Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended December 31, 1998 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from ___________ to ___________
Commission file number: 33-83740
DIAMOND CABLE COMMUNICATIONS PLC
(Exact name of registrant as specified in the charter)
ENGLAND NONE
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
DIAMOND PLAZA, DALESIDE ROAD,
NOTTINGHAM NG2 3GG, ENGLAND NONE
(Address of Principal Executive Offices) (Zip Code)
011-44-115-912-2242
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act: None
NONE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__X__ No_____
Indicate by check mark 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
INTRODUCTION
Diamond Cable Communications Plc (the "Company") is a public limited
company (with registered number 2965241) incorporated under the laws of England
and Wales. The Company is a holding company which holds all of the shares of the
group of companies operating in the telecommunications and cable television
sector through an intermediate holding company, Diamond Holdings plc ("Diamond
Holdings"). In this Annual Report, except as the context may otherwise require,
references to the Company refer to the Company and/or its predecessor,
references to the "Group" or "Diamond" refer to the Company and its
subsidiaries.
The Group operates a telecommunications and cable television business
focused on the East Midlands area of England. The Group is currently
constructing a broadband fiber-optic network to serve the approximately 1.2
million homes and an estimated 60,600 businesses within its contiguous franchise
areas. As of December 31, 1998, the Group's cable television and
telecommunications network had passed by civils construction approximately
699,700 homes and an estimated 30,100 businesses, of which portions of the
network passing approximately 677,400 homes and an estimated 30,100 businesses
had been activated. As of that date, the Group also had approximately 232,100
residential telephone lines, 117,300 cable television customers and 37,500
business telephone lines. Through that date, (pound)567 million had been
invested (at original cost) in the construction of the network and related
systems. For certain operating data as of December 31, 1998, see Item 1.
"Business -- Certain Operating Data".
On June 16, 1998, the Company announced that all of the holders of its
outstanding ordinary shares of 2.5p each and deferred shares of 25p each had
agreed to exchange all outstanding shares in the Company for newly issued shares
of common stock of NTL Incorporated ("NTL"), an alternative telecommunications
company in the UK, the common stock of which is quoted on NASDAQ (NTLi). On
March 8, 1999, the share exchange (the "Share Exchange") contemplated by the
Share Exchange Agreement, dated as of June 16, 1998, as amended (the "Share
Exchange Agreement"), among NTL and the shareholders of the Company, was
consummated. Pursuant to the Share Exchange Agreement, on March 8, 1999, all of
the issued and outstanding ordinary shares, par value 2.5p per share (the
"Ordinary Shares") of the Company and all of the issued and outstanding deferred
shares, par value 25p per share (the "Deferred Shares," and together with the
Ordinary Shares, the "Company Shares") of the Company were exchanged for shares
of NTL's common stock, par value $.01 per share (the "NTL Common Stock"). As a
result of the Share Exchange, the Company became a wholly-owned subsidiary of
NTL.
In connection with provisions in each of the indentures pursuant to
which the Group's debt securities were issued, which require that offers to
repurchase such debt securities be made to holders of such securities at a price
of 101% of their accreted value or principal amount following a "change of
control", the Company will commence offers to repurchase its outstanding debt
securities. It is expected that these offers will be launched on or about April
1, 1999 and will expire on or about April 30, 1999.
This Annual Report contains certain forward-looking statements,
identified as such, with respect to which the Company is seeking to utilize the
safe harbor provided by the Private Securities Litigation Reform Act of 1995.
These statements are accompanied by, and should be read in conjunction with, an
explanation of important factors that could cause actual results to differ
materially from those in the forward-looking statements. Among other statements,
statements regarding the Group's operational and financial goals and objectives,
expectations regarding the construction of the Group's network and the marketing
and acceptance of its services, including those under Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" are forward looking in nature. Similarly, among
other statements, statements regarding the effects of changes in the competitive
environment and government regulation, including those under Item 1. "Business
- -- Competition" and "Business -- Milestones" and statements regarding the
expected technological and managerial strains of continued growth, service
enhancement and year 2000 information processing issues, including those under
Item 1. "Business -- Competition" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Information Systems
- -- Year 2000", are forward looking in nature.
-2-
By their nature, forward-looking statements and forecasts involve risk and
uncertainty because they relate to events and depend on circumstances that will
occur in the future. There are a number of factors that could cause actual
results and developments to differ materially from those expressed or implied by
these forward-looking statements and forecasts. These factors include, among
other things, changes in demand for the products and services of the Group,
changes in the cost and availability of supplies to the Group, the rate and cost
of the build out of the Group's network, technological changes, the impact of
competition and changes in economic conditions in England, and changes in the
Group's strategy in connection with the Share Exchange.
The Company operates only in the United Kingdom and, accordingly,
publishes its financial statements in pounds sterling. References herein to,
"(pound)", "pounds sterling", "pence" or "p" are to the lawful currency of the
United Kingdom and references to "U.S. dollars", "dollars", "$" or "(cent)" are
to the lawful currency of the United States. Merely for convenience, this Annual
Report contains translations of certain pound sterling amounts into U.S. dollars
at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such U.S.
dollar amounts or could have been or could be converted into U.S. dollars at the
rate indicated or at any other rate. Unless otherwise indicated, the
translations of pound sterling amounts into U.S. dollars have been made at
$1.6628 per (pound)1.00, the noon buying rate in The City of New York for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 1998. See Item
6. "Selected Financial Data -- Exchange Rates" for information regarding the
Noon Buying Rate for the past five fiscal years. On March 29, 1999 the Noon
Buying Rate was $1.6140 per (pound)1.00.
-3-
PART I
ITEM 1. BUSINESS
The Group offers three basic services over its network infrastructure:
(i) residential telephone services allowing customers to place and receive
local, national and international calls and to use additional services such as
three-way conference calling, voicemail, call waiting, call forward, call
barring and Internet access, (ii) business telecommunications services which
include services similar to those provided to residential customers as well as
advanced telecommunications services such as Centrex (which provides businesses,
including those with multiple sites, with virtual PABX and network services),
direct dialing inward (DDI), high speed data services and private circuits, and
(iii) cable television services offering 50 channels including movies, sports,
news and information, music, children's programming and general entertainment.
See "-- Business Telecommunications and Residential Telephone" and "-- Cable
Television".
CERTAIN OPERATING DATA
The following table sets forth certain data concerning the Group's
franchises at and for the years ended December 31, 1996, 1997 and 1998.
December 31,
--------------------------------------------------
1996 1997 1998
---- ---- ----
Homes passed by civils construction(1)........... 453,496 536,110 699,682
Homes activated(2)............................... 347,246 508,801 677,407
Homes marketed(3)................................ 252,601 405,787 584,457
Student service rooms marketed (4)............... - 1,805 9,908
BUSINESS TELECOMMUNICATIONS
Business customers accounts...................... 3,935 5,723 7,649
Business lines connected......................... 18,932 27,124 37,473
Private circuits(5).............................. 226 258 331
Average lines per business account(6)............ 4.8 4.7 4.9
Average monthly revenue per line(7)(8)........... (pound)50.17 (pound)46.26 (pound)43.07
Pro-forma average monthly revenue
per line(8).................................... (pound)51.32 (pound)46.26 (pound)43.26
RESIDENTIAL TELEPHONE(4)
Residential lines connected...................... 104,460 157,171 232,059
Penetration rate of homes marketed(9)............ 41.4% 38.6% 39.0%
Average monthly revenue per
line(8)(10).................................... (pound)18.40 (pound)18.75 (pound)18.82
Pro-forma average monthly revenue
per line(8).................................... (pound)18.66 (pound)18.75 (pound)18.89
Churn(11)(12).................................... 20.6% 16.3% 13.5%
CABLE TELEVISION
Basic service subscribers........................ 59,242 83,793 117,290
Penetration rate of homes marketed(13)........... 23.5% 20.6% 20.1%
Average monthly revenue per
subscriber(14)................................. (pound)18.03 (pound)19.84 (pound)19.46
Churn(11)(12).................................... 40.9% 32.7% 22.4%
-4-
- -------------------
(1) Homes passed by civils construction is the number of homes (excluding
student services rooms) that have had ducting buried outside.
(2) Homes activated is the number of homes (excluding student services
rooms) that are capable of receiving cable service without further
extension of transmission lines, apart from the final connection to the
home.
(3) Homes marketed is the number of homes activated (excluding student
services rooms) for which the initial marketing phase (including
door-to-door direct marketing) has been completed.
(4) During 1997 the Group began to provide telephone services and internet
access to students at a number of large educational establishments in
its franchise area. Academic terms make this business seasonal in
nature. In order to fairly present the results, the Company has adopted
the following policy: (i) rental revenue is recognized evenly over a
full twelve month period (or the balance of the period to the start of
the next academic year if shorter), (ii) call revenue is recognized in
the month in which it is earned and is incorporated in residential
telephone average monthly revenue per line, (iii) a student services
line is recognized as the equivalent of 3/4 of a residential line, (iv)
each student room at which service is available is treated as a home
marketed and incorporated in the calculation of residential telephone
penetration and, (v) any net decrease in the number of students taking
the service between one academic year and another is ignored for the
purposes of calculating residential telephone churn.
(5) Private circuits are point-to-point customer specific connections for
which a fixed annual rental charge is made.
(6) Average lines per business account is calculated by dividing the number
of business lines connected on the given date by the number of business
customer accounts on such date.
(7) The average monthly business telecommunications revenue per line is
calculated by dividing (i) business telecommunications line and
equipment rental, outgoing call charges and incoming call charges
(including revenue from private circuits) for the period by (ii) the
average number of business telecommunications lines and private circuits
(calculated as a simple average of the number of subscribed lines and
private circuits at the end of each month during the period) and
dividing that amount by twelve.
(8) The calculation of the average monthly revenue per line (for both
residential telephone and business telecommunication revenues) for the
year to December 31, 1996 reflects the reduction in revenues stemming
from rebates to BT on incoming termination revenues relating in part to
1995 but recorded in full against revenues in 1996. The rebates were
calculated in accordance with revised interconnect agreements with BT
that were made effective retroactively from April 1995. The pro-forma
average monthly revenue per line (for both residential telephone and
business telecommunications revenues) gives effect to the revised
interconnect agreements as if they had been in effect from April 1995
and allocates to each period the portion of the rebates that relates to
such period.
