o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 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: 1-13488
British Sky Broadcasting Group plc
England & Wales
Grant Way, Isleworth, Middlesex, TW7 5QD, England
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each | Name of each exchange | |
Class | on which registered | |
Ordinary shares (nominal value 50p per share)
|
New York Stock Exchange (1) | |
American Depositary Shares, each of which
represents four Ordinary shares of British Sky Broadcasting Group plc (nominal value 50p per share) |
New York Stock Exchange |
(1) | The listing of Registrants ordinary shares on the New York Stock Exchange is for technical purposes only and without trading privileges. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock at the close of the period covered by the annual report.
Ordinary shares (nominal value 50p per share)...........................................1,937,754,876
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 which financial statement item the registrant has elected to follow.
Item 17 o Item 18 x
TABLE OF CONTENTS
Page | ||||
FORWARD LOOKING STATEMENTS | 3 | |||
PART I
|
||||
ITEM 1:
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 4 | ||
ITEM 2:
|
OFFER STATISTICS AND EXPECTED TIMETABLE | 4 | ||
ITEM 3:
|
KEY INFORMATION | 4 | ||
ITEM 4:
|
INFORMATION ON THE COMPANY | 10 | ||
ITEM 5:
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS | 36 | ||
ITEM 6:
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES | 62 | ||
ITEM 7:
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 78 | ||
ITEM 8:
|
FINANCIAL INFORMATION | 79 | ||
ITEM 9:
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THE OFFER AND LISTING | 79 | ||
ITEM 10:
|
ADDITIONAL INFORMATION | 80 | ||
ITEM 11:
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 92 | ||
ITEM 12:
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | 95 | ||
PART II
|
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ITEM 13:
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | 95 | ||
ITEM 14:
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 95 | ||
ITEM 15:
|
CONTROLS AND PROCEDURES | 95 | ||
ITEM 16A:
|
AUDIT COMMITTEE FINANCIAL EXPERT | 95 | ||
ITEM 16B:
|
CODE OF ETHICS | 95 | ||
ITEM 16C:
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES | 96 | ||
ITEM 16D:
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES | 96 | ||
PART III
|
||||
ITEM 17:
|
FINANCIAL STATEMENTS | 96 | ||
ITEM 18:
|
FINANCIAL STATEMENTS | 96 | ||
ITEM 19:
|
EXHIBITS | 97 | ||
GLOSSARY OF TERMS |
FORWARD LOOKING STATEMENTS
This Annual Report on Form 20-F contains forward looking statements. These forward looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions.
Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions are intended to identify forward looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward looking statements.
We operate in a competitive environment, and a number of factors could affect our ability to achieve our goals, including, but not limited to, the effects of government regulation upon our activities; our ability to continue to obtain exclusive rights to movies, sports events and other programming content; the risks associated with our operation of digital television transmission in the UK and Ireland, as well as our US dollar/ pound sterling and euro/pound sterling exchange rate exposure.
These risks and uncertainties are described in Item 3 Key Information Risk Factors, Item 4 Information on the Company, Item 5 Operating and Financial Review and Prospects and elsewhere in this Annual Report on Form 20-F. We caution you not to place undue reliance on these forward looking statements, which reflect our managements view only as of the date of this Annual Report. The forward looking statements made in this Annual Report on Form 20-F relate only to events, of which we are aware, as of the date on which the statements are made.
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Set forth below is selected financial data for the Group for each of the years in the five year period ended June 30, 2003 and as at June 30, 1999, 2000, 2001, 2002 and 2003.
The information contained in the following tables should be read in conjunction with Item 5 and the Groups historical consolidated financial statements and related notes, as well as other information included elsewhere in this document.
The selected profit and loss account data set forth below for the years ended June 30, 2003, 2002 and 2001, and the balance sheet data at June 30, 2003 and June 30, 2002 are derived from audited consolidated financial statements included in this Annual Report on Form 20-F, which have been prepared in accordance with UK GAAP and differ in certain respects from US GAAP. A reconciliation of certain amounts from UK GAAP, as well as a description of principal differences between UK GAAP and US GAAP applicable to the Group, is presented in Note 28 of the notes to the Consolidated Financial Statements. The selected consolidated profit and loss account data for the years ended June 30, 2000 and 1999, and the balance sheet data at June 30, 2001, 2000 and 1999, are derived from the audited consolidated financial statements appearing in our historical annual reports as filed on Form 20-F with the Securities and Exchange Commission.
4
Year ended June 30, | |||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003(1) | ||||||||||||||||||||
(in millions except per share data) | |||||||||||||||||||||||||
Profit and Loss Account: Amounts in accordance
with UK GAAP
|
|||||||||||||||||||||||||
DTH subscriber revenues
|
£979 | £1,189 | £1,537 | £1,929 | £2,341 | $ | 3,870 | ||||||||||||||||||
Cable and DTT subscriber revenues
|
253 | 303 | 299 | 279 | 202 | 334 | |||||||||||||||||||
Advertising revenues
|
217 | 242 | 271 | 251 | 284 | 469 | |||||||||||||||||||
Interactive revenues
|
| 5 | 93 | 186 | 218 | 361 | |||||||||||||||||||
Other revenues
|
96 | 108 | 106 | 131 | 141 | 233 | |||||||||||||||||||
Group turnover
|
1,545 | 1,847 | 2,306 | 2,776 | 3,186 | 5,267 | |||||||||||||||||||
Operating expenses, net, before amortization of
goodwill and operating exceptional items
|
(1,360 | ) | (1,762 | ) | (2,146 | ) | (2,584 | ) | (2,815 | ) | (4,653 | ) | |||||||||||||
Amortization and impairment of intangible fixed
assets
|
| | (44 | ) | (118 | ) | (122 | ) | (202 | ) | |||||||||||||||
(Provision against) release of provision against
remaining unprovided ITV Digital programming debtors
|
| | | (23 | ) | 5 | 8 | ||||||||||||||||||
Estimated cost of reorganization of Sky
Interactive
|
| | (23 | ) | | | | ||||||||||||||||||
Cost of abortive Man Utd bid
|
(6 | ) | | | | | | ||||||||||||||||||
Estimated cost of transitioning analog customers
to digital service
|
(450 | ) | (58 | ) | | | | | |||||||||||||||||
Estimated cost of termination of analog operations
|
| (41 | ) | | 4 | | | ||||||||||||||||||
Estimated cost of Sky In-Home Service Limited
reorganization
|
| (6 | ) | | | | | ||||||||||||||||||
Operating expenses, net
|
(1,816 | ) | (1,867 | ) | (2,213 | ) | (2,721 | ) | (2,932 | ) | (4,847 | ) | |||||||||||||
Operating (loss) profit
|
(271 | ) | (20 | ) | 93 | 55 | 254 | 420 | |||||||||||||||||
Share of operating results of joint ventures
|
(58 | ) | (122 | ) | (256 | ) | (76 | ) | 3 | 6 | |||||||||||||||
Joint ventures goodwill amortization, net*
|
| (14 | ) | (101 | ) | (1,070 | ) | | | ||||||||||||||||
(Loss) profit on sale of fixed asset investments
|
| (1 | ) | | 2 | | | ||||||||||||||||||
Share of joint ventures loss on sale of
fixed asset investment
|
| (14 | ) | (70 | ) | | | | |||||||||||||||||
Amounts written off fixed asset investments, net
|
| | (39 | ) | (60 | ) | (15 | ) | (25 | ) | |||||||||||||||
(Provision) release of provision for loss on
disposal of subsidiary
|
| | (10 | ) | 10 | | | ||||||||||||||||||
Interest receivable and similar income
|
4 | 11 | 18 | 11 | 4 | 6 | |||||||||||||||||||
Interest payable and similar charges
|
(59 | ) | (103 | ) | (153 | ) | (148 | ) | (118 | ) | (195 | ) | |||||||||||||
Exceptional finance (charges) credits
|
(5 | ) | | 3 | | | | ||||||||||||||||||
(Loss) profit on ordinary activities before
taxation
|
(389 | ) | (263 | ) | (515 | ) | (1,276 | ) | 128 | 212 | |||||||||||||||
Tax on (loss) profit on ordinary activities
|
103 | 65 | (24 | ) | (107 | ) | 62 | 103 | |||||||||||||||||
(Loss) profit on ordinary activities after
taxation
|
(286 | ) | (198 | ) | (539 | ) | (1,383 | ) | 190 | 315 | |||||||||||||||
Equity dividends paid and
proposed(2)
|
(47 | ) | | | | | | ||||||||||||||||||
Retained (loss) profit
|
(333 | ) | (198 | ) | (539 | ) | (1,383 | ) | 190 | 315 | |||||||||||||||
(Loss) earnings per share basic
|
(16.6p | ) | (11.3p | ) | (29.2p | ) | (73.3p | ) | 9.9p | 16.4¢ | |||||||||||||||
(Loss) earnings per share diluted
|
(16.6p | ) | (11.3p | ) | (29.2p | ) | (73.3p | ) | 9.8p | 16.2¢ | |||||||||||||||
Dividends per share(2)
|
2.8p | | | | | | |||||||||||||||||||
Dividends per share(2) (US dollars at
date of payment)
|
4.5¢ | | | | | |
* | Included within joint ventures goodwill amortization of £1,070 million for fiscal 2002 is £971 million in respect of an impairment of KirchPayTV goodwill (see Notes 4 and 14 of Item 18). |
All results relate to continuing operations. |
5
Year ended June 30, | ||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003(1) | |||||||||||||||||||
(in millions except per share data) | ||||||||||||||||||||||||
Amounts in accordance with
US GAAP
|
||||||||||||||||||||||||
Total revenues
|
£ | 1,644 | £ | 1,911 | £ | 2,296 | £ | 2,707 | £ | 3,082 | $ | 5,094 | ||||||||||||
Amortization and impairment of intangible fixed
assets
|
(12 | ) | (12 | ) | (58 | ) | (145 | ) | (5 | ) | (8 | ) | ||||||||||||
Operating profit (loss)
|
118 | (247 | ) | (176 | ) | (30 | ) | 370 | 610 | |||||||||||||||
Joint ventures goodwill amortization, net
|
| (10 | ) | (71 | ) | (712 | ) | | | |||||||||||||||
Income (loss) before income tax
|
2 | (473 | ) | (660 | ) | (940 | ) | 259 | 428 | |||||||||||||||
Net (loss) income
|
(14 | ) | (351 | ) | (625 | ) | (1,047 | ) | 286 | 473 | ||||||||||||||
Basic (loss) earnings per share
|
(0.8p | ) | (20.1p | ) | (33.8p | ) | (55.5p | ) | 14.9p | 24.7¢ | ||||||||||||||
Diluted (loss) earnings per share
|
(0.8p | ) | (20.1p | ) | (33.8p | ) | (55.5p | ) | 14.7p | 24.3¢ | ||||||||||||||
Basic (loss) earnings per ADS(3)
|
(3.2p | ) | (80.3p | ) | (135.4p | ) | (221.9p | ) | 59.7p | 98.6¢ | ||||||||||||||
Diluted (loss) earnings per ADS(3)
|
(3.2p | ) | (80.3p | ) | (135.4p | ) | (221.9p | ) | 58.9p | 97.4¢ |
As at June 30, | ||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003(1) | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Balance Sheet:
|
||||||||||||||||||||||||
Amounts in accordance with UK GAAP
|
||||||||||||||||||||||||
Total assets
|
£ | 1,187 | £ | 3,280 | £ | 3,877 | £ | 2,201 | £ | 2,025 | $ | 3,347 | ||||||||||||
Long-term debt
|
(715 | ) | (1,412 | ) | (1,768 | ) | (1,577 | ) | (1,152 | ) | (1,904 | ) | ||||||||||||
Total liabilities
|
(1,735 | ) | (2,483 | ) | (2,816 | ) | (2,502 | ) | (2,131 | ) | (3,522 | ) | ||||||||||||
Net (liabilities) assets
|
(548 | ) | 797 | 1,061 | (301 | ) | (106 | ) | (175 | ) | ||||||||||||||
Shareholders (deficit) funds
|
(548 | ) | 797 | 1,061 | (301 | ) | (106 | ) | (175 | ) | ||||||||||||||
Capital stock(4)
|
1,566 | 3,123 | 3,920 | 3,879 | 3,806 | 6,291 | ||||||||||||||||||
Shares in issue (number)
|
1,726 | 1,826 | 1,889 | 1,893 | 1,938 | 1,938 |
As at June 30, | ||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003(1) | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Amounts in accordance with US GAAP
|
||||||||||||||||||||||||
Total assets
|
£ | 1,428 | £ | 3,060 | £ | 4,209 | £ | 2,853 | £ | 2,810 | $ | 4,645 | ||||||||||||
Long-term debt
|
(715 | ) | (1,412 | ) | (1,768 | ) | (1,577 | ) | (1,152 | ) | (1,904 | ) | ||||||||||||
Total liabilities
|
(1,327 | ) | (2,379 | ) | (3,359 | ) | (2,994 | ) | (2,362 | ) | (3,904 | ) | ||||||||||||
Net assets (liabilities)
|
101 | 681 | 850 | (141 | ) | 448 | 741 | |||||||||||||||||
Shareholders funds (deficit)
|
101 | 681 | 850 | (141 | ) | 448 | 741 | |||||||||||||||||
Capital stock(4)
|
1,566 | 3,123 | 3,920 | 3,879 | 3,806 | 6,291 | ||||||||||||||||||
Shares in issue (number)
|
1,726 | 1,826 | 1,889 | 1,893 | 1,938 | 1,938 |
As at June 30, | ||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Distribution of Sky Channels
|
||||||||||||||||||||||||
DTH subscribers
|
3,460 | 4,513 | 5,453 | 6,101 | 6,845 | |||||||||||||||||||
Cable subscribers
|
3,778 | 3,735 | 3,486 | 4,091 | 3,871 | |||||||||||||||||||
DTT UK(5)
|
204 | 740 | 1,105 | | 1,510 | |||||||||||||||||||
Total UK and Ireland
|
7,442 | 8,988 | 10,044 | 10,192 | 12,226 | |||||||||||||||||||
(1) | Solely for convenience, pounds sterling amounts for the year ended June 30, 2003 and as at that date have been translated into US dollars at the noon buying rate of the Federal Reserve Bank of New York on June 30, 2003, which was US$1.6529 per £1.00. |
(2) | An interim dividend of £47.3 million, representing 2.75p per share was paid for fiscal 1999. No final dividend was paid for fiscal 1999. No interim or final dividends have been paid or proposed for fiscal 2000, 2001, 2002 or 2003. |
(3) | In prior period reporting, the (loss) earnings per ADS have been calculated using the weighted average number of ADSs outstanding on the basis of 1 ADS for 6 Ordinary Shares. On December 23, 2002 the ratio was revised to reflect a new ratio of 1 ADS representing 4 Ordinary Shares. Therefore, the current and prior period (loss) earnings per ADS have been calculated using a weighted average number of |
6
ADSs outstanding on the basis of 1 ADS for 4 Ordinary Shares. (Loss) earnings per ADS is not exactly four times (loss) earnings per share due to rounding differences. | |
(4) | Capital stock includes called-up share capital, share premium, shares to be issued and merger reserve (see Note 24 within Item 18). |
(5) | From fiscal 2003, the number in respect of DTT consists of the Broadcasters Audience Research Boards (BARBs) estimate of the number of homes in the UK with access to Freeview services. Up to and including fiscal 2001, this number comprised subscribers to ITV Digitals DTT service. For further details see Item 4 Distribution. |
Factors which materially affect the comparability of the selected financial data
Accounting changes
During fiscal 2003, US accounting standard SFAS No. 142, Goodwill and Other Intangible Assets, was implemented. The impact of the adoption of this standard is described in Item 18, Note 28 (i).
During fiscal 2001, UK accounting standard FRS 19, Deferred Tax, was adopted.
During fiscal 2001, US accounting standard SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was implemented. The impact of the adoption of this standard is described in Item 18, Note 28 (i).
During fiscal 2000, US accounting standard SAB 101, Revenue Recognition in Financial Statements, was adopted.
Business combinations
On April 14, 2000, we completed the acquisition of a 24% interest in KirchPayTV (subsequently diluted to 22.03%). We gross equity accounted for our share of results of this joint venture from April 14, 2000 until February 8, 2002 under UK GAAP, and until December 31, 2001 under US GAAP. See the consolidated financial statements for further information relating to our accounting treatment of our investment in KirchPayTV under UK and US GAAP.
During fiscal 2001, we completed the acquisitions of BiB and SIG. The results of these acquisitions were consolidated from the respective dates of acquisition.
Exchange rates
A significant portion of our liabilities and expenses associated with the cost of programming acquired from US film licensors is denominated in US dollars. For a discussion of the impact of exchange rate movements on our financial condition and results of operations, see Item 5 Operating and Financial Review and Prospects.
Since any dividends that may be declared by us will be declared in pounds sterling, exchange rate fluctuations will affect the US dollar equivalent of cash dividends receivable by holders of ADSs.
The following table sets forth, for the periods indicated, information concerning the noon buying rates of the US Federal Reserve Bank for pounds sterling expressed in US dollars per £1.00.
Month | High | Low | ||||||
May 2003
|
1.6484 | 1.6020 | ||||||
June 2003
|
1.6840 | 1.6278 | ||||||
July 2003
|
1.6718 | 1.5867 | ||||||
August 2003
|
1.6170 | 1.5728 | ||||||
September 2003
|
1.6642 | 1.5732 | ||||||
October 2003
|
1.7025 | 1.6598 |
7
Year Ended June 30, | Average(1) | |||
1999
|
1.6421 | |||
2000
|
1.5919 | |||
2001
|
1.4509 | |||
2002
|
1.4479 | |||
2003
|
1.5915 |
(1) | The average rate is calculated by using the average of the noon buying rates on the last day of each month during the relevant year. |
On November 26, 2003 the noon buying rate was US$1.7090 per £1.00.
RISK FACTORS
This section describes the significant risk factors affecting our business. These risks could materially adversely affect our business, financial condition, prospects, liquidity or results of operations. Additional risks and uncertainties of which we are not aware or which we currently believe are immaterial may also adversely affect our business, financial condition, prospects, liquidity or results of operations.
We rely on intellectual property and proprietary rights, including in respect of programming content, which may not be adequately protected under current laws.
Our services are largely comprised of content in which we own, or have licensed the intellectual property rights, delivered through a variety of media, including broadcast programming, via interactive television services, and via the Internet. We rely on trademark, copyright and other intellectual property laws to establish and protect our rights in these products. However, we cannot assure you that our rights will not be challenged, invalidated or circumvented or that we will successfully renew our rights. Third parties may be able to copy, infringe or otherwise profit from our rights without our authorization. These unauthorized activities may be more easily facilitated by the Internet. In addition, the lack of Internet specific legislation relating to trademark and copyright protection creates an additional challenge for us in protecting our rights relating to our on-line business processes and other digital technology rights.
We generate wholesale revenues from a limited number of customers.
Our wholesale customers, to whom we offer the Sky Channels and from whom we derive our cable revenues, comprise principally ntl Group Ltd. (ntl) and Telewest Communications plc (Telewest). We understand that Telewest is in the process of completing a financial restructuring with its bondholders and shareholders (see Item 4 Distribution Cable Distribution United Kingdom).
Economic or market factors, or a change in strategy as it relates to the distribution of our channels by ntl or Telewest, may adversely influence the wholesale revenue we receive from ntl or Telewest which would negatively affect our business.
We are subject to a number of long term obligations.
We are party to a number of medium or long term agreements and/or other arrangements (including in respect of programming and transmission) which impose financial and other obligations upon us. Were we unable to perform any of our obligations under these agreements and/or arrangements, it could have a material adverse effect on our business.
We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.
We face competition from a broad range of companies engaged in communications and entertainment services, including cable television, digital and analog terrestrial television, telecommunications providers, and home video products companies, as well as companies developing new technologies and other suppliers of
8
Our ability to compete successfully will depend on our ability to continue to acquire, commission and produce programming content, and attractively package and offer it to our customers at competitive prices. The program content and third party program services we have licensed from others are subject to fixed term contracts which will expire. We cannot assure you that program content or third party program services (whether on a renewal or otherwise) will be available to us on acceptable terms, or at all, and if so available, that such program content or program services will be attractive to our customers.
Our business is heavily regulated and changes in regulations (or changes in interpretation of regulations) or failure to obtain required regulatory approvals could adversely affect our ability to operate.
We are subject to regulation primarily in the UK and the European Community. The regimes which affect our business include broadcasting, telecommunications, and competition (anti-trust) laws and regulations. Relevant authorities may introduce additional or new regulations applicable to our business. Our business and business prospects could be adversely affected by the introduction of new laws, policies or regulations or changes in the interpretation or application of existing laws, policies and regulations. Changes in regulations relating to one or more of licensing requirements, access requirements, programming transmission and spectrum specifications, consumer protection, or other aspects of our business, could have an adverse effect on BSkyBs or any competitors business and results of operations.
On December 17, 2002, following an investigation and the submission by BSkyB of written and oral representations, the Office of Fair Trading (OFT) announced that BSkyB had not been found in breach of the Competition Act 1998. Both ntl and the liquidator of ITV Digital requested, under the Competition Act 1998, the OFT to vary or withdraw its decision concerning BSkyB. On July 29, 2003, the OFT announced that it had rejected both applications. The period in which both ntl and the liquidator of ITV Digital had the right to appeal this decision of the OFT to the Competition Appeals Tribunal has now expired, without any appeal having been made. See Item 4 Government Regulation UK Competition Law Regime The Competition Act 1998.
The European Commission has commenced investigations into a number of agreements, decisions or practices leading to the acquisition of broadcasting rights to football events within the European Economic Area (EEA), including the sale of exclusive broadcast rights to Premier League football by The Football Association Premier League Limited (FAPL). On June 21, 2002, BSkyB Limited and the FAPL notified BSkyB Limiteds current arrangements for the broadcast of FAPL football matches to the European Commission seeking either a clearance or an exemption from Article 81 of the EC Treaty. The FAPL has also notified the rules of the FAPL to the European Commission. On December 20, 2002, the European Commission issued a Statement of Objections to the FAPL outlining certain concerns in respect of the FAPLs joint selling of broadcast rights to Premier League football. BSkyB has received several requests for information from the European Commission concerning the bidding process undertaken by the FAPL in relation to the sale of Premier League football rights in respect of the three year period 20042007. Whilst this EC investigation remains ongoing, the FAPL announced that BSkyB has been awarded (subject to contract) all four packages of exclusive live UK rights to FAPL football, two near live packages of UK rights to FAPL football (both on a delayed basis), four of the five packages of live rights in the Republic of Ireland and two near live packages of rights in the Republic of Ireland from the beginning of the 2004/05 season to the end of the 2006/07 season. BSkyB is currently unable to assess whether this EC investigation will have a material effect on the Group and its financial results.
We cannot assure you that we will succeed in obtaining all requisite approvals in the future for our operations without the imposition of restrictions which may have an adverse consequence to us nor that
9
Our business is reliant on technology which is subject to risk, change and development.
We are dependent upon satellites which are subject to significant risks that may prevent or impair proper commercial operations, including defects, destruction or damage, and incorrect orbital placement. If we were unable to obtain sufficient satellite transponder capacity in the future or our contracts with satellite providers were terminated, this would have a material adverse effect on our business and operations. Similarly, loss of the transmissions from satellites that are already operational, or failure of our transmission or uplinking facilities, could have a material adverse effect on our business and operations. We employ encryption technologies which protect against unauthorized access to our services. Whilst these encryption technologies have so far been resilient to piracy, and we continue to work with our technology supplier to maintain this status, there can be no assurance that they will not be compromised in the future. We have made and continue to make significant investment in our customer relationship management technology.
