SOUTH HERTFORDSHIRE UNITED KINGDOM FUND LTD - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-19889

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 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 an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o No ý

As of March 23, 2004, 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

TABLE OF CONTENTS

PART I		3
Item 1.	Business	5
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	17
PART II		17
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27
Item 9A.	Controls and Procedures	27
PART III		28
Item 10.	Directors and Executive Officers of the Registrant	28
Item 11.	Executive Compensation	28
Item 12.	Security Ownership of Certain Beneficial Owners and Management	28
Item 13.	Certain Relationships and Related Transactions	29
Item 14.	Principal Accountants’ Fees and Services	30
PART IV		31
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	31
Signatures		33
Index to Consolidated Financial Statements and Financial Statement Schedules		F-1

“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, 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 11, 2004 by the ultimate parent company of our General Partner, NTL Incorporated, or NTL, such as:

• potential adverse developments with respect to NTL’s and our liquidity or results of operations;

• NTL’s significant debt payments commencing in 2005 and its and our other contractual commitments coming due over the next several years;

• the success of NTL’s proposed refinancing transaction;

• NTL’s and our ability to fund and execute its and our business plan;

• the impact of new business opportunities requiring significant up-front investments;

• our ability to attract and retain customers, increase our overall market penetration and react to competition from providers of alternative services;

• NTL’s ability to integrate its billing systems;

• NTL’s significant management changes;

• NTL’s and our ability to develop and maintain back-up for its and our critical systems;

• our ability to respond adequately to technological developments;

• NTL’s and our ability to maintain contracts that are critical to our operations;

• our ability to continue to design networks, install facilities, obtain and maintain any required governmental licenses or approvals and finance construction and development, in a timely manner at reasonable costs and on satisfactory terms and conditions;

• interest rate and currency exchange rate fluctuations; and

• the impact of NTL’s recent reorganization and subsequent organizational restructuring.

We assume no obligation to update these forward-looking statements contained in this Annual Report to reflect actual results, changes in assumptions or changes in factors affecting these statements.

PART I

NTL CORPORATE STRUCTURE

NTL’s Completed Restructuring

On May 8, 2002, NTL, then known as NTL Communications Corp., the ultimate parent company of Fawnspring Limited, our General Partner, NTL Europe, Inc., NTL Europe, then known as NTL Incorporated and the former parent company of NTL Communications Corp., and certain of their subsidiaries filed a pre-arranged joint reorganization plan, referred to in this Annual Report as the Plan, under Chapter 11 of the US Bankruptcy Code. We were not included in the Chapter 11 filing. The Plan became effective on January 10, 2003, at which time NTL emerged from Chapter 11 reorganization.

Pursuant to the Plan, the entity formerly known as NTL Incorporated and its subsidiaries and affiliates were split into two separate groups, and NTL and NTL Europe each emerged as independent public companies. The entity formerly known as NTL Communications Corp. was renamed “NTL Incorporated” and became the holding company for NTL group’s principal UK and Ireland assets and the ultimate parent company of our General Partner. Prior to the consummation of the Plan, the ultimate parent company of our General Partner, then known as NTL Incorporated, which, pursuant to the Plan, was renamed “NTL Europe, Inc.” and became the holding company for the former NTL group’s continental European and certain other assets. We are no longer affiliated with NTL Europe.

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 United Kingdom. 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, 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 United Kingdom. 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.

In addition, NTL is the indirect parent company of our General Partner. The General Partner may, pursuant to the Limited Partnership Agreement dated December 31, 1991, or the Partnership Agreement, provide consulting services to us or designate consulting services to NTL or other affiliates. The General Partner purchased one of our partnership interests by contributing $1,000 to our capital.

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, 2003. It does not show NTL’s operating or other intermediate companies.

* Fawnspring Limited, a 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%.

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 US dollars per £1.00. The noon buying rate of the UK pound on March 23, 2004 was $1.85 per £1.00.

Year Ended December 31,	Period End	Average(1)	High	Low

1999	1.62	1.61	1.68	1.55
2000	1.49	1.51	1.65	1.40
2001	1.45	1.44	1.50	1.37
2002	1.61	1.51	1.61	1.41
2003	1.78	1.64	1.78	1.55
2004 (through March 23, 2004)	1.85	1.83	1.90	1.79

(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 UK pound amounts actually represent these US dollar amounts or that these amounts could have been converted into US dollars at any particular rate, if at all.

Unless we otherwise indicate, all US dollar amounts as of December 31, 2003 are translated to UK pound sterling at 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. All amounts disclosed as of December 31, 2002 are based on an exchange rate of $1.6095 to £1.00, and all amounts disclosed for the year ended December 31, 2002 are based on an average exchange rate of $1.5025 to £1.00. All amounts disclosed as of December 31, 2001 are based on an exchange rate of $1.4543 to £1.00, and all amounts disclosed for the year ended December 31, 2001 are based on an average exchange rate of $1.4392 to £1.00.