(9) Penetration rate of homes marketed is calculated by dividing the number
of residential lines, including student services lines recognized at the
equivalent of 3/4 of a residential line, connected on the given date by
the total number of homes marketed and student services rooms marketed
as of such date, expressed as a percentage.
(10) The average monthly revenue per residential telephone line is calculated
by dividing (i) line and equipment rental, outgoing call charges and
incoming call charges for the period by (ii) the average number of
residential telephone lines (calculated as a simple average of the
number of subscribed lines at the end of each month during the period)
and dividing that amount by twelve. Call revenue from student services
lines is recognized in the month in which it is earned and is
incorporated in
-5-
residential telephone average monthly revenue per line, with each
student services line recognized as the equivalent of 3/4 of a
residential line.
(11) Churn is calculated by dividing net disconnections (total disconnections
less the number of disconnected accounts for which service is later
restored) in a period by the average number of subscribers in the period
(calculated as a simple average of the number of subscribers at the end
of each month during the period). The calculation of churn excludes
student services lines.
(12) Since the beginning of 1997, the Group's reported churn has excluded
from net disconnected accounts subscribers who disconnect from the
service when moving residence and reconnect to the service in their new
residence. Previously, these subscribers were not identified under the
Group's information system and were therefore reported in the churn
calculation as disconnected accounts. If churn for the years ended
December 31, 1997 and 1998 were calculated on the basis used in periods
prior to 1997, annualized churn would have been 21.3% and 36.9% for
residential telephone and cable television, respectively, in 1997 and
19.6% and 27.6%, respectively, in 1998. The difference between churn on
the new and prior bases is not necessarily indicative of the adjustment
that would arise if churn for prior periods were restated.
(13) Penetration rate of homes marketed is calculated by dividing the number
of homes receiving basic cable television on the given date by the total
number of homes marketed as of such date, expressed as a percentage.
(14) The average monthly revenue per cable television subscriber is
calculated by dividing total cable television subscriber revenues
(excluding installation revenues) for the period by the average number
of cable television subscribers (calculated as a simple average of the
number of basic service subscribers at the end of each month during the
period) and dividing that amount by twelve.
BUSINESS TELECOMMUNICATIONS AND RESIDENTIAL TELEPHONE
OVERVIEW
The Group derives its business telecommunications and residential
telephone revenues from connection charges, monthly line rental charges, call
charges, special residential service charges, special business service charges
(e.g., private business circuits) and interconnection fees payable to the Group.
In the U.K., the historical practice has been that all calls, local or national,
are charged by time and distance.
Switching its own traffic enables the Group to offer a wider range of
services than would otherwise be possible, to monitor usage and manage doubtful
accounts, to gather information about customer calling patterns and use this
information in its marketing programs, and to structure rates and discount
programs accordingly. As part of the Group's strategy of increasing the volume
of calls switched locally and minimizing interconnect charges payable to BT, CWC
and other telecommunications providers, the Group has from time to time
discussed with other cable operators the development of inter-franchise
telephone networks. In addition, the Group intends to interconnect its network
with NTL's network. However, no assurance can be given as to whether or when any
such inter-franchise networks will be developed.
BUSINESS TELECOMMUNICATIONS
The Group has achieved its share of the business telecommunications
market in the areas which its network has passed by providing high-quality
services at competitive prices. The Group had 7,649 business telecommunications
customer accounts at December 31, 1998, including connections to a number of
important corporate and governmental entities such as The Boots Company, Capital
One, Prudential Banking plc (trading as Egg), Imperial Tobacco, Experian, the
Nottinghamshire County Council, the Nottingham City Council, Leicestershire
County Council, Leicester City Council, Ashfield District Council, North East
Lincolnshire District Council, Lincoln County Council, the Nottinghamshire
Constabulary, the Leicestershire Constabulary and the Lincolnshire Constabulary,
the U.K. Inland Revenue national headquarters and their main sites in Leicester,
Nottingham, Lincoln and Mansfield, the Nottingham Health Care N.H.S. Trust, the
-6-
Nottingham City Hospital N.H.S. Trust, Grantham Hospital, Lincoln Hospital
N.H.S. Trust, the University of Nottingham, Nottingham Trent University,
Leicester University, Lincoln University, BBC Radio Nottingham, Radio Trent, the
Nottingham Building Society, Vision Express Group, Knoll Pharmaceuticals,
Pedigree Pet Foods, the Northcliff Newspaper Group (four regional newspapers
including Nottingham's Evening Post and the Leicester Mercury) and the Mansfield
Chad Newspaper.
The focus of the business marketing effort in the Group's franchise
areas has been to attract large and medium-sized corporate and governmental
customers, which generate high volumes of traffic and revenue. At December 31,
1998, the Group provided 37,473 business lines to its 7,649 business accounts
giving the Group an average of approximately 4.9 lines per business account. In
many cases these customers have transferred all or a portion of their telephone
lines to the Group's service from those of the Group's principal competitors. A
number of these customers have been specifically targeted, and in some cases the
network has been built out to pass these customers. The Group plans to continue
this strategy of focusing a portion of the Group's network build and marketing
effort on town centers and industrial estates in its other franchise areas in
order to capitalize on business telecommunications opportunities. The Group
believes that its success in attracting these important customers has fostered a
positive image in the community and enhanced the Group's credibility with other
business customers.
The Group currently offers a range of special business services,
including:
o Custom Calling Features. The Group offers business customers three-way
conference calling and fully itemized and analyzed monthly billing at no
extra fee. At an extra charge, the Group provides services similar to
those offered to residential customers including call waiting, call
barring, call forward and alarm calls. Additionally, billing data on high
density 3.5" floppy disks and CD ROM is made available to customers.
o Centrex. Centrex allows the customer to use the facilities of the Group's
central exchange instead of purchasing its own telephone systems, and
allows the customer to link geographically separated sites within the
Group's network with common numbering, features and facilities. Centrex
offers significant advantages over networking private telephone systems
including reduced call charges and can include data calls using ISDN
instead of point-to-point data circuits.
o DDI (Direct Dialing Inward). Direct Dialing Inward offers multiple unique
numbers at a customer's premises via a smaller number of access lines.
o Private Circuits. Private (leased) circuits permit the customer to rent a
circuit between two points, for example between two office buildings, at
fixed rates. This permits the rapid exchange of data between customer
owned computers or exchanges without passing through the public network.
The customer can choose from among different circuit capacities, such as
multiples of 64 KBit/s for low speed applications, and 2, 8, 34, 50, 100
and 155 Mbit/s speeds for other computer, moving image, multiplexed voice
and other high capacity data applications such as main frame computer
lines, video conferencing and wide area networks (WANs) between local
offices.
o Digital Services. The Group offers digital connection to the public
network using DASS2 (Digital Access Signaling System) and Q931 (European
specification). The Group offers Primary Rate ISDN (30 x 64 Kbit/s
channels) for voice and data, or Basic Rate ISDN offering 2 channels of 64
Kbit/s and a 16 Kbit/s overhead which the Group is planning to use for "D"
channel services (i.e. telemetry, alarm circuits etc). The network allows
transparency for DPNSS (Digital Private Network Signaling System) where
customers are linking privately owned telephony systems over the public
network.
o Caller ID. Caller identification allows the customer to identify the
origin of the inbound call, which is essential for the successful
operation of computer telephony integration.
o Calling Cards. The Group currently offers pre-paid disposable calling
cards, which enable cardholders to make calls from any telephone and debit
the cost of the call from the credit available on their calling card. The
Group offers this service to hospital staff and patients as a co-branded
service with the Queen's Medical Centre in Nottingham and to students at
the University of Nottingham, Leicester
-7-
University and the University of Lincolnshire and Humberside, where the
Group has installed private telephones in 8,162 student rooms.
o Voicemail Services. The Group offers both residential voicemail and
business voicemail services.
o Internet Service. The Group offers four alternative forms of connection
(analog dial-up, 64 Kbit/s ISDN, 64 Kbit/s or 2 Mbit/s fixed and frame
relay) to its Internet service, known as Diamond Cable Online. The Group
also offers web space on its server, so it can offer customers their own
home page. It also offers backbone service capacity for a number of
Internet service providers.
o Managed Data Network Services. Customers can either manage their own data
networks by buying leased circuits from the Group or ask the Group to
manage their network connections. The Group currently offers a managed
frame relay-based service, which uses a transmission technology designed
to provide a flexible bandwidth in accordance with the customer's need.
Frame relay is primarily designed for LAN/WAN interconnect between speeds
of 64 Kbit/s and 45 Mbit/s.
o Closed Circuit Television. The Group supplies leased private circuits to
local authorities to support the provision of closed circuit television
services in the region.
o Automatic Call Distribution ("ACD"). The Group offers enhanced voice
managed services including ACD, where the customer can utilize the
functionality of the Group's switches to queue and manage its inbound
calls, thereby creating a call center, with visual and statistical
reporting capabilities.
o Number Translation Services. In 1998, the Group purchased a Nortel
intelligent network platform, which has enabled the Group to offer
toll-free, local call rate and national call rate numbers to business
customers. During 1999, the Group intends to introduce non-geographic
number portability, which will enable customers to port such numbers to
the Group from other public telecommunications operators ("PTOs").
The intelligent network platform will also enable the Group to introduce
other value added services, including personal numbering, premium rate
numbers, enhanced number portability and enhanced prepaid calling card
facilities.
The Group plans to offer in the future additional transmission
technology services suitable for managing data transfer at high speeds, such as
asynchronous transfer mode ("ATM") and switched megabit data services ("SMDS").
Other new services which the Group plans to introduce in 1999 include Data
Collect and Route, a call logging service which will enable the Group to provide
customers with on-line data about their incoming and outgoing centrex calls, and
Auto Attendant, a call center service which will enable a customer's incoming
callers to use their touch-tone phone to navigate through recorded alternatives
to reach the correct extension without the need for an operator.
In the business telecommunications area, the Group generally competes
primarily on the basis of the quality of services and to a lesser extent on
price, although the Group believes that its charges for services to business
customers are competitive with those of BT, CWC and other operators.