Were any of these technologies to fail, this could have a material adverse effect on our business.
We license conditional access software and receive a number of related support services, including the provision of smart cards, from NDS Limited, which is our sole supplier of such technology. Were NDS unable to continue to provide us with such services our business could be negatively affected.
There is a large existing population of digital set-top boxes (in which we have made a significant investment and which are owned by customers). Were a significant number of these to suffer failure, or were our set-top boxes to be rendered either redundant or obsolete by other technology or by the mandatory imposition of incompatible technology, or should we need to or wish to upgrade the existing population of set-top boxes this could have a material adverse effect on our business.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE GROUP AND BUSINESS OVERVIEW
Introduction
British Sky Broadcasting Group plc and its subsidiaries operate a leading pay TV service, principally in the United Kingdom (UK) and the Republic of Ireland (Ireland). We acquire programming to broadcast on our own channels and supply certain of those channels to cable operators for them to retransmit to their subscribers. We also retail our channels, together with channels broadcast by third parties, to DTH subscribers and certain of our channels (together with channels broadcast by third parties) to a limited number of DSL subscribers. We also make three of our channels available free-to-air via the UK DTT platform.
At September 30, 2003, there were approximately 12,576,000 subscribers to our pay TV service in the UK and Ireland. Of these, 7,015,000 were digital DTH subscribers (the remainder being subscribers of the cable operators to whom we supply certain of our channels). According to estimates of the Broadcasters Audience Research Board (BARB), there were 1,710,000 homes in UK capable of receiving certain of our channels via the DTT platform. Our total revenues in fiscal 2003 were £3,186.0 million (fiscal 2002: £2,776.1 million; fiscal 2001: £2,306.0 million). This was derived from £2,341.2 million in subscription fees from DTH viewers (fiscal 2002: £1,929.2 million; fiscal 2001: £1,536.7 million), £202.2 million in subscription fees from cable platform operators (fiscal 2002: £279.4 million (subscription fees from cable and DTT platform operators); fiscal 2001: £299.1 million (subscription fees from cable and DTT platform operators)), £283.6 million in advertising sales revenue (fiscal 2002: £250.7 million; fiscal 2001: £270.5 million), £218.3 million in interactive revenue (fiscal 2002: £186.0 million; fiscal 2001: £93.0 million) and £140.7 million in other revenue (fiscal 2002: £130.8 million; fiscal 2001: £106.7 million).
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We are engaged in television broadcasting, together with certain ancillary functions, principally within the UK and Ireland, with activities conducted principally from the UK. All of our turnover principally arises from services provided to retail and wholesale customers within the UK, with the main exception of £92.9 million (fiscal 2002: £62.4 million; fiscal 2001: £32.6 million) which arises from services provided to retail and wholesale customers in Ireland and £9.0 million (fiscal 2002: £7.7 million; fiscal 2001: £5.4 million) which arises from services provided in the Channel Islands.
As set forth herein, references to fiscal years are to our fiscal years which ended on the Sunday nearest to June 30, in each year. We publish our financial statements in British pounds sterling (£). References herein to US dollars, dollars, US$, $ and ¢ are to currency of the US, references to Euro and are to currency of the European Community and references to pounds sterling, £, pence and p are to currency of the UK. Certain pounds sterling amounts stated herein have been translated into US dollars at an assumed rate solely for the convenience of the reader and should not be construed as representations that such US dollar amounts actually represent such pound sterling amounts or that such pound sterling amounts could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise stated herein, such US dollar amounts have been translated from the corresponding pound sterling amounts at the noon buying rate in The City of New York for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the noon buying rate) on June 30, 2003, which was $1.6529 per £1.00. For information with respect to exchange rates, see Item 3 Key Information Exchange Rates.
Our Consolidated Financial Statements included herein are prepared in accordance with accounting principles generally accepted in the UK. UK GAAP differs in certain significant respects from accounting principles generally accepted in the US. A discussion of the principal differences between UK GAAP and US GAAP is contained in Note 28 within Item 18.
Certain terms used herein are defined in the Glossary which appears at the end of this Form 20-F.
The Company, a public company limited by shares and domiciled in the UK, operates under the laws of England and Wales. It was incorporated in England and Wales on April 25, 1988. Our principal executive offices are located at Grant Way, Isleworth, Middlesex, TW7 5QD, England. Tel: +44(0)870 240 3000. A list of our significant subsidiaries is set out in Note 15 within Item 18.
Programming
We provide viewers with a broad range of programming options. Our programming is an important factor in generating and maintaining subscriptions to our channels by viewers. With respect to the channels we own and operate, we incur significant expense to acquire exclusive pay TV rights to films, the exclusive rights to broadcast certain sports events live and rights to other general entertainment programming. We are dependent upon the licenses which grant us these rights as well as our satellite television services licenses, telecommunication licenses and authorizations. We also produce and commission original entertainment programming. We have also acquired the rights to market the television services of third parties to DTH viewers. Currently, we own, operate and distribute 15 Sky Channels via our digital service (or 25 including multiplexed versions of the Sky Channels but excluding the business channels SkyVenue and the Pub Channel). We also currently retail to DTH viewers 82 Sky Distributed Channels (including multiplexed versions of channels). We do not own the Sky Distributed Channels (although we have an equity interest in certain of them). In addition to the Sky Distributed Channels, we currently retail to Sky digital subscribers the digital audio services Music Choice and Music Choice Extra, nine radio services and the Sky Box Office service. In September 2001, we ceased broadcasting our residual analog services.
The current Sky Channels are Sky Movies 1 (which was previously branded Sky Movies Premier and which has four multiplex versions: Sky Movies 3, Sky Movies 5, Sky Movies 7 and Sky Movies 9), Sky Movies 2 (which was previously branded Sky Movies Max and which has three multiplex versions: Sky Movies 4, Sky Movies 6 and Sky Movies 8), Sky Cinema 1 (which was previously branded Sky Movies Cinema and which has one multiplex version: Sky Cinema 2), Sky Sports 1, Sky Sports 2, Sky Sports 3, Sky Sports Xtra (previously Sky Sports Extra), Sky Sports News, Sky One (and its multiplex version, Sky
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We retail to our DTH customers various combinations of the Sky Basic Channels and the Sky Distributed Channels (other than the Premium Sky Distributed Channels) as basic tiers of programming, ranging from 7 to 92 television channels (as well as certain music audio and radio services). All of these basic packages are collectively called the Basic Packages. Our DTH subscribers either subscribe to one of the Basic Packages alone (or together with any one or more Premium Sky Distributed Channel) or receive one of the Basic Packages within the cost of any of the Sky Premium Channels that the subscriber receives. We also offer Sky Box Office and Music Choice and Music Choice Extra to DTH subscribers. On the DTH platform, the Sky Premium Channels, the Sky Basic Channels (other than Sky News), Sky Box Office, Music Choice and Music Choice Extra and the Sky Distributed Channels (other than QVC) are encrypted in order to limit access to paying subscribers only.
Both ntl and Telewest currently carry all of the Sky Premium Channels, although both offer our movie multiplex channels only to their digital cable subscribers. ntl also carries on its digital networks all of the Sky Basic Channels other than Sky Travel Shop. Telewest carries three of the eight Sky Basic Channels (excluding multiplex versions). Both ntl and Telewest also carry some Sky Box Office events for re-transmission to their cable subscribers, but do not carry the Sky Box Office movie service.
According to surveys produced by BARB, as of June 30, 2003, an estimated 27% of the estimated 24.8 million TV homes in the UK were equipped with digital satellite reception equipment; 14% subscribed to a cable TV or SMATV package (single mast antenna television which is primarily for buildings that receive programming by means of a single satellite antenna connected to a head end and which distributes television signals to individual units in the building by cable); and 6% had digital terrestrial television. According to BARB estimates, in the UK the Sky Channels accounted for an estimated 29% of viewing in homes with cable or satellite reception equipment of all satellite and cable channels (or an overall 12% viewing share of all channels available within satellite and cable homes during the same period) and the Sky Distributed Channels accounted for the majority of the balance of viewing of satellite and cable channels.
For the year ended June 30, 2003, BARB estimates that 42% of all viewing in UK homes with digital satellite reception equipment (digital satellite homes) was of channels available via the satellite platform other than BBC1, BBC2, ITV1, Channel 4 and five. BARB estimates that in the same period Sky Channels accounted for 32% of multi-channel viewing in UK digital satellite homes, with an overall 16% viewing share across all channels available (including the traditionally analog terrestrial channels) within digital satellite homes.
In addition to owning the Sky Channels, we hold significant equity interests in ventures that own fifteen (not counting multiplex versions) of the Sky Distributed Channels (including certain Premium Sky Distributed Channels) which are operated and distributed in the UK and Ireland. In addition to the fifteen Sky Distributed Channels, we also have a significant equity interest in the venture operating the audio services Music Choice and Music Choice Extra (this venture also operates in certain international territories) and a 33.33% equity interest in the venture operating the Sky News Australia Channel, which is based in Australia.
Premium Channels |
Sky Premium Channels |
Sky Movies 1 and 2 |
Sky Movies 1 and 2 operate 24-hours per day, seven days a week and principally show the licensors output of recent release movies, made-for-TV movies and certain library movies (in respect of which we are typically granted exclusive pay TV rights to broadcast the licensors output during the relevant pay TV window) distributed by major Hollywood and independent US and European licensors.
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As of June 30, 2003, over 97% of movie subscribers subscribed to both of the Sky Movies channels.
In the last three years, we have also been involved in financing the production of feature films to be exploited on television, including on our own movie channels.
Sky Sports 1, Sky Sports 2, Sky Sports Xtra |
Both Sky Sports 1 and Sky Sports 2 provide on average 20 hours or more of sports programming per day, including live coverage of certain popular sports events. At June 30, 2003, there were approximately 5.2 million UK and Irish DTH and cable subscribers to either Sky Sports 1 or Sky Sports 2 and over 97% of these sports subscribers subscribed to both Sky Sports 1 and Sky Sports 2.
Since July 2003, Sky Sports Xtra has been available as a premium à la carte service as well as being provided as a free channel to DTH subscribers to both Sky Sports 1 and Sky Sports 2. Sky Sports Xtra broadcasts primarily non-UK sports such as NFL, international cricket, Masters tennis, NBA, UEFA Champions League football (soccer) and Spanish League football.
Our programming rights for the Sky Sports channels include exclusive rights to broadcast live in the UK and Ireland a number of important football, rugby, cricket, golf and boxing events. In addition, we purchase rights to broadcast a wide range of additional sports programming on both an ad hoc and longer term basis.
On August 8, 2003, October 3 and October 30, 2003, it was announced that the Group had successfully bid for all four packages of exclusive live UK rights to Football Association Premier League (FAPL) football, two near live packages of UK rights to FAPL football (both on a delayed basis), four of the five packages of live rights in Ireland and two near live packages of rights in Ireland from the beginning of the 2004/05 season to the end of the 2006/07 season. The European Commission is investigating the bidding process undertaken by the FAPL in relation to the collective selling of Premier League football rights.
Sky Bonus Channels |
Sky Cinema 1, Sky Sports 3 |
Sky Cinema 1 operates 24-hours per day, seven days a week and primarily features older or classic films. It is available free to DTH and cable subscribers who subscribe to both of our Sky Movies channels. There is one Sky Cinema 24-hour multiplex, Sky Cinema 2.
Sky Sports 3 currently offers on average 14 hours of sports programming each day. It is available free to DTH and cable subscribers who subscribe to either Sky Sports 1 or Sky Sports 2.
Premium Sky Distributed Channels |
The Disney Channel |
Under an agreement with The Walt Disney Company Limited, we have the exclusive rights to distribute the Disney Channel and three additional multiplexes to the core Disney Channel via DTH, in the UK and Ireland, as a bonus channel to those of our DTH subscribers receiving both of our Sky Movies channels and to other digital DTH subscribers on an à la carte basis.
Chelsea TV |
In August 2001, we entered into a joint venture with Chelsea Village plc in respect of Chelsea Digital Media Limited (in which we own a 20% equity interest) to establish and operate a digital subscription pay TV channel dedicated to showing certain programming relating to Chelsea Football Club. We offer Chelsea TV to our DTH subscribers solely on an à la carte basis.
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MUTV |
We are party to a joint venture, MUTV Limited, with Manchester United PLC and Granada Media Group Ltd (each party owning a 33.33% equity interest in MUTV) to operate a digital subscription pay TV channel dedicated to showing certain programming relating to Manchester United Football Club. We offer MUTV to our DTH subscribers solely on an à la carte basis and also act as agent for the cable carriage of MUTV in the UK and Ireland.
FilmFour |
We offer FilmFour, a pay TV film channel operated by Channel 4, together with its two multiplexes, FilmFour+1 and FilmFour Weekly, to our DTH subscribers solely on an à la carte basis.
Artsworld |
Artsworld, a pay TV channel (in which we own a 50% equity interest) broadcasting arts-oriented programming, including classical music, opera and dance, launched in December 2001. We offer Artsworld to our DTH subscribers solely on an à la carte basis.
Star News / Star Plus |
Star News, a world news pay TV channel, and Star Plus, a general entertainment pay TV channel, (both targeting the Indian sub-continent audience resident in the UK and Ireland), were launched via our digital platform in January 2001. We offer Star News and Star Plus together (but not individually) to our DTH subscribers solely on an à la carte basis.
Basic Packages |
Sky Basic Channels |
Sky One is the general entertainment flagship channel of the Sky Channels. It is targeted primarily at a 16-34 age group audience and includes first-run US entertainment programs and UK commissioned factual and drama series. Based upon BARB surveys, during the 52 weeks ended June 30, 2003, Sky One was viewed by approximately 43.8% of individuals in all UK TV homes. In December 2002, we launched Sky One Mix, a multiplex version of Sky One.
Sky News provides 24-hour national and international news coverage. Sky News is broadcast unencrypted and can be seen by all DTH viewers capable of receiving transmissions from the Astra satellites via which we broadcast our services and internationally in over 80 countries. Sky News is also distributed by all UK cable operators and by certain third party operators outside the UK.
Sky Sports News is currently available to our DTH subscribers and to subscribers to ntls and Telewests digital cable television services.
Sky Travel features travel related programming currently available to DTH subscribers and to subscribers to ntls digital cable television services. In August 2002, we launched Sky Travel Extra offering travel programming and the opportunity for Sky Travel DTH viewers to purchase a wide range of holidays via their television set. In February 2003 we also launched Sky Travel Shop, a tele-shopping channel offering DTH viewers holiday packages to purchase via the telephone or online.
Versions of Sky News, Sky Sports News and Sky Travel are available as part of the free-to-view service on DTT (See Distribution below).
In April 2003, we launched three interactive music channels, Flaunt, The Amp and Scuzz, currently available to our DTH subscribers and to subscribers to ntls digital cable television services.
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Basic Sky Distributed Channels |
We typically have the exclusive right to offer the basic Sky Distributed Channels to residential DTH viewers in the UK and Ireland.
We currently act as an agent for The History Channel, the Biography channel, MUTV, Granada Men & Motors and Granada Plus for the sale of these channels and their multiplexes (where relevant) to cable operators in the UK and Ireland, and have the non-exclusive right to distribute the Disney Channel to cable operators. The owners of the Sky Distributed Channels generally sell their own advertising time on such channels, although we act as an advertising sales agent for The History Channel, the Biography channel, the National Geographic Channel, Adventure One, MUTV, Chelsea TV, Hallmark, the six EMAP music channels (Q, Kiss, Magic, Kerrang, Smash Hits and The Box) and the eight Discovery Channels (Discovery, Home and Leisure, Travel and Adventure, Wings, Sci-Trek, Civilisations, Health and Animal Planet), on a commission basis as well as for these channels multiplexes other than The Hits and Discovery Kids.
Music Choice |
We offer Music Choice, a 24-hour digital audio service consisting of 10 audio channels, to all DTH subscribers. This is included in each of our Basic Packages. In addition, Music Choice Extra, which consists of 30 digital audio channels, is available to our DTH subscribers as an à la carte premium service.
Pay-per-view |
With our Sky Box Office service, we currently offer our DTH subscribers 62 screens of TV premieres of movies and occasional live sports and other special events on a pay-per-view basis. We have acquired certain exclusive DTH rights from movie distributors which enable us to show their movies on Sky Box Office. We also offer seven screens of adult movies, between 10 pm and 6 am, to our DTH subscribers via our 18 Plus Movies service.
Following our purchase of exclusive DTH pay-per-view rights to Premier League football matches (for the seasons 2001/02-2003/04 inclusive), a further 40 matches (over and above those matches broadcast on our Sky Sports channels) are available on a pay-per-view basis via our Premiership Plus service for the current football season, either for a per-match price or for a one-off season ticket price.
In addition to our own pay-per-view services, we retail to our DTH subscribers six third party adult services on a pay-per-night basis.
Distribution
We distribute our programming services directly to DTH subscribers through the Basic Packages and the Premium Channels. Cable subscribers, by contrast, contract with their local cable operators, which in turn acquire the rights to distribute certain of the Sky Channels from us which they combine with other channels from third parties. Prior to its closure in April 2002 we supplied versions of certain of the Sky Channels to ITV Digital on wholesale terms. These arrangements with ITV Digital made a material contribution to our operating profit.
As at June 30, | As at | |||||||||||||||
September 30, | ||||||||||||||||
2001 | 2002 | 2003 | 2003 | |||||||||||||
(in thousands) | ||||||||||||||||
Distribution of Sky Channels
|
||||||||||||||||
DTH subscribers
|
5,453 | 6,101 | 6,845 | 7,015 | ||||||||||||
Cable subscribers
|
3,486 | 4,091 | 3,871 | 3,851 | ||||||||||||
DTT UK(1)
|
1,105 | | 1,510 | 1,710 | ||||||||||||
Total UK and Ireland
|
10,044 | 10,192 | 12,226 | 12,576 | ||||||||||||
(1) | From fiscal 2003, the number in respect of DTT consists of BARBs estimate of the number of homes in the UK with access to Freeview services. Up to and including fiscal 2001, this number comprised subscribers to ITV Digitals DTT service. |
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DTH Distribution
We launched Sky digital, our digital DTH service, in October 1998 and we terminated our previous analog service in September 2001. During fiscal 2003, whilst there were 1,355,000 new subscribers to Sky digital, digital churn in that same period was 611,000. Digital DTH churn in total was 9.4% in fiscal 2003 (digital churn fiscal 2002: 10.5%; total churn fiscal 2001: 10.0%). We define digital churn as the number of digital DTH subscribers over a given period who terminate their subscription in its entirety, net of former subscribers who reinstate their subscription in that period.
As at September 30, 2003, we had a total of 7,015,000 DTH subscribers, with the Sky World package (the channel package containing all of the Sky Premium Channels and the largest number of basic channels) taken by over 54% of our DTH subscribers.
In fiscal 2003, we achieved an annual net growth of 744,000 digital DTH subscribers. The future demand and speed of take up of our digital service will depend upon the attractiveness of our digital service, the marketing initiatives adopted both by us and others and the competitive pressures resulting from the availability of competing services such as analog and digital terrestrial and analog and digital cable television.
In fiscal 2003 we derived £2,341.2 million of our total revenues from DTH subscription revenues, which are a function of the number of subscribers, the mix of services taken and the rates charged in subscription fees from DTH viewers (fiscal 2002: £1,929.2 million; fiscal 2001: £1,536.7 million).
In the UK, the price to a DTH subscriber of our basic package containing the largest number of basic channels is currently £18.50. In 2001 and 2002 it was £16; in 2000, it was £13. Depending upon the number of Sky Premium Channels taken (which currently can be between one and five (plus multiplexes)), the price to that same DTH subscriber in the UK of taking Sky Premium Channels currently ranges between £24.50 and £38 (2002: between £26 and £37; 2001: between £24 and £34; 2000: between £21 and £32).
In Ireland, the price to a DTH subscriber of our basic package containing the largest number of basic channels is currently 26.99 (27 between January and September 2002) (fiscal 2002: IR£16, IR£21.26 or 27; fiscal 2001 IR£13 or IR£16). Depending upon the number of Sky Premium Channels taken (which currently can be between one and five (plus multiplexes)), the price to that same DTH subscriber in Ireland of taking Sky Premium Channels currently ranges between 34.61 and 60 (fiscal 2002: between IR£24 and IR£41.74 or between 37 and 53; fiscal 2001: between IR£21 and IR£36).
We offer our DTH services to both residential and commercial DTH subscribers in the UK and Ireland. Our commercial subscribers include offices, retail outlets, hotels, pubs and clubs.
At June 30, 2003, residential and commercial DTH subscribers represented approximately 64% (the balance being made up of subscribers to our wholesale customers) of the total number of UK and Ireland subscribers to our services.
Digital Satellite Equipment
UK
In order to receive our Sky digital service, viewers are required to have a digital satellite system which includes a satellite dish and LNB, a digital set-top box and a remote control. When we launched Sky digital, the cost of this equipment to the customer without the benefit of any subsidy would have been approximately £400. With the benefit of a subsidy provided by BiB it was £199 (for new customers) or £159 (for existing Sky analog customers). In 1999, we began a new initiative to accelerate the take up of digital satellite by offering free digital satellite systems. During 2002, in order to receive a free digital satellite system a subscription to our services was required. However, from January 1, 2003 we offered free set-top boxes without a requirement to subscribe to one of our services (which was also the case prior to 2002). Recipients of free set-top boxes are still required to pay for installation and enter into a contract which requires them to connect the set-top box to a telephone line which is fully operational and able to make
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The services which a non-subscriber taking up the free box offer receives will depend upon the number of unencrypted services available on the Astra satellite system and also on whether third party broadcasters of encrypted non-subscription channels take the relevant conditional access services to make their channels available to satellite viewers who do not subscribe to pay TV.
The retail price for a set-top box during fiscal 2003 to a customer taking up the free equipment offer has been as follows:
Price (one-off ) for set-top box to
subscribers
|
Price including VAT | |
from January 1, 2002
|
Free | |
Price (one-off ) for set-top box to
non-subscribers
|
||
until December 31, 2002
|
£169 | |
from January 1, 2003
|
Free |
Our charges for standard installation of satellite equipment during fiscal 2003 have been as follows (charges for installations which are non-standard vary):
Installation charge (one-off ) to subscribers | Price including VAT | |||
from June 5, 2002
|
Sky World subscribers | £60 | ||
all other subscribers | £100 | |||
Installation charge (one-off) to non-subscribers | ||||
until December 31, 2002 | £100 | |||
from January 1, 2003 | £120 |
We also offer our subscribers the opportunity to purchase up to three extra standard set-top boxes for use at the same residence as their original set-top box which enables them to watch different satellite programs in different rooms at the same time using just one satellite dish. As well as the cost of the extra set-top box (currently £99 when taken with an extra Sky digital subscription), an installation charge and monthly subscription charge (discounted as against our standard subscription charges) are also payable by the subscriber. With each additional subscription the customer is able to obtain all the channels in his or her subscription for the original set-top box on each extra set-top box.
