UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) |
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ý | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the fiscal year ended December 31, 2005 |
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or |
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from to |
Commission file number: 000-19889
South Hertfordshire United Kingdom Fund, Ltd.
(Exact name of registrant as specified in its charter)
Colorado | | 84-1145140 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
ntl House, Bartley Wood Business Park, Hook,
Hampshire, RG27 9UP, England
+44 1256 752000
(Address and Telephone Number of Principal
Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Limited Partnership Interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the registrant’s limited partnership interests held by non-affiliates as of June 30, 2005, based on a price per limited partnership interest of $91.18, which was the weighted average price at which limited partnership interests were transferred during the second fiscal quarter, was $5,191,333.
As of March 24, 2006, there were 56,935 limited partnership interests of the Registrant outstanding. There is no established public market for the Registrant’s limited partnership interests.
DOCUMENTS INCORPORATED BY REFERENCE
None
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
Various statements contained in this document constitute “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. Words like “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy,” and similar expressions identify these forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from those contemplated, projected, forecasted, estimated or budgeted whether expressed or implied, by these forward-looking statements. These factors include those set forth under the caption “Risk Factors” in the Form 10-K filed on March 1, 2006 by NTL Incorporated, (now known as NTL Holdings Inc.) such as:
• The failure to obtain and retain expected synergies from the merger between NTL Incorporated and Telewest Global, Inc. or Telewest;
• Rates of success in executing, managing and integrating key acquisitions, including the merger between NTL and Telewest;
• The ability to achieve business plans for the combined NTL/Telewest group;
• NTL Incorporated’s (formerly known as Telewest Global, Inc.) or NTL’s ability to manage and maintain key customer relationships;
• NTL’s ability to fund debt service obligations through operating cash flow;
• NTL’s ability to obtain additional financing in the future and react to competitive and technological changes;
• NTL’s ability to comply with restrictive covenants in its indebtedness agreements;
• NTL’s ability to control customer churn;
• NTL’s ability to compete with a range of other communications and content providers;
• The effect of technological changes on NTL’s businesses;
• The functionality or market acceptance of new products that NTL may introduce;
• Possible losses in revenues due to systems failures;
• NTL’s ability to maintain and upgrade its networks in a cost-effective and timely manner;
• NTL’s reliance on single-source suppliers for some equipment and software;
• NTL’s ability to provide attractive programming at a reasonable cost; and
• The extent to which NTL’s future earnings will be sufficient to cover its fixed charges.
We assume no obligation to update the forward-looking statements contained herein to reflect actual results, changes in assumptions or changes in factors affecting these statements.
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PART I
NTL CORPORATE STRUCTURE
Historical Structure
We are a Colorado limited partnership that was formed in December 1991 pursuant to the public offering of our limited partnership interests for the purpose of acquiring one or more cable television/telephone systems in the U.K. Upon acquisition of our system, our primary investment objective was to obtain capital appreciation in the value of our investment in the system over the term such investment is held by us.
We hold 66.7% of the shares of NTL (South Hertfordshire) Limited, or NTL South Herts, which is principally engaged in the development, construction, management and operation of broadband communications networks for telephone, cable television and internet services in the U.K. As a result of our ownership of 66.7% of the shares of NTL South Herts, for accounting purposes we have consolidated the results of NTL South Herts with our results. NTL indirectly holds the remaining 33.3% of the shares of NTL South Herts. We are reliant on the support of NTL, the indirect parent company of NTL Fawnspring Limited, our General Partner, to continue our operations as a going concern.
The General Partner may, pursuant to our Partnership Agreement, provide consulting services to us or delegate the performance of such consulting services to NTL or other affiliates. The General Partner purchased one of our partnership interests by contributing $1,000 to our capital.
On January 10, 2003, NTL emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the plan of reorganization, which we refer to as the Plan, NTL’s former parent, NTL Europe, Inc, or NTL Europe, and its subsidiaries and affiliates, were split into two separate groups, with NTL and NTL Europe each emerging as independent public companies. NTL was renamed “NTL Incorporated” and became the holding company for the former NTL group’s principal U.K. and Ireland assets and the ultimate parent company of our General Partner. NTL Europe became the holding company for the former NTL group’s continental European and various other assets. All of the outstanding securities of NTL’s former parent and some of its subsidiaries, including NTL, were cancelled. NTL issued shares of its common stock and Series A warrants, and NTL Europe issued shares of its common stock and preferred stock, to various former creditors and stockholders. As a result, NTL and we are no longer affiliated with NTL Europe, which has since changed its name to PTV Inc., or PTV.
Effective March 3, 2006, pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of December 14, 2005, as amended by Amendment No.1 thereto, among Telewest Global, Inc., NTL Incorporated, Neptune Bridge Borrower LLC, and, for certain limited purposes set forth therein, Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of Old NTL, Neptune Bridge Borrower LLC was merged with and into NTL Incorporated, which was renamed “NTL Holdings Inc.” in the merger, continuing as the surviving corporation and as a wholly owned subsidiary of Telewest Global, Inc. Immediately following the Merger, the name of the registrant was changed from “Telewest Global, Inc.” to “NTL Incorporated.”
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Summary Corporate Structure
The following chart shows on a condensed basis the corporate structure of NTL and its relationship to us as of December 31, 2005. The chart does not show NTL’s operating or other intermediate companies.
* NTL Fawnspring Limited, an indirect wholly-owned subsidiary of NTL and our General Partner.
** NTL (South Hertfordshire) Limited, or NTL South Herts, our 66.7% subsidiary of which NTL owns 33.3%.
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Exchange rates
The following table sets forth, for the periods indicated, the high, low, period average and period end noon buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York expressed as U.S. dollars per £1.00. The noon buying rate of the pound sterling on March 24, 2006 was $1.7427 per £1.00.
Year Ended December 31, | | Period End | | Average(1) | | High | | Low | |
| | | | | | | | | |
2003 | | 1.78 | | 1.64 | | 1.78 | | 1.55 | |
2004 | | 1.92 | | 1.84 | | 1.95 | | 1.75 | |
2005 | | 1.72 | | 1.81 | | 1.93 | | 1.71 | |
2006 (through March 24, 2006) | | 1.74 | | 1.74 | | 1.79 | | 1.73 | |
(1) The average rate is the average of the noon buying rates on the last day of each month during the relevant period.
The above rates may differ from the actual rates used in the preparation of the consolidated financial statements and other financial information appearing in this annual report on Form 10-K. Our inclusion of these exchange rates is not meant to suggest that the pound sterling amounts actually represent these U.S. dollar amounts or that these amounts could have been converted into U.S. dollars at any particular rate, if at all.
Unless we otherwise indicate, all U.S. dollar amounts as of December 31, 2005 are translated to U.S. dollars at an exchange rate of $1.7188 to £1.00, and all amounts disclosed for the year ended December 31, 2005 are based on an average exchange rate of $1.82 to £1.00. All amounts disclosed as of December 31, 2004 are based on an exchange rate of $1.9160 to £1.00, and all amounts disclosed for the year ended December 31, 2004 are based on an average exchange rate of $1.8326 to £1.00. All amounts disclosed as of December 31, 2003 are based on an exchange rate of $1.7842 to £1.00, and all amounts disclosed for the year ended December 31, 2003 are based on an average exchange rate of $1.6348 to £1.00. U.S. dollar amounts for any individual quarter are determined by multiplying the pound sterling financial result for the period from January 1 to the end of the current quarter by the average exchange rate for the same period and subtracting from this total the U.S. dollar converted financial result for the period from January 1 to the end of the previous quarter of that fiscal year as computed above. The variation among the exchange rates for 2005, 2004 and 2003 has impacted the dollar comparisons significantly.
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Item 1. Business
About South Hertfordshire U.K. Fund, Ltd
We are a Colorado limited partnership that was formed in December 1991 pursuant to the public offering of our limited partnership interests for the purpose of acquiring one or more cable television/telephone systems in the United Kingdom, or U.K. Upon acquisition of our system, our primary investment objective was to obtain capital appreciation in the value of our investment in the system over the term such investment is held by us.
We hold 66.7% of the shares of NTL (South Hertfordshire) Limited, or NTL South Herts, which is principally engaged in the development, construction, management and operation of broadband communications networks for telephone, cable television and internet services in the U.K. As a result of our ownership of 66.7% of the shares of NTL South Herts, for accounting purposes we have consolidated the results of NTL South Herts with our results. NTL indirectly holds the remaining 33.3% of the shares of NTL South Herts. We are reliant on the support of NTL, the ultimate parent company of the General Partner, to continue our operations as a going concern.
We, as well as NTL, file annual, quarterly, and current reports with the SEC. You may read and copy any materials we or NTL files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also access electronically the information we file with the SEC via its website, located at http://www.sec.gov.
About NTL South Herts
Franchise Area
The South Hertfordshire franchise area comprises the three administrative areas of Three Rivers, Watford and Hertsmere. The franchise area covers commuter suburbs of London, and many people who reside in the franchise area use the available fast rail and motorway services to travel to work in central London. South Hertfordshire has benefited from the completion in 1986 of the M25 London Motorway, which makes commuting from the franchise area to other areas in or near London more convenient. An M1 motorway link exists to give London-bound commuters direct access from Watford to the London highway system. The M1 link is half a mile from our headend. There are approximately 95,000 homes in the franchise area, of which approximately 94,000 are passed by our cable television/telephone network. Construction in the franchise area is substantially complete.
Operations
Construction of a cable television-only network in the South Hertfordshire franchise area commenced in early 1991 and, integrated cable television/telephone network architecture was developed for this franchise in late 1991. As of December 31, 2005, approximately 94,000 of the total homes in this area had been passed. Cable television services commenced in April 1992 and telephone services commenced in February 1993, following completion of the installation of a telephone switch. In January 2000, NTL commenced the rollout of digital cable television services within the South Herts franchise and in 2001 commenced broadband internet access services. As of December 31, 2005, NTL South Herts serviced 21,709 digital cable customers, 31,927 residential telephone customers and 20,078 broadband customers, representing a total of 36,975 customers with a penetration level of 39.2%.
Management control is exercised by NTL Fawnspring Limited, a U.K. corporation, which is a wholly owned indirect subsidiary of NTL and is our General Partner, although management control is delegated to other affiliated companies of NTL. Our business is managed by NTL Group Limited, or NTLG, a subsidiary of NTL, from its headquarters in Hook, Hampshire. NTL and we believe that management of our business as an integral part of the larger NTL group reaps the benefits of synergy and maximizes returns. NTLG performs a variety of management functions and procures services on our behalf. Pursuant to an agreement with NTLG, we have the legal right to offset amounts receivable from NTLG against amounts payable to NTLG. Consequently, the net balance payable to NTL is disclosed under accounts payable to affiliates and related parties in the accompanying financial statements.
Our operations are fully integrated into the operations of NTL. Accordingly, the following business description describes NTL’s operations of which we comprise a part.
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NTL’s Business
On March 3, 2006 NTL (Old NTL) merged into a subsidiary of Telewest Global, Inc., pursuant to which the two businesses have combined, creating the UK’s second largest communications company. Immediately following the merger, Telewest Global, Inc. changed its name to NTL Incorporated (New NTL).
Following the merger, which was effective on March 3, 2006, NTL’s stockholders owned approximately 75% and Telewest stockholders approximately 25% of the combined company on a fully diluted basis. Following the merger, NTL, which has changed its name to NTL Holdings Inc. is wholly owned by New NTL. NTL’s common stock, which traded on NASDAQ under the symbol “NTLI,” was delisted. Telewest’s ticker symbol was changed to “NTLI.”
Further details relating to the merger are contained in NTL’s Form 8-K, which was filed on March 3, 2006.
NTL was incorporated in 1993 as a Delaware corporation. New NTL was incorporated in 2003 as a Delaware corporation. New NTL’s principal executive offices are located at 909 Third Avenue, Suite 2863, New York, New York 10022, United States, and NTL’s telephone number is (212) 906-8440. New NTL’s U.K. headquarters are located outside of London, England in Hook, Hampshire, United Kingdom. New NTL’s website is www.ntl.com and the investor relations section of their website can be accessed under the heading “Investors” where New NTL makes available free of charge annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, as soon as reasonably practical after they are filed with the SEC.
The following description relates to Telewest’s business prior to its merger with NTL.
Telewest is a leading broadband communications and media group in the U.K., providing:
• television, telephone and internet access services to residential customers in the U.K.;
• voice, data and managed solutions services for businesses in the U.K.;
• basic television channels and related services to the U.K. multi-channel broadcasting market; and
• a wide variety of consumer products by means of auction-based televised shopping programs.
Telewest’s television and communications services are delivered through its wholly owned broadband, local access communications network, passing approximately 4.7 million homes in the U.K. Telewest’s networks consist of local distribution networks, a “national network” and an internet protocol, or IP, services platform and provide high-speed interconnection and two-way interactivity with directly connected residential and business customers. Like NTL, Telewest offers the “triple play” of internet, telephone and television services to its residential customers.
Telewest’s television channels, auction-based shopping programs and related services are provided through its wholly owned subsidiaries, Flextech Limited, or Flextech, and sit-up Limited, or sit-up. Flextech has ten genre-based entertainment channels, four of which are multi-phased versions of its other channels. Flextech also owns a 50% interest in the companies that comprise the UKTV Group, a series of joint ventures with BBC Worldwide Limited, or BBC Worldwide. Together Flextech and the UKTV Group are the largest supplier of basic channels to the U.K. pay-television market. sit-up provides a wide-variety of consumer products through three interactive auction-based television channels: price drop TV, bid tv and speed auction tv.
The following description relates to NTL’s business prior to its merger with Telewest.
NTL is one of the leading communications and content distribution companies in the U.K., providing internet access, telephone and television services to 3.3 million residential customers, including 1.8 million broadband customers. NTL also provide internet and telephone services to its residential customers who are not connected to its cable network via access to other companies’ telecommunications networks and via an internet service provider operated by its subsidiary, Virgin Net Limited. NTL offers what it refers to as a “triple play” bundle of internet, telephone and television services through competitively priced bundled packages. NTL also provides a range of voice services to businesses and public sector organizations, as well as a variety of data communications solutions from high speed internet access to fully managed business communications networks and communication transport services.
NTL’s services are delivered through its wholly owned local access communications network passing approximately 7.7 million homes in the U.K. The design and capability of NTL’s network provides it with the ability to offer “triple play” bundled services to residential customers and a broad portfolio of reliable, competitive communications solutions to business customers.
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NTL provided services to customers through two sales channels: Consumer and Business.
Consumer
NTL provides broadband and dial-up internet, telephone and television services to residential customers in the U.K.
NTL’s services to residential customers are distributed principally via its wholly-owned, local access communications network to an addressable market of approximately 7.7 million homes in the U.K. The network covers parts of many major metropolitan areas in the U.K., and includes England, Wales and Scotland. In addition, NTL provides services to residential customers not connected to its network via access to other telecommunications networks and via an ISP, virgin.net, operated through its subsidiary Virgin Net Limited.