The Group believes it has achieved favorable penetration in the
business telecommunications market due to three factors. First, the Group's
strategy in business telecommunications is to target large and medium-sized
corporate and governmental customers, which generate the most revenue and the
Group has given priority to building out its network to such customers. Second,
the Group's fiber-optic network infrastructure provides customers with several
advantages including superior service reliability (due to the self-healing loop
architecture), greater system capacity and the ability to provide an extensive
range of digital services. Third, the Group provides a high level of customer
service including custom tailored network services and frequent communication
with major customers. The Group believes that this combination of quality
service and attractive rates has enabled the Group to achieve a substantial
share of the market of large and medium-sized business telecommunications
customers in the areas it has marketed.
Telephone customers changing to the Group historically have had to
change their telephone numbers. As a result certain business customers have been
reluctant to switch carriers because they would lose their existing telephone
numbers. In response to this, the Group has provided its business customers with
the
-8-
opportunity to use its telephone service for their outgoing telephone calls,
which carry higher revenues than incoming calls, and for their specialized
telecommunications needs, while retaining their existing service provider (and
their existing telephone number) for incoming telephone calls. In conjunction
with the introduction of number translation services, the Group intends to
introduce non-geographic number portability during 1999, which will enable
customers to port their existing toll-free, local call rate and national call
rate numbers to the Group. For a description of certain developments relating to
number portability, see "-- Competition -- Business Telecommunications" and " --
Certain Regulatory Matters -- Cable Telecommunications -- Number Portability".
RESIDENTIAL TELEPHONE
The Group had residential telephone line penetration of 39% of homes
marketed at December 31, 1998. The Group believes it is achieving this
residential telephone penetration rate due to (i) Diamond's well-recognized
brand name and (ii) the Group's competitive rates (including free voice calls
between the Group's residential customers in the same local and adjacent calling
areas during off peak evening and weekend hours). In the residential telephone
area, the Group generally competes on the following basis:
Reliability. The Group's fiber-optic network infrastructure provides
reliable, high-quality transmission across a modern network. In addition, the
Group believes that its early concentration on attracting prominent business and
governmental customers has enhanced its credibility with residential customers.
Special Services. By switching its own traffic, the Group is able to
offer a variety of special services to residential customers. Fully itemized
monthly billing is provided to all customers at no extra fee. The Group provides
three-way conference calling free of charge to most residential customers in
order to stimulate additional call and/or termination charges. Additional
"Custom Calling Features" offered by the Group for an extra charge include: call
waiting, call barring (prevents unauthorized outgoing or incoming calls), call
diversion (i.e., call forward) and voicemail. The Group's network architecture
provides a flexible platform for the Group to offer additional telephony
services as they become available in the future.
Cost Savings. The Group seeks to provide residential telephone
customers with savings on the cost of line rental and usage charges compared to
BT. In order to encourage customers to subscribe to both television and
telephone services, the monthly line rental charge for customers who subscribe
to both services is offered at a discount to the monthly charge for customers
who subscribe to telephone service only.
Free Evening and Weekend Voice Calls. The Group allows free voice calls
between the Group's residential customers and by the Group's residential
customers to the Group's business customers located within the same local and
adjacent calling areas during off-peak evening and weekend hours. The
incremental cost of these calls to the Group is negligible because they do not
require interconnection with another operator. The Group believes that this
service has encouraged its customers to recommend its services to other
potential customers, particularly friends and family members, and is believed by
the Group to increase calling traffic generally. The Group believes this
word-of-mouth marketing reinforces its well-recognized brand name.
The Group regularly evaluates its pricing strategy and intends to
remain price competitive in its residential telephone business. The Group
believes competitive pricing is particularly important initially as it
introduces services and seeks to gain market share. However, over time the Group
expects new products and customer service to become a more important component
of its marketing strategy.
The Group operates an Internet access service, Diamond Cable Online, in
its operating area. This service, available to both Group telephone customers
and others, is the result of an alliance with Cable Online Ltd., a subsidiary of
NTL, and provides users with access to the Internet and World Wide Web. The
Group also offers expanded Internet services, including ISDN and leased line
connections.
-9-
CABLE TELEVISION
PROGRAMMING
The Group currently offers a wide range of cable television
programming, including satellite and broadcast channels, tape delivered channels
and FM radio. This range includes 50 television channels, many of which are
available 24 hours a day. Local programming is provided only on a limited basis
and may be offered on a larger scale in the future. In addition, the Group has
carried pay-per-view events and launched in March 1998, together with several
partners, Front Row Television Limited ("Front Row"), a four-channel movie
pay-per-view service which also offers music and sporting events.
The Group believes that the availability of a wide variety of quality
programming is one of the most important factors influencing a consumer's
decision to subscribe for and retain cable television service. Consequently, the
Group devotes considerable resources to obtaining access to a wide range of
programming that it believes will be appealing to both existing and potential
customers of its basic and premium services. The Group may from time to time
pursue investments in programming providers.
The following sets forth the television programming offered by the
Group at February 28, 1999.
PROGRAMMING DESCRIPTION
- ----------- -----------
NEWS AND INFORMATION
CNN International 24-hour international news service
BBC Parliament Live coverage of the U.K. Parliament
Bloomberg TV Business news
Channel Guide Summary of programming schedule
Preview Channel Sampling of all cable channels
Diamond Vision/Cable 7 Local programming
BBC News 24 24-hour news services
Sky News (1) 24-hour news services
- --------------------------------------------------------------------------------
GENERAL INTEREST
BBC1 U.K. terrestrial television
BBC2 U.K. terrestrial television
ITV U.K. terrestrial television
Channel 4 U.K. terrestrial television
Channel 5 U.K. terrestrial television
Bravo Films and television series
Trouble Television series
QVC-- The Shopping Channel Home shopping
Sky One(1) Drama, films and serials
Discovery Science and education programming
Challenge TV Game show programming
Discovery Home & Leisure Education and documentary programming
The History Channel History programming
Travel Channel Travel programming
U.K. Gold Classic U.K. television programming
Live TV 24 hour U.K. entertainment and news
The Sci-Fi Channel Science fiction programming
God Christian Channel Religious programming
Carlton Select Classic U.K. Television programming
Carlton Food Network Food programming
Granada Plus Classic U.K. Television programming
Granada Men and Motors Male oriented programming
Paramount Comedy Channel Situation comedy programming
Granada Breeze Health, shopping and gardening programming
National Geographic Channel Nature and wildlife programming
Living Female oriented programming
- --------------------------------------------------------------------------------
-10-
PROGRAMMING DESCRIPTION
- ----------- -----------
MOVIES
TNT Classic movies
Sky Premier (1)(2) 24-hour feature movies
Sky Moviemax (1)(2) 24-hour feature movies
Sky Cinema (1)(2) Classic movies
Film Four (2) Independent movies
TVX, the Fantasy Channel(2) Adult entertainment
- --------------------------------------------------------------------------------
CHILDREN
The Disney Channel(1)(2) Children's entertainment
Cartoon Network Children's cartoons
Nickelodeon Children's entertainment
- --------------------------------------------------------------------------------
MUSIC
VH-1 Music videos
MTV Europe Music videos
Performance - the Arts Channel Classical music and opera
The Box Music videos selected by customer requests
Landscape Classical music accompanying scenic videos
- --------------------------------------------------------------------------------
SPORTS
Eurosport International sporting events
Sky Sports1(1)(2) U.K. and international sports
Sky Sports2(1)(2) U.K. and international sports
Sky Sports3(1)(2) U.K. and international sports
- --------------------------------------------------------------------------------
INTERNATIONAL
Zee TV(2) Asian sub-continent related programming
Asia NET Asian programming
Namaste Asian programming
ATM Asian programming
SET Asia (2) Asian programming
SAT 1 German language programming
TV5 French language programming
- -------------
(1) Programming acquired from BSkyB and, except in the case of Sky News,
governed by the BSkyB rate card.
(2) These services are offered for an additional charge or upon subscribing
to other services requiring an additional charge.
(3) Some programming shares a single channel. The group currently has analog
capacity for 50 channels, including channels reserved for the Group's
pay-per-view service, Front Row.
The Group believes that an important factor influencing a consumer's
decision to subscribe for and retain cable services is the consumer's ability to
choose and pay for only those channels the consumer desires. The Group is
constrained in its ability to offer a wider range of channel packages due to
requirements imposed by programming suppliers to provide certain channels to all
or a significant percentage of customers if provided to any. The Group has
negotiated with certain suppliers reductions in these requirements which have
provided the Group greater flexibility in designing the packages of channels it
can offer consumers in certain franchise areas.
Currently, the Group offers seven basic packages, ranging in price from
(pound)8.99 to (pound)20.98 per month (including (pound)1 direct debit
discount). These packages currently include between seven and thirty-seven basic
cable channels. The price of three of the Group's packages also includes rental
of one residential telephone line. These packages are priced between (pound)8.99
and (pound)12.99 per month (including (pound)1 direct debit discount). One of
the Group's packages, available in all areas except Grimsby, is aimed at the
Asian community. Customers choosing any of the Group's packages may add premium
channels and other a la carte channels for an additional charge, and all
television customers have access to the Front Row pay-per-view service. The
price of premium channels varies depending on the basic package selected. All of
the basic packages
-11-
include one set top converter that provides service to one television.
Additional set top converters may be rented at (pound)2.50 per month.
As part of its efforts to reduce churn, the Group has instituted a
(pound)9.95 installation charge for cable television and a (pound)14.95
installation charge for cable television and telephone. Generally, there is no
charge to the customer for service or repair of the cable television network or
customer premises equipment.
The Group obtains much of its programming from suppliers pursuant to
informal arrangements that are typically contemplated to run from three to five
years. The arrangements generally provide for payments by the Group based on the
number of customers subscribing to the service. Some programming, such as that
provided by the BBC and other terrestrial broadcasters, is provided to the Group
without charge.
PAY-PER-VIEW
DCL is a shareholder of Front Row, a joint venture with TeleWest plc,
General Cable plc and NTL, which launched a four-channel pay-per-view service in
March 1998. The joint venture has secured contracts with several of the major
Hollywood studios to provide movies for the pay-per-view service and is in
discussions with other studios regarding additional contracts. This service
enables customers to order specific feature films on a per viewing basis for an
additional charge of (pound)2.99 per viewing. Films are available on a
pay-per-view basis before they become available on terrestrial television or any
subscription movie channel but approximately three months after their release in
the video rental market. Front Row has also screened music and sporting events.
