated with changes in
interest rates, which is mitigated by payment of a fixed rate to the
counterparty, NYNEX. Since this is a related party transaction, the management
of NYNEX CableComms believes that any risk associated with counterparty
non-performance is remote. The remaining risk is limited to situations where the
floating rates become lower than the fixed rates. The settlement of these
transactions is not expected to have a material adverse effect upon NYNEX
CableComms' financial position or results of operations.
Fair value of financial instruments
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
Long-term debt. The carrying value of outstanding revolving loans is based
on the net book value and approximates fair value at December 31, 1996 and 1995.
Due to the revolving nature of these loans, along with the variable rate of
interest charged, NYNEX CableComms will repay and reborrow any loans that
diverge from fair value.
Interest rate derivatives. The estimated fair value is based on amounts
NYNEX CableComms would pay or receive to enter into similar instruments, taking
into account current market rates. The estimated fair value of derivatives was
L13.2 million and L19.0 million at December 31, 1996 and 1995, respectively.
H EMPLOYEE BENEFITS
NYNEX CableComms has established a defined contribution pension plan to
which it contributes up to specified percentages of annual compensation for
employees who are members of the plan. Participating employees contribute a
percentage of their annual compensation based on their age and length of
service. Company contributions are based on employee contributions and service
completed in the plan. Employee contributions are fully vested. Employer
contributions become vested after two years of qualifying service in the plan.
Substantially all employees are eligible to participate in the plan.
Administration and investment charges involved in running the plan are paid by
NYNEX CableComms. NYNEX CableComms' contributions and expenses in maintaining
the plan were L362,000, L313,000 and L272,000 for the year ended December 31,
1996, 1995 and 1994, respectively.
NYNEX CableComms does not sponsor a defined benefit pension plan nor does
it provide any significant postemployment or postretirement benefits.
F-16
80
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
I STOCK OPTION PLANS
The Companies operate two stock option plans, details of which are set out
below:
Employee Share Option Plan
The Employee Share Option Plan ("ESOP") was adopted in connection with the
Combined Offering to provide share options to employees and executive officers
of NYNEX CableComms. Employees and executive officers are eligible to
participate if they are contracted to work at least 20 hours a week (in the case
of employees) or 25 hours a week (in the case of Directors) and are not expected
to retire within two years of the date on which options are granted.
Options are granted in Units. The option price for each Unit so far granted
is 137p (the listing price on June 14, 1995). The price of any further options
granted will be the average of the middle market quotations as derived from the
Official List of the London Stock Exchange during the three trading days
immediately preceding the date on which options are granted. No option may be
granted to a participant which would, at the date of grant, cause the total of
the aggregate market value of Units comprised in such option to exceed the
greater of four times the amount of the participant's annual remuneration or
L100,000. From April 29, 1996, the aggregate market value of NYNEX CableComms
Units which can be granted under options to a participant is governed by the
limit introduced by the Finance Act 1996. The number of options which can be
granted is currently limited to 23.1 million. Options granted under the plan are
not transferable and generally may only be exercised within three to ten years
after the date of grant, after which it will lapse. The exercise of an option
will be subject to objective performance related conditions as have and may be
determined by the Remuneration Committee which administers the ESOP. Options
granted were 11,644,893 at each of December 31, 1996 and 1995, and options
outstanding were 8,670,440 and 10,791,089 at December 31, 1996 and 1995,
respectively, with the balance having been forfeited.
SAYE Plan
The NYNEX CableComms Savings-Related Share Option Plan (the "SAYE Plan")
was also adopted in connection with the Combined Offering. An eligible employee
who wishes to participate in the SAYE Plan must take out a Save-As-You-Earn
("SAYE") contract with a building society to save a regular sum of between L10
and L250 each month for five years. At the end of the SAYE contract (which can
be a term of five or seven years), the participant is entitled to a bonus
payable by the building society and may use the amount saved and the bonus to
purchase shares at the option price. An option granted under the SAYE plan is
not transferable and generally may only be exercised within the period of six
months commencing at the end of the SAYE contract.
Options are granted in Units. The option price per Unit granted in 1995,
which may not be less than 80% of the market value of such Units, is 111p, being
80% of the price of Units on the date of the Combined Offering. The option price
per Unit granted in 1996 is 85.5p. This option price, as with the price of any
further options granted, may not be less than 80% of the average of the middle
market quotations as derived from the Official List of the London Stock Exchange
during the three days immediately preceding the date invitations to apply for
options are issued. Options granted were 6,195,282 and 2,908,333 at December 31,
1996 and 1995, respectively, and options outstanding were 4,783,631 and
2,834,487 at December 31, 1996 and 1995, respectively, with the balance having
been forfeited.