NTL’s wholly-owned, local access communications network provides it with several competitive advantages in its industry:
• it provides real two-way interactivity with residential customers who are connected to the network;
• it enables NTL to provide true “triple play” bundled services of internet, telephone and television services to residential customers in its franchise areas without relying on another service provider or network; and
• the connection of customers to its networks is by means of a twin cable, consisting of both coaxial and twisted copper pair elements enabling NTL to deliver broadband and high-speed services over each type of cable to customers. NTL’s length of copper pairs is generally much shorter than its principal telephone competitor, allowing potentially higher speed services to be utilized in the future.
In contrast:
• direct to home satellite service providers do not have the capacity to offer two-way interactivity except by adding a phone line or other cable facility; and
• telephone service providers today have only a limited capacity to provide video over existing digital subscriber lines, or DSL, technology.
NTL’s packaging and pricing are designed to encourage its residential customers to use multiple bundled services like dual telephone and broadband internet access, dual telephone and dial-up internet access, dual telephone and television, or triple telephone, television and internet access. For example, NTL’s Family Pack bundle offers over 100 television channels and a telephone line rental. In addition, NTL’s “value packs” offer discounts to subscribers taking two or more products.
NTL believes that it is well-positioned in its service areas to use bundling to increase its customer base, reduce its customer churn rate and increase its profitability. As of December 31, 2005, approximately two thirds of its residential customers received multiple services from NTL. NTL refers to each service it provides as a revenue generating unit, or RGU, and, as of December 31, 2005, each of its on-net customers represented on average approximately two revenue generating units. For example, if NTL provided one customer with broadband internet and telephone services, this customer would represent two RGUs. NTL’s “triple play” customer base has been increasing as a percentage of its total residential customers. At the end of the fourth quarter of 2004, 24.0% of NTL’s on-net customers were triple play customers, and as of December 31, 2005, 29.3% of NTL’s on-net customers were triple play.
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In its service areas, NTL is the primary service provider that provides the full range of services that NTL offers, although competition in each of these services individually is significant and some of the other service providers have substantial resources. See “—Competition.”
The table below shows other typical service providers who offer their services in NTL’s areas:
| | | | BT | | BSkyB | | Broadband
Resellers | | Telephone
Resellers | | Freeview | | Home
Choice | | TUTV | |
| | NTL | | (1) | | (1) | | (2) | | (3) | | (4) | | (5) | | (6) | |
Telephone | | ü | | ü | | × | | × | | ü | | × | | ü | | × | |
Broadband Internet | | ü | | ü | | × | | ü | | ü | | × | | ü | | × | |
Dial Up | | ü | | ü | | × | | ü | | ü | | × | | × | | × | |
Television | | ü | | × | | ü | | × | | × | | ü | | ü | | ü | |
Bundled services | | ü | | × | | × | | × | | × | | × | | ü | | × | |
ü = service available
× = service not available
(1) Although BT Group plc, referred to as BT, and British Sky Broadcasting Group plc, referred to as BSkyB, co-market each other’s telephone and television services, customer and technical support remains distinct and customers are required to retain and pay for the different services separately. BSkyB also offers a CPS service through Sky Talk.
(2) For example, Wanadoo.
(3) For example, Alpha Telecom, Tesco and Carphone Warehouse’s Talk Talk.
(4) Freeview refers to a free-to-air digital television service offered by a consortium. Freeview provides digital television services through a Freeview-enabled set-top box or a television with a digital tuner, with no subscription fees for basic service of about 35 channels. For a subscription fee, some additional channels are available.
(5) Home Choice is the brand name for Video Networks Ltd., whose services are available only in parts of the London metropolitan area.
(6) TUTV refers to Top Up TV, a company offering approximately eleven pay TV channels available to subscribers who otherwise receive Freeview and have purchased TUTV software.
Internet Services
NTL offers several different packages of broadband and dial-up internet services with different features, speeds and pricing. NTL provides broadband and dial-up internet services to customers within reach of its access network, by direct connection to its network. NTL also provides broadband and dial-up internet services to customers not within reach of its access network by providing a connection to its network via BT’s local access network. NTL is the largest direct provider of residential broadband services in the U.K. Broadband provides users with a high-speed always-connected internet service. Users connect their home computers to NTL’s broadband network via high-speed cable modem. NTL offers broadband services at varying speeds: currently 1Mb, 2Mb and 10Mb.
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virgin.net
Through NTL’s Virgin Net Limited subsidiary, NTL provide internet services to residential customers who live inside or outside NTL’s service areas. Virgin Net offers both broadband and dial-up internet services. Various price and feature packages are available including metered and unmetered dial-up, and broadband ranging from 512Kb to 2Mb. Services up to 8Mb are planned for 2006. NTL has a license from Virgin Enterprises Limited to use the Virgin name and logo in connection with the activities of virgin.net. As of December 31, 2005, NTL had approximately 481,000 residential customers using virgin.net, including approximately 166,500 broadband customers.
Features and Content
Some features and content are provided free to all subscribers to NTL’s internet services, e.g. email, newsgroups and NetGuard, NTL’s internet security package. NetGuard provides PC anti-virus and a number of security tools including pop-up blocker, form filler and privacy manager.
Other features and content are provided on a subscription basis, or free to higher tier subscribers e.g. Broadband Plus, which is offered free to higher tier broadband subscribers and, for an additional monthly fee, to lower tier broadband subscribers. Broadband Plus gives residential customers access to premium subscription content, such as online gaming, educational, music and other entertainment content.
Internet Market Growth
Broadband is a dynamic and growing industry. NTL intends to continue to maximize its share of this market by leveraging the competitive advantages of its network to create broadband propositions that are superior in speed, value and features.
NTL has experienced substantial growth in its broadband customer base since 2002. For example, as of the close of 2002, NTL had 517,000 broadband customers. At the end of 2003, NTL had 949,200 broadband customers, at the end of 2004 NTL had 1,330,300 broadband customers and at the end of 2005, NTL had 1,823,900 broadband customers. This represents an average growth rate over this period of over 53.6%, including the 62,000 broadband customers already with virgin.net at the time of its acquisition by NTL in 2004, and over 52.0% excluding those customers.
Telephone
NTL provides local, national and international telephone services to its residential customers. NTL tiers its product offering with attractive pricing that includes “Talk Plans” that enable customers to make unlimited local and national calls for a fixed monthly fee in addition to the standard line rental. NTL provides telephone services to its residential customers who are within reach of NTL’s access network by direct connection to its network and also via BT’s local access network to customers off NTL’s network, a process known as indirect access. NTL also provides national and international directory inquiry services. As of December 31, 2005, NTL provided telephone services to approximately 2.6 million residential customers.
Cable Television
NTL offers a wide range of digital and analog television services to its customers. NTL’s digital services include access to over 130 channels, advanced interactive features and a range of premium and pay-per-view services. NTL’s analog service packages offer up to 45 channels including premium and/or pay-per-view services. In addition to offering all of the popular basic and premium channels available on BSkyB’s satellite platform, NTL also offers to its digital customers, through its joint venture with a subsidiary of Telewest Global, Inc., or Telewest, a cable-only movie, sport and special events pay-per-view television service called “Front Row.” Front Row provides NTL’s customers with similar access to films and special pay per view events as BSkyB’s “Sky Box Office”.
NTL’s network technology enables a significant range of digital interactive services to be delivered by making use of the always-connected broadband connection from a customer’s home to the network, known as the always-on return path. Examples of interactive services include games, television email and access to news, entertainment and information services from an on-screen menu. Interactive services also include enhanced television functionality utilizing the “red button” for BBC and other commercial broadcasters. “Red button” functionality in the U.K. permits television viewers to press a red button on their remote control handset to receive additional interactive services including multiple broadcasts. For example, during last year’s live Wimbledon tennis broadcast on BBC, a viewer could press the red button and receive a choice of multiple live tennis matches to watch, with the ability to switch back and forth between one match and several others.
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As of December 31, 2005, NTL provided cable television services to approximately 1.9 million residential customers, of which approximately 1.4 million received its DTV service and approximately 0.5 million received its ATV service.
Video on Demand
In January 2005, NTL launched its Video on Demand, or VOD, DTV service. This new service, called ntl On Demand, is being rolled out regionally to NTL’s DTV customers throughout the U.K. As of December 31, 2005 over 500,000 existing customers were able to receive the VOD service.
ntl On Demand is a significant enhancement to the existing ntl DTV service, offering viewers choice over and above scheduled programming. The VOD movie service, provided by FilmFlex, a joint venture company between Sony, Disney and the On Demand Group, offers hundreds of films, including many of the latest blockbusters and classics. The VOD service provides access to hundreds of hours of additional programming, including advertising-free children’s programs, a “Pick of the Week” option showing a selection of top shows from the previous seven days, and a music video jukebox service.
Companies who have already agreed to provide VOD content include the BBC, Nickelodeon, Jetix, Warner Music, Entertainment Rights, VPL, The Walt Disney Company, Hollywood Pictures, Touchstone Pictures, Miramax Film Corporation, Buena Vista International, Inc., Sony Pictures Entertainment, Sony Pictures Classics, Columbia Pictures, TriStar, Pathé, Icon Films and Playboy TV. Additional partners are expected to join the service as it develops.
ntl On Demand offers DVD-style features including freeze frame, fast-forward and rewind, and programs are available for 24 hours after purchase. These features provide a customer with full control over the content and timing of their television viewing. There is also an increasing amount of free content available to view at any time. Current films appear on television first through VOD, up to nine months before scheduled TV movie channels. To help customers choose which film to watch, film trailers can be viewed before purchasing.
As soon as this service goes live in each of NTL’s regions, it is available to all of NTL’s DTV customers. No new equipment, installation or additional subscription is required. ntl On Demand appears within the existing Electronic Programming Guide and customers can purchase films and television programs whenever they choose via the remote control.
Sales and Marketing
NTL uses a variety of advertising and marketing channels to sell its services to residential customers, including its dedicated door-to-door sales force and its telephone sales team. These channels are supported by direct marketing initiatives and national and regional press advertising.
NTL uses its residential customer database to identify the profiles of its customers so that it can design offers to match the needs of its customers. NTL’s offers encourage customers to purchase new services and upgrades to existing services.
Customer Service
Improving its customer service has continued to be a central focus for NTL during 2005. NTL now operates its customer service operations from three main custom-built centers based in the U.K. at Glasgow, Swansea and Manchester. These sites are virtualized, which means that calls come in to one access point and are distributed automatically to the first available agent in Glasgow, Swansea or Manchester. This allows real-time call routing between each center, depending on call volumes. A separate service performance team ensures peak call times are resourced properly. NTL uses various tools and processes to ensure that it matches its customers’ calls to the right service center staff and to meet peak demand. NTL’s employees are graded in terms of their expertise in specific call types, which allows the call routing to be linked to skill types of employees, ensuring customers are serviced by experts within their field of enquiry.
In addition, NTL has two specialist teams based in Manchester and Swansea, which deal in high-level fault diagnostics. These teams are staffed by employees trained in on-line diagnosis of faults for NTL’s products. NTL also employs approximately 587 service technicians whose role involves visiting customers who have registered a fault which cannot be rectified remotely. This team is tasked to restore service within 10 hours. During 2005, over 75% of faults were restored within the 10 hour window and a total of 92% within 24 hours. NTL constantly monitors its network to ensure that it detects and repairs network outages promptly, and to enable early communication with its customers.
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NTL’s customer service operation has over 1,600 staff handling over 24 million calls per year. The average call is answered within 187 seconds, with 34% of calls answered within 30 seconds. However, disruptions in service or other special situations can result in increases in call volumes and waiting times.
Since the 2004 call centre consolidation programme and the cessation of billing migration work there have been improvements in service levels, customer advocacy and churn. Customer research shows all aspects of service have improved with overall satisfaction of the Contact Centers having increased from 48% to 53% across 2005 and helped drive overall advocacy to 55%. This is further supported by the customer advocacy for those customers that have had a reason to call NTL. This advocacy measure has increased 11% year-on-year to 52% and is reflected in the likelihood of customers to purchase a new product with us (Customer Satisfaction and Advocacy measure) to 37% from a low in the year of 28%. Correspondingly controllable customer churn (excluding movers) has dropped to below 3% annualized with “service related churn” at 0.7% annualized.
Business
NTL provides voice, data and internet retail and wholesale services to a broad range of commercial and public sector organizations.
NTL believes that it benefits from both cost and performance competitive advantages from its network, in terms of its reach, bandwidth and performance, over that of its competitors, who largely depend on the BT local access network for the end connection to customers. NTL’s network infrastructure passes within 200 meters of more than 600,000 business premises in the U.K.
NTL derives approximately 40% of its retail business revenue from the public sector, particularly local government and the health and education markets. Where NTL’s network overlaps with the communities served by these organizations, NTL leverages its competitive advantage through cost of delivery or network performance. NTL also leverages its competitive advantage in the commercial markets around regional businesses.
NTL generally divides its business customers by market segment into wholesale and retail. Retail customers are divided further into three categories based on revenues generated or expected from that customer:
• Tier 1 — customer generating revenue of more than £100,000 per year;
• Tier 2 — customer generating revenue of between £25,000 and £100,000 per year; and
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• Tier 3 — customer generating revenue of less than £25,000 per year.
This tiering of existing retail customers has enabled NTL to develop cost-effective account management, business development and customer service processes appropriate to levels of customer revenues. Revenue from business retail customers for the year ended December 31, 2005 was £250.0 million, distributed across these Tiers, with 20% in Tier 3, 9% in Tier 2 and 71% in Tier 1.
Revenue from business wholesale customers was £177.6 million for the year ended December 31, 2005.
Services
Voice Services
Business Exchange Lines
NTL’s business exchange lines provide its business customers with analog telephone services that connect to customer telephone handsets or private automatic branch exchanges, or PABXs. Revenues for this service are derived from service installation, line rental and usage charges.
Business Line ISDN 30
NTL’s Business Line ISDN 30 service delivers 30 digital exchange lines over a single physical access link. The exchange lines may be used for voice or data applications or a mix of both. The number of digital exchange lines is sized to a customer’s needs. Revenues for this service are derived from service installation, line rental and usage charges.
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Centrex
NTL’s single and multi-site Centrex solutions provide customers with the facilities of a PABX without the need to invest in the provision and maintenance of a local PABX. Telephone calls between users within a building or in different buildings are handled through NTL’s network but appear to the user to be transferred through a local PABX. Revenues for this service are derived from installation, equipment rental, line rental and call charges.
Non-Geographic Numbers
NTL provides a range of freecall, non-geographic and premium rate number services for tele-business, including advice lines, call centers and telemarketing applications. Revenues for these services are derived from service installation, line rental, usage charges and revenue share with the tele-business line operator.
Data Services
Leased Lines
NTL’s leased line services provide high-quality dedicated connections between two customer locations. Customers use leased lines for voice, data and video applications, and for forming the basis of private networks. Service speeds are available at 2Mb/s, 10Mb/s, 34Mb/s, 45Mb/s, 100Mb/s and 155Mb/s. Revenues for this service are derived from service installation and recurring rental charges based on distance.
Ethernet Services
NTL provides point-to-point, point to multi-point and virtual private network capability, at 10 Mb/s, 100 Mb/s and 1 Gb/s bandwidth. Increasingly, customers use Ethernet as a means of achieving local area network, or LAN, performance over their Wide Area Networks; NTL provides users with the benefit of a dedicated private network at a lower cost. Revenues for this service are derived from installation, access circuit rental and virtual connection rental charges.