The prices for an extra set-top box (Extra Digibox) to our subscribers for equipment, installation and subscription have been as follows:
Price for each additional Extra
Digibox
|
||||
Price of set-top box until October 7, 2002
|
£ | 169 | ||
Price of set-top box from October 8, 2002
|
£ | 99 | * | |
Installation charge (standard)
|
£ | 50 | ||
Incremental charge for any other installation
(standard) at same time
|
£ | 25 | ||
Monthly subscription until October 7, 2002
(regardless of package subscribed to)
|
£ | 12 | ||
New monthly subscriptions from October 8,
2002 (regardless of package subscribed to)
|
£ | 15 |
* | when taken with an extra Sky digital subscription |
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During fiscal 2003, we have continued to offer Sky Plus (Sky+). Customers pay a one-off fee for the Sky+ box and must also pay a monthly subscription to use its recording features. The prices for equipment, installation and subscription have been as follows:
Price for Sky+
|
||||
Price of set-top box until October 7, 2002
|
£ | 300 | ||
Price of set-top box from October 8, 2002
|
£ | 250 | ||
Price of set-top box from March 1, 2003
|
£ | 249 | ||
Price of set-top box from August 22, 2003
|
£ | 199 | ||
Installation charge for Sky digital subscribers
(standard)
|
£ | 50 | ||
Installation charge for non-Sky digital
subscribers until March 7, 2003 (standard)
|
£ | 100 | ||
Installation charge for non-Sky digital
subscribers from March 8, 2003 (standard)
|
£ | 120 | ||
Incremental charge for any other installation
(standard) at same time until October 1, 2003
|
£ | 25 | ||
Incremental charge for any other installation
(standard) at same time from October 1, 2003
|
£ | 10 | ||
Monthly subscription for Sky+ functionality*
|
£ | 10 |
* | Since October 1, 2003, this monthly subscription fee has not been applicable to any DTH subscriber taking two or more Sky Premium Channels (excluding bonus and stand-alone premium channels). |
Both satellite equipment and subscriptions to our DTH service are offered by us directly and by a variety of retailers. Such retailers generally receive payments from us in connection with the supply of satellite reception equipment under our free digital satellite equipment initiative and commission for the sale of subscriptions to our DTH services. The level of sales of subscriptions varies depending upon the time of the year and the degree of promotion and special offers. Installation services are provided to customers by some of the smaller retailers. We provide installation and equipment repair services through Sky In-Home Service Limited (SHS), an installation company which is one of our subsidiaries. In fiscal 2003, approximately 1.0 million DTH systems were installed in the UK by or on behalf of SHS (2002: 1.3 million; 2001: 2.1 million).
We have built digital transmission and uplink facilities and have developed (in conjunction with others on a commissioned or licensed basis) a digital conditional access system, customer management systems, electronic program guide and navigation technology, as well as applications and online return path infrastructure to permit the offering by us of interactive television services. We have worked with a number of manufacturers and continue to work closely with selected manufacturers to develop digital satellite set-top boxes based upon our specifications. One manufacturer supplies television sets containing integrated digital satellite and DTT receivers.
At June 30, 2003, we had entered into agreements committing us until the end of June 2004 to purchase 1.1 million digital satellite set-top boxes from four manufacturers. Our agreements set the price to us of the set-top boxes until the end of July 2004.
Sky+ is a set-top box that we have developed, which contains two satellite tuners and an integrated personal television recorder allowing approximately 20 hours of programming to be recorded directly on to a hard-disk recording facility contained within the set-top box. This enables digital satellite viewers to watch one live digital satellite program (or a previously recorded program) while simultaneously recording another, pause or rewind live TV and automatically record some series of favorite programs.
From time to time, we update the functionality of Sky+ (and the digital satellite set-top boxes) using software downloads into the set-top box, broadcast via satellite.
Ireland
In Ireland, both satellite equipment and subscriptions to our services are offered directly by us and by a large number of Irish retailers. Such retailers, like their UK counterparts, generally receive payments from us in connection with the supply of satellite reception equipment under our free digital satellite equipment initiative and commission for the sale of subscriptions to Skys services sold to DTH customers in Ireland. Some of the channels offered in Ireland differ to those offered in the UK.
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At September 30, 2003, there were approximately 297,000 DTH subscribers to our services in Ireland.
Whilst our digital DTH services have been available in Ireland since December 1998, it was not until September 2000 that we made available to DTH subscribers in Ireland a free set-top box offer. To benefit from this offer, customers in Ireland must subscribe to our services. In September 2002, a limited range of online interactive services were provided to our DTH subscribers in Ireland for the first time.
Interactive
Our digital DTH service allows a broadcaster, such as ourselves, to develop and offer its viewers enhanced and interactive services as well as offering additional functionality. We offer enhanced broadcast applications behind a number of Sky Channels including Sky Movies Active (behind our movie channels), Sky Sports Active (behind our sports channels) and Sky News Active (behind Sky News). BSkyB, as well as other broadcasters, is enhancing its channels with interactive services which can be accessed whilst the programming on the channel stays in view. In fiscal 2003, we derived £218.3 million in interactive revenue (fiscal 2002: £186.0 million; fiscal 2001: £93.0 million).
Currently, in addition to the Sky Active portal (see Sky Interactive below), a range of other interactive services is available, and DTH customers can access these services by means of either stand alone portals (Sky Active being one of them) or in conjunction with certain broadcast channels. Services provided in this manner include competitions, voting, messaging services, quizzes, games and betting some of which relate to the program content.
Technological advances during the current year have allowed us to implement a multi-platform retail offering using third party fulfillment, and to produce interactive voting applications which can handle a higher level of call volumes. In addition, we have developed our browser technology, allowing betting and other applications to be developed to higher standards.
We have continued to develop our interactive advertising technology, for the first time developing advertising applications that make use of our browser technology with a view to enabling a wider range of interactive advertising services to be offered.
Sky Interactive
BiB, through its subsidiary Sky Interactive Limited, provides an interactive TV platform for the development and delivery of interactive services, such as games, home shopping, betting, banking, travel, holiday and e-mail services. It is also used to deliver the interactive services of third parties, such as a UK government information service and the enhanced services of a number of broadcasters. We currently own and operate four stand alone interactive portals on the digital satellite platform which relate to a broad range of interactive services including retail, betting and games.
Major product launches by us during the year include SkyBetVegas, offering a range of fixed odds betting games.
Sky Active is currently offered free of charge to all digital satellite viewers and the customers telephone line is the return path for these interactive services via a modem in the set-top box. It derives revenues principally from (1) premium rate telephone charges in connection with viewers usage of its services (such as pay-per-play games, voting and entries to quizzes), (2) revenue sharing in e-commerce transactions (e.g. retailing or betting) completed on the platform, (3) advertising and (4) tenancy and technology fees charged to content providers that offer services on the platform including licenses of its Wireless Mark-Up Language technology and backend infrastructure to third party broadcasters on the digital DTH platform. In addition, BiB (as well as other companies within the Group) earns revenues from the conditional access and access control charges charged to broadcasters and interactive service providers on the digital DTH platform.
In addition to the broadcasters who are enhancing their channels with interactivity, there are currently seven third party providers of stand-alone interactive services (i.e. separate to those offered with any
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Third party channels (and third party stand alone interactive portals such as PlayJam, GoPlayTV, Teletext Holidays, UK online and Fancy A Flutter) are increasingly making use of the interactive potential of the digital satellite platform. Already third party broadcasters such as the BBC, ITV, Channel 4, Flextech, UK TV, Discovery, MTV, Nickelodeon, QVC, Digital Television Production Company Ltd., Cartoon Network and Disney have successfully launched interactive services. These services include enhanced television, information services, games, betting, shopping, voting and quizzes. In October 2002, attheraces (in which we have a 33.3% equity interest) launched an interactive betting service linked to its own dedicated horse racing channel. Third party channels may offer such interactivity in conjunction with Sky Interactive Limited or provide their interactive services independently of Sky Interactive, including making use of competing interactive infrastructures connected to the digital satellite platform.
Until May 2001, the interactive platform now operated by Sky Interactive was operated through a joint venture, BiB, which was owned 32.5% each by us and by BT Holdings Limited (BT), 20% by HSBC Holdings Plc (HSBC) and 15% by Matsushita Electric Europe (Headquarters) Limited (Matsushita). In May and June 2001, we completed the purchase of the shares in BiB held by the other shareholders through the issue of new BSkyB ordinary shares with a fair market value of £291 million. In November 2002, we issued 43.2 million shares with a fair market value of £253 million to BT, HSBC and Matsushita (the selling shareholders) in respect of deferred consideration for the acquisition of the remaining 67.5% of BiB in May and June 2001. The Group also agreed with the selling shareholders certain other terms relating to the Agreement reached in July 2000 for the acquisition by the Group of the interest of the selling shareholders in BiB. These included the waiver of the selling shareholders rights under the earn out provisions. The earn out provisions had provided that if the valuation of BiB was £3 billion or more in January or July 2003, further contingent consideration would have been payable to the selling shareholders.
Cable Distribution
United Kingdom
Two major multiple system cable operators, ntl and Telewest, operate almost all of the UK broadband cable systems. Both of these operators provide a digital cable service across the majority of their cable systems and each accounts for a substantial proportion of our wholesale revenues, which are revenues derived from the supply of Sky Channels to cable platforms. In fiscal 2003, we derived £202.2 million in subscription fees from cable platform operators (fiscal 2002: £279.4 million (subscription fees from cable and DTT platform operators); fiscal 2001: £299.1 million (subscription fees from cable and DTT platform operators)). We estimate that, as of June 30, 2003, the subscribers to these cable operators networks represented approximately 99% of all cable television subscribers in the UK (measured by reference to total cable subscribers).
We understand that Telewest has recently undergone a financial restructuring and that on September 15, 2003, Telewest announced that it had reached agreement in principle with the ad hoc committee of its bondholders, subject to certain conditions, on the terms of a financial restructuring. Telewest has continued to pay its debts to us as they have fallen due. The Group is keeping its trading relationships with Telewest under close review.
Although cable operators do not carry all Sky channels, on their digital cable networks both ntl and Telewest carry all of the Sky Premium Channels.
Both ntl and Telewest carry certain of the Sky Basic Channels, but neither carries the enhanced Sky Channel services, such as Sky News Active and Sky Movies Active. In June 2003, we announced that we had concluded a new agreement with ntl for the supply of nine Sky Basic Channels until the end of 2006.
Most narrowband cable networks have a more limited channel capacity than digital satellite or digital cable and do not generally carry all Sky Channels.
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At September 30, 2003, there were approximately 3,851,000 UK cable subscribers (including broadband, narrowband and SMATV subscribers) to our programming. During fiscal 2003, the overall trend was a decrease in the cable television subscriber base in the UK. In the first quarter of fiscal 2004, the trend has been a stabilisation of the UK cable television subscriber base, however this may not be indicative of future trends.
Cable operators pay us a monthly per subscriber fee per channel in respect of their subscribers to the Sky Basic Channels and, for the Sky Premium Channels, a monthly per subscriber fee per package of channels. Since January 2002, the wholesale prices we charge have not included any discount structure. Like the previous rate cards setting out our wholesale prices, the current rate card allows cable operators to offer their customers any choice or combination of the Sky Premium Channels.
The Sky Basic Channels are not included in our current wholesale rate card and we negotiate separate commercial arrangements with cable operators for the carriage of these channels.
Ireland
In Ireland, cable subscriber fees for Sky Premium Channels are charged on a per subscriber per channel package basis. The level of prices charged to cable operators for most Sky Channels is lower than in the UK.
At September 30, 2003, there were approximately 584,000 Irish cable subscribers to our programming. We currently have arrangements in place with ntl Ireland and Chorus, the two leading Irish cable operators, for the re-transmission of certain of the Sky Channels to their subscribers. Both ntl Ireland and Chorus, have launched, albeit on a limited basis, digital cable services in Ireland.
DTT Distribution
Following the closure of the ITV Digital DTT service in April 2002 and the subsequent grant by the UK Independent Television Commission (ITC) of the multiplex licenses previously held by ITV Digital to the British Broadcasting Corporation (BBC) and to Crown Castle UK Limited (Crown Castle), we broadcast versions of three of our channels, Sky News, Sky Sports News and Sky Travel, unencrypted free-to-air via the DTT platform. According to BARB estimates, as at September 30, 2003, there were 1,710,000 homes in the UK with access to Freeview services via DTT.
Advertising
In fiscal 2003, we derived £283.6 million of our total revenues from advertising sales revenue (fiscal 2002: £250.7 million; fiscal 2001: £270.5 million).
In the UK, advertising agencies plan campaigns on behalf of their clients and allocate proportions of each clients proposed TV spend to the divisions of broadcasters that specialize in the sale of TV advertising, which are known as sales houses. The principal broadcasters in the UK with sales houses aside from us are ITV, Channel 4 and Channel 5.
Advertising agencies do not buy specific spots (defined as a 30-second commercial) within particular programs. Instead, agencies agree to spend a specified share of their clients advertising budgets with each broadcaster. These shares are, to a large degree, based on the percentage share of impacts that each sales house delivers. In advertising terms, an impact is defined as an individual watching one thirty-second commercial. The amount of advertising spend a broadcaster receives is proportionate to its share of audience viewing and the perceived quality of that audience.
We sell (or authorize others to sell) advertising for all of the 15 Sky Channels (as well as for their multiplexes) and around all programs that are broadcast on these channels, irrespective of whether the programming was produced in-house or purchased from a third party. We also act as the advertising representative for the National Geographic Channel, Adventure One, Hallmark, The History Channel, the Biography channel, MUTV, Chelsea TV, the eight Discovery Channels (Discovery, Home and Leisure, Travel
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Across all UK multi-channel homes, our share (for all of the Sky Channels) of commercial audiences (excluding those of the BBC) at June 30, 2003 was (according to BARB estimates) 17.5%, a slight increase from 17.3% at the end of the previous fiscal year (fiscal 2001: 18.0%) (in part due to the growth in subscribers to our channels). Our subscribers households tend to be younger and more affluent than the average UK household and reflect the 16-34 year old, ABC1 and male demographic profiles sought by many advertisers. Since our launch of interactive advertising in April 2000 over 300 interactive campaigns have been broadcast by us and others via the digital satellite platform.
Competition
We are involved in the industry as a channel provider, a distributor of TV services and (in administering through our subsidiary, Sky Subscribers Services Limited, a population of DTH set-top box decoders) a DTH platform operator. We therefore compete with a number of communications and entertainment companies both to obtain programming and for distribution.
Terrestrial Television Channels
We compete, in the UK, with the five traditionally analog terrestrial channels (BBC1, BBC2, ITV1, Channel 4 (and S4C, not Channel 4, in Wales only) and five) broadcasting free-to-air in the UK (which are now also available via DTH, cable and DTT, and, in the case of DTH and DTT, on a free-to-air basis). In Ireland, we compete with RTE1 and Network 2, the Irish language channel TG4 as well as the commercial channel TV3. Amongst other things, we compete with the terrestrial channels in both the UK and Ireland for the acquisition of programming and viewers and we compete with ITV1, Channel 4, five, and all of the Irish terrestrial channels for advertising sales also. Because we and the analog terrestrial channels (and other broadcasters) all require films, sports, general entertainment and/or other programming to attract viewers, in both the UK and Ireland, there have been, and may in the future be, bidding competitions, which could increase our programming acquisition costs or mean that certain programming in which we are interested may not be available to us.
Cable Operators
Competition in Programming
Whilst we are currently a leading supplier of premium programming to cable operators in the UK and Ireland, cable operators are potential competitors for programming rights such as exclusive live broadcast rights to certain sporting events. For example, ntl directly bid against us in its attempt to obtain the exclusive live pay TV broadcast rights to Premier League football until the end of the 2003/04 season and ntl and Telewest secured the cable pay-per-view rights to Premier League football until the end of the 2003/04 season. Competition between us and other channel providers or programming providers (including cable operators) may, from time to time, increase our programming costs. Furthermore, Telewest owns and operates one of the largest suppliers of television channels, Flextech, which provides channels to both cable operators and to the DTH platform.
Competition in Distribution
Cable operators compete with us as an alternative service to DTH distribution and carry the majority of the Sky Channels. There are a limited number of areas where it may not be economically feasible to offer cable TV services, such as some rural areas. Equally, there are also limited areas in the UK, such as conservation areas, where, due to planning and local regulations, DTH satellite reception equipment may not be installed. Both ntl and Telewest provide digital cable services in the UK. ntl Ireland and Chorus offer both analog and digital cable and multipoint microwave distribution system (MMDS) television services in
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Cable distribution of the Sky Channels represents a source of additional operating income. A reduction in or the loss of such operating income would negatively affect our business.
Digital Terrestrial Television
The three Sky Channels transmitted via DTT, together with a number of other free-to-air services (including those provided by the BBC), are marketed under the generic brand Freeview. In addition to these channels, there remains some capacity on the DTT platform for other free-to-air channels, and the possibility that a small pay TV service could be introduced in the future.
It is likely that as a result of the availability of free-to-air television channels via DTT, some consumers will choose to take such free-to-air DTT services in preference to a pay service from us or a cable operator. Since the availability of services under the Freeview brand, as at September 30, 2003, according to BARB estimates approximately 1,710,000 UK homes are able to receive free-to-air services, including certain Sky Channels, via DTT.
There is currently no DTT service operating in Ireland.
Other Channels
In addition to competing for programming, advertising and viewers with the Sky Distributed Channels, the Sky Channels face similar competition from other TV channels broadcast via satellite and/or via cable and/or via DTT. Via satellite, these channels may be broadcast in an unencrypted form, automatically-entitled encrypted form or may be independently-retailed pay TV channels. Both the unencrypted form and the automatically-entitled encrypted form channels (which together currently amount to more than 160 digital satellite channels (including radio services)) can be received by anyone with appropriate Astra satellite reception equipment (including a smart card for the reception of automatically-entitled channels) without payment of a subscription fee. Other than the digital satellite versions of the analog terrestrial channels (BBC 1, BBC 2, ITV 1, Channel 4 and five), none of these channels individually has a viewing share in the UK that approaches the combined Sky Channels share.
As at November 27, 2003, there were 24 digital encrypted satellite pay TV services for DTH reception retailed independently of us. There were additionally 14 such pay-per-view services, all of which are adult television channels except for the two Setanta Sport pay-per-view services.
Emerging Technologies
It remains too early to predict the competitive impact of emerging technologies such as video-on-demand (VOD), third generation cellular telephone networks (3G) and digital subscriber loop (DSL) networks, whether on a program or distribution level.
Home Videos
Home video sales and rentals (including DVDs) have historically been strong in the UK. In addition to offering viewers an alternative source of programming to terrestrial, cable or satellite TV, the video window (which includes DVDs) for new films generally starts before both the pay TV window and the pay-per-view television window. The video window typically commences approximately six months following a films UK cinema release. Currently the pay-per-view television window generally commences six months later. We have been able to develop a significant subscriber base for our pay-per-view services and movie channels notwithstanding such competition from the home video industry and increased competition from DVDs.
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Advertising
Our primary competitors for TV advertising sales are Granada plc and Carlton Communications plc, which between them sell advertising on behalf of all the Channel 3 licensees and ITV 2 (as well as some smaller channels), Channel 4 (which includes E4) and five. In October 2003, the Secretary of State for Trade and Industry confirmed that the proposed merger between Carlton and Granada could go ahead if certain undertakings could be agreed between Granada, Carlton and the Office of Fair Trading. We understand that undertakings were agreed on November 14, 2003. Should such a merger go ahead, it is not possible to say what effect, if any, it would have on our business. Based upon the latest BARB survey estimates, ITV 1 and Channel 4 were available to approximately 24.3 and 24.1 million TV homes respectively in the UK (both digital and analog), with approximately 86% of TV homes receiving an acceptable five terrestrial analog signal. In addition, according to BARB, approximately 11.5 million UK homes have access to satellite, cable, or digital terrestrial television. Both ITV 1 and Channel 4 have a significantly greater overall UK TV viewing share than any individual Sky Channel. As a result of the ability of ITV 1 and Channel 4 to reach almost all UK TV homes, these channels are able to generate greater advertising revenues than we do. We also compete with the Sky Distributed Channels and all other commercial channels for TV advertising sales.
Within UK satellite and cable TV homes, however, the Sky Channels in aggregate attract viewing levels which are comparable to some of the analog free-to-air terrestrial channels. This suggests to us that, as the number of satellite and cable TV homes increases, our competitive position with respect to advertising revenues may improve. The Sky Channels jointly have an overall viewing share (within UK satellite and cable TV homes) significantly greater than each of Channel 4 and five in those homes, although the Sky Channels joint viewing share is still less than that of ITV 1 in these homes. However, in UK digital satellite homes, the aggregate viewing share of the Sky Channels is close to that of ITV 1. Based upon BARB surveys for the 52 weeks ended June 30, 2003, the viewing shares in UK satellite and cable homes of the five analog terrestrial channels and the combined Sky Channels were, respectively, BBC1 19.7%, BBC2 7.0%, ITV1 19.4%, Channel 4 6.9%, five 4.6%, and the Sky Channels 12.2%, of which Sky One accounted for 29% of the Sky Channels viewing share. The remaining 30.2% of viewing was of other (non-Sky) satellite and cable channels.
Technology and Infrastructure
We control access to encrypted DTH channels through the use of a conditional access system, VideoGuard, as described below. Apart from the smart cards, we do not own the satellite reception equipment in DTH viewers homes (this equipment is owned by the subscriber (other than the software in the set-top box to which we retain title), even if they cease to subscribe). All costs associated with the acquisition of subscribers including the cost of satellite reception equipment are charged immediately to the profit and loss account and are therefore not included within capital expenditure. Our overall capital expenditure represented approximately 3% of revenues in fiscal 2003. We have £2.5 million of capital expenditure in fiscal 2004 which has been contracted for, but not provided for in our financial statements, of which approximately 75% relates to information technology infrastructure.
Underpinning the EPG in the set-top box is an operating system which we license from OpenTV, Inc. The OpenTV operating system provides a virtual machine interface which enables applications to be authored once, yet still be capable of running on all set-top boxes once the application is downloaded off-air. This simplifies application development, and ensures universal availability of services to all set-top boxes. The operating system in each set-top box is fully licensed in perpetuity upon payment by us to OpenTV of a per set-top box royalty.
Encryption of Digital Services
VideoGuard is a conditional access technology which can be used to encrypt and decrypt digital television and audio services. We use it to control DTH viewers access to encrypted satellite non-
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We use the VideoGuard technology and distribute smart cards in the UK and Ireland under an agreement with NDS Limited which expires in 2010, but is renewable, at our option, for a further three years. NDS supplies smart cards and undertakes ongoing security development and other support services in return for the payment of fees by us.
In conjunction with NDS, we maintain a policy of refining and updating the VideoGuard technology in order to protect against unauthorized DTH reception of our services. We believe that there are no VideoGuard pirate devices capable of unauthorized decryption of our services at this time in the market. We take, and will continue to take, appropriate measures to counter unauthorized reception, including implementing effective over-the-air countermeasures and seeking available legal remedies, both civil and criminal, reasonably available to us. We also periodically replace smart cards in circulation with smart cards containing progressively more sophisticated technology. Such replacement has the effect of rendering useless smart cards then in circulation, whether genuine or counterfeit. We have recently completed the first periodic replacement of digital smart cards since our digital launch.
We are actively working with cable companies in the UK to investigate the use of any cable piracy devices. We believe that we have suffered a loss of wholesale cable revenue as a result of the availability of cable piracy devices. We are unable to quantify this loss, including whether or not such amount is material. We have not (to date) invoiced any cable company in respect of such lost cable revenues and therefore such lost revenues have not been recognized within our financial statements.
In the case of delivery to cable operators, they generally receive our signal via secure landlines. We also, in some cases, provide delivery to cable operators via satellite. To enable reception of the satellite signal, a smart card is located at the site of the cable operators feed into its cable transmission system, permitting decryption of the signal received from the satellite, which the operator in turn distributes to those of its subscribers who are authorized and equipped to receive the service.