Accounting for stock based compensation
NYNEX CableComms has adopted the disclosure only provisions of SFAS No. 123
- - -- "Accounting for Stock Based Compensation", as of December 31, 1996. If NYNEX
CableComms had elected to recognize compensation costs for the ESOP and SAYE
plan based on the fair value at the grant dates for awards under the plans,
consistent with the methods prescribed by SFAS No. 123, net loss and loss per
ADS would not have
F-17
81
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
been materially affected, as a significant portion of the additional expense
would be allocated to the Minority interest. The effects of applying the
Statement for this period may not be representative of the effects on reported
net loss and net loss per ADS in future years.
J LEASES
NYNEX CableComms leases certain properties and equipment used in its
operations.
a) Capital leases
The following is an analysis of the leased property under capital leases by
major classes:
ASSET BALANCES AT
DECEMBER 31,
-------------------
CLASS OF PROPERTY 1995
- - ----------------------------------------------------------------------- -------
1996 L
-------
L
(IN THOUSANDS)
Computer related assets................................................ 8,350 1,813
Less: accumulated depreciation......................................... (494) (171)
----- -----
Total computer related assets, net..................................... 7,856 1,642
===== =====
At December 31, 1996, the future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments, for
the periods shown are as follows:
CAPITAL
--------------
L
(IN THOUSANDS)
Year ending
1997........................................................................... 3,064
1998........................................................................... 3,025
1999........................................................................... 1,934
2000........................................................................... --
2001........................................................................... --
Thereafter..................................................................... --
-----
Net minimum lease payments..................................................... 8,023
Less amount representing interest.............................................. (671)
-----
Present value of net minimum lease payments.................................... 7,352
=====
b) Operating leases
The rental costs arising from operating leases are expensed in the year
they are incurred. Rental expense was L5.6 million, L4.8 million, and L3.3
million for the year ended December 31, 1996, 1995 and 1994, respectively.
F-18
82
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
At December 31, 1996, the minimum lease commitments under noncancelable
leases with terms of up to 25 years for the periods shown are as follows:
OPERATING
--------------
L
(IN THOUSANDS)
1997........................................................................... 9,800
1998........................................................................... 11,495
1999........................................................................... 10,658
2000........................................................................... 9,179
2001........................................................................... 3,050
Thereafter 28,456
------
Present value of net minimum lease payments 72,638
======
Expiring leases are expected to be renewed or replaced by other leases in
the normal course of business.
K RELATED PARTY TRANSACTIONS
Transactions with Affiliates
NYNEX CableComms has entered into a trademark licence agreement dated May
15, 1995 between NYNEX and NYNEX CableComms and NYNEX CableComms Limited, under
which NYNEX CableComms and NYNEX CableComms Limited are required to pay L4.0
million per annum for five years for use of the "NYNEX" name, and services and
secondment agreements dated May 15, 1995 pursuant to which NYNEX and its
subsidiaries provide certain services and secondees at an arm's length cost to
NYNEX CableComms. The agreements cover both the scope and cost of such services.
NYNEX makes certain payments on behalf of NYNEX CableComms, including
purchases of equipment and payments of certain expenses. These payments amounted
to L6.6 million, L5.3 million, and L29.2 million in 1996, 1995 and 1994,
respectively.
Under an agreement dated May 15, 1995 between NYNEX and NYNEX UK CableComms
Holdings Inc. (as amended by a Supplemental Facility Agreement dated March,
1996), NYNEX has also made available to NYNEX CableComms a credit facility of
L200.0 million from 1 June 1996.
Prior to June 14, 1995, NYNEX CableComms received and was charged for
certain corporate governance and ownership services provided by NYNEX and
certain of its subsidiaries. These services included technical expertise and
system development work in the areas of network planning, design and operations,
evaluation of new technologies and architectures for the franchises, accounting
and tax support, technical support, data processing and related services,
material management services, human resources and planning and payroll
administration for individuals who have been seconded to NYNEX CableComms. The
costs of these services were allocated to NYNEX CableComms through intercompany
billings. The management of NYNEX CableComms believes that the allocation
methodologies, as described below, provided a reasonable basis for allocating
costs to NYNEX CableComms, which totaled L2.6 million and L4.3 million for 1995
and 1994, respectively.