BSKYB PROGRAMMING
British Sky Broadcasting Group plc and its wholly-owned subsidiary
British Sky Broadcasting Limited (collectively, "BSkyB") currently provide the
Group with nine channels on a non-exclusive basis and also offers this
programming (together with additional programming) directly to its DTH satellite
customers, in competition with the Group and other cable operators. In 1998, the
Group reduced the number of BSkyB channels it offers from eleven to nine. BSkyB
is the leading supplier of cable programming in the U.K. and the exclusive
supplier of certain programming. Its programming is generally popular in the
U.K. and is important in terms of attracting and retaining cable television
customers. In the absence of more alternative programming sources, BSkyB may be
able to set and raise prices for its programming without significant competitive
pricing pressure. With the exception of Sky News, the Group acquires all of
BSkyB's channels under the terms of BSkyB's industry rate card. BSkyB has
flexibility under its rate card to adjust, on 60 days' notice, the prices it
charges for those channels it provides to the Group under the rate card. In
addition, BSkyB distributes thirty-six other programs (some of which share a
channel) on behalf of other providers (including some providers partly owned by
BSkyB). BSkyB also supplies programming to ONdigital ("ONdigital"), a joint
venture owned by Carlton Communications and Granada Group.
The Group pays a monthly fee to BSkyB for programming based on the
number of the Group's customers taking the various BSkyB channels at the end of
each month. The fees vary by channel. The aggregate amount payable by the Group
to BSkyB during the year ended December 31, 1998 was (pound)7.5 million.
It was reported on September 3, 1996 that the Independent Television
Commission ("ITC") was investigating the bundling of certain channels by BSkyB
and, in particular, requirements that cable companies must acquire a package
including two premium movie channels in order to obtain the Disney Channel from
BSkyB. The ITC has completed its investigation. As a result, the Disney Channel
is now available as a separate premium channel. The ITC has, however, carried
out a broader investigation into effects of bundling in the pay television
market. In April 1998, the ITC published proposals for remedying
anti-competitive practices in the way pay-TV channels are supplied. The
solutions proposed by the ITC included:
- the prohibition of minimum carriage requirements and those tiering
obligations that prevent operators from offering basic channels either a
la carte or in small packages.
- permitting buy-through to premium channels from any basic package.
-12-
- the prohibition of bundling more than one premium channel (excluding bonus
channels) except where the channels are also available a la carte.
In June 1998, the ITC issued a formal direction to all licensees
including the Group prohibiting the inclusion of minimum carriage requirements
in all new programming agreements entered into from July 1, 1998. Minimum
carriage requirements effectively require the Group to transmit a channel to a
minimum number or percentage of customers and reduce the Group's flexibility in
adapting programming packages. The prohibition also applies to existing
agreements from July 1, 1998 for digital reception and from January 1, 2000 for
analog reception. The ITC allowed exceptions from the prohibition on minimum
carriage requirements for the first 12 months of carriage of any new channel and
has since also made exceptions for Live TV and Performance which are both
cable-exclusive channels, and for certain new BBC channels. Certain program
suppliers unsuccessfully challenged the ITC's direction.
The ITC's direction also required that from September 1, 1998, the
Group make available access to premium channels from any basic tier of
programming and to make all premium channels available to customers on an a la
carte basis. The Group has implemented changes to its retail offering to reflect
this. Management anticipates that the Group will have the opportunity to
negotiate future programming agreements which allow for greater packaging
flexibility and customer choice.
The prices that BSkyB charges the Group have been governed by rate
cards established by BSkyB from time to time. The two most recent rate cards
were approved by the Director General of Telecommunications (the "Director
General") of Fair Trading ("DGFT") following inquiries by the Office of Fair
Trading ("OFT"). Under its rate cards, BSkyB implemented significant price
increases. BSkyB submitted a revised rate card to the OFT in July 1996, which
was operative from February 16, 1997 until October 1, 1997. With effect from
October 1, 1997, BSkyB introduced a separate charge for Sky Sports 2, which had
previously been supplied free of charge to customers subscribing to Sky Sports
1. BSkyB also withdrew its charge to cable operators for Sky Sports 3 (which
BSkyB had always supplied free of charge to DTH subscribers to Sky Sports 1). As
a result of these programming changes, BSkyB submitted and the OFT approved a
further revised rate card.
During 1998, BSkyB asked the OFT to remove its basic channels from the
rate card, thereby enabling individual cable operators to negotiate alternative
pricing for carriage. Due to its market strength, the cable industry opposed the
removal of Sky One from the rate card. With effect from October 1, 1998, the OFT
agreed to removal of all basic channels except Sky One from the rate card.
However, delays in agreeing necessary consequential amendments required to
BSkyB's 1996 informal undertakings to the OFT have caused BSkyB to continue to
supply basic channels pursuant to rate card prices. The Group has been
successful in negotiating a small reduction in the fees it pays BSkyB for Sky
News, the only BSkyB basic channel carried by the Group other than Sky One, on a
short-term basis.
During 1998, BSkyB submitted a new draft rate card to the OFT. The new
draft rate card, which was to have been effective as of January 1, 1999, deleted
references to its basic channels other than Sky One and simplified the pricing
structure of its premium channels. Additionally, for the first time, it
purported to cover digital as well as analog transmission. However, BSkyB
subsequently withdrew this rate card without explanation and the Group, like
other cable operators, awaits submission by BSkyB of a new draft. As a result,
BSkyB continues to supply programming pursuant to its previous rate card.
During 1995 and 1996, the OFT conducted reviews of BSkyB's position in
the pay-TV market. Following its review in 1996 of BSkyB's supply of programming
to pay-TV (including to cable operators) and access to encryption and subscriber
management services, the OFT concluded that although BSkyB was not acting
anti-competitively, the competitive process was being impaired. BSkyB was not
referred to the Monopolies and Mergers Commission (the "MMC") but gave new
informal undertakings and accepted modifications to those it had previously
given in March 1995. BSkyB agreed not to require carriage of basic channels in
excess of 80% of homes; to unbundle channels, with the exception that two BSkyB
bonus channels could be linked with specified other BSkyB channels; to ensure
that its Videocrypt conditional access system is made freely available without
discrimination to programmers on the basis of a published rate card on
cost-related terms; to maintain separate accounts for its DTH business, with
actual or notional charges not less than offered to cable operators; and to
revise the structure of the cable rate card.
-13-
Although the DGFT previously announced that the informal undertakings
given by BSkyB would be reviewed by the end of 1998, this review has not yet
been undertaken. The DGFT has also concluded that BSkyB should offer cable
operators reasonable contractual security in terms of length of contract and
that the OFT would regard a demonstrable and unreasonable unwillingness to do so
as an abuse of BSkyB's market power.
On February 6, 1996, the DGFT announced that he was referring an
agreement between the Premier League, BSkyB and the BBC, by which the Premier
League sells the exclusive television rights for Premier League football
matches, to the Restrictive Practices Court (the "Court") because the agreement
contained significant restrictions on competition. The Court will decide whether
the restrictions are against the public interest in which case the Court may
order the parties not to give effect to, enforce, or try to enforce the
restrictions in the agreement and not make any other similar agreement. BSkyB,
the Premier League and the BBC are understood to have successfully resisted an
attempt made by the OFT to accelerate the review and the review has not yet been
completed. The matter is currently before the Court.
On September 9, 1998, BSkyB announced an agreed offer to acquire the
whole of the issued share capital of Manchester United PLC, a Premier League
football club. The Monopolies and Mergers Commission is currently considering
whether this proposed acquisition could significantly impact anticompetitive
concerns. On December 17, 1998, Premium TV, a wholly-owned subsidiary of NTL,
acquired 9,000,000 shares or 6.3% of Newcastle United from CHD, the majority
shareholder of Newcastle United, for approximately (pound)10 million in cash. In
conjunction with the sale of such shares, CHD also entered into an irrevocable
commitment to Premium TV providing that if Premium TV makes a general offer for
all of the issued share of capital of Newcastle United, CHD will accept such
offer in respect of the remaining balance of its shares in Newcastle United.
FUTURE SERVICES
The Group's network has been designed to enable it to provide customers
with a wide range of advanced interactive services as they become available.
Interactive services that may be offered by the Group in the future
include video games that would be transmitted periodically (or possibly upon
customer request) to a special converter box at a customer's home where they
would be available for use by the customer (as with a traditional video game)
and video-on-demand services that would enable individual customers to request
specific programming from the service provider's inventory for viewing at a
specific time. See "-- Competition -- Cable Television". Additional services
could include video telephone services and video conferencing, access to on-line
databases and interactive transactional services. However, there can be no
assurance that the Group will be able to develop and deliver any of these
products on a timely and competitive basis.
In addition, the Group believes that its network leaves it well placed
to provide digital television services if in the Group's view providing these
services in its franchise areas becomes commercially attractive. Digital
technology allows operators to provide more channels, through digital
compression, and higher quality pictures and sound.
The Group currently receives negligible revenues from advertising, and
does not expect to receive any significant advertising revenues from cable
television until its customer base has expanded significantly. The Group
believes that there may be potential for meaningful advertising revenues in the
future due to the relatively limited alternative outlets for local advertising
in the Group's franchise areas.
In connection with the Share Exchange, NTL intends to introduce over a
period of time its current and future products and services to the Group's
customers. NTL is developing a timetable by which this is intended to be
achieved from late 1999 through 2000. Any introduction of new services will be
done to ensure that there is little or no disruption to the Group's operations
or customers, and that any services offered would be additional to or
complementary with its existing services.
-14-
SALES AND MARKETING
Cable television and residential telephone services are marketed to the
residential customer on an integrated basis. Until February 1997, the
residential sales teams were comprised of approximately 150 residential
specialists employed by independent sub-contracting companies supervised by the
Group and paid on a full commission basis. In order to improve the management
and quality of its residential sales force, in February 1997 the Group
terminated arrangements with its independent sales contractors and began to
develop its own internal sales force through direct hiring of residential sales
people. The Group now employs and trains residential sales people directly and
pays them on the basis of a salary plus sales commission. At December 31, 1998,
the Group employed approximately 120 residential sales people, including a
number of former contracted sales people who were hired by the Group in
accordance with its employment criteria following interviews, and 12 telesales
representatives.