Item 1. Business

RECENT DEVELOPMENTS

On March 8, 2004, NTL entered into a commitment letter with Credit Suisse First Boston, Deutsche Bank, AG London, Goldman Sachs International and Morgan Stanley Senior Funding, Inc relating to a £2.425 billion new credit facility. The commitment by these lenders is subject to customary conditions as well as the issuance by NTL Cable PLC, a newly-formed wholly-owned subsidiary of NTL, of up to approximately £800 million equivalent in sterling, US dollars and euro denominations of ten-year senior notes. The proceeds of the high-yield bond offering, together with the proceeds from the new credit facility, will be used to repay in full NTL’s existing senior credit facilities, the existing notes issued by Diamond Holdings Limited and the debentures issued by NTL (Triangle) LLC. The aim of any new financing is to extend the maturity of NTL’s indebtedness and to reduce NTL’s weighted average cost of debt. NTL cannot provide any assurance that this refinancing transaction will be consummated.

ABOUT SOUTH HERTFORDSHIRE UK FUND, LIMITED

ABOUT NTL SOUTH HERTS

Franchise Area

The South Hertfordshire franchise area comprises the three administrative areas of Three Rivers, Watford and Hertsmere, with a population of approximately 240,000. 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 94,000 homes in the franchise area, of which approximately 92,000 are passed by our cable television/telephone network. Construction in the franchise area is substantially complete. The average housing density in the South Herts franchise area is approximately 1,150 homes per square mile.

The South Hertfordshire franchise area contains approximately 7,000 businesses, 80% of which are small or medium-sized. In addition, there are several business parks containing predominantly industrial and manufacturing concerns.

Operations

Construction of a cable television-only network in the South Hertfordshire franchise area commenced in early 1991 and, an integrated cable television/telephone network architecture was developed for this franchise in late 1991. As of December 31, 2003, approximately 92,000 homes, or 98% of 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, 2003, NTL South Herts serviced 24,776 basic cable television customers including 20,780 digital cable customers, 29,674 residential telephone customers and 10,850 broadband customers, representing a total of 33,121 customers with a penetration level of 36%.

Management control is exercised by our General Partner, although management control is delegated to other affiliated companies of NTL. Our business is managed by NTL Group Limited (“NTLG”), a subsidiary of NTL, from 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, as an integrated part of NTL’s UK operations, the following business description describes the portion of NTL’s UK operations of which we comprise a part.

NTL’s business

NTL is a leading broadband and communications services company in the UK based on total residential subscriber numbers. NTL provides the following communication services to its customers:

• ntl: home provides residential telephone, cable television and Internet services, as well as wholesale Internet access solutions to Internet Service Providers, or ISPs, in the UK; and

• ntl: business provides data, voice and Internet services to large businesses, public sector organizations and small- and medium-sized enterprises, or SMEs, located near our existing residential broadband network in the UK.

ntl: home

NTL’s ntl: home segment provides residential telephone, cable television and Internet services in the UK as well as wholesale Internet access solutions to UK ISPs. NTL is the largest direct provider of residential broadband services in the UK. NTL refers to each service NTL provides as a revenue generating unit, or RGU. For example, if NTL provided one customer with broadband Internet and telephone services, this customer would represent two RGUs. As of December 31, 2003, NTL had approximately 2.9 million ntl: home customers, representing approximately 5.5 million RGUs. As of December 31, 2003, NTL’s customer penetration rate was approximately 36.9%. The customer penetration rate measures the number of customers for NTL’s services divided by the number of homes within NTL’s service area that can potentially be served by NTL’s network with minimal connection costs. For the year ended December 31, 2003, ntl: home revenues increased by 14.2% to $2,442.5 million from $2,139.0 million in 2002, and expressed in UK pounds revenues increased by 4.9% to £1,494.1 million from £1,423.7 million during the same period.

During 2003, ntl: home added 181,500 net new customers compared with a net loss of 174,300 customers in 2002. This achievement is primarily the result of NTL’s efforts since 2002 to improve the pricing and packaging of its services, improve its customer service experience and re-build a sales force that had previously been scaled back. NTL’s gross activations increased to 557,800 in 2003 from 292,800 in 2002. In addition, NTL’s deactivations declined from 467,100, or a 16.8% average customer churn rate in 2002 to 376,300, or a 13.4% average customer churn rate in 2003. Customer churn is a cable industry term for the percentage of customers that stop using a provider’s services.

ntl: home services

Bundling advantage

In addition to providing its customers with better service, NTL also continues its efforts to cross-sell or up-sell its services to existing customers. As of December 31, 2003, NTL had approximately 949,200 broadband Internet subscribers. NTL’s packaging and pricing are designed to encourage its customers to use multiple services like dual telephone and broadband Internet access, dual telephone and narrowband 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, and is subscribed for by approximately 70% of its DTV customers. In addition, NTL offers subscribers “two-for-one” incentives, like a free basic DTV subscription (for 12 months) with the purchase of our 24 hour unlimited UK call package.

NTL believes that it is uniquely 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, 2003, over 70% of its customers received multiple services from NTL, and each of its ntl: home customers represented on average approximately two RGUs. In its service areas, NTL is the only service provider that can provide the full range of services that NTL offers. The table below shows other typical service providers who offer their services in NTL’s areas:

ntl: home service bundling

ntl: home

BT(1)

BSkyB(1)

Broadband Resellers(2)

Telephone Resellers(3)

Freeview

Telephone

Broadband

Dial Up

Television