Encryption of Channels Retailed by Third Parties
Any potential DTH broadcaster wishing to operate and independently retail an encrypted TV service within the UK and Ireland in either analog or digital needs either to acquire an alternative encryption and conditional access technology from someone other than us and build its own decoder base capable of receiving transmissions encrypted using that technology, or, in respect of digital services, to contract with us for conditional access services in respect of access to the installed VideoGuard decoder base.
We make digital conditional access services available to third-party broadcasters with or without customer billing and other customer management services.
As at November 27, 2003, there were 40 (excluding regional variants) third party television channels (other than the Sky Channels and the Sky Distributed Channels) using VideoGuard for digital encryption of their channels for broadcast into the UK and/or Ireland. These include ITV1, Channel 4, five, Sony Entertainment Television Asia, the Setanta pay-per-view sports channels and the B4U movie channel.
In addition to providing broadcast conditional access services, both for our own DTH offering and those of third parties, we also provide digital access control services for interactive services produced by us and others, including using a telephone return path to carry out transactions between supplier and viewer. These broadcast conditional access and access control services are regulated by the Director General of Telecommunications (and will shortly be regulated by Ofcom). See Government Regulation European Community Advanced Television Standards Directive.
The Customer Relationship Management Centers and Sky In-Home Service Limited
Throughout the last three fiscal years we have invested more than £120 million modernizing our customer relationship management centers. This expenditure has been focused on building new physical
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The customer relationship management centers also provide the distribution of ordered customer installations into Sky In-Home Service Limited which then provides a nationwide installation service of digital satellite equipment directly into customer homes. Sky In-Home Service Limited also provides an aftercare service to the DTH subscriber base.
Satellites
We lease the majority of the transponders that we use for digital transmissions for reception by both DTH viewers and cable operators, from SES ASTRA, the operator of the Astra satellites. SES ASTRA is 100% owned by SES GLOBAL, a Luxembourg company in which the Luxembourg State and GE Capital hold significant stakes. We also lease four transponders via a sub-lease from British Telecommunications plc (BT) on the Eurobird satellites, owned and operated by Eutelsat.
We use some of the transponders that we have leased for the Sky Channels. Some transponder capacity (and in some cases all of the capacity on a particular transponder) is subleased to third parties for the transmission of other channels or services, including certain of the Sky Distributed Channels.
For the transmission of the digital satellite service, we have 28 transponders leased from SES on SES satellites Astra 2A, 2B and 2D. All but five of our digital transponder leases from SES are for a period of 10 years with varying end dates between 2008 and 2011. The remaining five leases expire between 2005 and 2008. We have rights to extend certain of the initial lease periods.
The term of the digital leases on the Eurobird satellite is 12.5 years from the operational service date of the satellite which was in 2001.
We have arrangements in place with SES pursuant to which back-up capacity may be available for some of our transponder frequencies based on an agreed satellite back-up plan.
To date, we have not experienced any significant disruption of our transmissions. However, the operation of both the Astra and Eutelsat satellites is outside our control and a disruption of transmissions could have a material adverse effect on our business, depending on the number of transponders affected and its duration. Except to a very limited extent, we have not taken out any insurance with respect to our transponders or satellite failure. We nevertheless have put in place disaster recovery plans in the event that we were to experience any significant disruption of our transmissions.
We have been designated a non pre-emptible customer under each of our transponder leases. Where transponders are non pre-emptible, in the event of satellite or transponder malfunction, our use of these transponders cannot be suspended or terminated by SES in favor of another broadcaster which has pre-emption rights over capacity in preference to some other customers.
Our transponder leases with SES provide that our rights are subject to termination by SES in the event that SESs franchise is withdrawn by the Luxembourg government.
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Playout and Uplink Facilities
Our uplinking facility, located in Chilworth, England, provides primary uplinking capacity for our digital services to the Astra 2A, 2B and 2D satellites as well as Eutelsats Eurobird 1 satellite.
The majority of our television channels are played out from one of the buildings on our main site at Isleworth. The Isleworth-sourced channels are fed to the uplink site at Chilworth using a fiber link, which is backed up by a diversely routed secondary link in case of any malfunction in the primary fiber route. In the event of failure of our primary playout site we have alternative facilities available. The restoration of services would not be immediate and plans are now being implemented to improve this situation, including investing in further facilities to provide back up, which will be funded out of internally generated cash flows and existing external financing.
For those third parties to whom we sub-lease transponder capacity, we have agreements in place to provide uplinking facilities in respect of this capacity.
In the last fiscal year, we have completed the construction of a second uplink facility at Fair Oak, approximately 10 miles east of Chilworth. This facility provides a back-up uplinking capacity for our digital services to the Astra 2A, 2B and 2D satellites as well as Eutelsats Eurobird 1 satellite.
Emerging Technologies
We are currently evaluating possible means of distributing our services other than by DTH, cable and DTT, such as by DSL, Digital Audio Broadband, Internet, GPRS and third generation cellular telephone networks (3G). Since 1999, we have made certain of our channels available for redistribution on the DSL network operated by Kingston Communications in and around Hull, England, on a commercial trial basis. On November 1, 2002, a new commercial trial arrangement came into effect under which we retail certain of our channels and a number of other channels owned by third parties to subscribers via that DSL network (currently around 5,000).
We have developed an Internet-compatible microbrowser application to work with current digital satellite set-top boxes which deploys an enhanced Wireless Mark-Up Language (WTVML). Whilst not enabling access to the Internet, the nature of the microbrowser makes it suitable for the vast majority of e-TV and e-business applications on a digital TV platform. In addition to its use within our set-top boxes, we are exploring opportunities to use this technology on other devices.
Minority Equity Investments
In November 1999, we formed Sky New Media Ventures Limited (formerly Sky New Media Ventures plc) to invest in online ventures. In fiscal 2000, we made several investments in interactive and other Internet businesses. Following the completion of our purchase of 100% of BiB in June 2001, several investments made by BiB became part of the Group.
We have minority interests in the parent companies of three football teams (two of which are competing in the English Premier League this season): Leeds United, Manchester City and Sunderland. We are the exclusive commercial and media agent for certain commercial and audiovisual rights available for exploitation by these clubs (which excludes those rights required to be negotiated collectively), as well as with Chelsea Football Club and Chelsea Digital Media. In addition, the joint venture we formed with Chelsea Village plc, Chelsea Digital Media Limited (of which we own a 20% equity interest), carries on certain media, e-commerce, telecommunication and internet related activities of Chelsea Village plc, including the operation of the Chelsea TV channel. In July 2003, we sold our 9.9% equity interest in Chelsea Village plc, the parent company of Chelsea Football Club. In October 2003, we sold our 9.9% equity interest in Manchester United PLC, with whom (together with Granada Media Group Limited) we are interested in the MUTV Limited joint venture.
In April 2000, we acquired a minority equity interest in KirchPayTV. KirchPayTV became insolvent in fiscal 2002 (see Item 5 Operating and Financial Review and Prospects).
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Other Investments
In July 2000, we acquired Sports Internet Group plc (now Sports Internet Group Limited), then an AIM listed company, that designs and maintains third party sports websites as well as its own websites. As a result, Sports Internet shareholders received our shares in exchange for their shares in Sports Internet. The company also owns a bookmaker which offers a telephone betting service (under the brand name Surrey Sports) and via the Internet and via our interactive television services (under the brand SkyBet).
New Markets
We examine and discuss with third parties, from time to time, acquisition possibilities and joint ventures in media-related areas in the UK, continental Europe and elsewhere.
GOVERNMENT REGULATION
We are subject to regulation primarily in the UK and the European Community. The regimes which affect our business include broadcasting, telecommunications and competition (anti-trust) laws and regulation.
Broadcasting and Telecommunications Regulation
United Kingdom
Communications Act 2003
The Communications Act 2003 will introduce reforms of the broadcasting and telecommunications regulatory regimes in the UK. It will establish a new framework under the jurisdiction of a new single unified regulator, the Office of Communications (Ofcom), which will replace five existing regulatory bodies responsible for these sectors, including Oftel and the ITC. Part 2 of the Communications Act, which implements the package of EC Directives concerning the electronic communications sector (the New Directives), was brought into force on July 25, 2003. The remainder of the Communications Act will come into force on December 29, 2003.
The Communications Act will also enable Ofcom to introduce a new system for the management of spectrum designed both to ensure efficient use of spectrum and to protect the quality of spectrum. This will include a voluntary charging mechanism for spectrum reserved for satellite downlinks and, in the longer term, spectrum trading. This system will be subject to public consultation by Ofcom prior to implementation; a consultation document was published in November 2003, with a deadline for comments in February 2004.
Our Television Services Licenses
The broadcasting services provided by us are currently regulated by the ITC as satellite television services (STS) and digital program services (DPS) pursuant to the United Kingdom Broadcasting Act 1990 as amended and supplemented by the Broadcasting Act 1996 (together, the Broadcasting Acts).
We and our broadcasting joint ventures each currently hold an STS license for each of our respective channels and for a number of other broadcasting services. An STS license permits the operation of an STS service but does not confer on an STS licensee the right to use any specified satellite, transponder or frequency to deliver the service. STS licenses are granted for a period of ten years and new licenses are issued by the ITC if certain minimum objective criteria are met. We have also been issued a DPS license, which is required for the distribution of our channels via DTT, and we hold various ancillary service licenses, including that relating to the electronic program guide for digital satellite services which is further discussed below.
Finally, the ITC has granted BSkyB a local delivery service license which entitles BSkyB to retail television services over cable (including DSL) networks in the UK.
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A new licensing regime will apply to satellite and cable delivered services under the Communications Act 2003, with effect from December 29, 2003 (see above). Draft new licenses were recently subject to public consultation by Ofcom, and are due to be published in December 2003.
ITC Powers
In common with all television licenses issued by the ITC, our licenses impose on us an obligation to comply with the Codes and Directions issued by the ITC from time to time. The Codes include requirements as to impartiality and accuracy of news programming, requirements as to taste and decency and the portrayal of sex and violence, and restrictions on the quantity and content of advertisements.
These requirements will continue and will be administered by Ofcom from December 29, 2003 when the Communications Act comes into force.
The ITC may revoke a license in order to enforce the restrictions contained in the Broadcasting Acts (as amended by the Communications Act 2003) on the ownership of media companies or in the event that the characteristics of the licensee change so that it would not be granted a new license. In addition, the amended Broadcasting Acts prohibit disqualified persons from holding certain licenses. Disqualified persons include any bodies whose objects are wholly or mainly of a political or religious nature and advertising agencies. Ofcom has recently published a consultation document on the application of these disqualification principles to religious bodies.
Audience Share
Television companies (other than the BBC as the state-owned public service broadcaster) are not currently entitled to expand their activities so as to exceed 15% of total television audience share in the UK. If this audience share were exceeded, then the Broadcasting Acts empower the ITC to take steps to reduce this audience share to below 15%. The ITCs ultimate sanction is license revocation. We are currently well within the 15% limit. These provisions will be repealed in full by the Communications Act 2003, on December 29, 2003.
Media Ownership
The UKs rules in respect of media ownership, which are contained in the Broadcasting Acts, currently preclude us (for as long as the Group is ultimately owned as to over 20% by News Corporation or another member of the same group) from acquiring more than a 20% interest in the principal UK commercial public service licenses (which include Channel 3 regional licenses or the five (Channel Five) license) or in certain radio businesses. The restrictions on UK media ownership will be lifted by the Communications Act 2003 (as of December 29, 2003), save in relation to ownership of Channel 3 licenses. Certain restrictions on the ownership of multiple radio multiplex licenses will also remain. However, the Communications Act also introduces a plurality test for media mergers (see Enterprise Act 2002 Additional Reforms below).
Digital Terrestrial Television
The Broadcasting Act 1996 established a framework for digital terrestrial television (DTT) broadcasting in the UK. Certain multiplex frequencies are currently used to transmit public service and other channels. In August 2002, the ITC confirmed its conditional decision to award three multiplex licenses to the BBC and Crown Castle for an initial 12 year term. As part of an agreement with Crown Castle, BSkyB has agreed initially to supply versions of three channels, namely Sky News, Sky Sports News and Sky Travel, unencrypted free-to-air via the DTT platform.
Listed Events Limits on Exclusive Distribution Rights
The Broadcasting Act 1996 provides that no UK broadcaster may undertake the exclusive live broadcast of certain sporting or other events of national interest designated by the Secretary of State from time to time (listed events), whether on a free-to-air or subscription basis, without the previous consent
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A list of designated events in Ireland has also been defined, under the Irish Broadcasting (Major Events Television Coverage) Act 1999 (Designation of Major Events) Order 2003. This legislation may affect our ability to broadcast exclusively designated events in Ireland.
Our Telecommunications Licenses
We operated under a number of class licenses under the Telecommunications Act 1984 in relation to the technical side of our transmissions until July 25, 2003, when these class licenses were revoked by the Communications Act 2003 and replaced with authorizations or continuation notices. The most important of these relate to conditional access, electronic program guide and access control services for digital transmissions. These are discussed further in the context of the UKs implementation of European Community legislation (see EC Electronic Communications Directives).
European Community
The Television Without Frontiers Directive
The EC Television Without Frontiers (TWF) Directive 1989, as revised in 1997, sets forth basic principles for the regulation of broadcasting activity in the European Community. The UK has adopted a variety of measures to give effect to the requirements of the TWF Directive. The European Commission is responsible for monitoring compliance and has authority to initiate infringement proceedings against Member States which fail properly to implement the TWF Directive. The European Commission is reviewing the provisions of the TWF Directive through a work program, in consultation with all interested parties.
Program and Independent Productions Quotas
The TWF Directive requires Member States to ensure where practicable and by appropriate means that (a) broadcasters reserve a majority proportion of their transmission time for European works, and (b) broadcasters reserve at least 10% of their transmission time or, at the option of the Member State, 10% of their programming budget, for European works created by producers who are independent of broadcasters (an adequate proportion of the relevant works should be works produced within the five years preceding their transmission). The term where practicable and by appropriate means has not been defined in the TWF Directive and is left for the interpretation of each Member State. In applying this rule, broadcast time covering news, games, advertisements, sports events, teletext and teleshopping services are excluded.
We comply with our obligations under the UKs application of the TWF Directive. Sky News, Sky Sports News and Sky Sports 1, 2 and 3 currently devote a majority of relevant transmission time to works of European origin. The majority of programming on Sky One is not currently of European origin. Our movie channels consist largely of English language box office movies, supplied principally by US film studios.
Other than in respect of our movie channels, we believe that we are capable, without material adverse effect, of meeting any requirements as to independently produced works which may be imposed on us pursuant to these provisions of the TWF Directive.
Advanced Television Standards Directive
The use of standards for the transmission of television signals was, up until July 25, 2003, governed by the Advanced Television Standards Directive (ATS Directive), which required Member States to impose transmission standards on broadcasters of television services; to implement rules governing the provision of conditional access services to broadcasters wishing to provide encrypted digital television services; and to regulate the licensing of conditional access technology to manufacturers of digital decoders. The ATS Directive was repealed by the EC Framework Directive on July 25, 2003. The requirements on technical standards will continue to be administered by the ITC (and, in due course,
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Conditional Access Services and Technology
The Advanced Television Services Regulations 1996 implemented the conditional access aspects of the ATS Directive in the UK. Since July 25, 2003, the regulation of conditional access for digital television services is carried out under the Communications Act 2003. The conditions laid down under the Communications Act 2003 effectively replicate the regime established under the ATS Directive.
The principal requirements of the Communications Act 2003 are:
| that the provision of conditional access services to other broadcasters should be on fair, reasonable and non-discriminatory terms; | |
| that providers of conditional access services should co-operate with cable operators regarding transcontrol at cable head-ends; and | |
| that, where conditional access technology is licensed to manufacturers of digital decoders, such licenses should be on fair, reasonable and non-discriminatory terms. |
In May 2002, the Office of Telecommunications (Oftel) published a statement of policy regarding the pricing of conditional access services and in October 2002 published revised guidelines on the pricing of conditional access services, which replaced guidelines issued in May 1999. These Guidelines continue to be applied by Oftel (and, in due course, Ofcom).
Access Control Services
The provision of access control services (which include services, other than conditional access and EPG services, that control access to digital television services) is also regulated. Our subsidiary, Sky Subscribers Services Limited (SSSL) is currently designated a regulated supplier in respect of its activities in providing access control services to third parties on the digital satellite platform and it is, among other things, subject to the obligation to provide such access control services on fair, reasonable and non-discriminatory terms and not to favor related companies. This designation will remain in place for as long as SSSL is considered to have significant market power. Oftel commenced in November 2003 a review under the Communications Act 2003 to determine whether any provider of access control services has (or, in the case of SSSL, continues to have) significant market power. The deadline for comments on the consultation document is in January 2004. If Oftels successor, Ofcom, were to determine that no provider possessed significant market power, it would be precluded by the Communications Act 2003 from applying conditions to any provider of such access control services.
Regulation of Electronic Program Guides
Pursuant to the ITCs 1997 Code of Conduct on Electronic Program Guides, BSkyB is required to offer listings on its EPG on a fair, reasonable and non-discriminatory basis and to give analog terrestrial channels due prominence. Under the Communications Act 2003, Ofcom will have the ability to issue a revised code on EPGs, which we expect it to do in 2003 or early 2004.
In future, under the Communications Act, public service channels (which currently comprise all BBC digital television channels, ITV1, Channel 4, five and S4C in digital form and the digital public teletext service) must be given such degree of prominence in EPGs as Ofcom considers appropriate. Ofcom is
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EC Electronic Communications Directives
The EC brought into force the New Directives in April 2002. Their provisions were implemented in the UK under the Communications Act 2003 on July 25, 2003. The ATS Directive is one of a number of existing EC Directives which have been repealed by the New Directives. As explained above, the New Directives do not, however, materially change the rules in the UK on conditional access and access control services, as the existing fair, reasonable and non-discriminatory regime is carried across into the new regulatory regime.
BSkyB is currently not regulated by the Irish national communications regulatory authority, the Commission for Communications Regulation (ComReg), as the services offered by BSkyB fall under the jurisdiction of Oftel and the ITC (and Ofcom in the future) in the UK. The New Directives were also implemented in Ireland on July 25, 2003. During the consultations concerning the implementation of the New Directives in Ireland, ComReg indicated that it would be seeking to regulate BSkyBs and/or SSSLs Irish operations. In June 2003, ComReg clarified, however, that it would not, for the time being, seek to regulate the provision of access to broadcasting networks or the delivery of content services to end users in Ireland under the New Directives.
Under the terms of the EC Framework Directive, the European Commission must review progress towards facilitating access for content providers to multiple platforms by July 2004. If it concludes that such progress is insufficient the European Commission may mandate the use of technical standards for the delivery of interactive services listed in the Official Journal. The only standard listed currently is incompatible with our digital set-top boxes.
Regulation of Competition (Anti-Trust)
We are subject to the EC competition law regime (administered by the European Commission and by civil courts in each Member State) and to individual national regimes in the countries in which we operate, of which the principal country is the UK. We are also subject to specific competition regulation by the ITC under powers contained in the Broadcasting Acts (and in future by Ofcom under powers contained in the Communications Act).
UK Competition Law Regime
The Competition Act 1998
On March 1, 2000, the Competition Act 1998 came into force in the UK. It aligns UK domestic competition law with EC law, in particular Articles 81 and 82 of the EC Treaty.
Anti-competitive Agreements
The Chapter I prohibition of the Competition Act 1998 prohibits agreements which have the object or effect of preventing, restricting or distorting competition in the UK. The anti-competitive nature of an agreement is judged according to its object and/or effect on competition. An agreement will only infringe the Chapter I prohibition if it is likely to have an appreciably restrictive effect on competition.
Agreements which breach the Chapter I prohibition are capable of exemption where their beneficial effects in improving production or distribution or promoting technical or economic progress outweigh their restrictive effects, provided that consumers receive a fair share of the benefit, that competition will not be substantially eliminated and that no unnecessary restrictions are accepted by the parties.
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Abuse of a Dominant Position
The Chapter II prohibition of the Competition Act 1998 prohibits abusive behavior by dominant firms. Infringement of Chapter I or Chapter II may result in significant consequences.
Effect on Our Affairs
In December 2000, the Office of Fair Trading (OFT) announced that it was to conduct a Competition Act inquiry into BSkyBs activities, in particular the wholesale supply of its premium channels to third party distributors in the UK.
In December 2002, following the submission by BSkyB of written and oral representations, the OFT announced that BSkyB had been found not to be in breach of the Competition Act 1998. Both ntl and the liquidator of ITV Digital requested, under the Competition Act 1998, the OFT to vary or withdraw its decision concerning BSkyB. On July 29, 2003, the OFT announced that it had rejected both applications. The period in which both ntl and the liquidator of ITV Digital had the right to appeal this decision of the OFT to the Competition Appeals Tribunal has now expired, without any appeal having been made.
In November 2001, the arrangements relating to the attheraces joint venture (made between Arena Leisure plc, the Group, Channel Four Television Corporation and The Racecourse Association Limited) were notified to the OFT seeking either a clearance or exemption under Chapter I of the Competition Act 1998. On April 4, 2003, the OFT issued a Rule 14 Notice to the notifying parties (including the Group), in which it proposed to find that the Chapter I prohibition of the Competition Act 1998 had been infringed to the extent that the notified arrangements entailed the collective sale by the 49 racecourses of certain of their media rights to attheraces. The OFT also stated that it did not envisage the imposition of a penalty on the notifying parties. If the OFT were to issue a decision that the Chapter I prohibition had been infringed, it has proposed to issue a direction to the notifying parties requiring the media rights agreement, to the extent that it embodies collective selling of the 49 racecourses media rights, to be terminated. The OFT is currently considering responses to the Rule 14 Notice.
Enterprise Act 2002
Market investigations
Since June 20, 2003, the market investigation provisions of the Enterprise Act 2002 have replaced the monopoly inquiry regime of the Fair Trading Act 1973. These provide that the OFT may make a market investigation reference to the Competition Commission (CC) where it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts, or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK. From December 29, 2003, under the Communications Act 2003, Ofcom will have market investigation powers, concurrent with the OFT, in relation to the communications sector.
The OFT (or, in relation to the communications sector, Ofcom) may make a market investigation reference to the CC for a detailed inquiry, although it may accept undertakings instead of making a reference. The CC may decide that action is required if it finds that there is an adverse effect on competition in a market under investigation. Ultimately, the CC has extensive powers to impose remedial action including the divestment of parts of a business and the prohibition on the performance of agreements.
Additional reforms
Since June 20, 2003 the Enterprise Act 2002 has reformed UK competition law in a number of other ways:
| a criminal cartel offence has been created, applying to those participating in arrangements involving price fixing, market sharing, bid rigging or limitations of production. This criminal offence will operate alongside the existing civil regime under the Competition Act 1998. Investigations will be carried out |
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by the OFT and the Serious Fraud Office. The maximum penalty for infringement will be up to five years imprisonment (for those individuals found to have committed the offence) or a fine, or both; | ||
| provisions enabling company directors to be disqualified for involvement in (or failure to take steps to prevent) a breach of UK or EC competition law have been introduced. |
A number of changes have also been made to the UK merger control regime: in particular, the decision-making role of the Secretary of State in the merger control process was removed in the majority of cases, which will be decided by the OFT and, if relevant, the CC, solely on the basis of a competition-based test.
The Communications Act 2003 has amended the Enterprise Act 2002 merger control provisions to introduce a plurality test for mergers between broadcasters (or involving broadcasters and newspaper enterprises). Under the plurality test, which will come into force on December 29, 2003, the Secretary of State will be able to intervene in, and take decisions concerning, mergers involving broadcasters, on the basis of both a competition-based test and the additional plurality test. The Government has indicated, however, that it intends the plurality test only to be invoked in relation to mergers involving broadcasters to whom ownership restrictions currently apply under the Broadcasting Acts, save in exceptional circumstances. The Government has committed to publishing guidance on the intended application of the plurality test.
