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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the quarterly period ended March 31, 2010

 

 

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: 000-19889

 


 

South Hertfordshire United Kingdom Fund, Ltd.

(Exact name of registrant as specified in its charter)

 

Colorado
(State or other jurisdiction of incorporation or organization)

 

84-1145140
(I.R.S. employer identification no.)

 

 

 

Media House, Bartley Wood Business Park, Hook, Hampshire,
RG27 9UP, England
(Address of principal executive offices)

 


+ 44 1256 75 2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of limited partnership units of the registrant outstanding as of May 5, 2010 was 56,935.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page
Number

PART I.
FINANCIAL INFORMATION

5

Item 1.

Financial Statements

5

 

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009

5

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009

6

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 4.

Controls and Procedures

17

PART II.
OTHER INFORMATION

18

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

18

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

18

Item 3.

Defaults Upon Senior Securities

18

Item 4.

(Removed and Reserved)

18

Item 5.

Other Information

18

Item 6.

Exhibits

18

SIGNATURES

19

 


 

In this quarterly report, unless the context otherwise requires, the terms “we”, “us”, “our” and similar terms refer to South Hertfordshire United Kingdom Fund, Ltd. and its subsidiaries, and “Virgin Media” refers to the consolidated business of Virgin Media Inc. and its subsidiaries, as further described herein.

 

2



Table of Contents

 

“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, among others, include:

 

·                  our reliance on the continued support of Virgin Media;

 

·                  the lack of an established trading market for our partnership interests;

 

·                  conflicts of interest between us and Virgin Media and its affiliates;

 

·                  our reliance on a limited franchise area;

 

·                  the risks to Virgin Media’s business set forth below, which are risks that we share as a result of our reliance on, and integration with, Virgin Media;

 

·                  Virgin Media’s ability to compete with a range of other communications and content providers;

 

·                  the effect of technological changes on Virgin Media’s business;

 

·                  Virgin Media’s ability to maintain and upgrade its networks in a cost-effective and timely manner;

 

·                  possible losses in Virgin Media’s revenues due to systems failures;

 

·                  Virgin Media’s ability to control unauthorized access to its network;

 

·                  Virgin Media’s reliance on third-party suppliers and contractors to provide necessary hardware, software or operational support;

 

·                  Virgin Media’s continued right to use the Virgin name and logo;

 

·                  Virgin Media’s ability to manage customer churn;

 

·                  general economic conditions;

 

·                  Virgin Media’s ability to provide attractive programming at a reasonable cost;

 

·                  Virgin Media’s ability to implement its restructuring plan successfully and realize the anticipated benefits;

 

·                  currency and interest rate fluctuations;

 

·                  Virgin Media’s ability to fund debt service obligations and refinance its debt obligations;

 

·                  Virgin Media’s ability to obtain additional financing in the future; and

 

·                  Virgin Media’s ability to comply with restrictive covenants in its indebtedness agreements.

 

These and other factors are discussed in more detail under “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission, or SEC, on March 17, 2010. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements.

 

3



Table of Contents

 

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 31, 2010 was $1.5186 per £1.00.

 

 

 

U.S. dollars per £1.00

 

Three months ended March 31,

 

Period End

 

Average (1)

 

High

 

Low

 

2009

 

$

1.4300

 

$

1.4330

 

$

1.5254

 

$

1.3658

 

2010

 

1.5186

 

1.5478

 

1.6370

 

1.4884

 

 


(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 condensed consolidated financial statements and other financial information appearing in this quarterly report. 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.K. pound sterling amounts as of March 31, 2010 are translated to U.S. dollars at an exchange rate of $1.5186 to £1.00, all amounts disclosed for the three months ended March 31, 2010 are based on an average exchange rate of $1.5612 to £1.00, and all amounts disclosed for the three months ended March 31, 2009 are based on an average exchange rate of $1.4351 to £1.00. All amounts disclosed as of December 31, 2009 are based on an exchange rate of $1.6167 to £1.00. All rates are based on the 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.  The variation among the exchange rates for 2010 and 2009 has affected the U.S. dollar comparisons significantly.