In respect of charges prior to June 14, 1995, NYNEX and its subsidiaries
regularly conducted studies to identify on whose behalf functions were being
performed. Directly charged costs which applied exclusively to one subsidiary
were charged only to that subsidiary. Directly attributable costs which applied
to more than one subsidiary were allocated based on usage, specific work plans,
and relative size (composite of employees and assets) of the applicable
subsidiaries. Indirectly attributable and unattributable costs for services
performed on behalf of all subsidiaries were allocated based on the relative
size of the subsidiaries.
F-19
83
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
For additional discussion of related party transactions, see Notes E, F and
G.
L SUPPLEMENTAL CASH FLOW INFORMATION
The following information is provided in accordance with SFAS No. 95,
"Statement of Cash Flows":
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1996
------- ------- ------- -------
L L L $
(IN THOUSANDS)
Interest payments................................. 22,756 15,258 101 38,965
------- ------- ------- -------
Property, plant and equipment acquired by
incurring directly related liabilities.......... 67,577 63,953 51,183 115,712
------- ------- ------- -------
Issuance of ordinary shares and common stock in
relation to deferred compensation............... 665 -- -- 1,139
------- ------- ------- -------
Accrued transaction and finance costs............. -- -- 2,903 --
------- ------- ------- -------
M ADDITIONAL FINANCIAL INFORMATION
Receivables, net, consists of the following:
DECEMBER 31,
-------------------------------
1995 1996
------- -------
1996 L $
-------
L
(IN THOUSANDS)
Accounts receivable......................................... 20,882 10,612 35,756
Value Added Tax receivable.................................. 5,798 12,153 9,928
Amounts due from parent and its subsidiaries................ 8,702 6,808 14,901
Data processing costs repayment............................. 10,000 10,000 17,123
Contractor damages.......................................... 1,087 1,375 1,861
Other....................................................... 6,572 2,603 11,253
------- ------- -------
Total....................................................... 53,041 43,551 90,822
======= ======= =======
Other current liabilities consists of the following:
DECEMBER 31,
-------------------------------
1995 1996
------- -------
1996 L $
-------
L
(IN THOUSANDS)
Amounts owed to parent and its subsidiaries................. 10,160 -- 17,397
Accrued programming costs................................... 5,806 4,920 9,942
Deferred income............................................. 6,783 4,624 11,614
Other....................................................... 28,966 37,290 49,598
------- ------- -------
Total....................................................... 51,715 46,834 88,551
======= ======= =======
N LITIGATION AND OTHER CONTINGENCIES
Various legal actions and proceedings are pending that may affect NYNEX
CableComms. While counsel for NYNEX CableComms 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 for NYNEX CableComms, the
F-20
84
NOTES TO COMBINED FINANCIAL STATEMENTS OF NYNEX CABLECOMMS GROUP PLC
AND NYNEX CABLECOMMS GROUP INC. AND SUBSIDIARIES -- (CONTINUED)
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.
O QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE QUARTERS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
L L L L
(IN THOUSANDS, EXCEPT PER ADS AND MARKET PRICE
AMOUNTS)
1996
Operating revenues............................. 32,521 35,529 40,818 42,373
Operating loss................................. (19,220) (15,566) (12,085) (13,178)
Net loss....................................... (9,353) (4,133) (5,199) (4,160)
Net loss per ADS............................... (0.101) (0.045) (0.056) (0.045)
Market price:sec.
High......................................... $ 17 $ 19 1/4 $17 1/8 $ 19 5/8
Low.......................................... $ 13 $ 15 7/8 $13 1/4 $ 13 7/8
1995
Operating revenues............................. 16,904 18,364 21,807 27,944
Operating loss................................. (22,081) (25,324) (21,443) (11,030)
Net (loss) profit.............................. (3,618) 3,065 2,252 (2,138)
Net (loss) profit per ADS...................... (0.04) 0.03 0.02 (0.02)
Market price:sec.
High......................................... -- $ 22 $ 23 $ 22 5/8
Low.......................................... -- $ 19 1/4 $ 18 $ 17 3/8
- - ---------------
sec. Market prices are those published by the Nasdaq National Market and are
based on the middle market quotations derived from Datastream
International.