Structured Cabling/LAN Solutions
NTL provides in-building structured cabling services which include design, installation and project management of cable installations and upgrades. Revenues for this service are determined on a project-by-project basis.
Internet
Internet Access—Cable Modem/ADSL
NTL provides internet services across the U.K., with access by means of cable modem in areas served by its network or by means of asymmetric digital subscriber line, or ADSL, elsewhere. This allows NTL to provide services across the SME market and ubiquitous national access for larger enterprises.
High Speed Dedicated Internet Access
NTL provides high speed dedicated internet access from 2 Mb/s up to 45 Mb/s to organizations that support web services from their own locations as well as organizations that have heavy demands for access to the internet. Because NTL owns its network, it can provide competitively-priced internet access at higher speeds. NTL’s pricing is based on installation charges and recurring rental charges that vary based on the speed of access.
NTL’s Network
NTL’s business is underpinned by significant investment in its network infrastructure. This consists of a national core backbone network and a high capacity two-way local broadband network in the UK. The entire network was designed for large scale, high-speed telecommunications traffic from its inception. NTL’s core network infrastructure transports its voice, internet, data and digital television platforms, whilst its access networks deliver these services directly to its customers.
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NTL’s broadband communications network in the U.K. currently passes approximately 7.7 million homes in its regional franchise areas. NTL’s cables also pass a significant number of businesses in these areas. NTL’s service areas include parts of many of the major metropolitan areas in the U.K., including London, Manchester, Leeds, Southampton, Portsmouth, Brighton, Derby, Teesside, Cambridge, Oxford, Reading, Nottingham, Leicester, Coventry, Glasgow, Belfast, Cardiff and Swansea. NTL has the largest service area of any cable operator in the U.K. in terms of homes passed.
The core network has a fiber backbone that is approximately 11,000 kilometers long. This includes over 8,400 kilometers which are owned and operated by NTL and approximately 2,600 kilometers which are leased fiber from other network owners. Over 100 switches direct telephone traffic around the core and local networks. In addition, NTL has more than 500 hub sites, points of presence, repeater nodes or other types of network site, and facilities at over 150 radio sites.
NTL’s local access networks deliver internet, telephone and digital and analog television services to its customers’ homes and businesses. NTL’s access network is comprised of two networks together. First, to provide television services and high-speed broadband internet access, its local fiber network is connected to a customer’s premises via high capacity, two-way, coaxial cables. Second, NTL uses Time Division Multiplex (TDM) technology over the fiber network to provide telephone services. This is then connected to a customer’s premises via a relatively short length twisted copper-pair. Additionally, the copper-pair cables are capable of hosting digital subscriber line (DSL) services (NTL intend to pilot this service in 2006). Shorter lengths of copper provide a structural advantage in delivering very high-speed data services (for example 20Mbps ADSL2+ services).
NTL has a variety of alternative methods to connect its national telecommunications network over the “last mile” to the premises of those customers which are located outside of NTL’s cabled areas. NTL:
• obtains permits to construct telecommunications networks and build-out its network to reach its customers. Although this is often the most costly means of reaching a customer, the expense can be justified in the case of larger customers or where a significant level of traffic is obtained from a customer; and
• leases circuits and DSL connections on the local networks of other service providers to connect to the customers’ premises. Although this may reduce the operating margin on a particular account, it requires significantly less capital expenditure than a direct connection and can often be put into place relatively quickly and can be replaced with a direct connection at a later date if traffic volumes justify doing so.
Nationally, approximately 85% of the homes passed by NTL’s network can receive all of its broadband, digital television and telephone services. NTL cannot however currently provide all three of the main services on some older parts of the network. In 2005, NTL continued a network upgrade program targeting approximately half a million homes in the London area, where there is older, less robust cable network. Approximately 230,000 of the London homes were upgraded during 2005, compared to 102,000 in 2004; these homes can now be offered broadband, interactive digital television and telephone services. This program is scheduled to be completed in 2006 with the upgrade of approximately 200,000 homes.
Once the London upgrade program is completed, approximately 88% of the homes passed by NTL’s network nationally will be able to receive all of its broadband, interactive digital television and telephone services.
Information Technology
NTL outsources the management of the primary elements of its information technology systems to various suppliers. These suppliers include IBM, pursuant to an agreement which terminates in 2013 or, if NTL pays a termination fee, on or after May 23, 2006. NTL retains control of its information technology activities that are fundamental to NTL’s competitive advantage and key to the development of its intellectual property. The services IBM provides include:
• management of NTL’s Wintel and mid-range information technology equipment;
• software application development;
• software application maintenance and support;
• end-user help desk services; and
• end-user desk top and laptop computing support.
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Competition
Consumer
NTL believes that it has a competitive advantage in the U.K. residential market because it offers integrated communications services including high-speed broadband internet, telephone and television services. NTL offers most of its products on a stand-alone basis or as part of bundled packages designed to encourage customers to subscribe to multiple services. There is only one other significant cable service provider in the U.K., Telewest, which has different service areas than NTL. NTL has merged with Telewest, effective March 3, 2006. NTL offers internet and telephone services nationally. Television services are offered on NTL’s network in its service areas only.
Internet
NTL provides broadband and dial-up internet services to customers within reach of NTL’s access network, by direct connection to its network. NTL also provides broadband and dial-up internet services to customers not within reach of NTL’s access network by providing a connection to NTL’s network via BT’s local access network. NTL’s internet services compete with BT, which provides broadband and dial-up internet access services over its own network. NTL also competes with ISPs, including Wanadoo (rebranding as Orange in 2006), AOL and Tiscali which do not own an access network infrastructure but offer internet access services by providing access to BT’s network.
Additionally, NTL competes with an increasing number of companies who deploy their own network access equipment in BT exchanges. These companies are known as Local Loop Unbundlers (LLU), for example Easynet (recently acquired by BSkyB) and Bulldog (part of Cable & Wireless). BT and third-party service providers use DSL technologies which, like NTL’s network, permit internet access to be provided at substantially greater speeds than conventional dial-up access. NTL anticipate that BT, as well as NTL’s other major competitors, will increase their access speeds during 2006 to as much as 24Mb.
NTL operates in a highly competitive marketplace which is reflected in the increasing pressures NTL sees on pricing and speeds. Additionally NTL sees an increasing number of new entrants aggressively moving into the market during 2006 (e.g. Carphone Warehouse, BSkyB and Be) as LLU begins to gain traction in the UK. Also, third generation (or 3G) mobile technology or other wireless technologies (like Wi-Max) may subject NTL to increased competition over time in the provision of broadband services.
Telephone
NTL provides fixed line telephone services to customers who are within reach of NTL’s network by direct connection to its network and, like NTL’s internet services, to customers off NTL’s network via BT’s local access network. This process is known as indirect access. NTL competes primarily with BT in providing telephone services to residential customers in the U.K. BT occupies an established market position and has substantial resources. NTL also competes with other telecommunications companies that provide indirect access telephone services, including One.Tel, Carphone Warehouse under the brand name Talk Talk, Caudwell Group under the brand name Homecall, and Tesco.
Previously, when providing indirect access services, calls were routed onto another operator’s network by customers dialing additional digits before entering the primary telephone number or via a dialer box that had to be provided to each customer. Calls can now be routed directly within a BT switch, through a method known as carrier pre-selection. Carrier pre-selection dispenses with the need to dial additional digits or use a dialer box, creating a simpler connection process for the customer. Carrier pre-selection is encouraging new companies to provide indirect access telephone services, increasing the pressure on NTL’s telephone services.
NTL also competes with mobile telephone networks that may threaten the competitive position of its networks by providing a substitute to fixed line telephone services. Mobile telephone services also contribute to the downward price pressure in fixed line telephone services. However, NTL expects that any decrease in demand for fixed line telephone services as a result of competition from mobile telephone networks may be at least partially offset by increased demand for its wholesale services to mobile telecommunications operators.
On December 5, 2005, NTL confirmed that it had approached Virgin Mobile about a potential offer to combine itself with Virgin Mobile, and that NTL had engaged in discussions with Virgin Enterprises to extend its existing license for use of the Virgin name in the internet services area also to cover telephone (as well as television and mobile telephone services). On January 16, 2006, NTL and the independent directors of Virgin Mobile confirmed discussions to enable a cash offer, with share alternative offers, to be made by NTL or
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one or more of NTL’s subsidiaries to acquire 100% of the shares of Virgin Mobile. However, no assurances can be made that an offer will be made, of the terms on which any offer may be made, or whether any transaction will be completed.
Television
NTL competes primarily with BSkyB in providing pay DTV to residential customers in the U.K. BSkyB is the only pay-satellite television platform and has high market share of the UK pay television market. BSkyB owns the UK rights to various sports and movie programming content which it has used to create some of the most popular premium pay TV channels in the U.K. BSkyB is therefore both NTL’s principal competitor in the pay-television market, and a critical supplier of content to NTL. The Office of Fair Trading, a U.K. regulatory agency which we refer to as the OFT, has previously determined that BSkyB is dominant in the wholesale supply of channels carrying certain premium sports content and premium movies. Subject to a continuing finding of dominance, this should prevent BSkyB from abusing its market position in relation to the supply of these channels to NTL. Even so NTL believes that the current pricing for this content is not favorable to it and should be improved. NTL has an agreement in place with BSkyB for their basic service. NTL currently trade on BSkyB’s rate card terms and pricing for their premium service. Residential customers may also receive digital terrestrial television, or DTT. Digital signals are delivered to customer homes through a conventional television aerial and a separately purchased set top box or an integrated digital television set.
The free-to-air DTT service in the U.K. is branded Freeview. This service is provided by a consortium of BSkyB, National Grid Wireless and the BBC and offers customers a limited range of television channels, which include the traditional analog channels. Customers do not pay a monthly subscription fee for basic Freeview service but must acquire a freeview-enabled set top box or a television with a digital tuner. Presently Freeview does not offer several of the most popular pay television channels, such as Sky Sports, Sky Movies and MTV.
Top Up TV offers a pay television service offering staggered times approximately eleven pay television channels for a fixed fee to subscribers who otherwise receive freeview and have purchased Top Up TV software. Currently a limited number of residential customers can receive DTV over BT’s ADSL lines. Video Networks Limited, under the brand name Homechoice, supplies this service, including video on demand, to customers in parts of the London metropolitan area, and Kingston Interactive Television supplies to customers in one region in England.
Following NTL’s merger with Telewest, no other competitors are able to offer the full range of services NTL provides. Some new competitors are using DSL technology to offer a comparable “triple play.” For example, Homechoice, provides bundled services to approximately 30,000 customers, according to Homechoice. However, the offerings of both of these companies are on a significantly smaller scale than NTL’s.
Pay television and pay-per-view services offered by NTL compete to varying degrees with other communications and entertainment media, including home video, video games and DVDs. NTL are introducing video on demand services which may compete in the future with programming provided by video on demand services offered by other parties and may compete against other video formats.
Telecommunications is a constantly evolving industry and NTL expects that there will continue to be many advances in communications technology and in content. These advances, together with changes in consumer behavior, and in the regulatory and competitive environments, mean that it will be difficult to predict how NTL’s operations and businesses will be affected in the future.
The U.K. government has stated that it will terminate ATV transmission by 2012. Consumers wishing to receive television services will have to convert to DTV, currently available via digital satellite, DTT, DSL or cable. However, when ATV transmission is terminated the terrestrial DTV signal and network may be increased. This will enable terrestrial DTV to be made available to customers’ homes that cannot currently receive it. Some customers may wish to subscribe for free DTT, via Freeview, rather than pay for DTV.
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Business
NTL faces a wide range of competitors in the U.K. market. The nature of this competition varies depending on geography, service offerings and size of the marketable area. Only BT and Telewest have both extensive local access networks and a national backbone network. However, as Telewest’s local networks do not overlap with NTL’s networks, NTL does not compete with Telewest to any material extent. BT is a major competitor in almost all of NTL’s opportunities. Cable and Wireless plc, or C&W, and its recently acquired subsidiary Energis own national backbone networks and they tend to focus on the large enterprise and corporate markets. However, these companies do not own local networks to any material extent and rely on wholesale arrangements to supply their customers.
Colt Telecom Group plc has an extensive network particularly in London and also focuses on large enterprise and corporate accounts. Thus Group plc has its network in Scotland, principally in Edinburgh and Glasgow, and United Utilities plc has its network in Manchester. NTL faces these competitors on a local basis mainly in the medium to large end of the SME (small and medium size enterprises) market and in the market for larger corporate accounts and public sector organizations. In addition, for voice services NTL competes with a number of resellers who purchase wholesale minutes from BT and others and competes aggressively in the retail market.
Although many customers have a dual supplier sourcing policy, competition remains based on price and quality of service. NTL expects price competition to intensify as existing and other new entrants compete aggressively. Most of these competitors have substantial resources and NTL cannot assure you that these or other competitors will not expand their businesses in its existing markets or that NTL will be able to continue to compete successfully with these competitors in the business telecommunications market.
BT and C&W are NTL’s principal competitors in NTL’s wholesale services markets. Competition is based on the price, range and quality of services. BT has a local access network across the U.K. that puts BT in a strong competitive position. Competition is most intense on key city-to-city routes where new entrants have increased the number of suppliers and had a significant negative impact on prices. Where opportunities are more closely aligned to the geographic areas NTL serves, the number of its competitors is reduced.
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Government Regulation
Regulation in the European Union (EU)
The European Parliament and Commission regulate our principal business activities through Directives and various other regulatory instruments.
In particular, in February 2002, the European Commission adopted a package of new Directives which, together, set out a new framework for the regulation of electronic communications networks and services throughout the EU. This new framework consisted of four Directives, namely:
• Directive 2002/21 on a common regulatory framework for electronic communications networks and services (the Framework Directive)
• Directive 2002/20 on the authorization of electronic communications networks and services (the Authorization Directive)
• Directive 2002/19 on access to and interconnection of electronic communications networks and associated facilities (the Access and Interconnection Directive), and
• Directive 2002/22 on universal service and users rights relating to electronic communications networks and services (the Universal Service Directive).
This package of Directives was supplemented, subsequently, by the Communications and Privacy Directive which dealt, among other things, with data protection issues in relation to the provision of electronic communications services.
The U.K. Government incorporated these Directives into its national laws under the Communications Act 2003, which came into effect on July 25, 2003, and the Communications Privacy Regulations, which came into effect on December 11, 2003.
During 2006, the European Commission will be conducting a review of these Directives (the 2006 Review) to assess their continuing suitability and efficacy and whether any amendments are necessary. It is not possible, at this stage, to express any opinion as to the likely outcomes of this review.
In addition, the European Parliament and Commission are currently carrying out a review of the Television Without Frontiers Directive. This Directive, which was originally adopted in 1989, has been a cornerstone of EU audiovisual media policy. It requires the Member States of the EU, among other things, to set certain minimum standards for broadcasting and controls on the amount and content of advertising. The Directive also requires Member States to take active measures to ensure that broadcasters under their jurisdiction support the European film and TV production industry. This requirement is achieved, in large part, through the imposition of a European content quota under which broadcasters must reserve a majority of their transmission time for European works.