 

4



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Deferred tax asset

 

$

1,218,502

 

$

1,626,861

 

Fixed assets, net

 

39,533,524

 

42,685,169

 

Total assets

 

40,752,026

 

44,312,030

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable to affiliates and related parties

 

$

37,616,882

 

$

41,618,716

 

Total liabilities

 

37,616,882

 

41,618,716

 

 

 

 

 

 

 

Partners’ Capital

 

 

 

 

 

General Partner

 

 

 

 

 

Contributed capital

 

1,000

 

1,000

 

Accumulated deficit

 

(474,822

)

(481,112

)

 

 

(473,822

)

(480,112

)

Limited Partners

 

 

 

 

 

Contributed capital, net (56,935 units outstanding at March 31, 2010 and December 31, 2009)

 

48,817,997

 

48,817,997

 

Accumulated deficit

 

(46,726,330

)

(47,349,062

)

 

 

2,091,667

 

1,468,935

 

 

 

 

 

 

 

Partners’ capital

 

1,617,845

 

988,823

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

(1,006,697

)

(700,000

)

Total South Hertfordshire United Kingdom Fund, Ltd. Partners’ capital

 

611,148

 

288,823

 

 

 

 

 

 

 

Noncontrolling interest

 

2,523,996

 

2,404,491

 

Total Partners’ capital

 

3,135,144

 

2,693,314

 

 

 

 

 

 

 

Total Liabilities and Partners’ Capital

 

$

40,752,026

 

$

44,312,030

 

 

See accompanying notes.

 

5



Table of Contents

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenue

 

$

6,976,998

 

$

6,622,104

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Operating costs

 

(2,338,100

)

(2,716,403

)

Allocated overhead

 

(2,500,725

)

(2,301,640

)

Management fees

 

(348,850

)

(331,105

)

Selling, general and administrative expenses

 

(97,036

)

(39,389

)

Operating income

 

1,692,287

 

1,233,567

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

Interest payable to General Partner and affiliates

 

(747,154

)

(752,640

)

Exchange gains

 

275,070

 

39,728

 

 

 

 

 

 

 

Net profit before taxes

 

1,220,203

 

520,655

 

Income tax expense

 

(318,329

)

 

 

 

 

 

 

 

Net profit

 

901,874

 

520,655

 

 

 

 

 

 

 

Less: Profit attributable to noncontrolling interest

 

(272,852

)

(189,673

)

Net profit attributable to South Hertfordshire United Kingdom Fund, Ltd.

 

$

629,022

 

$

330,982

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net profit attributable to South Hertfordshire United Kingdom Fund, Ltd.

 

 

 

 

 

General Partner

 

$

6,290

 

$

3,310

 

Limited Partners

 

622,732

 

327,672

 

Net profit attributable to South Hertfordshire United Kingdom Fund, Ltd.

 

$

629,022

 

$

330,982

 

 

 

 

 

 

 

Net profit attributable to South Hertfordshire United Kingdom Fund, Ltd. allocated to limited partners per limited partnership unit

 

$

10.94

 

$

5.76

 

Average number of limited partnership units outstanding

 

56,935

 

56,935

 

 

See accompanying notes.

 

6



Table of Contents

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net profit

 

$

901,874

 

$

520,655

 

Adjustments to reconcile net profit to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

1,117,774

 

1,006,777

 

Deferred income taxes

 

318,329

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts payable to affiliates and related parties

 

(1,811,133

)

(1,386,647

)

Net cash provided by operating activities

 

526,844

 

140,785

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of fixed assets

 

(526,844

)

(140,785

)

Net cash used in investing activities

 

(526,844

)

(140,785

)

Increase (decrease) in cash and cash equivalents

 

 

 

Cash and cash equivalents at beginning of period

 

 

 

Cash and cash equivalents at end of period

 

$

 

$

 

 

See accompanying notes.

 

7



Table of Contents

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1 — Basis of Presentation

 

Formation and Business

 

South Hertfordshire United Kingdom Fund, Ltd., or 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 and an indirect wholly owned subsidiary of Virgin Media Inc., is the general partner, or the General Partner, of the Partnership.

 

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.  Virgin Media Inc. indirectly holds the remaining 33.3% of the shares of NTL South Herts.  We are reliant on the support of Virgin Media Inc., the ultimate parent company of the General Partner, to continue our operations as a going concern.