Effect on our Affairs
Our operations are subject to both the Enterprise Act 2002 and the Communications Act 2003. To date, there have been no market investigation references made to the CC.
ITC Competition jurisdiction
Broadcasting Act 1990
The ITC has duties to ensure fair and effective competition in the provision of television services and those connected with them. Ofcom will assume the functions of the ITC in December 2003; it will operate under a similar duty to promote competition.
There have been no rulings by the ITC that have had a material adverse effect on our business since June 30, 2002.
Irish Competition Law Regime
BSkyBs operations in Ireland are subject to the Irish competition law regime which regulates anti-competitive agreements, abuses of dominant positions, and mergers.
European Community Regime
Anti-Competitive Agreements
Article 81(1) of the EC Treaty renders unlawful agreements and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the Common Market (that is, the Member States of the EU collectively). An agreement may infringe Article 81 only if it is likely to have an appreciable restrictive effect on competition. Article 81(2) makes offending provisions (and, in some cases, the entire agreement) void. Article 81(3) allows for exemption from the provisions of Articles 81(1) and 81(2) for agreements whose beneficial effects in improving production or distribution or promoting technical or economic progress outweigh their restrictive effects, provided that consumers receive a fair share of the benefit, the competition will not be substantially eliminated and that no unnecessary restrictions are accepted by the parties.
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Abuse of a Dominant Position
Article 82 of the EC Treaty prohibits abuse by one or more enterprises of a dominant market position in the Common Market or a substantial part of it, insofar as the abuse may affect trade between Member States.
Mergers
The European Commission regulates mergers, full function joint ventures (i.e. ones which perform on a lasting basis all the functions of an autonomous economic entity) and the acquisition of holdings which confer decisive influence over an enterprise and which meet the turnover thresholds specified in the EC Merger Regulation. Such transactions cannot be carried out without prior approval from the European Commission. Where the European Commission has jurisdiction under the EC Merger Regulation, national authorities do not normally have jurisdiction.
Effect On Our Affairs
The European Commission has commenced investigations into a number of agreements, decisions or practices leading to the acquisition of broadcasting rights to football events within the EEA, including the sale of exclusive broadcast rights to Premier League football by the FAPL. On June 21, 2002, BSkyB Limited and the FAPL notified BSkyB Limiteds current arrangements for the broadcast of FAPL football matches to the European Commission seeking either a clearance or an exemption from Article 81 of the EC Treaty. The FAPL has also notified the rules of the FAPL to the European Commission. On December 20, 2002, the European Commission issued a Statement of Objections to the FAPL outlining certain concerns in respect of the FAPLs joint selling of broadcast rights to Premier League football. BSkyB has received several requests for information from the European Commission concerning the bidding process undertaken by the FAPL in relation to the sale of Premier League football rights in respect of the three year period 20042007. Whilst this EC investigation remains ongoing, the FAPL has announced that BSkyB has been awarded (subject to contract) all four packages of exclusive live UK rights to FAPL football, two near live packages of UK rights to FAPL football (both on a delayed basis), four of the five packages of live rights in Ireland and two near live packages of rights in Ireland from the beginning of the 2004/05 season to the end of the 2006/07 season. BSkyB is currently unable to assess whether this EC investigation will have a material effect on the Group and its financial results.
The European Commission is investigating the terms on which movies produced by major US movie studios are supplied to distributors, including pay TV operators, throughout the European Union. BSkyB is co-operating with this investigation. At this stage, BSkyB is unable to determine whether it will have a material effect on the Group and its financial results.
PROPERTY, PLANT AND EQUIPMENT
Our headquarters are located at leasehold and freehold premises in Isleworth, England.
The principal properties of the Group are as follows:
Current | |||||||||||||||
annual rent | Approximate | ||||||||||||||
or | square foot | ||||||||||||||
Location | Tenure | Use | Term | license fee | area | ||||||||||
Athena Court, 2, 5, 6 and 7 Grant Way
|
Leasehold | Offices, studios and | Leases expire | £ | 2,532,590 | 206,234 | |||||||||
and Cromwell Centre, Centaurs Business Park, Isleworth, England |
storage |
between June 2008 and July 2015 |
|||||||||||||
1 Grant Way,
|
Freehold | Offices and | n/a | n/a | 55,000 | ||||||||||
Centaurs Business Park, Isleworth, England | studio |
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Current | |||||||||||||||
annual rent | Approximate | ||||||||||||||
or | square foot | ||||||||||||||
Location | Tenure | Use | Term | license fee | area | ||||||||||
3a/3b Grant Way,
|
Freehold | Offices, | n/a | n/a | 38,739 | ||||||||||
Centaurs Business Park, Isleworth, England | storage and workshop | ||||||||||||||
4 Grant Way,
|
Freehold | Offices and | n/a | n/a | 46,377 | ||||||||||
Centaurs Business Park, Isleworth, England | technology | ||||||||||||||
New Horizons Court,
|
Leasehold | Offices | Lease expires | £ | 468,995 | 17,000 | |||||||||
Brentford, England | June 25, 2007 | ||||||||||||||
West Cross House,
|
Leasehold | Offices | Lease expires | £ | 1,349,296 | 88,400 | |||||||||
Brentford, England | March 26, 2019 | ||||||||||||||
The Chilworth Research Centre,
|
Leasehold | Satellite uplink | Lease expires | £ | 1 | 18,850 | |||||||||
Southampton, England | February 25, 2087 | ||||||||||||||
Knowle Lane, Fairoak,
|
Freehold | Satellite uplink | n/a | n/a | 43,087 | ||||||||||
Eastleigh, England | |||||||||||||||
123 Buckingham Palace Rd,
|
Leasehold | Offices | Lease expires | £ | 1,834,300 | 36,500 | |||||||||
London, England | March 31, 2017 with an option to terminate at March 24, 2012 | ||||||||||||||
Marcopolo House and Arches,
|
Leasehold | Sub-let | Lease expires | £ | 2,406,847 | 85,509 | |||||||||
Queenstown Road, London | December 24, 2013 | ||||||||||||||
1, 2, 4 and 5 Macintosh Road,
|
Freehold | Customer call centers | n/a | n/a | 120,280 | ||||||||||
Kirkton Campus, Livingston, Scotland | |||||||||||||||
Carnegie Campus,
|
Leasehold | Customer call center | Lease expires | £ | 500,000 | 75,431 | |||||||||
Dunfermline, Scotland | September 29, 2020 | ||||||||||||||
Centrex Campus,
|
Licensed | Serviced offices | Lease expires | £ | 486,924 | 15,965 | |||||||||
Hardie Road, Livingston, Scotland | June 30, 2004 | ||||||||||||||
New Logic House,
|
Leasehold | Offices | Lease expires | £ | 222,000 | 13,900 | |||||||||
Kirkton South, Livingston, Scotland | October 3, 2017 |
In addition we own or lease a number of other properties throughout England and Ireland.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
INTRODUCTION
The following discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report on Form 20-F. The financial statements have been prepared in accordance with UK GAAP, which differs in significant respects from US GAAP. Note 28 to our consolidated financial statements provides a description of the significant differences between UK GAAP and US GAAP as they relate to our business, and provides a reconciliation from UK GAAP to US GAAP.
We have continued to consolidate our position as a leading pay TV service, operating principally in the UK and Ireland. As the pay TV business has developed in the UK, we have continued to expand our total subscriber base, develop new products and acquire and develop programming.
OPERATING RESULTS
Revenues
Our principal revenues result from DTH subscribers, cable subscribers, advertising, and interactive.
Our DTH subscription revenues are a function of the number of subscribers, the mix of services taken and the rates charged. Revenues from pay-per-view, which includes Sky Box Office, are included within DTH or cable subscriber revenues as appropriate.
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Our wholesale revenues, which are revenues from the supply of Sky Channels to cable platforms, are a function of the number of subscribers on cable operators platforms, the mix of services taken by those subscribers and the rates charged to those cable operators. We are currently a leading supplier of premium pay TV programming to cable operators in the UK for re-transmission to cable subscribers, although cable operators do not carry all Sky Channels.
Our advertising revenues are a function of the number of commercial impacts, defined as an individual watching one thirty-second commercial on a Sky Channel, the quality of impacts delivered, and the overall advertising market trends.
Interactive revenues include income from betting, online advertising, internet access, e-commerce, telephony income from the use of interactive services (e.g. voting), text services, and set-top box subsidy recovery charges made to conditional access and access control customers on the Sky digital platform.
Other revenues principally comprise revenues from the installation of digital satellite reception equipment (net of any discount given), Sky+ and Extra Digibox sale revenues, Sky Talk revenues, conditional access fees, service call revenues, warranty revenues, sales commission and customer management service fees.
Operating expenses
Our principal operating expenses result from programming, transmission and related functions, marketing, subscriber management, administration and betting costs.
Programming represents our largest single component of costs. Programming costs include payment for: (i) licenses of television rights from certain US and European film licensors; (ii) the rights to televise certain sporting events; (iii) other programming acquired from third party licensors; (iv) the production and commissioning of original programming; and (v) the rights to retail the Sky Distributed Channels and the Music Choice and Music Choice Extra audio services to DTH viewers.
Under our Pay TV agreements with the US major movie studios, we generally pay a US dollar license fee per movie calculated on a per movie subscriber basis, subject to a minimum guarantee, which was exceeded some time ago. We currently manage this US dollar/ pound sterling exchange risk primarily by the purchase of forward foreign exchange agreements for up to 18 months ahead. Although these financial instruments can mitigate the effect of short-term fluctuations in exchange rates, there can be no effective or complete hedge against long-term currency fluctuations. See Item 5 Liquidity and Capital Resources. Offering multiplexed versions of our movie channels on the digital DTH platform and on digital cable incurs no additional rights fees.
Under the DTH distribution agreements for the Sky Distributed Channels, we generally pay a monthly fee per subscriber for each channel, the fee in some cases being subject to periodic increases; or we pay no such fee at all. Under a number of our distribution agreements we guarantee payment against percentages of the total number of subscribers to our basic packages. Our costs for carriage of the Sky Distributed Channels will (where a monthly per subscriber fee is payable) continue to be dependent on changes in the subscriber base, contractual rates or the number of channels distributed.
Transmission and related functions costs, including other technical costs, are primarily dependent upon the number and annual rental cost of the satellite transponders which we use. The most significant components of transmission and related costs are transponder rental costs relating to the SES Astra satellites and Eutelsat Eurobird satellite and costs associated with our transmission, uplink and telemetry facilities, and comprised 53% of transmission and related functions costs in the year (2002: 55%).
Marketing costs include commissions payable to retailers and other agents for the sale of subscriptions; promotional and related advertising costs; and the costs of our own direct marketing to our DTH customers. In addition, marketing costs include the cost of providing free digital satellite equipment to new customers and the installation cost in excess of the relevant amount actually received from the customer. A significant part of marketing expenditure is subject to the discretion of management. The
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Subscriber management costs include subscriber handling costs, smart card costs, DTH subscriber bad debt costs, costs relating to our satellite reception equipment installation and the installation cost of Sky+ and Extra Digibox sold to subscribers, all of which are largely dependent on DTH subscriber levels. Subscriber management costs exclude both the cost of free digital satellite equipment and the installation cost to us in excess of the amount actually received from the customer for such installation. These costs are included within marketing costs.
Administration costs include channel management, facilities and other operational overhead and central costs. Amortization of goodwill arising on the acquisitions of BiB, Sports Internet Group and WAPTV is included within administrative costs. The goodwill arising on these acquisitions is being amortized over periods of seven years from the dates of acquisition, on a straight-line basis.
Betting costs mainly comprise the cost of payouts for winning bets placed through our wholly-owned bookmaker, Hestview Limited, which operates a telephone betting service (under the brand name Surrey Sports) and an interactive betting service (under the name SkyBet).
2003 FISCAL YEAR COMPARED TO 2002 FISCAL YEAR
Total revenue for fiscal 2003 of £3,186.0 million exceeded £3 billion for the first time, an increase of 15% over fiscal 2002. Total operating costs before goodwill and exceptional items increased by 9% to £2,815.3 million, generating an operating profit margin before goodwill and exceptional items of 12%, compared to 7% in fiscal 2002. Total operating costs after goodwill and exceptional items increased by 8% to £2,932.0 million. Goodwill and exceptional items are discussed separately below.
Total UK and Ireland subscribers to Skys channels increased by 524,000 from 10,192,000 in fiscal 2002 to 10,716,000 in fiscal 2003. DTH subscribers increased from 6,101,000 at June 30, 2002 to 6,845,000 at June 30, 2003.
Revenues
Revenues increased to £3,186.0 million in fiscal 2003 from £2,776.1 million in fiscal 2002, representing growth of 15% in fiscal 2003.
The Groups revenues can be analyzed as follows:
Revenues | ||||||||||||||||
2002 | 2003 | |||||||||||||||
£m | % | £m | % | |||||||||||||
DTH subscribers
|
1,929.2 | 69.5 | 2,341.2 | 73.5 | ||||||||||||
Cable and DTT subscribers(1)
|
279.4 | 10.1 | 202.2 | 6.3 | ||||||||||||
Advertising
|
250.7 | 9.0 | 283.6 | 8.9 | ||||||||||||
Interactive
|
186.0 | 6.7 | 218.3 | 6.9 | ||||||||||||
Other
|
130.8 | 4.7 | 140.7 | 4.4 | ||||||||||||
2,776.1 | 100.0 | 3,186.0 | 100.0 | |||||||||||||
(1) | DTT subscriber revenues were nil in fiscal 2003. |
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DTH subscriber revenues |
DTH subscription revenues are our largest single source of revenues and increased to £2,341.2 million in fiscal 2003 from £1,929.2 million in fiscal 2002. The improvement of 21% in fiscal 2003 was largely driven by a 14% increase in the average number of DTH subscribers, in addition to a 7% increase in average DTH subscription revenue per subscriber, from £323 at June 30, 2002 to £344 at June 30, 2003.
The increase in average DTH subscription revenue per subscriber reflected the change in our UK retail prices which was effective from January 1, 2003, along with increased subscription revenues from products such as Sky+ and the Extra Digibox.
The total number of UK and Ireland DTH subscribers increased by 744,000 in fiscal 2003. One factor contributing to this increase was a reduction in DTH churn. DTH churn for the year was 9.4% (2002: 10.5% excluding the effect of analog churn up to September 27, 2001 and the effect of the termination of the analog service on September 27, 2001).
Cable and DTT subscriber revenues |
Cable and DTT subscription revenues, also referred to as wholesale revenues, decreased by 28% to £202.2 million in fiscal 2003 from £279.4 million in fiscal 2002. This was mainly due to a £51.8 million decrease in DTT subscription revenues to nil following the termination of operations by ITV Digital in April 2002. Cable subscription revenues continue to be an important source of revenue, although revenues decreased by 11% to £202.2 million from £227.6 million in fiscal 2002. This decrease was a result of both the loss of subscribers by our two major customers, ntl and Telewest, and the lower penetration of Sky Premium Channels amongst remaining cable subscribers. ntl and Telewest, who represented in excess of 99% of the UK broadcast cable industry (measured by reference to total cable subscribers), accounted for 99% of our cable subscriber revenues in fiscal 2003. On June 23, 2003 we announced that we had concluded a new agreement with ntl for the supply of nine Sky Basic Channels (including multiplex versions), effective until the end of 2006.
At June 30, 2003, 3,871,000 (fiscal 2002: 4,091,000) UK and Ireland cable subscribers received our programming.
In fiscal 2003, we charged UK cable operators between £9.97 and £19.10 per subscriber for Sky Premium Channels, dependent upon the number of Sky Premium Channels to which the cable customer subscribed. In addition, the percentage of cable subscribers who subscribed to Sky Premium Channels is far lower than that for DTH subscribers. As a result, on average, cable subscribers (including Irish cable operators subscribers) accounted for 38% of total subscribers (fiscal 2002: 40% including DTT subscribers), although cable subscription revenues accounted for only 8% (fiscal 2002: 13% including DTT subscription revenues) of total subscription revenues.
For further details on our major cable customers, ntl and Telewest, see Item 4 Distribution Cable Distribution.
Advertising revenues |
Advertising revenues increased to £283.6 million in fiscal 2003 from £250.7 million in fiscal 2002. This increase reflects the growth in total UK advertising revenue, growth in Skys viewing share, the growth in agency commissions earned on the sale of advertising on behalf of those channels that have appointed Sky Sales to represent their airtime sales during the year, and the growth of airtime sales in Ireland.
Our share of television advertising revenues has increased in recent years as viewing levels to our channels have increased (in part due to the growth in subscribers to our channels) and as we have increased the levels of sales of advertising on third party channels. Our share for fiscal 2003 was 11% (2002: 9%). The other main determinant of advertising revenue levels is overall television advertising revenue growth. We anticipate that UK television advertising revenue will decline marginally over the
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Interactive revenues |
Total interactive revenues, including both Sky Active and gross betting revenues, increased to £218.3 million from £186.0 million in fiscal 2002.
Sky Active revenues continued to grow in the period and increased by 11% from £91.1 million in fiscal 2002 to £101.4 million in fiscal 2003. This increase was principally driven by interactive advertising, retail services, increased usage of games and revenues from third party channels using interactive applications. Revenue from retail services increased from £4.8 million in fiscal 2002 to £11.3 million in fiscal 2003, primarily driven by the launch of Sky Buy, a retail service offering electrical goods and entertainment and sports merchandise. Interactive advertising has demonstrated increased popularity with revenue increasing from £2.9 million in fiscal 2002 to £4.4 million in fiscal 2003.
Gross betting revenue increased by 23% from £94.9 million in fiscal 2002 to £116.9 million in fiscal 2003. The increase in betting revenue was driven by a threefold increase over fiscal 2002 in the total volume of bets placed to over 15 million, of which 12 million were interactive television bets.
Other revenues |
Other revenues increased by 8% from £130.8 million in fiscal 2002 to £140.7 million in fiscal 2003, primarily due to new product revenue (from Sky+ and Extra Digiboxes), increased service call revenues due to a larger subscriber base and increased extended warranty revenues.
Operating expenses, net
Total operating expenses after goodwill and exceptional items increased by 8% to £2,932.0 million in fiscal 2003, from £2,721.1 million in fiscal 2002.
Programming |
Programming costs, which represent the largest single element of our cost structure, constituted 55% of operating expenses in fiscal 2003 (fiscal 2002: 53%). These costs increased by 11% to £1,603.9 million in fiscal 2003 from £1,439.3 million in fiscal 2002. Programming costs are stated net of amounts receivable from the disposal of programming rights not acquired for use by the Group of £12.0 million (fiscal 2002: £15.3 million).
Sports channels programming costs increased by 9% to £722.9 million in fiscal 2003 from £663.0 million in fiscal 2002. This increase was primarily due to contractual increases in rights costs and the costs of non-annual events such as the Ryder Cup and the Cricket World Cup. Contractual increases were partly offset by savings achieved by decisions made by the Group not to renew agreements to broadcast UEFA Cup football, Scottish Premier League football and Six Nations Rugby.
Movie channels programming costs increased by 10% to £397.4 million in fiscal 2003 from £360.5 million in fiscal 2002, mainly due to the increase in the average number of movie subscribers, around a 30% increase in the number of output titles qualifying as Megahits compared to fiscal 2002, and contractual increases. Megahits are normally defined by reference to US theatrical release revenue. This increase was offset by savings resulting from the weakness of the US dollar in fiscal 2003.
Our costs in relation to the distribution agreements for the Sky Distributed Channels increased by 18% to £351.5 million in fiscal 2003 from £297.4 million in fiscal 2002. This increase is primarily due to the impact of a greater number of subscribers; new channels; and contracted per subscriber fee increases. These increases were partly offset by savings generated by the renewal, on improved terms, of contracts with a number of channel suppliers. In all cases, savings of at least 15% on the pence per subscriber cost of channel carriage were achieved.
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Entertainment programming costs increased by 10% to £93.5 million in fiscal 2003 from £84.8 million in fiscal 2002, principally due to the scheduling of newly acquired programming and the launch of four new Sky Channels during the year (Sky One Mix, Flaunt, The Amp and Scuzz).
News programming costs increased by 15% to £38.6 million in fiscal 2003 from £33.6 million in fiscal 2002, principally due to the cost of covering the conflict in Iraq.
Transmission and related functions |
Transmission and related functions costs after exceptional items (net of amounts receivable for the provision of spare transponder capacity to third party broadcasters of £25.5 million in fiscal 2003 (fiscal 2002: £23.7 million)) increased to £142.8 million in fiscal 2003 from £142.5 million in fiscal 2002. This is as a result of the £4.1 million release of the analog termination provision in fiscal 2002 that reduced the prior year expense, and a reduction of fiscal 2003 costs, mainly due to reductions in technical operations costs through transponder cost efficiency savings.
At June 30, 2002, £4.1 million of the £41.0 million provision originally made in fiscal 2000, relating to the cost of early termination of the analog service on September 27, 2001, had not been utilized and was therefore released to the profit and loss account as an exceptional operating credit.
Marketing |
Marketing costs have continued to be significant, comprising the second largest element of our cost base, primarily as a result of the continued free digital satellite equipment offer to new customers. The impact in fiscal 2003 of these costs was £217.2 million (2002: £261.4 million).
Marketing costs decreased by 4% to £400.5 million in fiscal 2003 from £416.6 million in fiscal 2002 mainly due to reduced hardware costs, an increase in install revenues and a greater proportion of direct customer acquisitions.
Subscriber management |
Subscriber management costs increased by 11% to £324.4 million in fiscal 2003 from £291.1 million in fiscal 2002. Subscriber management costs comprise two main activities: customer relationship management (CRM) costs associated with managing the existing subscriber base; and supply chain costs relating to systems and infrastructure and the hardware costs of new products purchased by subscribers such as Sky+ and Extra Digiboxes. CRM costs per subscriber have decreased by 15% from fiscal 2002, leading to an overall reduction in CRM costs of 4% over fiscal 2002 to £147.9 million from £153.3 million, as a result of call center efficiencies and lower call volumes leading to a lower head count in the call center. Supply chain costs increased by 28% to £176.5 million in fiscal 2003 from £137.8 million in fiscal 2002, as a result of the associated hardware costs of new products and costs associated with the smartcard swap-out as part of stringent on-going anti-piracy measures. The corresponding revenue associated with the sale of hardware products is included in other revenues.
Administration |
Administration costs, including goodwill amortization and exceptional items, increased by 3% to £352.8 million in fiscal 2003 from £343.8 million in fiscal 2002. This is a result of an increase in goodwill amortization from £118.3 million in fiscal 2002 to £121.5 million in fiscal 2003, a provision against ITV Digital programming debtors of £22.3 million made in fiscal 2002, £4.8 million of which was released in fiscal 2003, and an increase in fiscal 2003 costs, mainly due to increases in insurance and disaster recovery planning costs.
Goodwill amortization of £121.5 million in fiscal 2003 (2002: £118.3 million), which is included in administration costs, above operating profit, mainly comprises the amortization of goodwill for the £272.4 million, £542.1 million and £5.2 million of goodwill arising, respectively, on the acquisitions of Sports Internet Group, BiB and WAPTV, over seven years from the date of acquisition on a straight-line basis. In
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On March 27, 2002, ITV Digital, a 50:50 joint venture between Carlton Communications plc and Granada plc, which provided pay television program services via the UK DTT platform, was placed into administration. As of March 27, 2002, we had balances owing to us and unprovided for, in respect of programming licensed to ITV Digital, of £22.3 million. On April 30, 2002, the joint administrators of ITV Digital announced the closure of ITV Digitals pay television service on the platform and their intention to close the administration. Accordingly, in fiscal 2002, we made an exceptional operating provision against the whole of this balance. During fiscal 2003, we received £4.8 million from ITV Digitals administrators and released £4.8 million of the operating exceptional provision accordingly. This operating exceptional credit has been included within administration costs.