F-21
85
EXHIBIT INDEX
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- - ----------- ----------- ------
10.11(a) Letter Agreement on Interconnect Charges dated July 19,
1996 between BT and NYNEX CableComms Bolton. (Identical
agreements have been entered into between BT and
fifteen other affiliates of the Registrants).
10.11(b) Letter Agreement on Interconnect Charges dated July 19,
1996 between BT and NYNEX CableComms Bolton. (Identical
agreements have been entered into between BT and fifteen
other affiliates of the Registrants).
10.11(c) Letter Agreement on Review of certain aspects of the
Interconnect Agreement dated July 19, 1996 between BT
and NYNEX CableComms Bolton. (Identical agreements have
been entered into between BT and fifteen other affiliates
of the Registrants).
10.11(d) Letter Agreement on Interconnect Charges dated July 19,
1996 between BT and NYNEX CableComms Bolton. (Identical
agreements have been entered into between BT and fifteen
other affiliates of the Registrants).
10.11(f) Letter Agreement on conveyancing termination rate dated
June 13, 1996, between BT and NYNEX CableComms Bolton.
(Identical agreements have been entered into between
BT and fifteen other affiliates of the Registrants).
10.11(g) Letter Agreement on Interconnect Charges dated December
19, 1996, between BT, the Operating Companies and
NYNEX CableComms Limited.
10.12 Interconnection Agreement, dated November 11, 1996,
between Mercury Communications Limited and NYNEX
CableComms Limited.
10.12(a) Agreement settling payment for backdated claims relating to
Interconnect Charges ("Interconnect") dated November 11, 1996,
between Mercury Communications Limited and NYNEX CableComms
Limited.
10.12(b) Agreement dated November 11, 1996 between Mercury Communications
Limited and NYNEX CableComms Limited regarding mobile charges.
10.12(c) Amendment to Interconnection Agreement, dated February 11, 1997
between Mercury Communications Limited and NYNEX CableComms
Limited.
10.17(b) Agreement, dated October 1, 1996, between NYNEX CableComms
Limited, John F. Killian, NYNEX CableComms Group PLC and NYNEX
CableComms Group Inc. amending the terms of the Service
Agreement between the same parties.
10.20(b) Second Amendment to Secondment Agreement, dated October 1,
1996, between NYNEX CableComms Limited and NYNEX Worldwide
Services Group, Inc. with respect to John F. Killian.*
10.22(a) Amendment to Letter of Appointment, dated July 11, 1996, among
John L. Rennocks, NYNEX CableComms Group PLC and NYNEX
CableComms Group Inc.
10.37(a) Supplemental Facility Agreement amending the Facility
Agreement dated March , 1996, between NYNEX UK
CableComms Holdings, Inc. and NYNEX Corporation.
10.39(b) Second Amendment to Assignment Letter, dated October 1,
1996, among NYNEX Corporation, NYNEX Worldwide Services
Group, Inc. and John F. Killian.*
10.44(a) Letter Agreement amending Programming dated [July/August]
, 1995 between British Sky Broadcasting Limited,
British Sky Broadcasting Group PLC, NYNEX CableComms
Limited and the Operating Companies.
10.45 Letter of Appointment, dated July 11, 1996, among Sir Bryan
Carsberg, NYNEX CableComms Group PLC and NYNEX CableComms Group
Inc.
10.46 Letter of Appointment, dated July 11, 1996, among Mel Meskin,
NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.
10.47 Letter of Termination, dated April 16, 1996, among Jeff Henry,
NYNEX CableComms Group PLC and NYNEX CableComms Group Inc.
10.48 Loyalty Bonus and Severance Terms Letter, dated December 13,
1996, among Carl Grose, NYNEX CableComms Group PLC and NYNEX
CableComms Group Inc.
10.49 Form of Loyalty Bonus and Severance Terms Letter, dated December
13, 1996, among the named Executive director, NYNEX CableComms
Group PLC and NYNEX CableComms Group Inc. (Substantially
identical agreements have been entered into for Colin I.
Chadwick, John Doherty, Edward L. Hatch, John J. McHale, Paul H.
Repp, Graham L. Robertson, Allen J.M. Saunders, Michael T.
Schieck, Michael W. Stevenson and Patrick Welsh III).
10.50 Loyalty and Severance Terms Letter, dated December 13, 1996,
among Nicholas P. Mearing-Smith, NYNEX CableComms Group PLC and
NYNEX CableComms Group Inc.
24 Power of Attorney.
27 Financial Data Schedule.