 

Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the rules and regulations of the Securities and Exchange Commission, or SEC.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of our management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  Results of operations for the three months ended March 31, 2010 are not necessarily indicative of results to be expected for the full year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 17, 2010.

 

Note 2 — Comprehensive Profit

 

Comprehensive profit includes net profit as well as other comprehensive profit.  Our other comprehensive profit consists of changes in cumulative foreign currency translation adjustments.  Comprehensive profit comprises:

 

 

 

Three months ended

 

 

 

March 31, 2010

 

 

 

Partners of South 
Hertfordshire 
United Kingdom 
Fund, Ltd.

 

Noncontrolling 
interests

 

Total

 

 

 

 

 

 

 

 

 

Net profit

 

$

629,022

 

$

272,852

 

$

901,874

 

Foreign currency translation adjustments

 

(306,697

)

(153,347

)

(460,044

)

Comprehensive profit

 

$

322,325

 

$

119,505

 

$

441,830

 

 

 

 

Three months ended

 

 

 

March 31, 2009

 

 

 

Partners of South
Hertfordshire
United Kingdom
Fund, Ltd.

 

Noncontrolling
interests

 

Total

 

 

 

 

 

 

 

 

 

Net profit

 

$

330,982

 

$

189,673

 

$

520,655

 

Foreign currency translation adjustments

 

(24,281

)

(12,141

)

(36,422

)

Comprehensive profit

 

$

306,701

 

$

177,532

 

$

484,233

 

 

8



Table of Contents

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 3 — 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 three months ended March 31, 2010 and 2009 were $348,850 and $331,105, respectively. These amounts were expensed in the condensed consolidated statements of operations.

 

Distribution Ratios and Reimbursement

 

Any Partnership distributions made from cash flows (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 flows, 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, salaries of any full or part-time employees, rent, supplies, telephone, travel, and restructuring and other charges.  The General Partner believes that the methodology used in allocating these expenses is fair and reasonable.  During the three months ended March 31, 2010 and 2009, reimbursement made by NTL South Herts and the Partnership to the General Partner or its affiliates for any allocable direct and indirect expenses totaled $2,500,725 and $2,301,640, respectively.

 

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 three months ended March 31, 2010 and 2009, affiliates of the General Partner charged the Partnership aggregated interest, bank fees and finance charges of $668,969 and $720,469, respectively, relating to non-permanent loans, and an affiliate of the General Partner charged the Partnership interest on advances of $78,185 and $32,171 respectively. 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 Virgin Media’s senior credit facility allocable to the Partnership or NTL South Herts.

 

9



Table of Contents

 

SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.

(A Limited Partnership)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 4 — Recent Accounting Pronouncements

 

In September 2009, the Financial Accounting Standards Board, or FASB, ratified new accounting guidance for existing multiple-element revenue arrangements. The revised multiple-element revenue arrangements guidance will be effective for the first annual reporting period beginning on or after June 15, 2010 and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We have not yet adopted the provisions of this guidance and are evaluating the impact on our consolidated financial statements.

 

Note 5 — Income taxes

 

For the three months ended March 31, 2010, income tax expense was $318,329. The income tax expense relates to the partial utilization of the deferred tax asset in respect of carried forward tax losses and tax depreciation of NTL South Herts recognized as at December 31, 2009. There was no income tax expense for the three months ended March 31, 2009.

 

10



Table of Contents

 

Item 2. 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 that the 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. Virgin Media Inc. indirectly holds the remaining 33.3% of the shares of NTL South Herts. We are reliant on the support of Virgin Media Inc., 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 residential customers to use multiple services like “double-play” telephone and broadband, “double-play” telephone and television or “triple-play” telephone, television and broadband.

 

Our expenses include certain costs that are charged to us by a subsidiary of Virgin Media Inc. for the provision of network services and support, the use of Virgin Media’s national backbone telephone network for carriage of our telephone traffic, as well as the provision of technical infrastructure and network capacity by Virgin Media 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 systems and equipment. The principal components of Virgin Media’s expenses include payroll and other employee-related costs; television programming costs; interconnect costs paid to other carriers relating to call termination; facility-related costs, such as rent, utilities and rates; marketing and selling costs; repairs and maintenance costs; and allowances for doubtful accounts.