In December 2005, the European Commission published proposed amendments to the Directive which are designed to update the Directive in the light of technological and market developments. The main proposal is that on-demand services, which the European Commission refer to as “non-linear services”, should be brought within the scope of the Directive and should be made subject to some of its requirements. In particular, there is a proposal that on-demand service providers such as ourselves should be required, where practicable and by appropriate means, to promote production of and access to European works. The Commission cites content quotas and investment levies as examples of how this might be achieved.
Debate on the proposed amendments will continue throughout 2006 and, in particular, the proposals will be debated in the European Parliament within this period. It is not possible, at this stage, to predict the outcome with certainty but there is a risk that our on-demand services will become more heavily regulated as a result and that we may be required to take steps, similar to those which already apply to traditional linear broadcasters, to support European film and TV production.
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Regulation in the U.K.
We are subject to regulation under the Communications Act 2003, the Broadcasting Acts 1990 and 1996 and other U.K. statutes and subordinate legislation.
The Communications Act 2003 established a new regulatory authority, the Office of Communications (Ofcom), as the single regulatory authority for the entire communications sector. Ofcom replaced a number of sectoral regulatory authorities such as the Office of Telecommunications (Oftel) and the Independent Television Commission (ITC).
Under the Communications Act 2003, communications providers, such as ourselves, are no longer required to hold individual licenses in order to provide electronic communications networks and services, although certain licenses are required (see below under Cable TV regulation) in order to own or operate TV channels or to provide certain facilities such as electronic programme guides on the cable TV platform. Even so, all communications providers are subject to a set of basic conditions imposed by Ofcom, which are known as the General Conditions of Entitlement. Any breach of these conditions could lead to the imposition of fines by Ofcom and, ultimately, to the suspension or revocation of a company’s right to provide electronic communications networks and services.
The General Conditions of Entitlement and SMP conditions
Full details of the General Conditions of Entitlement are available on Ofcom’s website (www.ofcom.org.uk). Some of the requirements under the General Conditions of Entitlement with which we must comply include:
• a requirement to negotiate interconnection arrangements with other network providers
• a requirement to ensure that any end-user can access the emergency services
• a requirement to offer outbound number portability to customers wishing to switch to another network provider and to support inbound number portability where we acquire a customer from another network provider
• a requirement to ensure that any end-user can access a directory enquiry service
• a requirement to publish up-to-date price and tariff information
• a requirement to provide itemized billing on request from each customer.
Our entitlement to provide electronic communications networks and services extends throughout the UK and is not constrained in time.
Under current arrangements, any company, including ourselves, providing an electronic communications network or service is liable to pay annual administrative fees to Ofcom if its turnover in the second calendar year before the charging year in question was £5 million or more. These fees are calculated at a rate set by Ofcom each year and are applied to relevant turnover bands.
In addition to the General Conditions of Entitlement, Ofcom is under an obligation to impose further conditions on providers of electronic communications networks or services who have significant market power (SMP) in identified markets. In regulatory terms, SMP equates to the competition law concept of dominance. The new EU regulatory framework, adopted in 2002, required Ofcom to carry out a number of initial market reviews to establish which providers held SMP in these markets, and should therefore be subject to further conditions, and to keep these markets and any other relevant markets identified by Ofcom under regular review. This has resulted in British Telecommunications plc (BT) being found to have SMP in a substantial number of markets. As a result, BT has been made subject to further regulatory requirements in both wholesale and retail markets.
All fixed operators, including ourselves, have been found to possess SMP in relation to the termination of calls on their own networks. This has resulted in the imposition of a requirement on all fixed operators to provide access to their networks on fair and reasonable terms for terminating calls, with additional requirements being imposed on BT and Kingston Communications. This apart, we have not been found to possess SMP in any of the other voice, data or Internet markets in which we operate.
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The Strategic Review of Telecommunications
Following the passing of the Communications Act 2003, Ofcom announced that one of its first tasks would be to carry out a strategic review of telecommunications in the UK (TSR).
The TSR commenced in April 2004 with the observation from Ofcom that, despite almost twenty years of telecommunications liberalization in the UK, BT remained dominant in almost all telecommunications markets. Ofcom’s preliminary assessment was that although the true infrastructure competition offered by the cable industry was highly desirable and had resulted in substantial consumer benefits, it did not represent a sufficient competitive constraint on BT. Similarly, the intensity of competition to BT based on access by third party service providers to the BT network via wholesale products, was insufficient. Ofcom felt, therefore, that it should seek to increase competitive intensity by improving third party access to the BT network.
Having reached this conclusion, Ofcom has developed a concept known as “equivalence”. Broadly, this concept has been defined as enabling BT’s competitors to gain access to BT’s network infrastructure on exactly the same (i.e. equivalent) terms as BT itself enjoys.
At the conclusion of the TSR, BT offered and Ofcom accepted a number of undertakings to put the concept of equivalence into practice in its dealings with competitors. This will be achieved primarily through the creation of a new division within BT called “openreach” which will manage and sell network services to competitors and the rest of BT on the same terms and conditions (including prices) and in accordance with the same processes. By giving these undertakings, BT avoided a reference by Ofcom to the UK competition authorities.
The outcome of the TSR is expected to create further commercial opportunities for new entrants in markets across the communications sector and therefore to meet Ofcom’s objective of increasing competitive intensity.
Universal Service
The concept of universal service is designed to ensure that basic fixed-line telecommunications services are available at an affordable price to all citizens across the EU. The scope of universal service obligations is defined by the Universal Service Directive (see above under Regulation in the European Union) and is transposed into U.K. regulation by the Universal Service Order. This Order has been implemented by Ofcom which has imposed a number of specific universal service requirements on BT and Kingston Communications, both of which have been designated by Ofcom as universal service providers.
The European Commission is expected to review the future scope of universal service obligations as part of the 2006 Review (see above under Regulation in the European Union). This review is likely to consider, among other things, whether universal service should extend to the provision of broadband internet connectivity and whether there is scope in the future for making use of mobile technologies in the provision of some aspects of universal service. We would be impacted by any future decision to require us to provide or to contribute to the funding of universal service in the U.K.
Electronic Communications Code
Under the Telecommunications Act 1984, which was largely replaced by the Communications Act 2003, licensed public telecommunications operators were eligible for enhanced legal powers under the electronic communications code annexed to the Telecommunications Act 1984, or Code Powers. Code Powers are of particular benefit to those who construct and maintain networks because they give enhanced legal rights of access to private land, exemption from some requirements of general planning law and the right to install equipment in the public highway.
The Communications Act 2003 retained the broad structure of Code Powers. Any operator which possessed Code Powers under the previous licensing regime automatically retained those powers under the Communications Act regime. Any operator wishing to obtain new Code Powers must now apply to Ofcom. NTL’s subsidiaries that provide electronic communications networks and services, ntl Group Limited and ntl National Networks Limited, both have Code Powers.
Although Code Powers give operators the right to install equipment in public highways, each operator is required to certify to Ofcom each year that it has sufficient and acceptable financial security in place to cover the costs which could be incurred by local councils or road authorities if they were required to remove equipment or restore the public roads following the insolvency of that operator. This security is commonly described as “funds for liabilities.” Ofcom has indicated that it will generally require an operator to provide board-level certification of third party security for this purpose.
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Cable TV regulation
Although NTL are no longer required to hold individual licenses to provide electronic communications networks and services, NTL are still required to hold individual licenses under the Broadcasting Acts 1990 and 1996 for any television channels which it owns or operates and for the provision of certain other services (e.g. electronic programme guides) on our cable TV platform.
NTL therefore holds a number of Television Licensable Content Service Licenses (TLCS licenses) under the Broadcasting Act 1990 for the provision of promotional channels and for the provision of our electronic programme guide.
TLCS licenses are granted and administered by Ofcom. The licenses require that each licensed service complies with a number of Ofcom codes, including the recently published Broadcasting Code, and with all directions issued by Ofcom. Breach of any of the terms of a TLCS license may result in the imposition of fines on the license holder and, ultimately, to the license being revoked.
Holders of TLCS licenses are required to pay an annual fee to Ofcom. The fees are related to the revenue-earning capacity of each television service and are based on a percentage, set by Ofcom, of revenues from advertising, sponsorship, subscriptions and interactive services, with special rules applying to shopping channels.
U.K. competition law
The Competition Act 1998, which came into force in March 2000, introduced a prohibition on the abuse of a dominant market position and a prohibition on anti-competitive agreements, modeled on Articles 81 and 82 of the Treaty of Rome. The Act also introduced third party rights, stronger investigative and enforcement powers and the ability for the competition authorities to issue interim measures. The new enforcement powers include the ability to impose fines of up to 10% of worldwide turnover. The Competition Act is enforced by the Office of Fair Trading (OFT) and gives concurrent investigative and enforcement powers in matters concerning communications to Ofcom.
The U.K.’s competition law framework was further strengthened by the competition provisions of the Enterprise Act 2002, which came into force in June 2003. Under these provisions, among other things, decisions on mergers are now made by the independent competition authorities, using competition-based tests, rather than by the U.K. Government.
NTL’s merger with Telewest Global, Inc was cleared by the OFT on December 30, 2005. The OFT’s detailed decision in this case was published on January 10, 2006. The time for any third party appeal of this decision has expired.
Under other provisions of the Enterprise Act, individuals who cause, encourage, participate in or, in some cases, even those who have knowledge of, the making of agreements between competitors which are designed to fix prices, share markets, limit supply or production or rig bids in the U.K., can be prosecuted and punished with unlimited fines and imprisonment for up to five years. The courts may also order the disqualification for up to fifteen years of directors whose companies have committed a breach of U.K. or EU competition law.
Seasonality
Some revenue streams are subject to seasonal factors. For example, telephone usage revenue by customers and businesses tends to be slightly lower during summer holiday months. NTL’s customer churn rates include persons who disconnect service because of moves, resulting in a seasonal increase in its churn rates during the summer months when higher levels of U.K. house moves occur and students leave their accommodations between school years.
Research and Development
NTL’s research and development activities involve the analysis of technological developments affecting its cable television, telephone and telecommunications business, the evaluation of existing services and sales and marketing techniques and the development of new services and techniques.
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Patents, Trademarks, Copyrights and Licenses
NTL does not have any material patents or copyrights nor does it believe that patents play a material role in its business. NTL owns and has the right to use registered trademarks, which in some cases are, and in others may be, of material importance to its business, including the “ntl:” logo. NTL uses the Virgin.net name and logo in connection with the activities of its virgin.net ISP under license from Virgin Enterprises Limited.
Employees
As the management of our business is performed by NTL, we do not have any employees on our payroll. At December 31, 2005, NTL had 9,820 employees, 8,896 of whom were permanent and 924 of whom were temporary or contract. NTL believes that its relationship with its employees is generally good.
Item 1B Unresolved Staff Comments
None.
Item 2. Properties
We do not own or lease any properties. NTL South Herts owns a freehold property at 9 Greycaine Road, Watford for use as offices and to house network equipment.
Item 3. Legal Proceedings
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of our business. In the opinion of the management, the amount of ultimate liability with respect to these actions will not materially affect our financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters that were submitted to a vote of the holders of our limited partnership interests during the quarter ended December 31, 2005.
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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
While our interests are publicly held, there is no established public trading market for the limited partnership interests, and it is not expected that such a market will develop in the future. As of March 24, 2006, the approximate number of holders of our limited partnership interests was 5,204.
Item 6. Selected Financial Data
The following table sets forth certain financial data for the years ended December 31, 2005, 2004, 2003, 2002, and 2001. This information should be read in conjunction with the consolidated financial statements and notes and the information contained in our Management Discussion and Analysis appearing elsewhere in this Annual Report. Historical results are not necessarily indicative of future results.
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | | | | | | | | | |
Income Statement Data: | | | | | | | | | | | |
Revenue | | $ | 38,740,331 | | $ | 38,042,360 | | $ | 32,772,962 | | $ | 29,552,065 | | $ | 28,354,653 | |
Cost of goods sold | | (10,430,813 | ) | (11,550,360 | ) | (10,662,169 | ) | (10,772,887 | ) | (12,277,725 | ) |
Selling, general and administrative expenses | | (92,063 | ) | (103,018 | ) | (130,840 | ) | (167,225 | ) | (277,224 | ) |
Management fees and allocated overhead from | | | | | | | | | | | |
General Partner | | (17,063,743 | ) | (14,321,728 | ) | (13,544,514 | ) | (12,035,660 | ) | (11,901,237 | ) |
Other charges | | (653,559 | ) | (602,691 | ) | (220,329 | ) | (1,488,502 | ) | (2,307,942 | ) |
Depreciation | | (5,882,179 | ) | (6,621,976 | ) | (7,460,577 | ) | (7,595,523 | ) | (14,629,055 | ) |
Operating income (loss) | | 4,617,974 | | 4,842,587 | | 754,533 | | (2,507,732 | ) | (13,038,530 | ) |
Interest expense | | (2,957,398 | ) | (2,203,792 | ) | (1,922,710 | ) | (1,587,925 | ) | (1,577,428 | ) |
Exchange gains (losses) | | 219,959 | | (143,217 | ) | (179,033 | ) | (162,100 | ) | 23,590 | |
Income (loss) before minority interest | | 1,880,535 | | 2,495,578 | | (1,347,210 | ) | (4,257,757 | ) | (14,592,368 | ) |
Minority interest expense | | (654,656 | ) | (94,898 | ) | — | | 768,837 | | 4,723,504 | |
Net income (loss) | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) |
| | | | | | | | | | | |
Net income (loss) per Limited | | | | | | | | | | | |
Partnership Unit | | $ | 21.32 | | $ | 41.74 | | $ | (23.43 | ) | $ | (60.67 | ) | $ | (171.60 | ) |
Average number of Limited | | | | | | | | | | | |
Partnership Units outstanding | | 56,935 | | 56,935 | | 56,935 | | 56,935 | | 56,935 | |
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Balance Sheet Data: | | | | | | | | | | | |
Total assets | | $ | 63,195,826 | | $ | 62,528,387 | | $ | 61,450,329 | | $ | 58,973,664 | | $ | 59,167,848 | |
Accounts payable to affiliates and related parties | | 64,324,939 | | 65,398,192 | | 66,757,685 | | 62,691,338 | | 58,599,365 | |
Long-term debt | | — | | — | | — | | — | | — | |
General Partner’s deficit | | (501,583 | ) | (513,842 | ) | (537,849 | ) | (524,377 | ) | (489,488 | ) |
Limited Partners’ (deficit) capital | | (656,602 | ) | (1,870,222 | ) | (4,246,895 | ) | (2,913,157 | ) | 540,874 | |
Minority interest | | 707,259 | | 99,216 | | — | | — | | 739,160 | |
| | | | | | | | | | | | | | | | |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a Colorado limited partnership that was formed in December 1991 pursuant to the public offering of our limited partnership interests for the purpose of acquiring one or more cable television/telephone systems in the U.K. Upon acquisition of our system, our primary investment objective was to obtain capital appreciation in the value of our investment in the system over the term such investment is held by us.