The Group believes that improvements in the quality of its sales force
have contributed to a reduction in churn and enable the sales force to market
more sophisticated products and services including Internet service and more
advanced telephone features to residential customers.
During construction of the Group's network, a customer relations
program is in place, beginning with a "Sorry to Disturb You" pre-construction
notice providing general information about the Group's services and describing
the construction process, followed by a "Thank You for Your Patience" packet
containing an apology for the inconvenience caused during construction, complete
information on the cable television and telephone services offered by the Group.
This approach is designed to inform potential customers of construction status,
to minimize inconvenience during construction and to foster a loyal customer
base.
During 1997, the Group intentionally slowed the pace of civils
construction to reduce the percentages of both homes passed by civils
construction but not activated and homes activated but not yet released to
marketing. At December 31, 1997, these percentages were respectively 5% and 20%,
having fallen from 23% and 27%, respectively, at December 31, 1996. During 1998,
the pace of both construction and marketing was greatly accelerated. At December
31, 1998, 3.2% of homes passed by civils construction had not been activated and
13.7% of homes activated had not been released to marketing. In 1999, the Group
intends to slow down civils construction to enable activated homes to be
marketed, and to remarket in marketed areas to increase penetration.
COMPETITION
The Group faces significant competition in each of its business
telecommunications, residential telephone and cable television business areas.
In addition, new forms of media distribution, including digital terrestrial and
satellite television have entered the marketplace. The U.K. telecommunications
industry is highly competitive. The Office of Telecommunications ("OFTEL") has
pursued a policy of encouraging competition, and over 200 PTO licenses have been
granted, although many of these have not yet been used. The Group believes that
competition will continue to intensify in each of its business areas.
BUSINESS TELECOMMUNICATIONS
The Group competes primarily with BT and a number of other competitors,
the largest of which is CWC, in providing business telecommunications services
to businesses in its franchise areas. The Group competes largely on the basis of
quality of services and, to a lesser extent, price. The Group believes that its
call charges are competitive with those of BT and CWC.
Both BT and CWC have resources substantially greater than those of the
Group. In addition each of CWC and BT has a national presence which permits it
to offer telecommunications, data transmission and other services on a
nationwide basis to business telecommunications customers with nationwide
operations beyond those that the Group is currently able to offer on its own.
With effect from May 1997, Mercury was merged with three U.K. regional cable
companies, NYNEX CableComms Group plc, Bell Cablemedia plc and Videotron
Holdings plc, to create a new group held by CWC, which is a 52.6% owned
subsidiary of Cable and Wireless plc. While the effects of the merger cannot be
predicted, the Group does not believe that the merger has had a material effect
on the Group's competitive position in the Group's franchise areas.
-15-
In April 1997, the Group was granted a national telecommunications
license, which enables it to offer telecommunications services anywhere in the
U.K. The Group recently began providing services to business customers in Derby,
which is adjacent to the Group's franchise areas, and continues to evaluate
opportunities to offer these services outside its franchise areas.
The Group also faces competition from a number of recent entrants to
the business telecommunications market. For example, Energis operates a national
SDH fiber optic network constructed along the existing national electricity
transmission infrastructure in England and Wales. Energis has focused on the
business telecommunications market and does not currently offer residential
telephony services. Energis's service offering, along with indirect service from
ACC, MCIWorldCom, Esprit, and other, smaller, long distance operators, and the
success of international simple resellers have increased competition in the long
distance and international telecommunications markets. Other owners of extensive
infrastructure, including local electricity distribution companies and the owner
of the former rail telecommunications network, are currently constructing
telecommunications networks or offering telecommunications services, and it is
possible that other owners of extensive infrastructure, such as other utilities,
will seek to use their existing infrastructures to construct telecommunications
networks that will compete with the Group's telecommunications business. The
Group also faces competition from mobile telecommunications providers.
The Group believes that the Group's ability to compete effectively with
BT had been adversely affected, particularly with respect to smaller businesses,
because there had historically been no telephone number portability in the U.K.
(i.e., a new customer could not transfer its BT telephone number to the Group's
system). The Group believes that this discouraged some customers from changing
from BT to the Group's service because of the costs and inconvenience associated
with changing numbers. In response to this, the Group provided its customers
with the opportunity to use its services for all outgoing telephone traffic,
while continuing to use other providers for incoming traffic. In conjunction
with the introduction of number translation services, the Group intends to
introduce non-geographic number portability during 1999, which will enable
customers to port their existing toll-free, local call rate and national call
rate numbers to the Group. For a discussion of certain regulatory developments
regarding the introduction of number portability in the U.K. See " -- Certain
Regulatory Matters -- Cable Telecommunications -- Number Portability". The Group
believes that number portability will offer little improvement to the Group's
results in residential areas but could offer marginal increased sales in the
small business area where number recognition and number advertising for the two
and three line customer is an issue. Overall, the Group believes that number
portability will be relatively neutral in its effect on the Group's business.
RESIDENTIAL TELEPHONE
The Group's principal competitor in providing telephone services to
residential customers is BT, which has an established market presence, fully
built networks and resources substantially greater than those of the Group. As
the substantial majority of U.K. residential telephone customers are currently
customers of BT, the Group's growth in residential telephone services depends
upon BT customers changing to the Group's telephone system. The Group believes
that price is currently one of the most important factors influencing the
decision of U.K. customers to switch to a cable telephone service. As a result,
the Group currently seeks to provide its telephone customers with monthly
savings on the cost of calls compared to BT. BT regularly reviews its prices,
generally resulting in price reductions. The Group has generally reacted to
previous BT price reductions by reducing its rates in order to maintain its
competitive price advantage. The Group believes that BT will be required for
regulatory and competitive reasons to continue to reduce its prices for most
residential customers in the future. However, BT's ability to respond to price
competition from local cable operators is restricted by its license obligation
not to show undue preference to, or unduly discriminate against, different
classes of customers throughout the U.K. This effectively obligates BT to price
all of its services equally to the same classes of customer throughout the U.K.,
although BT may provide discounts to high volume users and may be given greater
flexibility in the future.
BT currently is subject to regulatory controls over the prices it may
charge to residential customers, which last until 2001. See " -- Certain
Regulatory Matters -- Cable Telecommunications -- Price Regulation". These
current controls impose significant downward pricing pressure on charges in the
U.K. telephone service market. As a result, BT has implemented significant price
reductions and per second pricing, which has led to further price reductions for
certain users. The revised price controls on BT indicate that BT will be
required by its telecommunications license to reduce the average level of its
prices further in each of the next few years. The impact of BT's price
reductions on the financial performance of the Group
-16-
has been partially offset by reduced interconnection costs charged by BT for the
conveyance of calls. There can be no assurance, however, that any such price
cuts will not adversely impact the financial performance of the Group's
telephone operations.
BT has also started to market its services more aggressively to
maintain its market position over other service providers. For example, BT
provides voice mail services on a national basis and caller ID services in
digital switch areas, and has implemented on a national basis other services
currently offered by the Group in its franchises, such as itemized billing. BT
has also implemented extensive marketing campaigns to win back customers from
cable operators.
The introduction of international facilities licensing in 1996 has
increased competition for international traffic, and the Group's telephone
customers can obtain access to these alternative international service
providers.
In addition to BT and CWC, the Group competes with international
service providers and mobile telecommunications operators, including Vodafone,
Cellnet, One2One and Orange, and other service providers, and competition is
expected to intensify in the future.
CABLE TELEVISION
Historically, the ITC did not grant more than one cable television
license within a franchise area. As a result, the Group previously did not
compete with other cable operators for cable television customers within its
franchise areas. On April 23, 1998, the Department of Trade and Industry
announced the U.K. government's intention to progressively end this policy,
allowing any operator to seek a license to compete in the provision of broadcast
entertainment in those areas outside current cable franchises. From January 1,
2001, competition within current cable franchises will also be permitted.
Additionally, the Group competes directly with television programming provided
by analog and digital terrestrial (over-the-air) broadcast television stations
and analog and digital DTH satellite services and may be subject to competition
from SMATV systems. The Group's cable television programming also competes to
varying degrees with other entertainment media, including home video (generally
video rentals). The Group has also begun to compete with providers of digital
terrestrial television and digital DTH satellite services and may in the future
also compete with programming provided by video-on-demand and other
entertainment services provided by national PTOs and others.
The principal current (and potential) competitors for the Group's cable
television business are the following:
Broadcast. Television viewing in the U.K. has long been one of the most
popular forms of entertainment, and daily viewing time in the U.K. has been
estimated to average over 230 minutes per person (Source: BARB). Until 1989,
four broadcast channels were the only source of television programming. An
additional commercial terrestrial channel (Channel 5) commenced broadcasting
March 30, 1997. Although the national television channels in the U.K. generally
are perceived as providing high-quality programming, the Group believes that
most viewers prefer a wider variety of television programming. The market share
of cable television and satellite service programming is approximately one-third
of all viewing in homes with cable television and satellite services (Source:
BARB).
The Group believes that its primary competitive advantages over
existing terrestrial television are significantly more programming options,
access in the future to advanced interactive services and, in some areas,
improved television reception. The Group believes that analog terrestrial
television benefits from its position as the traditional source of low cost
television in the U.K.
Under the Broadcasting Act 1996, the ITC was given responsibility for
the licensing and regulation of digital terrestrial television, which provides
an additional 30 or more new terrestrial channels serving between 60% and 90% of
the U.K. population. Forty percent of the channels were set aside for digital
broadcasting by the existing terrestrial broadcasters. The ITC granted a license
for three other frequency ranges to British Digital Broadcasting Limited, which
trades as ONdigital. BSkyB has undertaken to the ITC to supply programming to
BDB for 5 years. ONdigital launched its service in November 1998. Digital
terrestrial television broadcasts from land-based transmitters and can be
received by consumers with conventional aerials. A digital decoder box or a
digital television which has ONdigital's encryption technology
-17-
embedded in it is needed to view the new channels, which have digital picture
and sound quality. BSkyB has also formed a joint venture with BT, Midland Bank
and Matsushita, called British Interactive Broadcasting ("BIB"), to develop and
market a digital set top decoder on a heavily subsidized basis. Both BDB and BIB
are currently under investigation by EU competition authorities. The
introduction of digital terrestrial, as well as digital DTH satellite,
television will provide additional competition for the Group. See " -- Certain
Regulatory Matters -- Future Developments -- Digital Broadcasting".