 

In the second quarter of 2009, the General Partner agreed to the transfer of customer and supplier contracts relating to NTL South Herts’ premium TV services, resulting in a transfer of revenue and costs to Future Entertainment Sarl, a wholly owned subsidiary of Virgin Media, which with effect from June 1, 2009, carries substantially all Virgin Media’s premium TV channels and associated revenue and costs. This has resulted in a decline in revenues earned by NTL South Herts along with a decline in the costs incurred, but as these services were loss making, it has not been detrimental to the results of operations or financial position of NTL South Herts.

 

Factors Affecting Our Business

 

Our residential customers account for the majority of our total revenue. The number of residential 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 these customers and by the number of services that we provide to them. For example, broadband internet is more profitable than our television services and, on average, our “triple-play” customers are more profitable than “double-play” or “single-play” customers. Our packaging of services and our pricing are designed to encourage our customers to use multiple services such as television, telephone and broadband at a lower price than each stand-alone product on a combined basis. Factors particularly affecting our business include general macroeconomic factors, currency movements, integration and restructuring activities, churn, average revenue per user, competition, capital expenditures and seasonality.

 

General Macroeconomic Factors.  General macroeconomic factors in the U.K. have an impact on our business. For example, during an economic slowdown, potential and existing customers may be less willing or able to purchase our products or upgrade their services. We may also experience increased churn and higher bad debt expense.

 

Currency Movements.  Because substantially all of our revenue and operating costs are earned and paid in U.K. 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.

 

11



Table of Contents

 

Integration and Restructuring Activities.  In the fourth quarter of 2008, Virgin Media commenced the implementation of a restructuring plan aimed at driving further improvements in Virgin Media’s and our operational performance and eliminating inefficiencies in order to create a fully-integrated, customer-focused organization.  Virgin Media anticipates significant cost savings from the plan and that the annual savings from and after 2010 will exceed the annual costs incurred in connection with the plan. These costs will include purchases of fixed assets, lease and contract exit costs, employee termination costs and other restructuring and restructuring-related expenses, some of which will be classified as restructuring costs. In total, Virgin Media expects to incur operating expenditures of between £140 million to £155 million and capital expenditures of between £40 million to £45 million in connection with this plan over a three-year period. Virgin Media’s and our financial performance may be negatively affected if Virgin Media is unable to implement its restructuring plan successfully and realize the anticipated benefits.

 

Capital Expenditures.  Our business requires substantial capital expenditures on a continuing basis for various purposes, including expanding, maintaining and upgrading our cable network, investing in new customer acquisitions, and offering new services. If Virgin Media and we do not continue to invest in our network and in new technologies, our ability to retain and acquire customers may be hindered. Therefore, Virgin Media’s and our liquidity and the availability of cash to fund capital projects are important drivers of our revenue. When Virgin Media’s and our liquidity is restricted, so is our ability to meet our capital expenditure requirements.

 

Churn.  Churn is the proportion of customers who stop subscribing to any of our services. An increase in our 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 order to manage our churn rates. Our ability to reduce our churn rates beyond a base level is limited by factors such as competition, the economy and customers moving outside our network service area, in particular during the summer season. Managing our churn rates is a significant component of our business plan. Our churn rates may increase if our customer service is seen as unsatisfactory, if we are unable to deliver a service without interruption, if we fail to match offerings by our competitors, if we increase our prices, if there is an improvement in the U.K. housing market or if there is a prolonged economic downturn.

 

ARPU.  Average revenue per user, or ARPU, is a measure Virgin Media uses to evaluate how effectively it is realizing potential revenue from its residential cable customers on its network. Virgin Media believes that its “triple-play” cable offering of television, broadband and fixed line telephone services is attractive to its existing customer base and generally allows Virgin Media to increase its ARPU by facilitating the sale of multiple services to each customer.

 

Competition.  Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant and increasing competition in the market for our consumer services, including broadband and telephone services offered by BT Group plc, or BT; resellers or local loop unbundlers, such as British Sky Broadcasting Group plc, or BSkyB, and Talk Talk Telecom Group PLC; alternative internet access services like DSL; satellite television services offered by BSkyB and by BBC and ITV through Freesat; free-to-air digital terrestrial television offered through Freeview; and internet protocol television offered by BT. In addition, certain competitors, such as BT and BSkyB, are dominant in markets in which we compete and may use their dominance in those markets to offer bundled services that compete with our product offerings. As a result of increased competition, we have had to, and may be required to continue to, adjust our pricing and offer discounts to new and existing customers in order to attract and retain customers.