Betting |
Betting costs increased to £107.6 million from £87.8 million in fiscal 2002 directly as a result of the growth in betting revenues.
Operating profit, gross margin and operating margin
Operating profit after goodwill amortization and exceptional items increased by £199.0 million to £254.0 million in fiscal 2003 from £55.0 million in fiscal 2002. This increase was driven by the increase in revenues, which was primarily due to the increase in DTH subscription revenues. This increase in revenues was partly offset by the increase in operating expenses, primarily due to the increase in programming costs.
Gross margin (based on total revenues less programming costs) for fiscal 2003 was 50%, up from 48% in fiscal 2002. This was the result of a 15% increase in total revenues which was principally due to the 14% increase in the average number of DTH subscribers. In contrast, programming costs increased by only 11% due to decisions made not to renew certain sports rights agreements, savings in movies programming due to the weakness of the US dollar in fiscal 2003, and by savings generated by the renewal, on improved terms, of contracts for certain Sky Distributed Channels.
Operating margin (based on total revenues less all operating expenses before goodwill amortization and exceptional items) for fiscal 2003 was 12%, up from 7% in fiscal 2002. The most significant contributors to this increase were programming costs, which increased by 11% compared to the 15% increase in revenues; marketing costs, which fell by 4% due to reduced hardware costs, an increase in install revenues and a greater proportion of direct customer acquisitions; and transmission and related functions costs which decreased by 3% due to reductions in technical operations costs through transponder cost efficiency savings.
Goodwill
Goodwill amortization and impairment within operating profit increased by £3.2 million to £121.5 million in fiscal 2003 from £118.3 million in fiscal 2002. This increase was primarily a result of the £5.2 million provision against Opta made in the current year.
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Non-operating exceptional items (except taxation)
2003
Amounts written off fixed asset investments
At December 31, 2002, we made a further provision against our minority equity investments in football clubs, reflecting the accounting treatment of these investments required by UK GAAP, leading to a non-cash exceptional charge of £21.0 million. This provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred. At June 30, 2003 we reduced our provision against our investment in Chelsea Village plc by £3.2 million, following the agreement to sell our minority interest in July 2003.
At December 31, 2002, we reduced our deferred revenue balance by £5.1 million relating to minority investments in new media companies, and reduced both our investment and provision against our investment by £5.1 million accordingly. This was a result of the new media companies no longer requiring the services for which the deferred balance was being held.
At December 31, 2002, we made a provision against our investment in Open TV, leading to a non-cash exceptional charge of £2.9 million due to a permanent diminution in value of this investment. This brought the carrying value of our investment in Open TV to £0.3 million. Between February 12, 2003 and March 24, 2003 we disposed of our entire investment in Open TV shares, leading to a loss on disposal of £0.1 million.
In March 2003, we disposed of our investment in Streetsonline for total consideration of £0.6 million, which had been held at a cost of £6.0 million less provision of £6.0 million. These amounts were written back upon disposal of our investment in Streetsonline, leading to an exceptional credit of £0.6 million.
2002
Amounts written off fixed asset investments
At December 31, 2001, £60.0 million was provided against our minority investments in football clubs. This provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred.
Release of provision for loss on disposal of subsidiary
On October 16, 2001, we jointly announced with Ladbrokes, the betting and gaming division of Hilton Group plc, that we had agreed not to pursue the proposed joint venture to offer a fixed-odds betting service on Sky Sports channels and other media. As a result, the provision for loss on disposal of subsidiary of £10.0 million, taken in fiscal 2001, was written back in fiscal 2002 as a non-cash exceptional credit, below operating profit. We continue to operate and develop interactive TV betting services through our wholly-owned bookmaker, SkyBet (formerly known as Surrey Sports).
Profit on sale of fixed asset investments
During fiscal 2002, we disposed of our unlisted minority investment in Static 2358 Limited, realizing a profit on disposal of £2.3 million.
The treatment of the above non-operating exceptional items differs under US GAAP. See Note 28(i) within Item 18 for further details.
Joint ventures
Our share of the operating results from joint ventures improved from a £76.7 million net loss in fiscal 2002 to a £3.4 million net profit in fiscal 2003. This was mainly due to the non-recognition of KirchPayTV losses from February 8, 2002, down from £70.0 million in fiscal 2002 to nil in fiscal 2003. The remaining improvement of £10.1 million was due to the improved performance of certain programming joint ventures,
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Joint ventures goodwill amortization, net
As at December 31, 2001, the carrying value of our investment in our KirchPayTV joint venture was written down to nil, following an exceptional charge to joint ventures goodwill amortization of £984.9 million. Joint ventures goodwill amortization also included goodwill amortization of £98.5 million for the prior year. To match our share of KirchPayTVs losses for the period from January 1, 2002 to February 8, 2002, we released an amount of £13.5 million from the impairment provision made at December 31, 2001.
Our investment in KirchPayTV was treated as a joint venture until February 8, 2002, by which date we considered that we were no longer able to exercise significant influence over KirchPayTV. Accordingly, on February 8, 2002, the investment was transferred within fixed asset investments to Other investments at a net book value of nil. On August 1, 2002, formal insolvency proceedings were opened for KirchPayTV. We do not expect to receive any funds from these proceedings. On May 13, 2002, we exercised a put option to transfer our interest in KirchPayTV to Taurus Holding GmbH & Co KG, a company which became the subject of formal insolvency proceedings on September 13, 2002. We do not expect to receive a significant amount, if any, from the exercise of our put option.
Net interest payable
Interest payable and similar charges, net of interest receivable and similar income, decreased by 16% to £114.5 million in fiscal 2003 from £136.9 million in fiscal 2002. This was primarily a result of a reduction in average gross debt from £1,853.9 million for fiscal 2002 to £1,461.0 million for fiscal 2003, and a decrease in our share of joint ventures interest payable, due to inclusion in the prior period of our share of KirchPayTVs interest payable. This was partly offset by decreased interest receivable due to lower levels of cash held. Our average cash balance for fiscal 2003 was £113.1 million compared to £202.7 million for fiscal 2002. Net interest costs are expected to decline in fiscal 2004, reflecting an expected continued reduction in average levels of net debt.
Taxation
The net tax credit for fiscal 2003 includes a current pre-exceptional tax charge of £85.0 million and a deferred tax credit of £3.0 million (which is included within the total £28.4 million non-exceptional deferred tax credit) due to the Group generating profits chargeable to corporation tax in this fiscal year. Before the effect of goodwill, joint ventures and exceptional items, this results in an underlying effective rate of 31%, slightly higher than the UK statutory rate due to a number of standard disallowable items. A reconciliation of the Groups current tax charge to the UK statutory rate is given in Note 9 within Item 18.
As a result of the significant investment made in digital, and the resultant losses incurred, the Group has accumulated significant tax losses within different Group companies.
Under the UK Accounting Standard FRS 19, a deferred tax asset in respect of these tax losses may only be recognized in the Groups balance sheet at the point when it is more likely than not that there will be sufficient future taxable profits to offset the tax losses thereby being capitalized.
As the Groups and individual entities profitability has continued to rise it has become increasingly possible to satisfy the requirements of FRS 19. During the six months ended December 31, 2002, the Group recognized a £40.4 million deferred tax asset, principally as a result of the forecast future profitability of one of the Groups trading subsidiaries.
Subsequently, following a review of the forecast utilization of tax losses within the Group, and as a consequence of a planned reorganization of certain assets within the Group, the Directors have been able to conclude that the required FRS 19 conditions have also now been satisfied, in respect of other tax losses in the Group, permitting the Group to recognize a further deferred tax asset of £122.6 million, which
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After the £85.0 million current pre-exceptional tax charge for fiscal 2003, the £151.0 million deferred tax credit, the tax charge on exceptional items of £1.4 million and our share of joint ventures tax charge of £2.1 million, the net tax credit for fiscal 2003 was £62.5 million.
In fiscal 2002, the tax charge of £106.4 million mainly comprised an exceptional write-off of a deferred tax asset arising on losses, following the impairment charge made in respect of KirchPayTV goodwill, of £83.3 million; utilization of the existing deferred tax asset of £27.3 million; an exceptional tax charge on the release of the remaining analog termination provision of £1.2 million; and our share of our joint ventures tax charges of £1.3 million. This was partly offset by an exceptional tax credit arising on the provision made against unprovided for ITV Digital debtors of £6.7 million. There was no current tax charge in fiscal 2002.
Following the impairment charge made in respect of our investment in KirchPayTV at December 31, 2001, there was insufficient evidence to support the recognition of a deferred tax asset arising on losses incurred by certain UK companies. Accordingly, the deferred tax asset of £95.6 million was written off in full as at December 31, 2001. Subsequent to this date, £12.3 million of this amount was written back due to the utilization of tax losses.
Profit after taxation
In fiscal 2003, the profit for the financial year was £190.3 million compared to a loss of £1,382.6 million in fiscal 2002, mainly as a result of the impairment of KirchPayTV goodwill by £971.4 million in fiscal 2002, a tax credit of £62.5 million in fiscal 2003 compared to a tax charge of £106.4 million in fiscal 2002 and an increase in operating profit after goodwill and exceptional items of £199.0 million. Furthermore, we ceased to account for our share of KirchPayTVs losses after February 8, 2002 (fiscal 2002: loss of £70.0 million), and, following the impairment charge against KirchPayTV goodwill in fiscal 2002, there was no amortization charge for KirchPayTV goodwill in fiscal 2003 (fiscal 2002: charge of £98.5 million).
The impairment charge relating to KirchPayTV goodwill followed an impairment review of the carrying value of the investment in KirchPayTV, which resulted in a carrying value of nil. The tax credit of £62.5 million is mainly due to the recognition of a deferred tax credit of £163.3 million relating to deferred tax assets not previously recognized. The increase in operating profit is the result of revenues increasing by £409.9 million, partly offset by an increase in operating expenses of £210.9 million.
Earnings (loss) per share
Basic earnings per share after goodwill and exceptional items increased by 83.2p to earnings per share of 9.9p in fiscal 2003 from a loss per share of 73.3p in fiscal 2002, primarily due to the movement in profit after taxation described above. Similarly, diluted earnings per share after goodwill and exceptional items increased to earnings per share of 9.8p in fiscal 2003 from a loss per share of 73.3p in fiscal 2002.
2002 FISCAL YEAR COMPARED TO 2001 FISCAL YEAR
During fiscal 2002, the continued growth in DTH subscribers led to significant growth in revenues and operating profit before goodwill and exceptional items, despite the closure of ITV Digital and a challenging advertising market.
Total UK and Ireland subscribers to Skys channels increased by 148,000 from 10,044,000 in fiscal 2001 to 10,192,000 in fiscal 2002, as the increase in the number of DTH and cable subscribers was greater than the loss of DTT subscribers from the closure of ITV Digital. Sky digital subscribers increased to 6,101,000 at June 30, 2002 from 5,308,000 at June 30, 2001.
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Revenues
Revenues increased to £2,776.1 million in fiscal 2002 from £2,306.0 million in fiscal 2001, representing growth of 20% in fiscal 2002.
The Groups revenues can be analyzed as follows:
Revenues | ||||||||||||||||
£m | % | £m | % | |||||||||||||
2001 | 2002 | |||||||||||||||
DTH subscribers
|
1,536.7 | 66.6 | 1,929.2 | 69.5 | ||||||||||||
Cable and DTT subscribers
|
299.1 | 13.0 | 279.4 | 10.1 | ||||||||||||
Advertising
|
270.5 | 11.8 | 250.7 | 9.0 | ||||||||||||
Interactive
|
93.0 | 4.0 | 186.0 | 6.7 | ||||||||||||
Other
|
106.7 | 4.6 | 130.8 | 4.7 | ||||||||||||
2,306.0 | 100.0 | 2,776.1 | 100.0 | |||||||||||||
DTH subscriber revenues |
DTH subscriber revenues were our largest source of revenue and increased to £1,929.2 million in fiscal 2002 from £1,536.7 million in fiscal 2001. The improvement of 26% in fiscal 2002 was largely driven by a 14% increase in the average number of subscribers, and January 2002 price rises.
Average DTH subscription revenue per subscriber increased by 10%, from £293 at June 30, 2001 to £323 at June 30, 2002. The increase in average DTH subscription revenue per subscriber reflected the change in our UK retail prices which was effective from January 1, 2002, along with increased subscription revenues from products such as Sky+ and the Extra Digibox.
The total number of DTH subscribers increased by 648,000 (12%) in fiscal 2002, primarily due to the significant growth in new digital subscribers, partly offset by digital churn and the closure of our analog service in September 2001.
Annualized net digital churn for the year to date was 10.5% at June 30, 2002 (excluding the effect of analog churn up to September 27, 2001 and the effect of the termination of the analog service on September 27, 2001) and 10.0% at June 30, 2001.
Cable and DTT subscriber revenues |
Cable and DTT subscriber revenues were still an important source of revenue, although they decreased by 7% to £279.4 million in fiscal 2002, from £299.1 million in fiscal 2001. The decrease was due to a £19.9 million decline in cable revenues to £227.6 million, partly offset by a £0.2 million increase in DTT subscription revenues to £51.8 million. The decrease in cable revenues was due to fewer cable subscribers taking Sky Premium Channels and a decrease in average revenue per cable subscriber of 19% in the period, partly offset by an 11% increase in the average number of cable subscribers. DTT revenues experienced only £0.2 million of growth since no revenues were received after April 30, 2002 following the termination of the ITV Digital DTT operations on that date. As a result of this termination, Sky made an exceptional operating provision of £22.3 million at April 30, 2002 in respect of remaining unprovided programming debts with ITV Digital (see Operating expenses, net Administration).
At June 30, 2002, 4,091,000 (June 30, 2001: 4,591,000 cable and DTT subscribers) UK and Ireland cable subscribers (including broadband, narrowband and SMATV subscribers) received our programming.
In fiscal 2002, we charged UK cable operators between £9.97 and £18.35 per subscriber for Sky Premium Channels, dependent upon the number of Sky Premium Channels to which the cable customer subscribed. In addition, the percentage of cable and DTT subscribers who subscribed to Sky Premium Channels is far lower than that for DTH subscribers. As a result, on average, in fiscal 2002, cable (including
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Advertising revenues |
Advertising revenues decreased to £250.7 million in fiscal 2002 from £270.5 million in fiscal 2001. The decrease in advertising revenues of 7% was driven by a downturn in UK television advertising revenue, partly offset by the growth in viewing share of Sky Channels, according to BARB estimates of viewing of commercial channels, from 9.4% to 10.4%, and increased advertising revenue from Ireland.
Interactive revenues |
Interactive revenues increased to £186.0 million in fiscal 2002 from £93.0 million in fiscal 2001. The increase of £93.0 million was due to increased betting revenues, up £16.5 million to £94.9 million (resulting from an increase in the overall number of bets placed), and the inclusion of a full year of consolidated BiB revenues for the first time subsequent to the acquisition of BiB as a subsidiary on May 9, 2001 (previously BiBs revenues had been equity accounted). SkyBet had over 100,000 interactive TV betting registrations from DTH subscribers and received over 65,000 bets per week on average. The majority of the remainder of interactive revenues comprises Sky Active and subsidy recovery charges made to conditional access and access control customers on the Sky Digital platform.
Other revenues |
Other revenues increased £24.1 million to £130.8 million in fiscal 2002, primarily due to new product revenue from the sale of Sky+ and Extra Digibox, increased service call revenues due to a larger subscriber base and increased extended warranty revenues, partly offset by fewer installations in fiscal 2002.
Operating expenses, net
Operating expenses after goodwill and exceptional items increased to £2,721.1 million in fiscal 2002, from £2,213.2 million in fiscal 2001, representing annual growth of 23%.
Programming |
Programming costs, which represented the largest single element of our cost structure, constituted 53% of operating expenses in fiscal 2002 (fiscal 2001: 51%), and increased to £1,439.3 million in fiscal 2002 from £1,133.8 million in fiscal 2001. Programming costs are stated net of amounts receivable from the disposal of programming rights not acquired for use by the Group of £15.3 million (fiscal 2001: £55.1 million).
Sports channels programming costs increased 59% to £663.0 million in fiscal 2002, from £416.5 million in fiscal 2001, driven by an increase of £192.3 million in football costs (mainly due to the existing FAPL agreement that commenced in fiscal 2002 and the introduction of FAPL pay-per-view matches in fiscal 2002) together with the increased costs of rugby union and cricket internationals.
Movie channels programming costs increased by 7% to £360.5 million in fiscal 2002, from £336.4 million in fiscal 2001. The increase was primarily due to additional licensed programming costs, driven by the 3% increase in the average number of movie subscribers, an increase in the number of buys of Sky Box Office movies and an increased proportion of mega-hit titles, which are normally defined by reference to US theatrical release revenue.
Entertainment programming costs decreased 5% to £84.8 million in fiscal 2002, from £89.6 million in fiscal 2001. The decrease in entertainment programming costs principally resulted from savings in commissioned programming for Sky One and the rationalization of certain channels.
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Our costs in relation to the distribution agreements for the Sky Distributed Channels have grown from £256.1 million in fiscal 2001 to £297.4 million in fiscal 2002, mainly due to the increased number of subscribers and contracted per subscriber fee increases.
Transmission and related functions |
Transmission and related functions costs after exceptional items (net of amounts receivable for the provision of spare transponder capacity to third party broadcasters) increased from £128.6 million in fiscal 2001 to £142.5 million in fiscal 2002. Transmission and related costs before exceptional items increased from £128.6 million in fiscal 2001, to £146.6 million in fiscal 2002, mainly as a result of the inclusion of a full year of BiB transmission costs and the usage of an increased number of transponders, offset by savings from the termination of the analog service in September 2001.
At June 30, 2002, £4.1 million of the £41.0 million provision originally made in fiscal 2000, relating to the cost of early termination of the analog service on September 27, 2001, had not been utilized and was therefore released to the profit and loss account as an exceptional operating credit.
Marketing |
Marketing costs continued to be significant in fiscal 2002, comprising the second largest element of our cost structure, primarily as a result of the continued free digital satellite equipment offer to new customers.
Marketing costs after exceptional items increased to £416.6 million in fiscal 2002, from £378.1 million in fiscal 2001. The increase of £38.5 million was mainly due to the consolidation for the full year of BiBs subsidy of the set-top box (resulting in an increase of £48.7 million over fiscal 2001) and an increase in discounted installation offers. This was partly offset by reductions in above-the-line advertising spend and commissions paid, as more sales were made directly to subscribers rather than through retail outlets.
Subscriber management |
Subscriber management costs grew from £243.4 million in fiscal 2001 to £291.1 million in fiscal 2002. This increase in costs of 20% was driven by the higher number of digital subscribers and by the introduction of new products such as Sky+ and Extra Digibox; partly offset by lower call center headcount and call volumes, reflecting improvements in our billing and other customer support systems, and subscribers increasing familiarity with Sky products.
Administration |
Administration costs, including goodwill and exceptional items of £140.6 million, increased to £343.8 million in fiscal 2002, from £254.0 million in fiscal 2001. Administration costs before goodwill and exceptional items increased by £16.6 million, mainly due to the consolidation of BiB costs for the first full year since acquisition as a subsidiary on May 9, 2001, and increases in other central costs and depreciation. Goodwill amortization increased by £74.0 million, mainly due to the amortization of BiB goodwill for the first full year in fiscal 2002.
On March 27, 2002, ITV Digital, a 50:50 joint venture between Carlton Communications plc and Granada plc, which provided pay television program services via the UK DTT platform, was placed into administration. Partners of Deloitte & Touche were appointed as administrators. As of March 27, 2002, we had balances owing to us and unprovided for, in respect of programming licensed to ITV Digital, of £22.3 million. On April 30, 2002, the joint administrators of ITV Digital announced the closure of ITV Digitals pay television service on the platform and their intention to close the administration. Accordingly, in fiscal 2002, we made an exceptional operating provision against the whole of this balance.
In fiscal 2001, an exceptional operating item of £23.1 million comprised a reorganization provision relating to the costs of reorganization within the Sky Interactive division. This division brought together BiB with our other interactive properties including the Sports Internet Group (SIG). The costs of
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Betting |
In fiscal 2002, betting costs increased by £12.5 million to £87.8 million, from £75.3 million in fiscal 2001, due to increased numbers of interactive TV and internet bets placed following the introduction of interactive betting in December 2000 and the relaunch of the interactive TV betting service in November 2001. These costs relate to the £94.9 million of interactive betting revenues described previously. In fiscal 2001, betting costs were included for the first time, following the acquisition of SIG in July 2000.
Operating profit, gross margin and operating margin
Operating profit after goodwill amortization and exceptional items decreased by £37.8 million to £55.0 million in fiscal 2002 from £92.8 million in fiscal 2001. This decrease was driven by the inclusion of a full years amortization charge for goodwill arising on the acquisition of BiB and an operating exceptional provision of £22.3 million against balances owed by ITV Digital. These expenses were offset by an increase in revenues, which was primarily due to an increase in DTH subscription revenues. This increase in revenues was partly offset by an increase in operating expenses, primarily due to an increase in programming costs.
Gross margin (based on total revenues less programming costs) for fiscal 2002 was 48%, down from 51% in fiscal 2001. The decrease in margin was driven by the fact that programming costs rose proportionally more than total revenues. The 20% increase in total revenues was principally due to the 14% increase in the average number of DTH subscribers. In contrast, programming costs increased by 27% due to a 59% increase in sports programming costs due to a new FAPL agreement beginning in fiscal 2002 and increased costs of rugby union and cricket internationals, a 7% increase in movies programming costs due to an increase in the number of subscribers and an increase in the number of mega-hit titles, and a 16% increase in costs for Sky Distributed Channels due to the increased number of subscribers and contracted per subscriber fee increases.
Operating margin (based on total revenues less all operating expenses before goodwill amortization and exceptional items) for fiscal 2002 was 7%, remaining constant compared to fiscal 2001.
Goodwill
Goodwill amortization included within operating profit increased by £74.1 million to £118.3 million in fiscal 2002, as a result of the inclusion of a full years amortization charge for goodwill arising on the acquisition of BiB. Joint ventures goodwill amortization of £1,070 million shown below operating profit relates to the amortization and subsequent impairment of the goodwill arising upon the acquisition of KirchPayTV.
Non-operating exceptional items
2002 |
Amounts written off fixed asset investments
At December 31, 2001, £60.0 million was provided against our minority investments in football clubs. This provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred.
Release of provision for loss on disposal of subsidiary
On October 16, 2001, we jointly announced with Ladbrokes, the betting and gaming division of Hilton Group plc, that we had agreed not to pursue the proposed joint venture to offer a fixed-odds betting
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Write down of deferred tax asset
Following the impairment charge made in respect of our investment in KirchPayTV at December 31, 2001, there was insufficient evidence to support the recognition of a deferred tax asset arising on losses incurred by certain UK companies. Accordingly, the deferred tax asset of £95.6 million was written off in full as at December 31, 2001. Subsequent to this date, £12.3 million of this amount was written back due to the utilization of tax losses.
Profit on sale of fixed asset investments
During fiscal 2002, we disposed of our unlisted minority investment in Static 2358 Limited, realizing a profit on disposal of £2.3 million.