We hold 66.7% of the shares of NTL South Herts, which is principally engaged in the development, construction, management and operation of broadband communications networks for telephone, cable television and internet services in the U.K.. As a result of our ownership of 66.7% of the shares of NTL South Herts, for accounting purposes we have consolidated the results of NTL South Herts with our results. NTL indirectly holds the remaining 33.3% of the shares of NTL South Herts. We are reliant on the support of NTL, the ultimate parent company of the General Partner, to continue our operations as a going concern.
We derive our revenue principally from monthly fees and usage charges. Our packaging of services and pricing are designed to encourage our customers to use multiple services like dual telephone and broadband, dual telephone and television or triple telephone, television and internet access.
The principal components of our expenses include payroll and other employee related costs; interconnection costs paid to other carriers related to telephone services; television programming costs; marketing and selling costs; repairs and maintenance; facility related costs, like rent, utilities and rates; and allowances for doubtful accounts. Our expenses include certain costs that are charged by a subsidiary of NTL for the provision of network services and support, the use of NTL’s national backbone telephone network for carriage of our telephone traffic, as well as the provision of technical infrastructure and network capacity by NTL for our subscription internet access service and digital television services, the provision of corporate services, including finance, legal, human resources and facility services, and for the provision of IT services, including our use of the related IT equipment.
Factors affecting our business
Our residential customers account for the majority of our total revenue. The number of customers, the number and types of services that each customer uses and the prices we charge for these services drive our revenue. Our profit is driven by the relative margins on the types of services we provide to customers. For example, broadband internet is more profitable than ATV. Our packaging of services and our pricing are designed to encourage our customers to use multiple services like dual telephone and broadband. Factors affecting our profitability include customer churn, average revenue per user, or ARPU, and competition.
Selected Operating Data
We set forth in the following table certain data concerning our franchise at December 31, 2005 and 2004:
| | December 31
2005 | | December 31
2004 | |
| | | | | |
Homes passed (1) | | 94,350 | | 93,063 | |
Homes marketable (2) | | 94,350 | | 93,063 | |
Total customers | | 36,975 | | 35,643 | |
Digital cable subscribers | | 21,709 | | 22,000 | |
Analog cable subscribers | | 2,332 | | 3,137 | |
Broadband Internet subscribers | | 20,078 | | 15,275 | |
Telephony subscribers | | 31,927 | | 31,296 | |
Penetration (homes marketable) (3) | | 39.0 | % | 38.0 | % |
Churn (4) | | 1.0 | % | 1.3 | % |
(1) Homes passed is the number of homes that have had ducting buried outside.
(2) Homes marketable refers to the number of homes within our service area that can potentially be served by our network with minimal connection costs.
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(3) Penetration rate measures the number of subscribers for our services divided by the number of marketable homes that our services pass.
(4) Customer churn is calculated by taking the total disconnects during the month and dividing them by the average number of customers during the month. Average monthly churn during the quarter is the average of the three monthly churn calculations within the quarter.
Customer Churn. Customer churn is a measure of the number of customers who stop using our services. An increase in our customer churn can lead to increased costs and reduced revenue. We continue to focus on improving our customer service and enhancing and expanding our service offerings to existing customers in an effort to manage our customer churn rate. Although our ability to reduce our customer churn rate beyond a base level is limited by factors like customers moving outside our network service area, in particular during the summer season, managing our customer churn rate is a significant component of our business plan. Our customer churn rate may increase if we are unable to deliver our services over our network without interruption or if we fail to match offerings by our competitors.
Competition. Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant competition in our markets, including through other broadband service providers, telephone services offered by BT, alternative internet access services, like DSL, which is offered by BT, digital satellite services offered by BSkyB and digital terrestrial television offered by Freeview. If competitive forces prevent us from charging the prices for these services that we plan to charge, or if our competition is able to attract our customers or potential customers we are targeting, our results of operations will be adversely affected.
Capital Expenditures. Our business requires substantial capital expenditures on a continuing basis for various purposes, including expanding, maintaining and upgrading our network, investing in new customer acquisitions, and offering new services. If we do not continue to invest in our network, our ability to retain and acquire customers may be hindered. Therefore, our liquidity and the availability of cash to fund capital projects are important drivers of our revenue. When our liquidity is restricted, so is our ability to meet our capital expenditure requirements. We believe that our cash from operations and cash from NTL will be sufficient for our cash requirements in 2006. The merger transaction between NTL and Telewest has been financed with a new stock issuance, cash on hand and new financings.
Currency Movements. Because revenue and expenses from our principal operations are denominated primarily in pounds sterling but we report our financial results in U.S. dollars, our financial results are impacted by currency fluctuations, which are unrelated to our underlying results of operations.
Seasonality. Some revenue streams are subject to seasonal factors. For example, telephone usage revenue by customers and businesses tends to be slightly lower during summer holiday months. Our customer churn rates include persons who disconnect service because of moves, resulting in a seasonal increase in our churn rates during the summer months when higher levels of U.K. house moves occur and students leave their accommodations between school years.
Integration of Billing Systems. NTL’s historical growth through acquisitions resulted in it inheriting numerous billing systems, which had many differences in functionality, resulting in inefficiencies in its customer service processes. NTL has consolidated the number of billing systems for its residential customers from eleven at the beginning of 2003 to three currently. NTL continues to evaluate how many billing systems it will utilize for residential and business customers, taking into account the prospects for improved efficiencies and better customer service as well as the potential for disruption in the business from additional migration of data. Accordingly, the timing and extent of further integration efforts remain under review and are likely to be influenced by the merger with Telewest.
Call Center Consolidation. On April 7, 2004, NTL announced the consolidation over the next 18 months of its 13 U.K. customer service call centers into three equipped to handle anticipated expansion of its customer base. Following an internal review, three specialist call centers have been retained and developed and are supported by four sales and customer support sites, located throughout the U.K. NTL’s call centre consolidation was completed as of December 31, 2005 at a cost of $43.1 million.
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Critical Accounting Policies
Our consolidated financial statements and related financial information are based on the application of accounting principles generally accepted in the United States, or GAAP. GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported, as well as disclosures about contingencies, risks and financial condition. The following critical accounting policies have the potential to have a more significant impact on our financial statements. An impact could occur because of the significance of the financial statement item to which these policies relate, or because these policies require more judgment and estimation than other matters owing to the uncertainty related to measuring, at a specific point in time, transactions that are continuous in nature.
These policies may need to be revised in the future in the event that changes to our business occur.
Foreign Currency Translation:
Our functional currency is the pound sterling, while our reporting currency is the U.S. dollar. The assets and liabilities of our U.K. subsidiary have been translated using the exchange rate in effect at the balance sheet date and revenue and expenses have been translated at the weighted average rates for the respective years. Exchange gains and losses on translation of our net equity investments in our subsidiaries are reported as a separate component of accumulated other comprehensive income (loss) in partners’ capital (deficit). Foreign currency transaction gains and losses are recorded in the statements of operations.
Fixed Assets:
• Fixed assets, net, totaled $63.2 million and $62.5 million, in 2005 and 2004 respectively. Fixed assets, net are stated at cost less accumulated depreciation.
• The cost of fixed assets includes amounts capitalized for labor and overhead expended in connection with the design and installation of our operating network equipment and facilities. Costs associated with initial customer installations, additions of network equipment necessary to enable advanced services, acquisition of additional fixed assets and replacement of existing fixed assets are capitalized. The costs of reconnecting the same service to a previously installed premise are charged to expense in the period incurred. Costs for repairs and maintenance are charged to expense as incurred.
• We assign fixed assets useful lives that impact the annual depreciation expense. The assignment of useful lives involves significant judgments and the use of estimates. Our managers use their experience and expertise in applying judgments about appropriate estimates. Changes in technology or changes in intended use of these assets may cause the estimated useful life to change, resulting in higher or lower depreciation charges or asset impairment charges.
Revenue:
We recognize revenue only when it is realized or realizable and earned. We recognize revenue when all of the following are present:
• persuasive evidence of an arrangement exists between us and our customers;
• delivery has occurred or the services have been rendered;
• the price for the service is fixed or determinable; and
• collectibility is reasonably assured.
Revenue is invoiced and recorded as part of a periodic billing cycle, and is recognized as the services are provided. At the end of each period, adjustments are recorded to defer revenue relating to services billed in advance and to accrue for earned but unbilled services.
• Telephone, cable television and internet revenues are recognized as the services are provided to customers.
• Bundled services revenue is recognized at the time the services are provided to the customer or the performance of all of the services have been completed. We apply the provisions of EITF No. 00-21 Accounting for Revenue Arrangements with Multiple Deliverables to assess whether the components of the bundled services should be recognized separately.
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• Installation revenue is recognized by applying the provisions of FASB Statement No. 51 Financial Reporting by Cable Television Companies in relation to connection and activation fees for cable television, as well as telephone and internet services, on the basis that we market and maintain a unified fiber network through which we provide all of these services. Installation revenue is recognized at the time the installation has been completed to the extent that such revenue is less than direct selling costs. Installation revenue in excess of direct selling costs is deferred and amortized over the expected life of the customer’s connection.
• Rental revenue in respect of line rentals and rental of equipment provided to customers is recognized on a straight-line basis over the term of the rental agreement.
Other Policies:
• A subsidiary of NTL provides infrastructure and management support services to us. The related charges represent our portion of costs incurred by the subsidiary of NTL for the benefit of all U.K. operations within NTL. The charges are made on the basis of an allocation formula appropriate to each category of charge.
• We maintain allowances for doubtful accounts and other receivables to reflect estimated losses resulting from the potential inability of our customers to make payments. These allowances are estimated based on the current aging of receivables, prior collection experience and future expectations of conditions that might impact the collectibility. If the financial condition of our customers were to deteriorate resulting in impairment in their ability to make payments, additions to the allowances may be required.
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Results of Operations
Years ended December 31, 2005 and 2004
We present below summarized consolidated financial information for the years ended December 31, 2005 and 2004:
| | Year ended December 31, | | Increase (decrease) | |
| | 2005 | | 2004 | | $ | | % | |
| | | | | | | | | |
Revenue | | $ | 38,740,331 | | $ | 38,042,360 | | $ | 697,971 | | 1.8 | |
Cost of goods sold | | (10,430,813 | ) | (11,550,360 | ) | (1,119,547 | ) | (9.7 | ) |
Selling, general and administrative expenses | | (92,063 | ) | (103,018 | ) | (10,955 | ) | (10.6 | ) |
Management fees and allocated overhead | | (17,063,743 | ) | (14,321,728 | ) | 2,742,015 | | 19.1 | |
Other charges | | (653,559 | ) | (602,691 | ) | 50,868 | | 8.4 | |
Depreciation | | (5,882,179 | ) | (6,621,976 | ) | (739,797 | ) | (11.2 | ) |
Operating income | | 4,617,974 | | 4,842,587 | | (224,613 | ) | (4.6 | ) |
Interest expense | | (2,957,398 | ) | (2,203,792 | ) | 753,606 | | 34.2 | |
Foreign exchange gains (losses) | | 219,959 | | (143,217 | ) | (363,176 | ) | — | |
Net income before minority interests | | 1,880,535 | | 2,495,578 | | (615,043 | ) | 24.6 | |
Minority interest expense | | (654,656 | ) | (94,898 | ) | (559,758 | ) | — | |
Net income | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,174,801 | ) | 48.9 | |
Revenue
For the year ended December 31, 2005, revenue increased by 1.8% to $38.7 million from $38.0 million in 2004 and revenue expressed in pounds sterling increased by 2.5% to £21.3 million in 2005 from £20.8 million in 2004. We have increased our revenue primarily due to the increase in the number of broadband customers served by the South Herts System. At December 31, 2005, we served 20,078 broadband customers compared with 15,275 at December 31, 2004.
Expenses
Costs of goods sold. For the year ended December 31, 2005, costs of goods sold decreased by 9.7% to $10.4 million from $11.6 million in 2004 and cost of goods sold expressed in pounds sterling decreased by 9.1% to £5.7 million in 2005 from £6.3 million in 2004. Costs of goods sold as a percentage of revenue declined to 26.9% for the year ended December 31, 2005, from 30.4% for 2004 primarily because revenue growth was focused on higher-margin services and customers, particularly consumer broadband internet services.
Selling, general and administrative expenses. For the year ended December 31, 2005, selling, general and administrative expenses decreased by 10.6% to $92,063 from $103,018 in 2004. We have made savings in selling, general and administrative costs through negotiated reductions in investor relations’ costs.
Management fees and allocated overhead. For the year ended December 31, 2005, management fees and allocated overhead increased by 19.1% to $17.1 million from $14.3 million in 2004. Management fees and allocated overhead expressed in pounds sterling increased by 20.0% to £9.4 million in 2005 from £7.8 million in 2004. The business of NTL South Herts is managed as an integral part of NTL. The combined costs of managing the larger group are allocated to each entity with the NTL group, including NTL South Herts, on a consistent and proportional basis according to the level of trading in that entity. The General Partner considers this to be a fair and reasonable method as management as an integral part of a larger group to reap benefits of synergy maximizes returns. The increase in the amounts charged to us resulted primarily from the increase in the allocable cost base but more specifically from increases in network repair and maintenance, marketing and communications costs together with increased allowances for doubtful accounts offset by reduced levels of set-top box repair and recycling costs and lower employee costs through involuntary employee terminations at the end of 2004.
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Other charges. For the year ended December 31, 2005, other charges increased to $653,559 from $602,691 in 2004, which include restructuring costs allocated to us by a subsidiary of NTL in respect of lease exit costs in connection with properties that have been vacated and for employee severance and related costs in connection with the call center consolidation program. Charges allocated to us by a subsidiary of NTL are made on the basis of an allocation formula appropriate to each category of charge that is based on management’s judgment of a reasonable methodology given the facts and circumstances. Other charges in the year ended December 31, 2004 relate to NTL’s call center consolidation program.
Depreciation expense
For the year ended December 31, 2005, depreciation expense decreased to $5.9 million from $6.6 million in 2004. Certain assets have become fully depreciated in the year.
Interest expense
Two changes to the interest expense charging policies were implemented, as permitted by the Partnership Agreement, in the fourth quarter of 2005. Effective October 1, 2005, interest is charged on the full amount of non-permanent loans provided to us by our affiliates, rather than just the proportion thereof relating to unpaid management fees paid on our behalf by an affiliate of the General Partner. Also effective October 1, 2005, we are charged our allocation of the bank fees and deferred financing costs relating to NTL’s senior credit facilities.
For the year ended December 31, 2005, interest expense increased to $3.0 million from $2.2 million in 2004. The increase in interest expense is primarily owing to the increase in the amount of non-permanent loans on which interest is charged and of allocated bank fees and deferred financing costs in the fourth quarter. In the fourth quarter of 2005, the impact of the change in the amount of non-permanent loans on which interest is charged was $359,805 and the impact of the allocation of bank fees and deferred financing costs was $268,295, for a combined impact of $628,100. This increase is offset by favorable exchange rate movements and a lower effective average interest rate for NTL’s cost of financing.
Exchange gains/(losses)
For the year ended December 31, 2005, foreign currency exchange gains were $219,959 as compared with a loss of $143,217 for 2004. The change in exchange gains/losses is primarily attributable to fluctuations in the valuation of the U.S. dollar on certain of our assets and transactions, which are denominated in pounds sterling. Our results of operations will continue to be affected by foreign exchange rate fluctuations.