 

Seasonality.  Some revenue streams are subject to seasonal factors. For example, telephone usage revenue by residential customers tends to be slightly lower during summer holiday months. Our churn rates include persons who disconnect their service because of moves, resulting in a seasonal increase in our churn rate during the summer months when higher levels of U.K. house moves occur and students leave their accommodation between academic years.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and contingent liabilities. We base our judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

For a discussion of the accounting judgments and estimates that we have identified as critical in the preparation of our consolidated financial statements, please refer to our annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 17, 2010.

 

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Consolidated Results of Operations

 

Three Months Ended March 31, 2010 and 2009

 

We present below summarized consolidated financial information in U.S. dollars and U.K. pounds sterling for the three months ended March 31, 2010 and 2009:

 

 

 

Three months ended

 

 

 

Three months ended

 

 

 

 

 

March  31,

 

%

 

March  31,

 

%

 

 

 

2010

 

2009

 

Change

 

2010

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,976,998

 

$

6,622,104

 

5.4

 

£

4,468,997

 

£

4,614,385

 

(3.2

)

Operating costs

 

(2,338,100

)

(2,716,403

)

(13.9

)

(1,497,630

)

(1,892,832

)

(20.9

)

Allocated overhead

 

(2,500,725

)

(2,301,640

)

8.6

 

(1,601,797

)

(1,603,819

)

(0.1

)

Management fees

 

(348,850

)

(331,105

)

5.4

 

(223,450

)

(230,719

)

(3.2

)

Selling, general and administrative expenses

 

(97,036

)

(39,389

)

146.4

 

(62,155

)

(27,447

)

126.5

 

Operating income

 

1,692,287

 

1,233,567

 

37.2

 

1,083,965

 

859,568

 

26.1

 

Interest expense

 

(747,154

)

(752,640

)

(0.7

)

(478,577

)

(524,451

)

(8.7

)

Exchange gains

 

275,070

 

39,728

 

 

 

176,191

 

27,683

 

 

 

Income tax expense

 

(318,329

)

 

 

 

(203,900

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net profit

 

901,874

 

520,655

 

73.2

 

577,679

 

362,800

 

59.2

 

Noncontrolling interest

 

(272,852

)

(189,673

)

43.9

 

(174,771

)

(132,167

)

32.2

 

Net profit attributable to South Herts

 

$

629,022

 

$

330,982

 

90.0

 

£

402,908

 

£

230,633

 

74.7

 

 

Revenue

 

For the three months ended March 31, 2010, revenue increased by 5.4% to $7.0 million from $6.6 million for the three months ended March 31, 2009, and revenue expressed in pounds sterling decreased by 3.2% to £4.5 million for the three months ended March 31, 2010 from £4.6 million for the three months ended March 31, 2009. The decrease in sterling revenue was primarily driven by the impact on revenue of the transfer, in the second quarter of 2009, of customer and supplier contracts relating to the NTL South Herts’ premium TV services to Future Entertainment Sarl, a wholly owned subsidiary of Virgin Media Inc., partially offset by the impact of continued growth in customer numbers and triple-play customers.

 

Expenses

 

Operating costs

 

Operating costs include cost of goods sold and depreciation of fixed assets related to the network. For the three months ended March 31, 2010, operating costs decreased by 13.9% to $2.3 million from $2.7 million for the three months ended March 31, 2009, and operating costs expressed in pounds sterling decreased by 20.9% to £1.5 million for the three months ended March 31, 2010 from £1.9 million for the three months ended March 31, 2009. The reduction in operating costs was primarily driven by the impact on cost of goods sold of the transfer, in the second quarter of 2009, of customer and supplier contracts relating to NTL South Herts’ premium TV services to Future Entertainment Sarl, a wholly owned subsidiary of Virgin Media Inc. For the three months ended March 31, 2010 and 2009, depreciation expense included in operating costs was $1,117,774, or £715,971, and $1,006,777, or £701,538, respectively.