2001 |
Share of joint ventures operating exceptional item
In April 2001, BiB incurred exceptional operating costs of £16.5 million, which principally comprised the cost of the write-down of the current platform. Of these costs, £13.1 million were included within fixed assets and the remainder within provisions. The exceptional charge was accounted for within the share of operating results of joint ventures.
Share of joint ventures loss on sale of fixed asset investment
On August 31, 2000, KirchPayTV disposed of its remaining 58 million holding of BSkyB shares. Our share of the loss on disposal was £69.5 million. The loss was calculated as our share of the difference between the balance sheet value of the 58 million shares at £15.21 per share (based on the value of the shares at the date of acquisition of 24% of KirchPayTV by us) and the net proceeds realized by KirchPayTV of £10.05 per share.
Amounts written off fixed asset investments
At June 30, 2001, £38.6 million was provided against our minority investments in new media companies.
Provision for loss on disposal of subsidiary
On July 11, 2001, we reached agreement with Ladbrokes, the betting and gaming division of Hilton Group plc, to form a 50:50 joint venture to develop and operate a fixed-odds and pools betting business linked to Sky channels on Sky digital. We were to contribute our wholly-owned bookmaker, Surrey Sports, to the joint venture. On the transfer of Surrey Sports to the joint venture, existing goodwill on our balance sheet was to be adjusted by £10.0 million and a provision for this was made in fiscal 2001. This provision was subsequently reversed when we jointly announced with Ladbrokes in October 2001 that we had agreed not to pursue the proposed joint venture (see note on Release of provision for loss on disposal of subsidiary above).
The treatment of the above non-operating exceptional items differs under US GAAP. See Note 28(i) within Item 18 for further details.
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Joint ventures
Our share of the operating losses from joint ventures, excluding exceptional items, decreased from £239.2 million in fiscal 2001, to £76.7 million in fiscal 2002. This was mainly due to the decrease in our share of BiBs operating losses, before exceptional items, from £118.9 million to nil (following the consolidation of BiB as a subsidiary from May 9, 2001), and the non-recognition of the losses of KirchPayTV from February 8, 2002 (£70.0 million net losses recognized in fiscal 2002 (see Note 5 within Item 18) and £116.0 million losses recognized in fiscal 2001).
KirchPayTV
As a result of an impairment review as at December 31, 2001, we wrote down the carrying value of our investment in KirchPayTV to nil. This resulted in an exceptional charge of £984.9 million to joint ventures goodwill amortization.
By February 8, 2002, our relationship with KirchPayTV had irrevocably changed and we have not exercised significant influence since that date. Therefore from February 8, 2002, we no longer accounted for our interest in KirchPayTV as a joint venture and ceased accounting for KirchPayTVs losses using the gross equity method from that date.
To match our share of KirchPayTVs losses for the period from January 1, 2002 to February 8, 2002, we released an amount of £13.5 million from the impairment provision made at December 31, 2001 (see Note 5 within Item 18).
On May 8, 2002, KirchPayTV filed for insolvency and on August 1, 2002, formal insolvency proceedings were opened for KirchPayTV. The purpose of formal insolvency proceedings under German law is to satisfy the creditors by realizing the assets of the insolvent company and distributing the proceeds to creditors. The method of realization (asset sale or sale as a going concern) is determined by the insolvency trustee who reports and consults with the creditors. The entitys shareholders do not have a formal position in the insolvency proceedings. On May 13, 2002, we exercised a put option to transfer our interest in KirchPayTV to Taurus Holding GmbH & Co KG, a company which became the subject of formal insolvency proceedings on September 13, 2002. We do not expect to receive a significant amount, if any, from the exercise of our put option.
Further details regarding our investment in KirchPayTV can be found within the KirchPayTV section of Item 4 and in notes 28(i) and 31 of Item 18 of our 2002 Annual Report on Form 20-F.
BiB
On July 17, 2000, we announced the acquisition of a further 47.6% of BiB, subject, inter alia, to regulatory approval, to increase our shareholding to 80.1%. On May 9, 2001, we completed the acquisition of such 47.6% of BiB, and on June 28, 2001, we completed the acquisition of the remaining 19.9% of BiB, taking our shareholding to 100%. We accounted for BiB as a 32.5% joint venture up until November 2000. From this date, to May 9, 2001, we recognized 100% of BiBs joint venture losses due to an arrangement dated July 15, 2000, under which we agreed to provide 100% of BiBs funding after existing funding had been utilized. From May 9, 2001, we fully consolidated BiB as a subsidiary.
Other
We continue to invest in programming joint ventures managed by our wholly-owned subsidiary, Sky Ventures Limited. Our share of losses in joint ventures owned by Sky Ventures Limited increased to £6.7 million in fiscal 2002, from £4.3 million in fiscal 2001, mainly due to the completion in July 2001 of the attheraces joint venture, in which we have a 33.3% stake (see Item 4 The Competition Act 1998).
Amortization of joint ventures goodwill relates to goodwill arising on the acquisition of our stake in KirchPayTV. In the second half of fiscal 2001, we revised the useful economic life of KirchPayTV goodwill from 20 years to seven years, although we only accounted for approximately seven months worth of
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Interest
Interest payable and similar charges, net of interest receivable and similar income, increased to £136.9 million in fiscal 2002, from £132.4 million in fiscal 2001. This was due to an increase of £161.4 million in average net debt for fiscal 2002, partly offset by a reduction in the average interest rates payable on main borrowings from 7.6% in fiscal 2001 to 7.4% in fiscal 2002, and a decrease in our share of joint venture interest payable following the cessation of accounting for KirchPayTV as a joint venture. Net debt peaked at £1,833 million in December 2001, falling to £1,528 million at June 30, 2002.
Taxation
In fiscal 2002, the tax charge of £106.4 million mainly comprised an exceptional write-off of a deferred tax asset arising on losses, following the impairment charge made in respect of KirchPayTV goodwill, of £83.3 million (fiscal 2001: nil); utilization of the existing deferred tax asset of £27.3 million (fiscal 2001: £24.1 million); an exceptional tax charge on the release of the remaining analog termination provision of £1.2 million (fiscal 2001: nil); and our share of our joint ventures tax charges of £1.3 million (fiscal 2001: nil). This was partly offset by an exceptional tax credit arising on the provision made against unprovided for ITV Digital debtors (£6.7 million; fiscal 2001: nil). There was no current tax charge in fiscal 2002 or fiscal 2001.
In fiscal 2001, the adoption of FRS 19 had resulted in the recognition of a deferred tax asset of £143.9 million at June 30, 2001, primarily as a result of losses and certain exceptional items incurred in fiscal 2000 and 2001. These losses and costs were associated with the launch of digital television and the termination of analog operations.
Loss after taxation
In fiscal 2002, the loss for the financial year was £1,382.6 million compared to a loss of £538.6 million in fiscal 2001. The increased loss was mainly as a result of the impairment of KirchPayTV goodwill by £971.4 million, an increase in the tax charge of £82.3 million and an increase in subsidiary goodwill amortization of £74.0 million. This was offset by a decrease of £179.0 million in our share of the operating losses from joint ventures, mainly due to the decrease in our share of BiBs operating losses (following the consolidation of BiB as a subsidiary from May 9, 2001) and the non-recognition of the losses of KirchPayTV from February 8, 2002, an increase in operating profit before goodwill and exceptional items of £31.3 million due to an improved operating performance of the core business, and an exceptional charge of £69.5 million in fiscal 2001 relating to our share of KirchPayTVs loss on disposal of BSkyB shares.
The loss relating to KirchPayTV followed an impairment review of the carrying value of the investment in KirchPayTV, which resulted in a carrying value of nil. The increase in the tax charge was mainly due to an exceptional deferred tax charge of £83.3 million incurred in fiscal 2002, following the impairment of KirchPayTV. The increase in subsidiary goodwill amortization is the result of the first full year of amortization being charged on the goodwill relating to the acquisitions of BiB and SIG.
Loss per share
Basic loss per share, after goodwill and exceptional items, increased by 44.1p from 29.2p for fiscal 2001 to 73.3p for fiscal 2002, primarily due to the movement in loss after taxation described above.
2003 BALANCE SHEET COMPARED TO 2002 BALANCE SHEET
Intangible assets decreased by £121.5 million, from £657.4 million at June 30, 2002 to £535.9 million at June 30, 2003, due to amortization of goodwill and the provision against Opta goodwill. Intangible
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Tangible fixed assets increased in the period by £3.2 million, mainly due to £101.4 million of additions, including investment in customer-facing technology, improvement in web-based technology and improved back-up facilities, partly offset by depreciation of £97.9 million. Fixed asset investments decreased by £20.0 million, mainly due to the further provision against our minority investments in football clubs of £21.0 million made at December 31, 2002. Subsequently, we reduced our provision against our investment in Chelsea Village plc at June 30, 2003 by £3.2 million, following the agreement to sell our minority investment in July 2003.
Net current assets decreased by £88.4 million, principally caused by an increase in creditor balances, mainly due to the increase in deferred subscription revenues resulting from an increased subscriber base; a decrease in debtors due to the amortization of the FAPL contract prepayment; and a decrease in non-programming stock due to the utilization of set-top box stocks outweighing purchases in the period.
Equity shareholders deficit
Total equity shareholders deficit decreased from a deficit of £300.7 million at June 30, 2002 to a deficit of £105.7 million at June 30, 2003. This was due to a net profit in the current year of £190.3 million and the issue of shares, net of share issue costs, of £4.7 million.
In November 2002, we issued 43.2 million shares with a fair value of £253.1 million to HSBC, Matsushita and BT in respect of deferred consideration for the acquisition of the remaining 67.5% of BiB in May and June 2001. This consideration was previously classified as shares to be issued within shareholders funds. The share premium arising on the issue of the deferred consideration to BT of £111.5 million was credited to the merger reserve. The remaining £120.0 million was credited to share premium. Amounts held in the merger reserve are transferred to the profit and loss reserve over the same useful economic life as the goodwill that arose on the acquisition. Further details on the merger reserve are given in Note 28(i) within Item 18.
Reserves
At June 30, 2003, the Company had a deficit of £1,120.4 million on its company-only profit and loss reserve. In order to improve the presentation of the Companys balance sheet, and give the Company greater flexibility in any future distribution policy, the Directors proposed a special resolution at the Annual General Meeting held on November 14, 2003 to eliminate the deficit at June 30, 2003 by reducing the Companys share premium account. At that meeting shareholders approved this special resolution. In addition to such approval of the reduction by shareholders, the Company requires the approval of the High Court, for which it has applied. Whilst it is not possible to state with any certainty when this will occur, it is currently anticipated that the reduction will become effective by the end of the current calendar year.
FOREIGN EXCHANGE
For details of the impact of foreign currency fluctuations on our results of operations, see Item 11 Currency exchange rates.
CONTINGENT LIABILITIES
The Group has contingent liabilities by virtue of its investments in unlimited companies, or partnerships, which include Nickelodeon UK, The History Channel (UK), Paramount UK, QVC, and National Geographic Channel UK. The Directors do not expect any material loss to arise from the above contingent liabilities.
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SEASONALITY
New subscriptions to our channels have tended to be highest in the second quarter of our financial year, the pre-Christmas period. As a result of this, marketing costs tend to be highest in the second quarter of each fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Groups principal sources of liquidity are operating cash flow, combined with access to aggregate of £800 million (2002: £1,050 million) in revolving credit facilities, reducing to £600 million from June 29, 2004. Long-term funding comes primarily from US dollar and sterling-denominated public bond debt. For details of our facilities and long-term funding see Note 20 within Item 18. Further details of our funding and treasury policies, and the manner in which they are controlled, are provided in Item 11.
We believe that our existing external financing, together with internally generated cash inflows, will continue to be sufficient sources of liquidity to fund our current operations and our approved capital expenditure requirements.
Our liquidity and working capital may be affected by a material decrease in cash flow from operations due to factors such as infringement of intellectual property and proprietary rights, increased competition, failure to obtain required regulatory approvals, loss of wholesale revenues and failure of technology. See Item 3 Risk Factors. Our revolving credit facilities contain certain covenants (see Note 20 within Item 18). These include undertakings relating to certain financial ratios. The obligation to comply with such financial undertakings may restrict access to the facilities from time to time. A breach of certain of our undertakings, including our financial undertakings, may also have the effect of accelerating repayment of all outstanding advances under our debt facilities. However, the facilities do not contain any ratings-related triggers that would reduce the availability of funding in the event of a ratings downgrade.
Dividends cannot be paid between Group companies other than out of profits available for distribution under the provisions of the statutes and as such these may restrict the ability of Group companies to transfer funds within the Group.
Contractual obligations and commercial commitments
A summary of our contractual obligations and commercial commitments at June 30, 2003 is shown below:
Payments due by period | ||||||||||||||||||||
Less than | Between | Between | More than | |||||||||||||||||
Total | 1 year | 1-3 years | 4-5 years | 5 years | ||||||||||||||||
£m | £m | £m | £m | £m | ||||||||||||||||
Obligation or commitment
|
||||||||||||||||||||
Purchase obligations:
|
||||||||||||||||||||
Television program rights
|
1,618 | 898 | 532 | 144 | 44 | |||||||||||||||
Set-top boxes and related equipment
|
106 | 106 | | | | |||||||||||||||
Third party payments
|
46 | 17 | 25 | 4 | | |||||||||||||||
Other
|
10 | 8 | 2 | | | |||||||||||||||
Long-term debt
|
1,144 | | | 264 | 880 | |||||||||||||||
Operating lease obligations
|
495 | 76 | 157 | 128 | 134 | |||||||||||||||
Capital lease obligations
|
8 | | 1 | 1 | 6 | |||||||||||||||
Total cash obligations
|
3,427 | 1,105 | 717 | 541 | 1,064 | |||||||||||||||
Purchase obligations Television program rights
At June 30, 2003, we had minimum TV programming commitments of £1,618 million (fiscal 2002: £2,166 million), of which £692 million (fiscal 2002: £1,005 million) related to commitments payable in
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Of the total decrease in our minimum TV programming commitments of £548 million compared to June 30, 2002, £345 million is due to the fact that we now only have one year of commitments, compared to two years, remaining on the FAPL rights contract and the remaining £203 million is principally due to a decreased average period remaining on our commitments for other sports channels and movie channels programming.
Purchase obligations Set-top boxes and related equipment
At June 30, 2003, we had made commitments to manufacturers, in relation to the supply of set-top boxes, up to a maximum of £106 million (fiscal 2002: £127 million). The decrease compared to the prior period is due to a reduction in the price charged per box by manufacturers.
Purchase obligations Third party payments
At June 30, 2003, we had minimum third party payment commitments in respect of distribution agreements for the Sky Distributed Channels of £46 million (fiscal 2002: £58 million). An additional £799 million (fiscal 2002: £885 million) of commitments is also payable for periods of up to six years (fiscal 2002: six years), assuming that DTH subscribers remained unchanged from current levels.
Long-term debt
Further information concerning long-term debt is given in Note 20 within Item 18.
Operating lease obligations
We lease certain land and buildings on short-term and long-term leases. The rents payable under these leases are subject to renegotiations at various intervals specified in the leases. In addition we have agreements for the use of transponders on the Astra and Eurobird satellites.
Capital lease obligations
Obligations under finance leases represent amounts drawn down in connection with the Customer Relationship Management Center in Dunfermline, Scotland. Repayments of £0.7 million (2002: £0.8 million) were made against the Customer Relationship Management Center lease and repayments of £1.5 million (2002: £2.4 million) were made against the IT asset leases, which were fully repaid in the current year. A proportion of these payments has been allocated to any capital amount outstanding. The Customer Relationship Management Center lease bears interest of 8.5% and expires in September 2020.
Cash flows
During fiscal 2003 there was an operating cash inflow of £663.6 million, compared with an operating cash inflow of £249.7 million in fiscal 2002. This represented the conversion of 179% of operating profit before goodwill amortization and exceptional items to cash inflow.
The operating cash inflow was driven primarily by improved operating results and a positive working capital movement of £191.4 million. The movement in working capital this year was due to a combination of one-off factors (for example the unwinding of prepayments of certain sports rights) and factors which will
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After capital expenditure of £98.4 million, net interest payments of £124.6 million, net funding to joint ventures of £10.1 million, corporation tax paid of £17.6 million and other net inflows of £9.8 million, net debt decreased by £422.7 million to £1,105.4 million.
During the year, our capital expenditure was £98.4 million, compared with £100.8 million in fiscal 2002. A significant part of this expenditure related to investment in upgrades to customer-facing technology based in Scotland and a second up-linking facility. In addition, we continue to invest in computer systems, contingency planning, studio and transmission facilities and building refurbishment as the Isleworth site near London continues to expand.
In fiscal 2002, the operating cash inflow of £249.7 million was driven by the increase in operating profit before goodwill and exceptional items during the year; this includes an outflow of £18.6 million in relation to transitioning analog subscribers to digital. In addition to the operating cash inflow, there were inflows of £22.5 million for consortium tax relief and £14.3 million net proceeds on the issue of shares. These inflows were partly offset by net funding to joint ventures (principally the attheraces joint venture) of £6.8 million, capital expenditure of £100.8 million, net interest paid of £132.8 million and purchase of our own shares of £26.9 million.
During fiscal 2002, we spent £100.8 million on capital expenditure. The principal expenditure was on large projects, such as upgrading and renewing our customer-facing technology based in Scotland, replacement of our airtime sales system, expenditure on disaster recovery and the purchase of freehold property (3 and 4 Grant Way, Isleworth, England). In addition to this, we continued to replace and renew our computer equipment, studio facilities, buildings and infrastructure.
At June 30, 2003, our net debt was £1,105.4 million compared to net debt of £1,528.1 million at June 30, 2002 and net debt of £1,546.5 million at June 30, 2001. Net debt is defined as all short-term, medium-term and long-term borrowing, less all cash and liquid resources. Liquid resources comprise short-term deposits of less than one year and investments that are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £1,151.8 million at June 30, 2003 compared to £1,578.4 million at June 30, 2002 and £1,770.1 million at June 30, 2001. At June 30, 2003, cash and liquid resources were £46.4 million compared to £50.3 million at June 30, 2002 and £223.6 million at June 30, 2001.
Major non-cash transactions
During fiscal 2001, we acquired 67.5% of BiB, 47.6% on May 9, 2001, and 19.9% on June 28, 2001, increasing our interest to 100% (2000: 32.5%). The consideration was satisfied by the issue to HSBC, Matsushita and BT of 39.7 million new BSkyB shares, with a fair value of £290.9 million and deferred consideration of new BSkyB shares or loan notes, with a fair value of £253.1 million. On November 11, 2002, we issued 43.2 million shares to HSBC, Matsushita and BT in respect of this deferred consideration.
Effective December 31, 2001, we wrote down the carrying value of our investment in KirchPayTV to nil. The write-down resulted in a non-cash exceptional net charge to the profit and loss account of £985 million under UK GAAP. Subsequently, an amount of £13.5 million was released from the provision matching our share of losses for the period from January 1, 2002 to February 8, 2002.
In May 2001, we acquired the remaining 5% minority interest in WAPTV Limited. The consideration was satisfied by the issue of 169,375 new BSkyB shares, with a fair value of £1.3 million and contingent consideration of 508,130 new BSkyB shares with a fair value of £3.7 million. In June 2002, we issued
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In July 2000, we acquired 100% of SIG. The consideration was satisfied by the issue to SIG shareholders of 21,633,099 new BSkyB shares, with a fair value of £267.3 million.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2003, the Company did not have any undisclosed off-balance sheet arrangements that required disclosure as defined by Securities and Exchange Commission Release No. 33-8182.
TREND INFORMATION
The significant trends which have a material effect on our financial performance are outlined below and are reflected within our operating results for the current year.
We achieved our target of 7,000,000 DTH subscribers in September 2003, and we expect that the trend of digital DTH subscriber growth will continue at a run rate of net additions consistent with achieving our target of 8,000,000 DTH subscribers by the end of calendar year 2005. The emphasis in fiscal 2004 remains on acquiring and retaining higher value subscribers, the latter being of greater importance now that 81% of all DTH subscribers are no longer within their initial minimum 12 month contract period (2002: 75%). Although the rate at which our subscribers take Sky Premium Channels (calculated as the ratio of the total number of Sky Premium Channels subscribed to (other than Sky Sports Xtra) compared to the total number of subscribers) has declined in the current fiscal year, and is currently expected to continue to decline marginally, average DTH subscription revenue per subscriber has continued to grow in this period, and we expect the growth to continue.
During the year ended June 30, 2003, the number of cable subscribers receiving Sky Channels in the UK and Ireland decreased by 220,000 to 3,871,000. We expect the rate at which cable subscribers take Sky Premium Channels will continue to decline in the future. We currently have agreements with ntl and Telewest for the supply of certain Sky Basic Channels until 2006 (see Item 4 Programming).
We anticipate that over the remainder of calendar year 2003, UK television advertising revenue will decline marginally, with year on year growth of around 3% anticipated for calendar year 2004. We expect that our share of total revenue will increase year on year as we benefit from a greater number of subscribers leading to growth in Skys commercial impacts, although this is likely to be partly offset by a fall in the share of viewing of Sky Channels as the total number of channels available to multi-channel viewers increases. This will enable us to attract a greater proportion of total UK television advertising expenditure and will have a positive impact on advertising revenues.
Interactive revenues are expected to grow in the next few years as the range of interactive services available on the digital satellite platform develops. The core growth areas are expected to be interactive betting via television, games, interactive programming, interactive advertising, and set-top box subsidy recovery revenues from conditional access and access control customers.
We will continue to seek to reduce the per subscriber cost of sports and movies programming and the per subscriber cost in relation to the Sky Distributed Channels, as and when the contracts for these are renewed. We expect that programming costs will increase at a slower rate than our subscriber revenues.
Included within marketing costs, are the costs of providing free digital satellite equipment and the installation cost in excess of the relevant amount actually received from customers. It remains our current intention to continue the practice of providing free digital satellite equipment and subsidizing installation to new subscribers, however, we expect marketing costs as a percentage of revenues to continue to fall.
We expect that the increase in subscriber management costs will continue in fiscal 2004 due to a greater proportion of Sky+ installations, which carry higher hardware costs than the standard installations, partly offset by a reduction in the cost of standard set-top boxes. We expect that customer relationship management (CRM) costs will be higher in fiscal 2004 than in fiscal 2003 due to the incremental costs of
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We expect the increase in operating margin to continue towards our target of 30%, last achieved prior to the launch of our digital DTH service in October 1998.
RESEARCH AND DEVELOPMENT
The Group did not incur significant research and development expenditure in fiscal 2003, 2002 or 2001.
US GAAP RECONCILIATION
Net profit after tax under UK GAAP in fiscal 2003 was £190.3 million (fiscal 2002: loss of £1,382.6 million; fiscal 2001: loss of £538.6 million). Under US GAAP net profit after tax was £286.0 million (fiscal 2002: loss of £1,047.3 million; fiscal 2001: loss of £624.6 million).
The principal differences between US GAAP and UK GAAP, as they relate to BSkyB, arise from the methods of accounting for goodwill, employee stock based compensation, certain provisions, non-traded financial instruments and the derivatives which hedge these financial instruments, amounts written off fixed asset investments, joint venture losses and deferred taxation.
For a further explanation of the differences between US GAAP and UK GAAP, see Note 28 to the Consolidated Financial Statements included within Item 18.
CRITICAL ACCOUNTING POLICIES
The application of UK GAAP often requires our judgment when we formulate our accounting policies and when presenting a true and fair view of our financial position and results in our consolidated financial statements. Often, judgment is required in respect of items where the choice of specific policy to be followed can materially affect our reported results or net asset position, in particular through estimating the lives of recoverability of particular assets, or in the timing of when a transaction is recognized. A summary of our significant accounting policies is discussed in the accompanying notes to the consolidated financial statements, and our critical accounting policies are discussed below.