The Group believes that its network has been designed such that the
Group would be well placed to provide digital television services if providing
these services in its franchise areas were to become commercially attractive.
DTH Satellite. DTH satellite television service providers obtain
programming from a variety of sources (including some of those used by the
Group) and transmit the programming signal up to a satellite which then
retransmits the signal down to customers. In order to receive a satellite
service, the customer must have an outdoor reception dish.
Analog DTH satellite services are widely available in the U.K., and the
number of analog DTH satellite subscribers has increased from 500,000 in 1989 to
approximately 4.5 million at September 30, 1998. BSkyB is the leading supplier
of satellite programming in the U.K. See "-- Cable Television -- Programming".
The Sky Multi-Channels package provided by BSkyB currently offers subscribers
approximately thirty channels.
In the multichannel television market, BSkyB is the Group's principal
competitor as well as one of its most important sources of programming. The
Group provides to its customers most of the channels included in the Sky
Multi-Channels package. There can be no assurance that BSkyB will continue to
provide programming to the Group on acceptable terms. However, as other
programming sources become available, the Group believes that it may become less
dependent on programming from BSkyB. See "-- Cable Television -- Programming".
The Group believes that DTH satellite services will continue to be
significant competitors in the future. However, the Group believes that cable
television has a number of competitive advantages over DTH satellite service,
including the following: (a) the higher up-front or ongoing costs for the
purchase or rental of a satellite dish and related equipment required for DTH;
(b) the perception that satellite dishes are unsightly; (c) the long-term
contracts (one-year) generally required for DTH satellite services; and (d) the
ability of cable networks to offer telephone services and in the future to offer
certain interactive and integrated entertainment, telecommunications and
information services over their existing networks.
The Group believes that the principal competitive advantage of analog
and digital DTH satellite service is the monthly service charges for basic
services and premium services which are lower than those for comparable services
provided by the Group. Aggressive promotional activity by BSkyB has accentuated
this advantage. In addition, BSkyB introduced a digital DTH satellite service
offering the possibility of over 200 television channels and a range of
interactive services in October 1998. BSkyB's digital service includes expanded
numbers of movie and sports channels, an expanded number of pay-per-view
channels and a number of new channels, together with an electronic program
guide. ONdigital launched its digital terrestrial service in the U.K. in
November 1998. The digital terrestrial service requires a set top box to decode
encrypted digital terrestrial signals or a digital television with ONdigital's
encryption technology embedded in it. The initial service offered by ONdigital
includes a choice of 12 basic channels (6 of which the Group offers) in addition
to the free-to-air digital terrestrial channels and a range of 6 premium
channels (all of which the Group offers) including certain of BSkyB's sports and
movie channels. The Group believes that DTH satellite services may become more
competitive with cable service if digital services are successfully introduced
in the U.K. such that satellite services can provide more channels and direct
specific programming to particular subscribers.
On December 1, 1997, BSkyB launched an analog pay-per-view movie
service, broadcast on four of its DTH satellite channels, which competes with
Front Row, the Group's pay-per-view service. This service also includes sport
and music events, some of which the Group offers to its customers.
Other Competitors. The Group also faces competition from video cassette
rentals and SMATV systems (which receive signals from either broadcast or
satellite sources and then distribute them by cable to a discrete group of
subscribers). Currently, no video-on-demand service is commercially available in
the
-18-
U.K. (although BT and others are now conducting commercial trials). However, the
successful introduction of a video-on-demand service in the Group's franchise
areas, particularly by a national PTO, would result in the Group's services
being subject to increased competition. See "-- Certain Regulatory Matters --
Restrictions on National PTOs". SMATV systems can compete with cable television
within a franchise area, but currently there are no SMATV systems licensed to
provide service to more than 1,000 homes in the Group's franchise areas.
New Technologies. The extent to which new media and technologies will
compete with cable television systems in the future cannot be predicted and such
media or technologies may become dominant in the future and render cable
television systems less profitable or even obsolete. Certain operators currently
are deploying digital compression technology in the U.S. If digital compression
technology is deployed successfully in the U.K., it will enable the Group, as
well as its digital terrestrial and DTH satellite competitors, to increase
significantly the number of channels they are currently able to offer to their
customers. An increase in the number of channels offered by terrestrial and DTH
satellite services at competitive costs could affect the Group's current
competitive position.
FRANCHISE AREAS
The Group has been granted cable television licenses to provide cable
television services in fifteen franchise areas that form a contiguous cluster of
approximately 1,229,900 equity homes. The Group has been granted eight
individual franchise telecommunications licenses and a national
telecommunications license which enables the provision of business and
residential telecommunications in the Group's seven remaining franchises and
elsewhere in the U.K. The table below sets forth the number of homes in the
individual franchise areas according to CACI Information Services (for the
franchises governed by individual franchise telecommunications licenses and the
Burton-upon-Trent and Hinckley LDLs) and the ITC (for the other LDLs).
EQUITY
OWNERSHIP HOMES
------------ --------
TELECOMMUNICATIONS LICENSES
Nottingham....................................... 100% 270,000
Mansfield........................................ 100% 85,000
Newark-on-Trent.................................. 100% 42,000
Grantham......................................... 100% 22,000
Melton Mowbray................................... 100% 19,000
Lincoln.......................................... 100% 52,000
Grimsby and Cleethorpes.......................... 100% 64,000
Leicester and Loughborough....................... 100% 203,000
LDLS(1)
Burton-upon-Trent................................ 100% 94,000
Hinckley......................................... 100% 45,000
Ravenshead....................................... 100% 2,900
Bassetlaw........................................ 100% 41,000
Lincolnshire and South Humberside................ 100% 174,000
Chesterfield..................................... 100% 107,000
Vale of Belvoir.................................. 100% 9,000
---------
Total........................................ 1,229,900
=========
- -------------------
(1) The Group has been granted an LDL for each of these franchise areas and a
national telecommunications license that covers all of the U.K. including
the LDL franchise areas but excluding the areas covered by the Group's
individual franchise telecommunications licenses.
Diamond's original franchise areas comprise a substantial regional
market centered around the City of Nottingham. In addition, the LCL franchises
and the Ravenshead, Bassetlaw, Lincolnshire and South Humberside, Chesterfield
and Vale of Belvoir franchise areas are contiguous to the original Diamond
franchises. All of the Group's franchises are concentrated in a single region
and the Group owns a 100% interest in the licenses associated with each
franchise. The Group believes that the Group's regional focus provides it with a
number of advantages, including the ability to (a) achieve significant cost
benefits in
-19-
designing, constructing and managing a single network infrastructure and
providing telecommunications services over an extensive area, (b) be more
responsive to customer needs than its national competitors, thereby increasing
customer loyalty and (c) increase its name recognition.
Under present rules, the individual franchise telecommunications
licenses covering these franchises last for 23 years from the date from which
the cable system first becomes operative. Thereafter, these licenses are not
extendable and application must be made for a new license. The individual
franchise telecommunications license for the Nottingham franchise, which was the
first to become operative, expires in 2013. The individual franchise
telecommunications licenses currently held by the Group incorporate construction
milestones which are reviewed by OFTEL. LDLs include milestones which are
reviewed by the ITC. See "-- Milestones". The national telecommunications
license lasts for an initial period of 25 years from the date of grant, April
28, 1997, and is then subject to revocation on 10 years' notice. For further
descriptions of the Group's licenses, see " -- Certain Regulatory Matters".
The Group may from time to time seek to acquire one or more new or
existing franchises either from the ITC or by private purchases from third
parties. The Group anticipates that it will generally seek to acquire franchises
that are contiguous to the Group's existing franchises and therefore can
effectively be integrated into the Group's existing operations. No agreement for
any specific material acquisition has been reached or is currently pending. The
Group currently operates solely in the U.K. and currently expects that any
future acquisitions would be of franchises or businesses in the U.K.
An LDL enables an operator to provide cable television and (when held
in conjunction with a telecommunications license) telecommunications services,
utilizing not only cable networks but also microwave distribution systems. See
"Certain Regulatory Matters". When such licenses are applied for by one
operator, they are then generally advertised to interested applicants by the
ITC. No license has been awarded for certain other geographic areas that are
contiguous to the Group's franchise areas. The Group may bid for additional
LDLs, if the Group estimated that the additional capital costs to complete the
network for the additional franchise areas would provide an attractive return,
in order to further improve the Group's operating leverage and increase asset
value. If the Group were to be awarded any of the LDLs it may bid for in the
future, the areas would be constructed in parallel with the existing franchises,
but it is expected that the completion of the network for the enlarged area
would be later than that planned for the existing area. In addition, to complete
construction of an enlarged franchise area, the Group would be required to
expend additional funds which, depending on the size of the franchise area,
could be significant. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
In addition, the Group operates a master antenna television service
which serves approximately 16,000 council properties in Nottingham and
approximately 7,000 council properties in Leicester. This service is provided by
the primary cable television network without the necessity to build and operate
a separate master antenna service system.
CONSTRUCTION
As of December 31, 1998, approximately 729,800 of the premises in the
Group's franchise areas had been passed by civils construction and a portion of
the network passing approximately 707,500 premises had been activated. The
number of premises activated represents approximately 69% of the Group's
aggregate milestone requirements. Construction has now commenced in all of the
Group's franchise areas. While the projected rate of construction is governed
principally by the applicable regulatory milestones, the pace of construction is
also influenced by the capacity of the Group to market and connect the Group's
services to premises which have been activated. See "-- Sales and Marketing".
The Group has undertaken a rapid acceleration in the build out of its
existing franchise areas. As of December 31, 1998, the Group's cable television
and telecommunications network had passed by civils construction approximately
699,700 homes and an estimated 30,100 businesses, of which portions of the
network passing approximately 677,400 homes and an estimated 30,100 businesses
had been activated. During 1998, approximately 164,000 homes were passed by
civils construction by the Group's cable network, as compared with approximately
82,000 and 172,000 homes passed by civils construction in 1997 and 1996,
respectively. The Group may encounter difficulty in obtaining qualified
contractors and may encounter cost overruns or further delays in construction.