 

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Allocated overhead

 

For the three months ended March 31, 2010, allocated overhead increased by 8.6% to $2.5 million from $2.3 million for the three months ended March 31, 2009 and allocated overhead expressed in pounds sterling, of £1.6 million, was unchanged.  The business of NTL South Herts is managed as an integral part of Virgin Media. The combined costs of managing the larger group are allocated to each entity within the Virgin Media group, including NTL South Herts, on a consistent and proportional basis according to the level of trading in that entity. Allocated overhead expressed in pounds sterling was unchanged which is in line with Virgin Media’s cost base which was also relatively unchanged.

 

Management fees

 

For the three months ended March 31, 2010, management fees increased by 5.4% to $348,850 from $331,105 for the three months ended March 31, 2009, and management fees expressed in pounds sterling decreased by 3.2% to £223,450 for the three months ended March 31, 2010 from £230,719 for the three months ended March 31, 2009. Management fees are charged as a percentage of revenue and changes in management fees are therefore a direct reflection of changes in revenue.

 

Selling, general and administrative expenses

 

For the three months ended March 31, 2010, selling, general and administrative expenses increased to $97,036, or £62,155, from $39,389, or £27,447, for the three months ended March 31, 2009. The increase was primarily due to higher audit fees.

 

Interest expense

 

For the three months ended March 31, 2010, interest expense decreased by 0.7% to $747,154 from $752,640 for the three months ended March 31, 2009, and interest expense expressed in pounds sterling decreased by 8.7% to £478,577 for the three months ended March 31, 2010 from £524,451 for the three months ended March 31, 2009. This decrease was primarily due to a lower accounts payable to affiliates and related parties balance, arising from increased profitability of the operating entity.

 

We paid no cash interest for the three months ended March 31, 2010 and 2009.

 

Exchange gains

 

For the three months ended March 31, 2010, foreign currency exchange gains were $275,070, or £176,191, as compared with gains of $39,728, or £27,683, for the three months ended March 31, 2009. The change in foreign currency exchange gains was primarily attributable to fluctuations in the value of the U.S. dollar on certain of our liabilities and transactions. The value of the U.S. dollar strengthened by approximately 7% against the pound sterling from December 31, 2009 to March 31, 2010. Our results of operations will continue to be affected by foreign exchange rate fluctuations.

 

Income tax expense

 

For the three months ended March 31, 2010, income tax expense was $318,329 or £203,900. The income tax expense relates to the partial utilization of the deferred tax asset in respect of carried forward tax losses and tax depreciation of NTL South Herts recognized as at December 31, 2009. There was no income tax expense for the three months ended March 31, 2009.

 

Noncontrolling interest

 

During the three months ended March 31, 2010, the profit attributable to the noncontrolling interest was $272,852, or £174,771 compared with $189,673, or £132,167, for the three months ended March 31, 2009. This was due to the increased profitability of the operating entity.

 

Net profit attributable to South Hertfordshire United Kingdom Fund, Ltd.

 

For the three months ended March 31, 2010, net profit attributable to South Hertfordshire United Kingdom Fund, Ltd. was $629,022 or £402,908 as compared with $330,982, or £230,633, for the three months ended March 31, 2009, primarily due to the reasons described above.

 

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Table of Contents

 

Selected Operating Data

 

The following table sets forth certain data concerning our residential cable customers for the last five quarters:

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

 

2010

 

2009

 

2009

 

2009

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Total customers

 

34,160

 

33,668

 

33,476

 

33,399

 

33,457

 

Digital television subscribers

 

27,418

 

26,911

 

26,602

 

26,217

 

26,048

 

Analog television subscribers

 

 

 

 

 

5

 

Broadband internet subscribers

 

28,235

 

27,511

 

27,090

 

26,785

 

26,613

 

Telephony subscribers

 

30,059

 

29,646

 

29,424

 

29,284

 

29,245

 

Average monthly churn (1)

 

1.1

%

1.4

%

1.5

%

1.3

%

1.2

%

 


(1)          Churn is calculated by taking the total number of customers disconnecting from our services 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.

 

Condensed Consolidated Statement of Cash Flows

 

In the three months ended March 31, 2010, we generated $526,844 from our operating activities compared with $140,785 in the three months ended March 31, 2009, which was used to purchase fixed assets including equipment for customer installations. Our cash provided by operating activities increased primarily due to an improved operating result.