Minority interest
In 2005, we recorded a minority interest of $654,656. We record a charge for the minority interest in NTL South Herts when the assets of NTL South Herts exceed its liabilities. Until the quarter ended December 31, 2004, the losses of NTL South Herts applicable to the minority interest exceeded the minority interest in the equity capital of NTL South Herts. In accordance with Accounting Research Bulletin 51, or ARB 51, paragraph 15, such excess and further losses applicable to the minority interest have been charged against the majority interest, as there is no obligation on the part of the minority interest to make good such losses. The minority interests charge for the year ended December 31, 2004 was $94,898, which represented 33.33% of the net assets as at that date.
Net income
For the year ended December 31, 2005, net income was $1.2 million as compared with $2.4 million in 2004 due primarily to the increase in the minority interest expense together with the increase in interest expense as described above.
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Years Ended December 31, 2004 and 2003
We present below summarized consolidated financial information for the years ended December 31, 2004 and 2003:
| | Year ended December 31, | | Increase (decrease) | |
| | 2004 | | 2003 | | $ | | % | |
| | | | | | | | | |
Revenues | | $ | 38,042,360 | | $ | 32,772,962 | | 5,269,398 | | 16.1 | % |
Cost of goods sold | | (11,550,360 | ) | (10,662,169 | ) | 888,191 | | 8.3 | % |
Selling, general and administrative expenses | | (103,018 | ) | (130,840 | ) | (27,822 | ) | (21.3 | )% |
Management fees and allocated overhead | | (14,321,728 | ) | (13,544,514 | ) | 777,214 | | 5.7 | % |
Other charges | | (602,691 | ) | (220,329 | ) | 382,362 | | 173.5 | % |
Depreciation | | (6,621,976 | ) | (7,460,577 | ) | (838,601 | ) | (11.2 | )% |
Operating income (loss) | | 4,842,587 | | 754,533 | | 4,088,054 | | 541.8 | % |
Interest expense | | (2,203,792 | ) | (1,824,622 | ) | 379,170 | | 20.8 | % |
Other interest | | — | | (98,088 | ) | (98,088 | ) | (100.0 | )% |
Foreign exchange losses | | (143,217 | ) | (179,033 | ) | (35,816 | ) | (20.0 | )% |
Net income (loss) before minority interests | | 2,495,578 | | (1,347,210 | ) | (3,842,788 | ) | 285.2 | % |
Minority interests | | (94,898 | ) | — | | (94,898 | ) | — | |
Net income (loss) | | $ | 2,400,680 | | $ | (1,347,210 | ) | (3,747,890 | ) | 278.2 | % |
Revenue
For the year ended December 31, 2004, revenue increased by 16.1% to $38.0 million from $32.8 million in 2003 and revenue expressed in pounds sterling increased by 3.5% to £20.8 million in 2004 from £20.0 million in 2003. We have increased our revenue through price rises and more broadband customers served by the South Herts System. At December 31, 2004, we served 15,275 broadband customers compared with 10,850 at December 31, 2003.
Expenses
Costs of goods sold. For the year ended December 31, 2004, costs of goods sold increased by 8.3% to $11.6 million from $10.7 million in 2003 but cost of goods sold expressed in pounds sterling decreased by 3.4% to £6.3 million in 2004 from £6.5 million in 2003. Costs of goods sold as a percentage of revenue declined to 30.4% for the year ended December 31, 2004, from 32.5% for 2003 primarily because revenue growth was focused on higher-margin services and customers, particularly consumer broadband internet services.
Selling, general and administrative expenses. For the year ended December 31, 2004, selling, general and administrative expenses decreased by 21.3% to $103,018 from $130,840 in 2003. We have made savings in selling, general and administrative costs through negotiated reductions in investor relations’ costs.
Management fees and allocated overhead. For the year ended December 31, 2004, management fees and allocated overhead increased by 5.7% to $14.3 million from $13.5 million in 2003 but management fees and allocated overhead expressed in pounds sterling decreased by 5.7% to £7.8 million in 2004 from £8.3 million in 2003. The business of NTL South Herts is managed as an integral part of NTL. The combined costs of managing the larger group are allocated to each entity with the NTL group, including NTL South Herts, on a consistent and proportional basis according to the level of trading in that entity. The General Partner considers this to be a fair and reasonable method as management as an integral part of a larger group to reap benefits of synergy maximizes returns. The decrease in the amounts charged to us resulted from decreases in the cost of NTL’s outsourced information technology services, savings in property and related facility costs, and reductions in employee costs and other cost efficiencies that have been largely offset by higher sales and marketing costs and involuntary employee termination costs following further business rationalizations by NTL in the fourth quarter of 2004.
Other charges. For the year ended December 31, 2004, other charges increased to $602,691 from $220,329 in 2003. Other charges include restructuring costs allocated to us by a subsidiary of NTL. These costs are for employee severance and related costs. Charges allocated to us by a subsidiary of NTL are made on the basis of an allocation formula appropriate to each category of charge that is based on management’s judgment of a reasonable methodology given the facts and circumstances. Other charges in 2004 relate to NTL’s call center consolidation program.
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Depreciation expense
For the year ended December 31, 2004, depreciation expense decreased to $6.6 million from $7.5 million in 2003. During 2004, we evaluated the remaining useful economic lives of our fixed assets. As of January 1, 2004, we adopted new useful economic lives. The change in lives reduced the depreciation charge by $0.7 million for the year ended December 31, 2004.
Interest expense
For the year ended December 31, 2004, interest expense increased to $2.2 million from $1.8 million in 2003. We incur interest on management fees paid on our behalf by the General Partner. The increase in interest expense is owing to the higher level of these unpaid management fees as well as foreign exchange movements.
We paid no cash interest for the years ended December 31, 2004 and 2003.
Foreign exchange losses
For the year ended December 31, 2004, foreign currency exchange losses were $143,217 as compared with $179,033 for 2003. The change in exchange losses is primarily attributable to fluctuations in the valuation of the U.S. dollar on certain of our assets and transactions, which are denominated in pounds sterling. Our results of operations will continue to be affected by foreign exchange rate fluctuations.
Minority Interest
In 2004, we recorded a minority interest of $94,898. We record a charge for the minority interest in NTL South Herts when the assets of NTL South Herts exceeds its liabilities. Until the quarter ended December 31, 2004, NTL South Herts’ liabilities exceeded its assets and consequently, we had not recognized the resulting minority interest asset since such an asset would not be recoverable. Under U.K. law, the shareholders of a U.K. limited company are protected from the company’s liabilities. The minority interests charge for the year ended December 31, 2004 represented 33.33% of the net assets as at that date.
Net Income (loss)
For the year ended December 31, 2004, net income was $2.4 million as compared with a net (loss) of $1.3 million in 2003. This change was primarily a result of the improvement in our operating performance.
Statement of Cash Flows
Years Ended December 31, 2005 and 2004
For the year ended December 31, 2005, cash provided by operating activities increased to $13.2 million from $3.3 million in 2004.
For the year ended December 31, 2005, purchase of fixed assets increased to $13.4 million from $3.3 million in 2004. Expressed in pounds sterling, the purchase of fixed assets increased to £7.3 million from £1.8 million in 2004. Purchase of fixed assets relate primarily to the transfer of Network assets from an affiliate amounting to $11.6 million together with $1.8 million fixed asset additions through customer installations, particularly broadband. The asset transfer from the affiliate was effective December 31, 2005, consequently there was no impact on the depreciation charge for the year.
Years Ended December 31, 2004 and 2003
For the year ended December 31, 2004, cash provided by operating activities increased to $3.3 million from $1.5 million in 2003, owing to the improvement in our operating performance.
For the year ended December 31, 2004, purchase of fixed assets increased to $3.3 million from $1.5 million in 2003. Expressed in pounds sterling, the purchase of fixed assets increased to £1.8 million from £0.9 million in 2003. Purchase of fixed assets relate primarily to customer installations, particularly broadband.
33
Liquidity and Capital Resources
Outstanding indebtedness
We have no financing independent of NTL. We are reliant upon the support of NTL to continue our operations. As of December 31, 2005 we had consolidated current liabilities of $64.3 million due to NTL Group companies compared with $65.4 million as of December 31, 2004.
Historically, our source of cash had been the net proceeds of our offerings of limited partnership interests and our principal uses of cash have been capital contributions to NTL South Herts in order to fund our proportionate share of the construction costs of the South Herts System.
Accordingly, until such time as NTL South Herts begins to pay dividends on its ordinary shares (which is not expected in the foreseeable future) we will be required to fund our administrative expenses by additional issuances of limited partnership interests or from borrowings. It is unlikely that we will be able to sell debt or equity securities in the public markets at least in the short term or to obtain financing from commercial banks. Accordingly, we are dependent on NTL for funds to cover operating expenses, and will continue to be dependent upon NTL to meet our liquidity requirements for the foreseeable future. We expect that cash from our operations in 2006 will be utilized fully for the purchase of fixed assets including connecting new customers to our networks.
Telewest financing
NTL obtained a total of £5.1 billion in financing to effect the merger with Telewest and pay the related fees, costs and expenses in connection therewith, to repay in full NTL’s existing senior credit facilities, repay in full the existing senior and second lien credit facilities of Telewest and to finance the ongoing working capital needs and general corporate requirements of the combined company and its subsidiaries after the merger.
Off -Balance Sheet Transactions
We have no off–balance sheet transactions as of December 31, 2005.
Contractual Obligations and Commercial Commitments
We have no significant contractual obligations and commercial commitments as of December 31, 2005.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The functional currency of NTL South Herts is pounds sterling and all revenue and substantially all costs are incurred in pounds sterling. We report in U.S. dollars. Therefore, we are exposed to fluctuations in the pound sterling to U.S. dollar exchange rate.
The aggregate potential loss from a hypothetical one-percent fall in the pound sterling / U.S. dollar exchange rate is $19,640 for the year ended December 31, 2005.
We have no debt other than amounts due to affiliates. As of December 31, 2005, we had approximately $64.3 million in amounts due to NTL. Interest on amounts due to affiliates is at a variable rate based on the average rate incurred by NTL. Therefore we are exposed to changes in NTL’s borrowing rate. The aggregate potential loss from a hypothetical one-percentage point increase in the interest rate is approximately $530,000 for the year ended December 31, 2005.
34
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, the notes thereto and the report of the independent auditors are on pages F-1 to F-13 of this annual report and are incorporated by reference. The following is a summary of the quarterly results of operations for the years ended December 31, 2005 and 2004.
| | 2005 | |
| | Three Months Ended | |
| | March 31 | | June 30 | | September 30 | | December 31 | |
| | | | | | | | | |
Revenues | | $ | 10,247,295 | | $ | 9,974,629 | | $ | 9,543,147 | | $ | 8,975,260 | |
Operating income | | 1,469,018 | | 994,361 | | 1,470,718 | | 683,877 | |
Income before minority interest | | 913,996 | | 517,914 | | 927,601 | | (478,976 | ) |
Minority interest | | (319,979 | ) | (162,724 | ) | (325,757 | ) | 153,804 | |
Net income | | 594,017 | | 355,190 | | 601,844 | | (325,172 | ) |
Net income per limited partnership unit | | 10.33 | | 6.18 | | 10.47 | | (5.65 | ) |
| | | | | | | | | | | | | |
| | 2004 | |
| | Three Months Ended | |
| | March 31 | | June 30 | | September 30 | | December 31 | |
| | | | | | | | | |
Revenues | | $ | 9,358,412 | | $ | 9,206,782 | | $ | 9,539,081 | | $ | 9,938,085 | |
Operating income | | 1,191,736 | | 1,001,281 | | 1,377,008 | | 1,272,562 | |
Income before minority interest | | 593,267 | | 491,858 | | 828,265 | | 582,188 | |
Minority interest | | — | | — | | — | | (94,898 | ) |
Net Income | | 593,267 | | 491,858 | | 828,265 | | 487,290 | |
Net Income per limited partnership unit | | 10.32 | | 8.55 | | 14.40 | | 8.47 | |
| | | | | | | | | | | | | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer of NTL*, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, NTL’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, these controls and procedures are effective to ensure that information required to be disclosed by the registrant in the reports the registrant files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits is accumulated and communicated to the registrant’s management, including NTL’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We are not an accelerated filer, as defined in Rule 12b-2 of the Exchange Act. As a result, we are required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, as adopted by the SEC, for fiscal years ending on or after July 15, 2007. We therefore expect to file our first internal control report certification and related attestation report when filing an Annual Report on Form 10-K for the year ending December 31, 2007.
(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting covered by this Report.
* The Partnership has no Chief Executive Officer or Chief Financial Officer. Robert Mackenzie and Robert Gale are Directors of ntl Directors Limited, which is a corporate director of NTL Fawnspring Limited, the general partner of the Partnership.
Item 9B. Other Information
None.
35
PART III
Item 10. Directors and Executive Officers of the Registrant
We have no officers or directors. Certain information concerning directors and executive officers of our General Partner is set forth below.
Name | | Age | | Title |
Robert Mackenzie | | 43 | | Director and Secretary |
Robert Gale | | 45 | | Director |
Robert Mackenzie
Mr. Mackenzie, age 43, has been the Secretary and Director of our General Partner since May 30, 2000 and is NTL’s Group Legal Director. He joined International CableTel Incorporated in 1993, to establish the legal department in the U.K. and act as Company Secretary for the newly formed CableTel, subsequently renamed NTL. From 1988 to 1993, Mr. Mackenzie worked for Theodore Goddard as a Solicitor in the Corporate Finance department advising public and private companies on corporate finance, takeovers, domestic and international mergers and acquisitions. He was additionally seconded to corporate brokers Phoenix Securities Ltd. as Mergers & Acquisition Manager. Previously he worked for Mischon de Reya, handling High Court commercial litigation. He was admitted as a Solicitor in 1987, and graduated in law from King’s College, University of London. His Law Society Finals were taken at College of Law, London.
Robert Gale
Mr. Gale, age 45, is the vice president—controller of NTL. He has held this position since June 17, 2003. Mr. Gale joined NTL in May 2000 from Cable & Wireless Communications plc, where he was head of finance for the ConsumerCo business acquired by NTL. In October 2000, he was appointed as group director of financial control for NTL’s UK operations. He had joined Cable & Wireless in January 1998. From 1995 to 1997, Mr. Gale was chief financial officer of ComTel, a cable operator subsequently acquired by NTL. Between 1989 and 1995, Mr. Gale was group financial controller at TVS Entertainment PLC, a UK television broadcaster and program producer. Mr. Gale is a chartered accountant and worked for KPMG at its London office between 1981 and 1989.
We have no Audit Committee. The Audit Committee of the board of directors of NTL reviews, acts on and reports to the board of directors of NTL with respect to various auditing and accounting matters. In this capacity, the audit committee acts on our behalf as necessary. The current members of the Audit Committee are Charles K. Gallagher, who is its chairman and who the board of directors has determined to be an audit committee financial expert, David Elstein, George R. Zoffinger and Jeffrey D. Benjamin. The members of the Audit Committee are independent within the meaning of the Nasdaq National Markets listing standards currently applicable to NTL.