Although the Group believes it will be able to
-20-
continue to negotiate construction contracts at competitive rates, construction
costs could increase significantly over the next few years in light of the
demand for cable construction services as the industry seeks to meet milestone
requirements. As with other U.K. cable operators, the Group is generally
required to use underground construction, which is more expensive and time
consuming than aerial construction. The Group cannot broadly employ mechanized
construction methods due to existing underground utility infrastructure, and is
responsible for the expense of restoring surface area after construction is
completed. Given the current high levels of cable construction in the U.K. and
the corresponding demand for materials, the Group has from time to time
experienced (and may in the future experience) shortages or price increases for
critical components such as fiber optic cable, ducting and cabinets.
The Group originally relied on its own construction team for the build
out of its network. In 1998, the Group phased out the small in-house
construction team previously maintained to build out particularly difficult
areas, and the Group now uses outside contractors for all of the build out of
its network.
Cable operators have the benefit of and must comply with the New Roads
and Street Works Act 1991 (the "Street Works Act") which permits them to
construct on public highways on the same basis as public utilities. This has, to
some extent, reduced construction delays. See " -- Certain Regulatory Matters --
Cable Telecommunications -- Network Construction and Service Obligations".
For a discussion of the Group's plans to fund construction see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
MILESTONES
The Group is obliged by the milestones in its individual franchise
telecommunications licenses and LDLs to construct and activate a network to pass
an aggregate of 1,021,894 premises within prescribed time periods. See " --
Certain Regulatory Matters -- Cable Telecommunications -- Network Construction
and Service Obligations".
Both Diamond and LCL failed to meet their original regulatory
milestones. Diamond had failed to meet the milestones in its original licenses
due principally to the unavailability of sufficient funding in periods prior to
the acquisition in May 1994 by European Cable Capital Partners, L.P. ("ECCP") of
a majority stake in Diamond and the decision to allocate resources to the
building out of the Nottingham franchise. Having obtained revisions to its
licenses, Diamond raised approximately $143 million at the end of September 1994
through the issuance of its 13 1/4% Senior Discount Notes due September 30, 2004
(the "1994 Notes") and, after a slight delay due to construction planning and
the hiring of contractors, began to accelerate the pace of the build out of its
network.
At December 31, 1995, the Group was obligated to meet milestones
specified in telecommunications licenses for eight of the Group's franchise
areas where building was due to have commenced. Compliance with the milestones
in these areas is monitored by OFTEL. During June 1996, OFTEL informed the Group
that it did not agree with the Group's historical method for calculating
compliance with its milestone obligations. Based on OFTEL's method of
calculating premises passed, the Group failed to meet its year-end 1995
milestones for six of its eight telecommunications licenses.
The Group has renegotiated its milestone obligations with OFTEL, and at
December 31, 1998, the Group met the required milestone obligations under each
of its telecommunications licenses. The Group has completed all of the milestone
obligations in its telecommunications licenses with the exception of the
Leicester and Loughborough franchise, where the final milestone falls due in
1999.
Principally because of delays by the Department of Trade and Industry
in granting the Group a national telecommunications license, and consequent
delays in the commencement of construction, the Group did not meet its annual
LDL milestones in six of the seven LDL franchises at the end of 1997, although
construction has now commenced in all LDL franchises. Following an application
by the Group to the ITC, the ITC modified the annual build milestone obligations
in all of the Group's LDL franchise areas except Vale of Belvoir. The Group has
met the modified milestone obligations in all of its LDL franchises as at
December 31, 1998, except in relation to its Ravenshead franchise. See " --
Certain Regulatory Matters -- Cable Telecommunications -- Network Construction
and Service Obligations".
-21-
The following table sets forth the milestones that are incorporated
into the Group's telecommunications licenses and LDLs. Since the actual
milestones that the Group is required to meet are specified individually for
each of the franchises, the Group could meet the aggregate milestones but still
fail to meet one or more individual franchise milestones and therefore subject a
telecommunications license or LDL to the risk of revocation or termination.
AFTER
GROUP FRANCHISE AREAS 1996 1997 1998 1999 2000 2000
- --------------------- ---- ---- ---- ---- ---- -----
TELECOMMUNICATIONS LICENSE
MILESTONES(1)(2)(3)
Nottingham................ 132,000 190,000 230,000 230,000 230,000 230,000
Mansfield................. 42,000 66,000 66,000 66,000 66,000 66,000
Newark-on-Trent........... 13,500 13,500 13,500 13,500 13,500 13,500
Grantham.................. 14,000 14,000 14,000 14,000 14,000 14,000
Melton Mowbray............ 10,000 10,000 10,000 10,000 10,000 10,000
Lincoln................... 18,000 43,000 43,000 43,000 43,000 43,000
Grimsby and Cleethorpes... 35,000 57,000 63,000 63,000 63,000 63,000
Leicester and Loughborough 76,000 100,000 149,000 200,670 200,670 200,670
LDL MILESTONES(2)(3)
Ravenshead................ -- 2,050 2,500 2,500 2,500 2,500
Bassetlaw................. -- 1,000 -- 19,000 28,000 32,800
Lincolnshire and South
Humberside................ -- -- 3,000 33,000 70,000 144,000
Chesterfield.............. -- -- -- 23,000 57,000 89,000
Vale of Belvoir........... -- 1,000 2,000 3,000 4,545 4,545
Burton-upon-Trent......... -- 2,000 14,000 36,000 58,000 77,675
Hinckley.................. -- 2,000 16,000 23,000 31,204 31,204
------- ------- ------- ------- ------- ---------
Aggregate Cumulative Totals 340,500 501,550 626,000 779,670 891,419 1,021,894
======= ======= ======= ======= ======= =========
Aggregate Annual Totals 161,050 124,450 153,670 111,749
(1) Although reflected above on an annual basis, the group's individual
franchise telecommunications license milestones are measured on a
quarterly basiS.
(2) Final milestones are shown in bold.
(3) Telecommunications license milestones refer to premises and LDL
milestones refer to homes.
The table below sets forth by franchise and date the number of premises
activated.
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ----
Nottingham................ 182,254 194,370 203,542 230,352 240,947 246,211
Mansfield................. 61,632 69,707 78,530 79,775 80,963 81,926
Newark-on-Trent........... 13,509 13,509 13,949 15,605 20,449 20,584
Grantham.................. 15,719 15,719 15,936 16,089 16,562 16,717
Melton Mowbray............ 10,045 10,045 10,099 10,163 10,351 10,404
Lincoln................... 34,997 44,619 49,905 50,043 53,043 54,966
Grimsby and Cleethorpes... 49,912 58,894 63,578 64,343 64,804 65,288
Leicester and Loughborough 107,008 118,721 126,563 138,330 151,062 165,452
Vale of Belvoir........... -- 1,652 2,598 2,598 2,657 2,717
Burton-upon-Trent......... -- 2,422 4,704 8,433 12,668 16,927
Hinckley.................. -- 2,012 4,361 9,530 15,144 19,715
Ravenshead................ -- 2,050 2,050 2,050 2,485 2,485
Lincolnshire and South
Humberside................ -- -- 1,348 1,348 2,568 4,077
------- ------- ------- ------- ------- -------
CUMULATIVE TOTAL...... 475,076 533,720 577,163 628,659 673,703 707,469
======= ======= ======= ======= ======= =======
The Group is potentially subject to enforcement orders from the
Director General for failure to meet its telecommunications license milestones,
which could lead to revocation of the relevant licenses. Similarly, in the event
that the Group failed to meet the milestones for any of its LDLs, the ITC would
have power to shorten the LDL period, impose fines or commence proceedings
leading to revocation. The Group has not been subject to date to any enforcement
action by OFTEL or the ITC due to missed milestones. Although there can be no
assurance that OFTEL or the ITC will not take enforcement action in the future,
the Group considers such action unlikely, particularly in light of the
government's new policy of removing the exclusivity of existing cable television
franchises from January 1, 2001, or earlier if the current license holder
requests
-22-
that its exclusive license be replaced with a non-exclusive license. Such
non-exclusive licenses are no longer required by the ITC to contain build
schedules.
SOURCES OF SUPPLY
The Group obtains services and equipment for the construction and
operation of its cable systems from numerous independent suppliers. As the Group
has grown and its construction and purchasing needs have increased, the Group
has sought to use its increased buying power to obtain more favorable pricing
and contract terms.
With certain exceptions, the Group believes that it can purchase the
services and equipment it needs to operate its business from more than one
source. However if a supplier of a product that involves significant lead time
for production and delivery were to be unwilling or unable to supply the Group,
the Group could suffer delays in the operation of its business, which could have
an adverse effect on the Group. Further, in the case of certain supplies,
limited competition in the provision of these materials has subjected (and may
in the future subject) the Group to price increases higher than those
experienced with other supplies.
For certain products, the Group depends on a single supplier. Diamond
formerly obtained exclusively from Marconi (formerly GPT) its switches, primary
multiplexers and certain telephone transmission equipment. LCL obtained such
equipment from Nortel Limited, and the Group now also purchases Nortel
equipment. The Group obtains all of its cable television transmission equipment
and set top converters from Scientific Atlanta. Scientific Atlanta, Marconi and
Nortel Limited are among the largest providers of cable television and telephone
equipment in their respective markets. While the Group to date has experienced
no significant difficulty in receiving products from these companies, the
failure or inability of any of these companies to continue to supply the Group
with these products in the future could have a material adverse effect on the
Group.
The Group has not experienced significant difficulty in obtaining
timely deliveries of equipment and services. In order to reduce warehousing
expenses, maximize inventory control and minimize the possibility that the Group
will not have the required inventory to proceed with construction in a timely
manner, the Group centralized its warehouse operations. Due to the high level of
construction in the U.K. cable industry, delays may be encountered in obtaining
certain supplies such as fiber optic cable; however the Group is making efforts
to avoid such delays.