 

Liquidity and Capital Resources

 

Outstanding Indebtedness

 

We have no financing independent of Virgin Media. We are reliant upon the support of Virgin Media to continue our operations. As of March 31, 2010, we had consolidated current liabilities of $37.6 million due to Virgin Media group companies compared with $41.6 million as of December 31, 2009 and $41.6 million as of March 31, 2009.

 

Historically, our source of cash has been the net proceeds of our offerings of limited partnership interests along with funding from Virgin Media 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 and ongoing operations.

 

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 from borrowings or, theoretically, additional issuances of limited partnership interests. 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 Virgin Media for funds to cover operating expenses, and will continue to be dependent upon Virgin Media to meet our liquidity requirements for the foreseeable future. We expect that cash from our operations in 2010 will be utilized fully for the purchase of fixed assets including connecting new customers to our networks.

 

Virgin Media’s business is capital intensive and it is highly leveraged. Virgin Media has significant cash requirements for operating costs, capital expenditures and interest expense. Virgin Media believes that it will be able to meet its current and medium-term liquidity and capital requirements, including fixed charges, through cash on hand, cash from operations, available borrowing under its revolving credit facility, and its ability to obtain future external financing.

 

Virgin Media had £6,146.9 million of debt outstanding as of March 31, 2010, compared to £5,974.7 million as of December 31, 2009 and £6,180.0 million as of March 31, 2009, and £420.7 million of cash and cash equivalents, compared to £430.5 million as of December 31, 2009 and £139.6 million as of March 31, 2009. The decrease in debt since March 31, 2009 is due to repayments offset by adverse movements in exchange rates. The increase in debt from December 31, 2009 is primarily due to adverse movements in exchange rates.

 

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Table of Contents

 

On January 19, 2010, Virgin Media issued approximately £1.5 billion equivalent aggregate principal amount of senior secured notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended, or, the Securities Act, and outside the United States to certain non-U.S. persons pursuant to Regulation S under the Securities Act. The notes were issued by Virgin Media’s wholly owned subsidiary Virgin Media Secured Finance PLC in two tranches: $1.0 billion of 6.50% senior secured notes due 2018 and £875 million of 7.00% senior secured notes due 2018, collectively referred to as the senior secured notes. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources —Senior Secured Notes” in Virgin Media’s quarterly report on Form 10-Q as filed with the SEC on May 6, 2010. The net proceeds from the issuance of the senior secured notes were used to repay £1,453.0 million of Virgin Media’s obligations under its senior facilities agreement dated March 3, 2006, as amended and restated, or the old senior credit facility.

 

On April 19, 2010, Virgin Media drew down an aggregate principal amount of £1,675.0 million under a new senior facilities agreement dated March 16, 2010, as amended and restated, or the new senior credit facility, and applied the proceeds towards the repayment in full of all amounts outstanding under its old senior credit facility and for general corporate purposes. The new senior credit facility comprises a term loan A facility in an aggregate principal amount of £1,000 million, a term loan B facility in an aggregate principal amount of £675 million and a revolving credit facility in an aggregate principal amount of £250 million. For more information see Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources — Senior Credit Facility” in Virgin Media’s quarterly report on Form 10-Q as filed with the SEC on May 6, 2010.

 

Virgin Media has also notified the holders of its senior notes due 2014 of its intention to redeem the full outstanding principal amount of such senior notes on May 12, 2010, using cash from its balance sheet. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources Unsecured Senior Notes” in Virgin Media’s quarterly report on Form 10-Q as filed with the SEC on May 6, 2010.

 

Virgin Media’s long term debt was issued by Virgin Media Inc. and certain of its subsidiaries that have no independent operations or significant assets other than investments in their respective subsidiaries and receivables under intercompany loans.  As a result, they depend upon the receipt of sufficient funds from their respective subsidiaries or payments under intercompany loans to meet their obligations. In addition, the terms of Virgin Media’s existing and future indebtedness and the laws of the jurisdictions under which its subsidiaries are organized limit the payment of dividends, loan repayments and other distributions from them under many circumstances.