As we have no officers, directors, or employees, we have not adopted a code of ethics. However, NTL has adopted a code of ethics for its senior executive and financial officers, which old NTL filed as exhibit 14.1 to its 2003 Form 10-K. NTL’s code of ethics establishes policies to promote honest and ethical conduct and to deter wrongdoing, including policies governing actual or apparent conflicts of interest, compliance with laws and prompt internal reporting for violations.
Item 11. Executive Compensation
We have no employees; however, various personnel are required to operate our network. Personnel are employed by NTL and its affiliates and, pursuant to the terms of our Partnership Agreement, NTL and its affiliates charge the cost of such employment to us as a direct reimbursement item. See Item 13, “Certain Relationships and Related Transactions” for a description of the relationship between us and NTL.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Our General Partner purchased one of our partnership interests by contributing $1,000 to our capital.
No person or entity known to us owns more than 5% of our limited partnership interests. No directors or executive officers of our General Partner beneficially own any of our limited partnership interests.
36
Item 13. Certain Relationships and Related Transactions
Our General Partner and its affiliates engage in certain transactions with us as contemplated by our Partnership Agreement and as disclosed in the prospectuses for our public offerings. Our General Partner believes that the terms of such transactions, which are subject to our Partnership Agreement, are generally as favorable as those that we could have obtained from unaffiliated parties. This determination has been made by our General Partner in good faith, but none of the terms were or will be negotiated at arm’s-length and there can be no assurance that the terms of such transactions have been or will be as favorable as those that we could have obtained from unaffiliated parties.
An affiliate of our General Partner is entitled to be paid a consulting fee by NTL South Herts. During the construction phases of the cable television/telephone system, this consulting fee was 2% of construction costs. After completion of construction of each portion of the system, the consulting fee for the completed portion is 5% of gross revenue, excluding revenue from the sale of cable television/telephone systems. Consulting fees paid or payable by us for the year ended December 31, 2005 totaled $1,937,016.
Our General Partner and its affiliates are entitled to reimbursement from NTL South Herts for direct and indirect expenses allocable to the operation of its network and from us for direct and indirect expenses allocable to our operation, which include but are not limited to rent, supplies, telephone, travel and salaries of any full or part time employees.
Our General Partner and its affiliates may make advances to, and defer collection of fees and allocated expenses owed by, us, although they are not required to do so. We will be charged interest on such advances and deferred amounts. Interest charges incurred by us for the year ended December 31, 2005 amounted to $145,205.
Item 14. Principal Accountant Fees and Services
Ernst & Young LLP are our principal accountants. We are not billed directly by Ernst & Young for services, but are allocated a proportion of the fees charged to NTL by Ernst & Young. We provide in the table below an analysis of the fees charged to NTL by Ernst & Young and allocated to us in the each of the two years ended December 31, 2005 and 2004.
| | Year ended December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Audit fees | | $ | 68,005 | | $ | 82,360 | |
Audit-Related fees | | 833 | | 6,160 | |
Tax fees | | 40,390 | | 69,510 | |
All other fees | | — | | — | |
| | $ | 109,228 | | $ | 158,030 | |
Audit fees. Audit fees represent the aggregate services provided to us by Ernst & Young for professional services rendered for the audit of our annual financial statements and review of financial statements included in our Form 10-K, including accounting consultations on matters addressed during the audit and interim reviews. These fees also include services that are provided in connection with our statutory and regulatory filings.
Audit-Related fees. Audit-Related fees represent the aggregate fees charged for assurance and related services by Ernst & Young that are related to the audit or review of our financial statements, including other accounting consultations. Audit-Related services include advice relating to the Sarbanes-Oxley Act of 2002 including advice on reporting on internal controls under Section 404.
Tax fees. Tax fees represent the aggregate fees charged for professional services rendered by Ernst & Young for tax compliance, tax advice and tax planning. Tax services included compliance work regarding the preparation and filing of our U.S. and U.K. tax returns.
All other fees. All other fees represent the aggregate fees charged for other products and services provided by Ernst & Young.
37
Audit Committee’s pre-approval policies and procedures
We have no Audit Committee. The Audit Committee of the board of directors of NTL reviews, acts on and reports to the board of directors of NTL with respect to various auditing and accounting matters. In this capacity, the audit committee acts on our behalf as necessary. The current members of the Audit Committee are Charles K. Gallagher, who is its chairman and who the board of directors has determined to be an audit committee financial expert, David Elstein, George R. Zoffinger and Jeffrey D. Benjamin. The members of the Audit Committee are independent within the meaning of the Nasdaq National Markets listing standards currently applicable to NTL.
NTL’s Audit Committee’s policy on pre-approval requirements for audit and other services provided to NTL and us by Ernst & Young is as follows:
• Annually, NTL’s Audit Committee agrees the terms, including fees, of the engagement for the services to be provided by Ernst & Young as part of the recurring annual audit.
• Quarterly, NTL’s Audit Committee pre-approves the Audit-Related fees, Tax fees and Other fees for services to be provided by Ernst & Young to us in respect of services that are either a continuation of services already pre-approved, or services which are expected to commence during the following three months. These limits represent amounts that may not be exceeded without approval by the Audit Committee.
• Between meetings, the Chairman of the Audit Committee has delegated authority to approve services on an ad-hoc basis to meet specific needs up to £100,000 per engagement.
38
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements—See list of Financial Statements on page F-1.
(2) Financial Statement Schedules—See list of Financial Statement Schedules on page F-1.
(3) Exhibits—See Exhibit Index below.
EXHIBIT INDEX
Exhibit
No. | | |
3.1 | | Certificate of Limited Partnership dated December 31, 1991 (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-K for the year ended December 31, 1994, filed on March 31, 1995, File No. 000-19889) |
| | |
3.2 | | Amendment to the Certificate of Limited Partnership dated January 31, 1995 (Incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-K for the year ended December 31, 1994, filed on March 31, 1995, File No. 000-19889) |
| | |
4.1 | | Limited Partnership Agreement dated December 31, 1991 (Incorporated by reference to the Registrant’s Post-Effective Amendment No. 2 to Form S-1, filed on May 6, 1993, File No. 33-48400) |
| | |
4.2 | | Amendment No. 1 to Limited Partnership Agreement dated October 20, 1992 (Incorporated by reference to Exhibit 4.2 to the Registrant’s Form 10-K for the year ended December 31, 1994, filed on March 31, 1995, File No. 000-19889) |
| | |
21.1* | | List of Subsidiaries of South Hertfordshire United Kingdom Fund, Ltd. |
| | |
31.1* | | Certification of Chief Executive Officer, pursuant to Rule 13(a)-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, or Exchange Act |
| | |
31.2* | | Certification of Chief Financial Officer, pursuant to Rule 13(a)-14(a) and Rule 15d-14(a) of the Exchange Act |
| | |
32.1* | | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed herewith.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SOUTH HERTFORDSHIRE UNITED |
| KINGDOM FUND, LTD. |
| | a Colorado limited partnership |
| | |
| By: | NTL Fawnspring Limited, |
| | its General Partner |
| | |
| By: | /s/ ROBERT MACKENZIE | |
| | Robert Mackenzie |
| | Director of ntl Directors Limited |
| | Corporate Director of NTL Fawnspring Limited, |
| | the General Partner of South Hertfordshire |
| | United Kingdom Fund, Ltd. |
Dated: March 30, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | | Title | | Date |
/s/ ROBERT MACKENZIE | | | Director of ntl Directors Limited Corporate Director of | | March 30, 2006 |
| Robert Mackenzie | | NTL Fawnspring Limited, the General Partner of South Hertfordshire United Kingdom Fund, Ltd.* | | |
| | | | |
/s/ ROBERT GALE | | | Director of ntl Directors Limited Corporate Director of | | March 30, 2006 |
Robert Gale | | NTL Fawnspring Limited, the General Partner of South Hertfordshire United Kingdom Fund, Ltd.* | | |
| | | | | | | |
* The Partnership has no Chief Executive Officer or Chief Financial Officer. Robert Mackenzie and Robert Gale are directors of ntl Directors Limited, which is a corporate director of Fawnspring Limited, the general partner of the Partnership.
40
FORM 10K - ITEM 15(a) (1)
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2005, and 2004
and for the Years Ended December 31, 2005, 2004, and 2003
The following consolidated financial statements of South Hertfordshire United Kingdom Fund, Ltd. are included in Item 8:
INDEX
F-1
Report of Independent Registered Public Accounting Firm
The Partners
South Hertfordshire United Kingdom Fund, Ltd.
We have audited the accompanying consolidated balance sheets of South Hertfordshire United Kingdom Fund, Ltd. (a Colorado limited partnership) as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income (loss), partners’ capital (deficit) and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the General Partner’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of South Hertfordshire United Kingdom Fund, Ltd. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
London, England
March 28, 2006
F-2
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
CONSOLIDATED BALANCE SHEETS
| | December 31,
2005 | | December 31,
2004 | |
| | | | | |
Assets | | | | | |
Fixed assets, net | | $ | 63,195,826 | | $ | 62,528,387 | |
| | | | | |
Total assets | | $ | 63,195,826 | | $ | 62,528,387 | |
| | | | | |
Liabilities and Partners’ Deficit | | | | | |
Current liabilities | | | | | |
Accounts payable to affiliates and related parties | | $ | 64,324,939 | | $ | 65,398,192 | |
Total liabilities | | 64,324,939 | | 65,398,192 | |
| | | | | |
Minority interest | | | | | |
Minority interest | | 707,259 | | 99,216 | |
| | | | | |
Partners’ Capital (Deficit) | | | | | |
General Partner | | | | | |
Contributed capital | | 1,000 | | 1,000 | |
Accumulated deficit | | (502,583 | ) | (514,842 | ) |
| | (501,583 | ) | (513,842 | ) |
Limited Partners | | | | | |
Contributed capital, net (56,935 units outstanding at December 31, 2005 and December 31, 2004) | | 48,817,997 | | 48,817,997 | |
Accumulated deficit | | (49,474,599 | ) | (50,688,219 | ) |
| | (656,602 | ) | (1,870,222 | ) |
Accumulated comprehensive loss | | (678,187 | ) | (584,957 | ) |
Total Partners’ deficit | | (1,836,372 | ) | (2,969,021 | ) |
| | | | | |
Total liabilities and Partners’ deficit | | $ | 63,195,826 | | $ | 62,528,387 | |
The accompanying notes
are an integral part of these consolidated financial statements.
F-3
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Year ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Revenues | | $ | 38,740,331 | | $ | 38,042,360 | | $ | 32,772,962 | |
| | | | | | | |
Costs and expenses | | | | | | | |
Cost of goods sold (exclusive of depreciation shown separately below) | | (10,430,813 | ) | (11,550,360 | ) | (10,662,169 | ) |
Selling, general and administrative expenses | | (92,063 | ) | (103,018 | ) | (130,840 | ) |
Management fees and allocated overhead from the General Partner | | (17,063,743 | ) | (14,321,728 | ) | (13,544,514 | ) |
Other charges | | (653,559 | ) | (602,691 | ) | (220,329 | ) |
Depreciation | | (5,882,179 | ) | (6,621,976 | ) | (7,460,577 | ) |
| | | | | | | |
Operating income | | 4,617,974 | | 4,842,587 | | 754,533 | |
| | | | | | | |
Other expenses | | | | | | | |
Interest payable to general partner and affiliates | | (2,957,398 | ) | (2,203,792 | ) | (1,824,622 | ) |
Other interest charges | | — | | — | | (98,088 | ) |
Exchange gains (losses) | | 219,959 | | (143,217 | ) | (179,033 | ) |
| | | | | | | |
Income (loss) before minority interest | | 1,880,535 | | 2,495,578 | | (1,347,210 | ) |
Minority interest | | (654,656 | ) | (94,898 | ) | — | |
| | | | | | | |
Net income (loss) | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,347,210 | ) |
| | | | | | | |
Allocation of net income (loss) | | | | | | | |
General Partner | | $ | 12,259 | | $ | 24,007 | | $ | (13,472 | ) |
Limited Partners | | 1,213,620 | | 2,376,673 | | (1,333,738 | ) |
Net income (loss) | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,347,210 | ) |
| | | | | | | |
Net income (loss) per Limited Partnership unit | | $ | 21.32 | | $ | 41.74 | | $ | (23.43 | ) |
| | | | | | | |
Average number of Limited Partnership units outstanding | | 56,935 | | 56,935 | | 56,935 | |
The accompanying notes
are an integral part of these consolidated financial statements.
F-4
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | Year ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Net income (loss) | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,347,210 | ) |
Foreign currency translation adjustments | | (93,230 | ) | (62,345 | ) | (242,472 | ) |
| | | | | | | |
Comprehensive income (loss) | | $ | 1,132,649 | | $ | 2,338,335 | | $ | (1,589,682 | ) |
The accompanying notes
are an integral part of these consolidated financial statements.
F-5
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
| | Year ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
General Partner: | | | | | | | |
Balance, beginning of year | | $ | (513,842 | ) | $ | (537,849 | ) | $ | (524,377 | ) |
Net income (loss) for the year | | 12,259 | | 24,007 | | (13,472 | ) |
Balance, end of the year | | $ | (501,583 | ) | $ | (513,842 | ) | $ | (537,849 | ) |
| | | | | | | |
Limited Partners: | | | | | | | |
Balance, beginning of year | | $ | (1,870,222 | ) | $ | (4,246,895 | ) | $ | (2,913,157 | ) |
Net income (loss) for the year | | 1,213,620 | | 2,376,673 | | (1,333,738 | ) |
Balance, end of the year | | $ | (656,602 | ) | $ | (1,870,222 | ) | $ | (4,246,895 | ) |
| | | | | | | |
Accumulated comprehensive loss | | (678,187 | ) | (584,957 | ) | (522,612 | ) |
Total Partners’ deficit | | $ | (1,836,372 | ) | $ | (2,969,021 | ) | $ | (5,307,356 | ) |
The accompanying notes
are an integral part of these consolidated financial statements.
F-6
SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Cash flows from operating activities | | | | | | | |
Net income (loss) | | $ | 1,225,879 | | $ | 2,400,680 | | $ | (1,347,210 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Exchange gains (losses) | | 219,959 | | (143,217 | ) | (179,033 | ) |
Minority interest expense | | 654,656 | | 94,898 | | — | |
Depreciation | | 5,882,179 | | 6,621,976 | | 7,460,577 | |
Change in operating assets and liabilities: | | | | | | | |
Decrease in other assets | | | | — | | 98,088 | |
Increase (decrease) in accounts payable to affiliates and related parties | | 5,375,946 | | (12,317,456 | ) | (7,552,428 | ) |
Net cash provided by operating activities | | 13,358,619 | | (3,343,119 | ) | (1,520,006 | ) |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Purchase of fixed assets | | (13,358,619 | ) | (3,343,119 | ) | (1,520,006 | ) |
Net cash used in investing activities | | (13,358,619 | ) | (3,343,119 | ) | (1,520,006 | ) |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Net cash used in financing activities | | — | | — | | — | |
| | | | | | | |
Increase (decrease) in cash and cash equivalents | | | | — | | — | |
Cash and cash equivalents., beginning of year | | | | — | | — | |
Cash and cash equivalents, end of year | | — | | — | | — | |
| | | | | | | | | | |
The accompanying notes
are an integral part of these consolidated financial statements.