NETWORK ARCHITECTURE
The network being constructed by the Group comprises an overlay of a
cable television network and a telecommunications network. Portions of the
network currently in the ground utilize conventional tree and branch
architecture and the other portions utilize optical fiber node architecture with
nodes serving up to 2,500 homes. Both of these portions of the network may need
to be upgraded to achieve higher capability and reliability. This upgrading is
not expected to require significant additional capital expenditure.
The Group is now constructing a cable system in which optical fiber is
employed to areas serving approximately 500 homes for both cable television and
telecommunications services. The geography of the Group's franchise areas and
the location of the cable television network's headends and the
telecommunications network's switches dictate to some degree the physical
construction of the cable television and telecommunications network. The
Nottingham central network control office will control and monitor all other
locations which will be interconnected to Nottingham supertrunking fiber
network.
Six switches are currently in operation in Nottingham, which is
presently interconnected with three other switches in Mansfield, Lincoln and
Grimsby. Leicester is interconnected with 2 Mbit/s circuits to Nottingham. Two
switches in Leicester are in service, with a third commissioned in nearby
Shepshed. The Group expects that an additional two switches will be commissioned
at Burton-upon-Trent and Chesterfield during the build out.
In addition to the existing switches, six remote concentrator units
("RCUs") have been interconnected to the Nottingham headend. An additional RCU
at Scunthorpe has been interconnected to the Grimsby headend. The Group expects
that an additional four RCUs will be added during the build program. There
-23-
are presently three cable television headend locations. The Nottingham location
monitors all headend locations. The interconnects are all fiber optics with
two-way capability and status monitoring.
The cable television headends consist of Scientific Atlanta and
Magnavox fiber transmitters, fiber receivers, satellite receivers, signal
processors, modulators, encoding equipment and network status monitoring and
Panasonic automated tape distribution equipment. The cable television network is
being constructed with Scientific Atlanta transmission equipment and set top
converters. The network's downstream upper frequency capability is 750 MHZ. From
the headends, fiber is deployed to each node for feeder distribution and from
the node, coaxial cable is installed to the distribution points. The Group has
begun the deployment of 750 MHZ Scientific Atlanta set top converters, with
analog capacity for 75 channels, as of February 1997.
The telephone switches are Marconi System X and Nortel DMS-100
platforms. The telecommunications network near the switch is fed directly by
copper. Outside the copper service area, the telecommunications network uses
Nortel or Marconi SDH multiplexing equipment in a fiber self-healing loop
configuration operating at 155 Mbit/s ("STM 1"). Four nodes of 500 homes will be
served off of each 2,000 home fiber ring. Marconi and Nortel 120 and 180 line
primary multiplexers are located in the same street cabinet with the SDH
multiplexers, and from there copper is fed down to approximately 30 homes per
street cabinet. As the telephone network grows more distant from the switch,
additional SDH rings operating at 622 Mbit/s ("STM 4") will support four STM 1
rings. The telecommunications network has been designed so that as penetration
and traffic intensifies, ring splitting will enable additional capacity to be
carried. All network equipment, both cable television and telephone, is powered
by battery backed-up power supplies.
Telecommunications and cable television services are transmitted to the
home through the same "Siamese" drop cable. The "Siamese" cable consists of two
twisted pair telephone cables and a cable television coaxial drop cable
manufactured in the same cable housing/insulation package so that both services
are installed at the same time. From a subscriber's home, the telephone cable is
run through the street cabinet up to the 500 home hub cabinet where calls are
processed through a primary multiplexer which handles many calls and transmits
them to the telephone switching equipment. The calls are then routed, if
possible, to their final destination via the lowest cost routing, be it BT,
Cable & Wireless Communications, Energis, Global One, ACC or the Group's own
network.
The duct system is constructed with 89mm diameter duct with a 2.4mm
wall thickness. Trunk cable routes usually contain multiple fiber and coaxial
cables within four to six ducts. Distribution cable routes carry the drop cable
to the customer premises and usually contain one or two ducts. A subscriber drop
is placed inside either 25mm or 50mm duct which is buried in its approach to a
residence to reduce cable drop cuts and other maintenance.
The network will support 100% cable television penetration and 100%
telephone penetration based upon cabinet space but only 50% telephone
penetration based upon transmission equipment with hardware expandability to
96%.
The Group believes that its network architecture design, with respect
to both telecommunications and cable television, will facilitate the transition
to greater fiber distribution. It should allow for efficient utilization of
primary multiplexers and eliminate the need for expensive digital cross connects
to maximize switch port utilization. The Group believes that the network design
has taken into account the need to be flexible with respect to both node and hub
sizes and future developments that may lead to integration between the
telecommunications and the cable television networks.
EMPLOYEES
As of December 31, 1998, the Group had 1,060 employees, including 1,012
employees in operations and 48 employees in civils construction. In 1998, the
Group phased out the small in-house construction team previously maintained to
build out particularly difficult areas, and the Group now uses outside
contractors for all of the build out of its network. With effect from February
1997, DCL began to directly employ residential salespeople, which increased the
number of its employees. Previously salespeople had been employed by independent
companies engaged by the Group on a subcontracting basis. The Group has not
entered into any collective bargaining agreement with employees and the Group
currently believes that its labor relations are good.
-24-
CERTAIN REGULATORY MATTERS
GENERAL
Cable television and cable telephone service industries in the U.K. are
governed by legislation under the Telecommunications Act, the Broadcasting Act
1990, which replaced the CBA, and the Broadcasting Act 1996. The operator of a
cable television and cable telephone franchise in the U.K. covering more than
1,000 homes requires the following two principal licenses for each franchise
area:
(a) a telecommunications license, granted under the
Telecommunications Act by the Secretary of State and supervised by the DTI
and OFTEL, which authorizes the installation and operation of the
telecommunications network used to provide cable television and cable
telephone services, and
(b) a cable television license, which authorizes the provision of
broadcasting services within a defined geographical area and which may be
either:
(i) a Prescribed Diffusion Service License ("PDSL"),
granted under the CBA prior to 1991, which allows an operator to
provide cable television and other entertainment services by
means of a cable network, or
(ii) an LDL granted since January 1, 1991 under the
Broadcasting Act 1990, which allows an operator to deliver
television and other programming services by means of a licensed
telecommunications network including a cable network.
Each type of license described above contains various conditions, and
in the event of the breach of such conditions, the Director General or the ITC,
as appropriate, could issue an enforcement order and ultimately commence
proceedings to require compliance or to revoke such licenses.
Under the Broadcasting Act 1990, cable operators may elect to replace
certain PDSLs with LDLs with similar terms.
The regulatory environment in the U.K. has generally encouraged the
development of the cable telecommunications and the cable television industry
by, among other things, licensing only one operator for each cable franchise
area and restricting the national PTOs from using existing telecommunications
networks to carry broadcast entertainment.
On April 23, 1998, the Department of Trade and Industry announced the
U.K. government's intention to progressively end this policy, allowing any
operator to seek a license to compete in the provision of broadcast
entertainment in those areas outside current cable franchises. From January 1,
2001, competition within current cable franchises will also be permitted.
CABLE TELEVISION
The Broadcasting Act 1990
The Broadcasting Act 1990 established the ITC to license and regulate
commercial television services (terrestrial and satellite) and the Radio
Authority to regulate radio services. The ITC's functions are, among other
things, to grant licenses for television broadcasting activities and to regulate
the commercial television sector by issuing codes on programming, advertising
and sponsorship, monitoring programming content and enforcing compliance with
the Broadcasting Act and cable television license conditions. The ITC has the
power to vary cable television licenses and impose fines and revoke such
licenses in the event of a breach of the license conditions. The ITC also
enforces ownership restrictions on those who hold or may hold an interest in
licenses issued under the Broadcasting Act. See "-- Cable Television Licenses --
Ownership Restrictions".
-25-
CABLE TELEVISION LICENSES
General. As of December 31 , 1998, cable television licenses had been
granted for over 160 franchise areas in the U.K. While the ITC had previously
indicated that it will grant only one cable television license for each
geographical area, on April 23, 1998, the Department of Trade and Industry
announced the U.K. government's intention to progressively end the policy of
granting only one cable television license for a franchise area. As a result,
any operator can seek a licence to compete in the provision of broadcast
entertainment in those areas outside current cable franchises. From January 1,
2001, competition within current cable franchises will also be permitted. The
ITC also has indicated that certain areas, for which cable television licenses
have yet to be awarded, may be advertised at the request of applicants. In the
past, such licenses (LDLs) were awarded after competitive bids. However, it is
now the government's policy to grant licences in new areas to all suitable
applicants. Before awarding an LDL, the ITC must be satisfied as to certain
matters, including the technical specification of the proposed system; that the
applicant has sufficient funding to run the franchise; and that the applicant is
a fit and proper person to be awarded a license.
Cable operators may carry U.K. licensed broadcast services, foreign
satellite programs or text in their services. Cable television licenses also
require cable operators to ensure that advertising and foreign satellite
programs carried by them as part of their services conform to the restrictions
set forth in the codes on advertising, sponsorship and programming issued by the
ITC. Cable television licenses also impose an obligation on licensees to provide
any information which the ITC may require for purposes of exercising its
statutory functions.
Term, Renewal and Revocation of Cable Television Licenses. The Group
holds eight PDSLs which were issued for 15-year terms. The Group also holds
seven LDLs, four of which were granted on September 1, 1995 and three of which
were granted on September 13, 1996, all for 15-year terms.
An application may be made to the ITC to extend a PDSL for up to an
additional eight years if the cable operator holds a 23-year telecommunications
license. Fees would continue to be payable on the same basis as for the
unextended PDSLs and no PQRs or cash bids would be payable during this 8-year
term. If the Group elects to extend the PDSLs, the Group will upon expiration of
such PDSLs as so extended, be required to apply for a new LDL under the
competitive bid procedures described above. If the Group elects not to extend a
PDSL, the Group may apply to the ITC (no earlier than five years prior to the
expiration of the PDSL) for a replacement 15-year LDL, with respect to which it
must agree with the ITC on the amount of the cash bid and PQR payments that will
be payable over the term of the LDL (based on what would have been offered if
the franchise had been offered for competitive bids).
The Group's PDSLs will currently all expire in 2005. The Group has not
yet applied to extend any of its PDSLs, nor has it applied for any replacement
LDLs under the procedure outlined above, since more than five years remain
before their e