 

Virgin Media’s debt agreements contain restrictions on its ability to transfer cash between groups of its subsidiaries or to us. As a result of these restrictions, although Virgin Media’s overall liquidity may be sufficient to satisfy its obligations, it may be limited by covenants in some of its debt agreements from transferring cash to other subsidiaries that might require funds. In addition, cross default provisions in its other indebtedness may be triggered if it defaults on any of these debt agreements.

 

For further information concerning Virgin Media’s liquidity and capital resources and the terms of its various debt facilities, including the new senior credit facility, see its annual report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on February 26, 2010, and its quarterly report on Form 10-Q for the three months ended March 31, 2010, as filed with the SEC on May 6, 2010.

 

Off-Balance Sheet Transactions

 

As of March 31, 2010 and 2009, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

 

Contractual Obligations and Commercial Commitments

 

There have been no material changes in the three months ended March 31, 2010 to the information required under this Item from what was disclosed in our annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 17, 2010.

 

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Table of Contents

 

Item 3.  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 and are therefore exposed to fluctuations in the pound sterling to U.S. dollar exchange rate.

 

The aggregate potential loss from a hypothetical one-percent decrease in the pound sterling/U.S. dollar exchange rate is approximately $36,000 for the three months ended March 31, 2010.

 

We have no debt other than amounts due to affiliates.  As of March 31, 2010 and 2009, we had approximately $37.6 million and $41.6 million, respectively, in amounts due to Virgin Media group companies. Interest on amounts due to affiliates is at a variable rate based on the average rate incurred by Virgin Media.  Therefore we are exposed to changes in Virgin Media’s borrowing rate.  The aggregate potential loss from a hypothetical one-percentage point increase in the interest rate is approximately $99,000 for the three months ended March 31, 2010.

 

Item 4.  Controls and Procedures

 

(a) Disclosure Controls and Procedures.  Our management, with the participation of the chief executive officer and chief financial officer of Virgin Media*, 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, which we refer to as the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, Virgin Media’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 us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 us in the reports that we file or submit is accumulated and communicated to our management, including Virgin Media’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)  Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 


*                                         The Partnership has no principal executive officer or principal financial officer. Robert Mackenzie and Robert Gale are Directors of NTL Fawnspring Limited, the General Partner of the Partnership.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are involved in various disputes and litigation arising in the ordinary course of our business.  While we do not believe any of these litigation matters alone or in the aggregate will have a material adverse effect on our financial position or results of operation, any adverse outcome in one or more of these matters could be material to our consolidated financial statements for any one period.

 

Item 1A.  Risk Factors

 

There have been no material changes in the risk factors discussed under “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 17, 2010.

 

Item 2.  Unregistered Sales of Equity Securities and use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

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 with the Securities and Exchange Commission 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 with the Securities and Exchange Commission 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 with the Securities and Exchange Commission 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 with the Securities and Exchange Commission on March 31, 1995, File No. 000-19889).

31.1**

 

Certification of Person Performing Function Similar to the Functions of Principal Executive Officer,* pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2**

 

Certification of Person Performing Function Similar to the Functions of Principal Financial Officer,* pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1**

 

Certifications of Persons Performing Function Similar to the Functions of Principal Executive Officer and Chief Financial Officer, respectively,* pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


*                                         The Partnership has no principal executive officer or principal financial officer. Robert Mackenzie and Robert Gale are Directors of NTL Fawnspring Limited, the General Partner of the Partnership.

 

**                                  Filed herewith.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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 Fawnspring Limited, the General Partner of South Hertfordshire United Kingdom Fund, Ltd.

 

Date: May 11, 2010

 

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.

 

 

By:

/s/ ROBERT MACKENZIE

 

 

Robert Mackenzie
Director of NTL Fawnspring Limited, the General Partner of South Hertfordshire United Kingdom Fund, Ltd.*

 

 

 

Date: May 11, 2010

 

 

 

 

 

 

By:

/s/ ROBERT GALE

 

 

Robert Gale
Director of NTL Fawnspring Limited, the General Partner of South Hertfordshire United Kingdom Fund, Ltd.*

 

Date: May 11, 2010

 


*                                         The Partnership has no principal executive officer or principal financial officer. Robert Mackenzie and Robert Gale are Directors of NTL Fawnspring Limited, the General Partner of the Partnership.

 

19