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SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.
(A Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PARTNERS’ INTERESTS
Formation and Business
South Hertfordshire United Kingdom Fund, Ltd. (the “Partnership”), a Colorado limited partnership, was formed on December 23, 1991, in connection with a public offering of its limited partnership interests. The Partnership was formed to acquire, construct, develop, own and operate cable television/telephone systems in the U.K. NTL Fawnspring Limited, a U.K. corporation, a subsidiary of NTL Incorporated, or NTL, is the general partner (the “General Partner”) of the Partnership.
The General Partner has the authority to manage the business, properties and activities of the Partnership. This includes the ability to operate and maintain cable television and telephone properties, and to purchase or lease property at the expense of the Partnership, the ability to make on behalf of the Partnership all payments required of the Partnership for all direct and indirect costs incurred in the conduct of its business, the ability to borrow money in the name of the Partnership, and the obligation to maintain accurate financial records and to prepare and file the reports required under applicable regulations.
Contributed Capital
The capitalization of the Partnership is set forth in the accompanying Consolidated Statements of Partners’ Capital (Deficit). No existing partner is obligated to make any additional contributions to partnership capital.
The General Partner purchased its interest in the Partnership by contributing $1,000 to partnership capital.
Profits, losses and distributions of the Partnership are currently allocated 99% to the limited partners and 1% to the General Partner until the limited partners have received distributions equal to 100% of their capital contributions plus an annual return thereon of 12%, cumulative and non-compounded. Thereafter, profits and distributions will generally be allocated 75% to the limited partners and 25% to the General Partner. Interest income earned prior to the formation of the Partnership was allocated 100% to the limited partners.
The profits allocated to the limited partners and General Partner is the net profit or loss rather than the comprehensive income. The net profit or loss does not take account of any foreign currency translation adjustments, as these are unrealized. The net profit or loss per limited partner unit is calculated after allocating 1% of the net profit or loss to the General Partner. For the year ended December 31, 2005 the income per limited partner unit amounted to $21.32.
NTL (South Hertfordshire) Limited
NTL (South Hertfordshire) Limited (“NTL South Herts”) is a U.K. corporation originally owned by Jones Global Funds, Inc. (the previous general partner) and Jones Cable Group, Ltd., an affiliate of the previous general partner. NTL South Herts is the holder of a franchise to own and operate a cable television/telephone system in the South Hertfordshire franchise area, located adjacent to the northwest perimeter of Greater London, England (the “South Herts System”).
NTL South Herts is owned 66.7% by the Partnership and 33.3% by NTL. NTL also owns the General Partner. The General Partner provides consulting services to the Partnership and may delegate some or all of the consulting services to NTL or to other affiliates.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount charged to NTL South Herts by a subsidiary of NTL for infrastructure and management support services, the amount to be paid to terminate certain agreements included in restructuring costs, the amount to be paid for other liabilities, estimated costs for interconnection, estimates related to the amount of costs to be capitalized in connection with the construction and installation of NTL South Herts’ network. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership, and its subsidiary. Significant intercompany accounts and transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Partnership’s principal operating subsidiary is the pound sterling, while the Partnership’s reporting currency is the U.S. dollar. The assets and liabilities of the Partnership’s U.K. subsidiary have been translated using the exchange rates in effect at the balance sheet dates, and revenue and expenses are translated at the average rates for the respective years. Exchange gains and losses on translation of the Partnership’s net equity investment in the subsidiary is reported as a separate component of accumulated other comprehensive income (loss) in the statement of partners’ capital (deficit). Foreign currency transaction gains and losses are recorded in the statements of operations.
Current Assets and Liabilities
Since May 2000, the current assets and liabilities of NTL South Herts have been managed by NTL. Books and records related to accounts receivable, accounts payable and deferred revenue are maintained by NTL. Pursuant to the arrangement between NTL and NTL South Herts contained in the letter of appointment and agreement, NTL South Herts has the legal right to offset amounts receivable from NTL against amounts payable to NTL. Consequently, the net balance payable by NTL South Herts to NTL is disclosed under accounts payable to affiliates and related parties in the accompanying financial statements. Effective from June 2000, the bank accounts maintained by NTL South Herts were closed and a bank account maintained by NTL is used for cash transactions. Accordingly the net result from cash transactions is also included in accounts payable to affiliates and related parties.
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Fixed Assets
Fixed assets, net are stated at cost less accumulated depreciation.
The cost of fixed assets includes amounts capitalized for labor and overhead expended in connection with the design and installation of the NTL South Herts’ operating network equipment and facilities. Costs associated with initial customer installations, additions of network equipment necessary to enable enhanced services, acquisition of additional fixed assets and replacement of existing fixed assets are capitalized. The costs of reconnecting the same service to a previously installed premise are charged to expense in the period incurred. Costs for repairs and maintenance are charged to expense as incurred.
Depreciation is provided on fixed assets at rates that are intended to write off the cost of the assets over their estimated useful lives. Effect is given to commercial and technical obsolescence. Depreciation is provided on a straight-line basis over 5-30 years for the cable network and other electronic equipment, 30 years for buildings and 3-12 years for office and other equipment. Depreciation of the capitalized construction costs begins from the time of receiving the first revenue from subscribers. Repairs and maintenance costs are charged to expense when incurred.
The assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying amount of the asset. The fair value of the asset is determined by the higher of the discounted cash flows and the net realizable value upon sale.
Restructuring Costs
As of January 1, 2003, we adopted FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or FAS 146, and recognize a liability for costs associated with restructuring activities when the liability is incurred. The adoption of FAS 146 did not have a significant effect on our results of operations, financial condition or cash flows.
Prior to 2003, we recognized a liability for costs associated with restructuring activities at the time a commitment to restructure was given, in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a restructuring). Liabilities for costs associated with restructuring activities initiated prior to January 1, 2003 continue to be accounted for under EITF 94-3.
Revenue Recognition
The Partnership recognizes revenue only when it is realized or realizable and earned. The Partnership recognizes revenue when all of the following are present:
• persuasive evidence of an arrangement exists between us and our customers;
• delivery has occurred or the services have been rendered;
• the price for the service is fixed or determinable; and
• collectibility is reasonably assured.
Revenues are invoiced and recorded as part of a periodic billing cycle, and are recognized as the services are provided. At the end of each period, adjustments are recorded to defer revenue relating to services billed in advance and to accrue for earned but unbilled services.
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• Telephone, cable television and internet revenues are recognized as the services are provided to customers.
• Bundled services revenue is recognized at the time the services are provided to the customer or the performance of all of the services have been completed. The Partnership applies the provisions of EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables to assess whether the components of the bundled services should be recognized separately.
• Installation revenue is recognized by applying the provisions of FASB Statement No. 51, Financial Reporting by Cable Television Companies in relation to connection and activation fees for cable television, as well as telephone and internet services, on the basis that we market and maintain a unified fiber network through which we provide all of these services. Installation revenue is recognized at the time the installation has been completed to the extent that those fees are less than direct selling costs. Installation fees in excess of direct selling costs are deferred and amortized over the expected life of the customer’s connection.
• Rental revenue in respect of line rentals and rental of equipment provided to customers is recognized on a straight-line basis over the term of the rental agreement.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs allocated to NTL South Herts were $1,020,654, $807,228 and $551,581 in 2005, 2004 and 2003, respectively.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, the FASB issued FSP FAS 143-1, Accounting for Electronic Equipment Waste Obligations, (FSP 143-1). The FASB issued the FSP to address the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive adopted by the European Union (EU). FSP 143-1 requires that the commercial user should apply the provisions of FASB Statement No. 143 and the related FASB Interpretation No. 47 to certain obligations associated with historical waste (as defined by the Directive), since this type of obligation is an asset retirement obligation. The FSP is effective for the later of the first reporting period ending after June 8, 2005 or the Directive’s adoption into law by the applicable EU-member country. As at December 31, 2005, the UK had not adopted the law. Management intends to evaluate the impact of this law on the Company’s results of operations or financial position as and when legislation is adopted in the UK.
4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATED ENTITIES
Consulting and Management Fees
An affiliate of the General Partner is entitled to be paid a consulting fee by NTL South Herts. During the construction phases of the South Herts System, this consulting fee was 2% of construction costs. Since completion of construction of each portion of the system, the consulting fee for the completed portion has been 5% of the gross revenue, excluding revenue from the sale of cable television/telephone systems. The consulting fee is calculated and payable monthly. Consulting fees paid or payable by NTL South Herts for the years ended December 31, 2005, 2004 and 2003 were $1,937,016, $1,902,118 and $1,638,649, respectively. These amounts were expensed in the Consolidated Statements of Operations each year.
Distribution Ratios and Reimbursement
Any Partnership distributions made from cash flow (defined as cash receipts derived from routine operations, less debt principal and interest payments and cash expenses) are allocated 99% to the limited partners and 1% to the General Partner. Any distributions other than interest income on limited partner subscriptions earned prior to the acquisition of the Partnership’s first cable television system or from cash flow, such as from the sale or refinancing of a system or upon dissolution of the Partnership, will be made as follows: 99% to the limited partners and 1% to the General Partner until any negative balances in the limited partners’ capital accounts are reduced to zero; 100% to the General Partner until any negative balance in its capital account is reduced to zero; 99% to the limited partners and 1% to the General Partner until the balance in the limited partners’ capital accounts is equal to their adjusted capital contribution plus a 12% return; 100% to the General Partner until the balance in its capital account is equal to its adjusted capital contribution, and any remaining income or gain shall be allocated 75% to the limited partners and 25% to the General Partner.
The General Partner and its affiliates are entitled to reimbursement from NTL South Herts for direct and indirect expenses allocable to the operation of the South Herts System, and from the Partnership for direct and indirect expenses allocable to the operation of the Partnership which include but are not limited to, rent, supplies, telephone, travel and salaries of any full or part-time employees. The General Partner believes that the methodology used in allocating these expenses is fair and reasonable. During the years ended December 31, 2005, 2004 and 2003, reimbursement made by NTL South Herts and the partnership to the General Partner or its affiliates for any allocable direct and indirect expenses totaled $15,126,727, $12,419,610 and $12,126,194, respectively.
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The General Partner and its affiliates may make advances to, and defer collection of fees and allocated expenses owed by, the Partnership, although they are not required to do so. The Partnership is charged interest on such advances and deferred amounts at a rate equal to the General Partner’s or certain affiliates’ effective average cost of debt financing from unaffiliated entities, which does not differ from their weighted average cost of debt financing. For the years ended December 31, 2005, 2004 and 2003, aggregated interest, bank fees and finance charges relating to non-permanent loans of $2,812,193, $2,039,277 and $1,686,284, respectively, was charged by affiliates of the General Partner, and interest on advances of $145,205, $164,515 and $138,338, respectively, was charged by an affiliate of the General Partner.
The General Partner and its affiliates are entitled to recover interest on the full amount of non-permanent loans they provide to the Partnership or NTL South Herts and the portion of bank fees and deferred financing costs relating to NTL’s senior credit facilities allocable to the Partnership or NTL South Herts. They have elected to recover these amounts commencing in the fourth quarter of 2005. The impact of the change in amount of non-permanent loans on which interest is charged was $359,805 and the impact of the allocation of bank fees and deferred financing costs was $268,295 for a total impact of $628,100 which is included in the amount of aggregate interest, bank fees and finance charges above.
5. OTHER CHARGES
Other charges in the year ended December 31, 2005 of $0.7 million mainly relate to changes in cash flow estimates with respect to lease exit costs in connection with properties that have been vacated. Other charges of $0.6 million in 2004 relate to NTL’s announcement to consolidate call centers. On April 7, 2004, NTL announced the consolidation over the next 18 months of its 13 UK customer service call centers into three equipped to handle anticipated expansion of its customer base. Following an internal review, three specialist call centers were retained and are supported by four sales and customer support sites, located throughout the UK. As part of the consolidation, NTL made additional investments in technology and training in order to streamline processes and generate efficiencies. This program was completed as of December 31, 2005 at a total cost to NTL of $43.1 million.
Other charges in the year ended December 31, 2003, relate to the NTL’s announcements that it was taking additional actions to reorganize, re-size and reduce operating costs and create greater efficiency in various areas. The charge allocated to NTL South Herts in 2003 includes employee severance and related costs of $0.2 million.
6. FIXED ASSETS
Fixed assets consist of:
| | Estimated | | December 31, | |
| | useful lives | | 2005 | | 2004 | |
| | | | | | | |
Cable Network and other electrical equipment | | 5-30 years | | $ | 174,966,272 | | $ | 147,762,516 | |
Building and other equipment | | 3-30 years | | 7,397,187 | | 8,152,597 | |
| | | | 182,363,459 | | 155,915,113 | |
Accumulated depreciation | | | | (119,167,633 | ) | (93,386,726 | ) |
| | | | $ | 63,195,826 | | $ | 62,528,387 | |
For the year ended December 31, 2005, purchase of fixed assets totalled $13.4 million relating primarily to the transfer of Network assets from an affiliate amounting to $11.6 million together with $1.8 million fixed asset additions through customer installations, particularly broadband. The asset transfer from the affiliate was effective December 31, 2005, consequently there was no impact on the depreciation charge for the year.
7. FINANCING
The Partnership and NTL South Herts have no indebtedness other than with NTL, accordingly the Partnership and NTL South Herts are reliant upon the support of NTL to continue their operations as a going concern.
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8. INCOME TAXES
Income taxes have not been recorded in the accompanying consolidated financial statements because net income and losses of the Partnership accrue directly to the partners, and its U.K. subsidiary, NTL South Herts, has net operating losses which offset taxable income arising in the year. The Partnership’s tax returns, the qualification of the Partnership as such for tax purposes, and the amount of distributable Partnership income or loss are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to the Partnership’s qualification as such, or in changes with respect to the Partnership’s recorded income or loss, the tax liability of the general and limited partners would likely be changed accordingly.
The tax basis in the Partnership’s assets and liabilities is approximately $8 million higher than its book basis in its assets and liabilities for financial reporting purposes.
U.K. profits (comprising income and gains) of NTL South Herts will be subject to U.K. corporation tax. However, corporations are able to carry forward losses from operations to be offset against subsequent profits of the same operations.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax liabilities and assets related to NTL South Herts are as follows:
| | December 31, | |
| | 2005 | | 2004 | |
Deferred tax liabilities: | | | | | |
Depreciation | | $ | — | | $ | — | |
Total deferred tax liabilities | | — | | — | |
Deferred tax assets: | | | | | |
Depreciation | | 5,225,464 | | 2,034,210 | |
Net operating loss carryforward | | 8,139,647 | | 6,141,321 | |
Total deferred tax assets | | 13,365,110 | | 8,175,531 | |
Valuation allowance | | (13,365,110 | ) | (8,175,531 | ) |
Net deferred tax assets | | — | | — | |
Net deferred tax liabilities | | $ | — | | $ | — | |
At December 31, 2005 NTL South Herts has U.K. net operating loss carry forwards of approximately $27.1 million. The U.K. net operating loss carry forwards are available for utilization in future years and do not expire. Management has established a valuation allowance against the net operating loss carry forwards on the basis that it was not more likely than not that such assets would be realized in the future.
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