We do not believe that we have any critical accounting policies which are specific to US GAAP, as any US GAAP accounting policies that we have deemed to be critical are also critical under UK GAAP.
We consider that our accounting policies in respect of the following are critical:
Goodwill
Where the cost of acquisition exceeds the fair values attributable to the net assets acquired, the difference is treated as purchased goodwill and capitalized on our balance sheet in the year of acquisition. Determining the fair value of assets acquired and liabilities assumed requires managements judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives, among other items. Purchased goodwill arising on acquisitions from July 1, 1998 is capitalized. Prior to July 1, 1998, goodwill arising on acquisitions was eliminated against reserves. As permitted by Financial Reporting Standard No. 10, Goodwill and Intangible Assets (FRS 10), this goodwill has not been restated on our balance sheet. As at June 30, 2003, the total value of goodwill written off directly to reserves was £523.8 million (2002: £523.8 million) principally relating to the merger of Sky Television and British Satellite Broadcasting in 1990.
Where capitalized goodwill is regarded as having a limited useful economic life, FRS 10 provides that the cost is amortized on a straight-line basis over that life, of up to 20 years. All goodwill currently held on our balance sheet is being amortized over seven year periods. Impairment reviews are carried out to ensure that goodwill is not carried at above the recoverable amounts. Any amortization or impairment write-downs are charged to our profit and loss account.
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At June 30, 2003, the carrying value of goodwill amounted to £535.7 million (2002: £657.2 million) and represented 26% (2002: 30%) of our total assets. As a result, the choice of amortization period is critical to our results. Applying the lives referred to in the previous paragraph has resulted in this years charge for amortization amounting to £116.3 million (2002: £216.8 million, including £98.5 million of KirchPayTV goodwill amortization).
Goodwill impairment reviews are also an area requiring our judgment, requiring assessment as to whether the carrying value of goodwill can be supported by the net present value of future cash flows derived from assets using cash flow projections, and discounting using an appropriate rate. We have completed two significant acquisitions in the past three years. These were the acquisitions of the 67.5% of BiB not previously owned by us and 100% of Sports Internet Group. In accordance with Financial Reporting Standard No. 11, Impairment of Fixed Assets and Goodwill, impairment reviews were performed on the carrying values of BiB and Sports Internet Group goodwill balances at the end of the first full financial year after acquisition, as at June 30, 2002. These reviews showed that no impairment was identified in either case. Consistent with our strategy, the business plans on which these reviews were based reflected significant projected increases in betting and other interactive revenues over the next five years. As neither business operates in a mature industry, there has been limited historical data available against which to assess these projections and, as such, actual results could differ materially from the projections used. As at June 30, 2003, the performance of these operations was broadly in line with the forecasts in the business plan used for these reviews, and no indications of impairment had arisen. Changing the assumptions selected by us to determine the level, if any, of impairment, including the discount rate or the growth rate assumptions in the cash flow projections, could significantly affect our results.
During the year ended June 30, 2003 we made a provision of £5.2 million, included within amortization, against goodwill which originally arose on the acquisition of Opta Index Limited (Opta) (a sports media and information company, a subsidiary of Sports Internet Group, which provides statistics on the sports industry). This provision was made as a result of our announcement in December 2002 that we would close Opta and the carrying value of this goodwill has been reduced to nil.
The treatment of goodwill under US GAAP differs significantly from that under UK GAAP (see Note 28 within Item 18 for further details).
Revenues
The main source of our revenue is revenue from subscribers. Revenues from the provision of DTH subscription services are charged to contract customers on a monthly basis. Revenues are invoiced and recorded as part of a periodic billing cycle, and are recognized as the services are provided. Pay per view revenue is recognized when the event, movie or football match is viewed. Cable revenue is recognized as the services are provided to cable companies and is based on the number of subscribers taking Sky Channels as reported to us by the cable companies and the applicable rate card. The overriding principle followed is to match revenues with the provision of service, and accordingly, this leaves little scope for subjectivity. In fiscal 2003, subscription revenues from DTH subscribers and cable companies comprised 80% of total turnover (2002: 80%, (including revenues from DTT subscribers)).
The remaining 20% of turnover (2002: 20%) is comprised of advertising, interactive and other revenues. Recognition of these revenues takes place once the advertising is broadcast, or when the relevant goods or services have been delivered. Betting revenues, which are included in interactive revenues, represent amounts receivable in respect of bets placed on events which occur in the year.
Under UK GAAP, betting costs from internet casino betting are offset against betting revenues within turnover, and costs from all other betting are shown within operating expenses, net. Our treatment under US GAAP of costs from betting, aside from internet casino betting, differs from that under UK GAAP (see Note 28 within Item 18 for further details).
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A further aspect of revenue recognition concerns the installation fees, set-top boxes and related equipment revenues received by us (net of any discount given) when a set-top box is installed and a subscriber is connected to the Sky digital service. Under UK GAAP, these revenues are recognized on the successful completion of the installation of the set-top box, together with any associated costs such as set-top box costs, smartcard costs and installer costs. The treatment of installation fees under US GAAP differs from that under UK GAAP (see Note 28 within Item 18 for further details).
Tangible fixed assets
Tangible fixed assets represent 17% of our total assets (2002: 16%). Tangible fixed assets are stated at cost, net of accumulated depreciation and any provision for impairment. Our depreciation policy in respect of tangible fixed assets is disclosed in Note 1 within Item 18. We estimate the useful life of these assets based on their periods of expected use and this estimation is judgmental. We review the period of expected use on a regular basis. Tangible fixed asset impairment reviews are also an area requiring our judgment and requiring assessment as to whether the carrying value of our tangible fixed assets can be supported by the net present value of future cash flows derived from that tangible fixed asset using cash flow projections, and discounting using an appropriate rate. We perform impairment reviews if events or circumstances indicate that the carrying value of tangible fixed assets may not be recoverable. There have been no significant impairments in the current year.
FRS 15 specifies criteria for the recognition of tangible fixed assets, including a detailed definition of costs that are capitalized in relation to self-constructed assets. As at June 30, 2003, £120.7 million (2002: £79 million) of costs associated with our customer relationship management project had been capitalized on the balance sheet, some of which continue to be under construction. If these costs had not been capitalized they would have been expensed immediately. Capitalized costs include technology hardware and software assets, site preparation and development costs, and associated consultancy expenditures. The majority of capitalized costs are associated with the customer relationship management systems (approximately 90%). These costs are being depreciated over approximately three years for software and approximately four years for hardware. The only US GAAP difference from UK GAAP relates to the capitalization of interest costs on funds invested in the construction of major capital assets (see Note 28 within Item 18 for further details).
Amortization of program stock
A significant proportion of programming costs relates to the amortization of television program rights. Programming costs constituted 55% of operating expenses in the period (2002: 53%). Our investments in television program rights are amortized over the planned number of showings according to the type of program right, with the exception of movie rights and certain sports rights, which are discussed below. The amortization methods used are based on program genre, for example, general entertainment programs, and have been based on the repeatability and value to us of showing the program. This basis is regularly reviewed. The principle followed is to match the benefit received from the showing of the program to the cost of the program rights. Acquired movie rights are amortized on a straight-line basis over the period of the transmission rights, although where acquired movie rights provide for a second availability window, 10% of the cost is allocated to that window. Our own in-house movie productions are amortized in line with anticipated revenue over a maximum of five years. Where contracts for sports rights provide for multiple seasons or competitions, the amortization of each contract is based on anticipated revenue. Provisions are made for any program rights which are surplus to our requirements or will not be shown for any other reason. There is no difference in the Groups treatment of amortization between UK GAAP and US GAAP.
Deferred tax
We recognize deferred tax assets and liabilities in respect of timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at the balance sheet date. Deferred tax liabilities existing at the balance sheet date are provided for in full at expected future tax rates.
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We regularly review our deferred tax assets for recoverability and the expected reversals of existing timing differences. If our ability to generate sufficient future taxable income changes, or if there is a material change in the actual tax rates or time period within which the underlying timing differences become taxable or deductible, we could be required either to write-down our deferred tax assets further, resulting in an increase in our effective tax rate and an adverse impact on our financial results, or reverse the existing provision against the deferred tax assets resulting in a decrease in our effective tax rate and a positive impact on our financial results. Included within the total deferred tax recognized at June 30, 2003 is £145.7 million (2002: £11.7 million), relating to carried forward tax losses. Following a review of the forecast utilization of tax losses within the Group, and as a consequence of a planned reorganization of certain assets within the Group, the Directors consider that at June 30, 2003 there was sufficient evidence to support the recognition of these deferred tax assets on the basis that it was more likely than not that there would be suitable taxable profits against which these assets could be utilized. The treatment of deferred tax under US GAAP differs from that under UK GAAP (see Note 28 within Item 18 for further details).
ADOPTION OF NEW ACCOUNTING STANDARDS
No new UK GAAP accounting standards have been issued during fiscal 2003 or fiscal 2002. In fiscal 2001, the following standards came into force and were adopted by us:
FRS 17 Retirement benefits
This standard addresses the measurement and valuation of retirement benefit pension schemes. We operate a defined contribution plan and compliance with this standard has not given rise to any change in accounting policies or any restatement of figures reported for prior periods.
FRS 18 Accounting policies
This standard addresses the adoption of appropriate accounting policies, judged against the objectives of relevance, reliability, comparability and understandability. Compliance with this standard has not given rise to any change in accounting policies or any restatement of figures reported for prior periods.
FRS 19 Deferred tax
This standard addresses the recognition, on a full provision basis, of deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. On adoption of FRS 19 in fiscal 2001, prior year results were restated accordingly.
Details of new US GAAP accounting standards issued during the year are given in Item 18, Note 28 Adoption of new standards.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
Our Directors are as follows:
Name | Age | Position with the Company | ||||
Chase Carey
|
50 | *Director | ||||
David DeVoe
|
56 | *Director | ||||
David Evans
|
63 | **Director | ||||
Allan Leighton
|
50 | **Director (Chairman of the Audit Committee)**** | ||||
James Murdoch
|
30 | Director, Chief Executive Officer*** | ||||
Rupert Murdoch
|
72 | *Chairman | ||||
Jacques Nasser
|
55 | **Director | ||||
Gail Rebuck
|
51 | **Director | ||||
Lord Rothschild
|
67 | **Director (Deputy Chairman & Senior Independent Director)***** | ||||
Arthur Siskind
|
65 | *Director | ||||
Lord St John of Fawsley
|
74 | **Director | ||||
Martin Stewart
|
40 | Director, Chief Financial Officer | ||||
John Thornton
|
49 | **Director (Chairman of Remuneration Committee) | ||||
Lord Wilson of Dinton
|
61 | **Director |
* | Non-Executive |
** | Independent Non-Executive |
*** | James Murdoch was appointed Chief Executive Officer of the Company with effect from November 4, 2003, following Tony Balls agreed resignation from the Board of the Company on November 4, 2003. |
**** | Allan Leighton was appointed Chairman of the Audit Committee on November 14, 2003 following the retirement of Philip Bowman from the Board of the Company on November 14, 2003. |
***** | Lord Rothschild was appointed as a Director of the Company and Deputy Chairman and Senior Independent Director on November 17, 2003. |
Our senior executives who are not members of the Board of Directors are as follows:
Name | Age | Position with the Company | ||||
Dawn Airey*
|
43 | Managing Director, Sky Networks | ||||
Deanna Bates*
|
41 | Head of Legal and Business Affairs | ||||
Julian Eccles*
|
45 | Director of Corporate Communications and Corporate Affairs | ||||
Jon Florsheim*
|
43 | Managing Director, Sales, Marketing and Interactive | ||||
Richard Freudenstein*
|
38 | Chief Operating Officer | ||||
David Gormley*
|
40 | Company Secretary | ||||
Simon Post*
|
38 | Group IT and Strategy Director | ||||
Vic Wakeling*
|
60 | Managing Director, Sky Sports | ||||
Alun Webber*
|
37 | Group Director of Engineering and Platform Technology |
* | Holds less than 1% of the issued share capital in the Company. |
Further information with respect to the Directors and senior executives is set forth below.
Board of Directors
Chase Carey was appointed a Director on February 13, 2003. He has been a Non-Executive Director of News Corporation since 2002 and was an Executive Director from 1996 until 2002. He has been named President and Chief Executive Officer of Hughes Electronics Corporation (Hughes) pending the
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David DeVoe has been a Director since December 1994. Mr. DeVoe has been an Executive Director of News Corporation since October 1990; Senior Executive Vice-President of News Corporation since January 1996; Chief Financial Officer and Finance Director of News Corporation since October 1990 and Deputy Finance Director from May 1985 to September 1990. Mr. DeVoe has been a Director of News America Incorporated (NAI) since January 1991; and a Director of STAR since July 1993. He has also been a Director of FEG since 1991 and a Senior Executive Vice-President and Chief Financial Officer since August 1998. Mr. DeVoe has been a Director of NDS since 1996 and a Director of Gemstar since 2001.
David Evans was appointed a Director on September 21, 2001. He is President and Chief Executive Officer of Crown Media Holdings, Inc. He was previously President and Chief Executive Officer of Crowns predecessor, Hallmark Entertainment Networks, from March 1, 1999. Prior to that he was President and Chief Executive Officer of Tele-Communications International, Inc. (TINTA) from January 1998. He joined TINTA in September 1997 as its President and Chief Operating Officer, overseeing the day-to-day operations of the company. Prior to joining TINTA, from July 1996, Mr. Evans was Executive Vice-President of News Corporation and President and Chief Executive Officer of Sky Entertainment Services Latin America, Inc.
Allan Leighton was appointed a Director in October 1999. In March 1992 he joined ASDA Stores Limited as Group Marketing Director, in September 1996 he was appointed Chief Executive and in November 1999 he was appointed President and Chief Executive Officer of Wal-Mart Europe. He resigned all of these positions in September 2000. Mr. Leighton is Chairman of Wilson Connolly Group plc, B.H.S. Limited, Lastminute.com plc, Royal Mail Group and Cannons Group Ltd. He is Deputy Chairman of Leeds United plc and a Non-Executive Director of Dyson Ltd and of George Weston Limited.
James Murdoch was appointed a Director on February 13, 2003 and Chief Executive Officer with effect from November 4, 2003. Until his appointment as Chief Executive Officer he was Chairman and Chief Executive Officer of STAR since May 2000. With effect from November 4, 2003, Mr. Murdoch resigned as Executive Vice President of News Corporation and as a member of News Corporations Board of Directors and Executive Committee and from the Board of NDS. Mr. Murdoch serves on the Board of the YankeeNets and the Board of Trustees of the Harvard Lampoon. Mr. Murdoch attended Harvard University.
Rupert Murdoch has been a Director since 1990 when he founded British Sky Broadcasting, and was appointed Chairman in June 1999. Mr. Murdoch has been a Director of News Limited in Australia since 1953; a Director of News International plc in the UK since 1969; a Director of NAI since 1973; and Executive Director, Managing Director and Chief Executive of News Corporation since 1979. Mr. Murdoch has also served as a Director of FEG and its predecessor companies since 1985, Chairman since 1992 and Chief Executive Officer since 1995. He has also been a Director of STAR since 1993 and Gemstar since 2001.
Jacques Nasser was appointed a Director on November 8, 2002 and is Senior Partner of One Equity Partners, the private equity business of Bank One Corporation. In addition he is Chairman of Polaroid Corporation, and he serves on the International Board of Allianz AG. He served as a Member of the Board of Directors, and as President and Chief Executive Officer of Ford Motor Company from 1998 to 2001. He has received an honorary Doctorate of Technology and graduated in Business from the Royal Institute of Melbourne. Because of his significant contributions to the well-being of humanity and to the country of Lebanon, he has received the Order of the Cedar. In recognition of his work for Australian industry, as an adviser to government, and for education in the areas of technology, he was awarded an Order of Australia and a Centenary Medal.
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Gail Rebuck was appointed a Director on November 8, 2002. She is Chairman and Chief Executive of The Random House Group Ltd, the UKs largest trade publishing company. In 1982 she became a founder director of Century Publishing. Century merged with Hutchinson in 1985 and in 1989 Century Hutchinson was acquired by Random House Inc. In 1991, Ms. Rebuck was appointed Chairman and Chief Executive of Random House UK. She has been a Trustee of the Institute for Public Policy Research since 1993 and was for three years a member of the Governments Creative Industries Task Force. She is on the Board of The Work Foundation, a member of the Court of the University of Sussex and a member of the Council of the Royal College of Art. Ms. Rebuck was awarded a Commander of the British Empire in the 2000 New Years Honours List.
Lord Rothschild was appointed a Director, Non-Executive Deputy Chairman and Senior Independent Director of the Company with effect from November 17, 2003. He is Chairman of RIT Capital Partners Inc and Five Arrows Limited and founded J Rothchild Assurance which is now part of St James Place Capital. From university he joined the family bank N.M. Rothschild & Sons and subsequently ran the corporate finance department and became chairman of the executive committee, before leaving N.M. Rothschild & Sons in 1980 to develop Rothschild Investment Trust and his interests in the financial sector. Lord Rothschild attended Oxford University and in addition to his career in the world of finance, he has been involved in philanthropy and public service.
Arthur Siskind has been a Director since June 1992. Mr. Siskind has been a Senior Executive Vice-President of News Corporation since January 1996; an Executive Director and Group General Counsel of News Corporation since 1991 and an Executive Vice-President of News Corporation from February 1991 until January 1996. Mr. Siskind has also been a Director of NAI since 1991, a Director of NDS since 1996 and a Director of STAR since 1993. Mr. Siskind has also been Senior Executive Vice-President, General Counsel and a Director of FEG since August 1998. He has been a Member of the Bar of the State of New York since 1962.
Lord St John of Fawsley has been a Director since 1991. He is a Director of Blue Lion Limited and until August 2003, was the Non-Executive Chairman of Blackfriars Investments of which he was previously Chairman. He was a Director of the N.M. Rothschild Trust from 1990 to 1998. Lord St John is Chairman of the Royal Fine Art Commission Trust and was Chairman of the Royal Fine Art Commission from 1985 to 2000. He is a member of the Privy Council and holds the Order of Merit of the Italian Republic. Lord St John has held the offices of Minister of State for Education, Minister of State for the Arts, Leader of the House of Commons and Chancellor of the Duchy of Lancaster. He has also been Master of Emmanuel College, Cambridge. He has edited the works of Walter Bagehot for The Economist and is a regular commentator on television and radio.
Martin Stewart was appointed as Chief Financial Officer and a Director in May 1998. He previously served as Head of Commercial Finance from March 1996. From 1991 to 1996, Mr. Stewart was employed at Polygram, latterly at Polygram Filmed Entertainment where he was Finance Director for two years. From February 2001 to October 2003, Mr. Stewart was a Non-Executive Director of Michael Page International plc.
John Thornton has been a Director since 1994. He is Professor and Director of Global Leadership at Tsinghua University in Beijing and a Director of the Ford Motor Company, Intel Corporation and the Pacific Century Group, Inc. Mr. Thornton is Chairman of the Brookings Institution and a Director or Trustee of several educational and philanthropic organizations. With effect from July 1, 2003, Mr. Thornton retired as President and Co-Chief Operating Officer of the Goldman Sachs Group, Inc. and as a member of its Board of Directors. Mr. Thornton attended Harvard College, Oxford University and the Yale School of Management.
Lord Wilson of Dinton was appointed a Director on February 13, 2003. He has been a Non-Executive Director of Xansa plc since April 2003. Lord Wilson entered the Civil Service as an assistant principal in the Board of Trade in 1966. He subsequently served in a number of departments including 12 years in the Department of Energy where his responsibilities included nuclear power policy, the privatization of Britoil, personnel and finance. He headed the Economic Secretariat in the Cabinet Office under Mrs. Thatcher
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Alternate Directors
A Director may appoint any other Director or any other person to act as his Alternate. An Alternate Director shall be entitled to receive notice of and attend meetings of the Directors and Committees of Directors of which his appointer is a member and not able to attend. The Alternate Director shall be entitled to vote at such meetings and generally perform all the functions of his appointer as a Director in his absence.
On the resignation of the appointer for any reason the Alternate Director shall cease to be an Alternate Director. The appointer may also remove his Alternate Director by notice to us signed by the Director making or revoking the appointment. An Alternate Director shall not be entitled to fees for his service as an Alternate Director.
Rupert Murdoch, David DeVoe, Arthur Siskind and Chase Carey have appointed each of the others to act as their Alternate Director and in addition have appointed Leslie Hinton as their Alternate Director.
David Evans has appointed Allan Leighton as his Alternate Director.
Senior executives
Our senior executives who are not members of the Board of Directors or Alternate Directors are as follows:
Dawn Airey joined us in January 2003 as Managing Director of Sky Networks. She is responsible for all wholly-owned Sky Channels (with the exception of Sky Sports) and is also responsible for Sky Media (airtime sales).
Deanna Bates has served as our Head of Legal and Business Affairs since November 1989. She has decided to assume a new role within the Legal and Business Affairs department from January 1, 2004, pursuant to which she will continue to provide legal counsel to the Group on a part-time basis. Also as of January 1, 2004, James Conyers, who joined us in April 1993 and is Deputy Head of Legal and Business Affairs, will be appointed Head of Legal and Business Affairs.
Julian Eccles joined us in March 2000 and is Director of Communications and Corporate Affairs.
Jon Florsheim joined us in April 1994 as Marketing Director, Direct to Home and in October 1998, he was appointed Director of Distribution and Marketing. In August 2000, Mr. Florsheim was appointed as Managing Director, Sales, Marketing and Interactive.
Richard Freudenstein joined us in October 1999 as General Manager and was appointed as Chief Operating Officer in October 2000.
David Gormley joined us in March 1995 as Assistant Company Secretary and was appointed as Group Company Secretary in November 1997.
Simon Post joined us in April 2002 as Group IT and Strategy Director and is responsible for Skys IT platform and Technical strategy.
Vic Wakeling joined us in 1991 as Head of Football, taking over as Head of Sport in January 1994. In August 1998, he was appointed Managing Director of Sky Sports.
Alun Webber joined us in 1995 and was part of the core team which launched Sky Digital, and established the Sky Interactive venture. In April 2002, he was appointed Group Director of Engineering and Platform Technology.
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Except as set forth above, there is no arrangement or understanding between any of the above listed persons and any other person pursuant to which he or she was elected as a Director or executive officer.
EMPLOYEES
The average monthly number of full time equivalent persons (including temporary employees) employed by us during the year was as follows:
2001 | 2002 | 2003 | ||||||||||
Number | Number | Number | ||||||||||
Programming
|
1,134 | 1,131 | 1,106 | |||||||||
Transmission and related functions
|
1,071 | 1,274 | 1,383 | |||||||||
Marketing
|
173 | 193 | 199 | |||||||||
Subscriber management
|
6,472 | 5,432 | 5,381 | |||||||||
Administration
|
872 | 965 | 954 | |||||||||
Betting
|
226 | 88 | 109 | |||||||||
9,948 | 9,083 | 9,132 | ||||||||||
There has been no significant movement in the number of full time equivalent persons employed by us during the year.
There are approximately 1,115 temporary staff included within the average number of full time equivalent people employed by the group.
CORPORATE GOVERNANCE
We are committed to high standards of corporate governance and have complied throughout the fiscal year with best practice provisions of Section 1 of the UKs Combined Code on corporate governance (the Code) save that:
The roles of the Chairman and Chief Executive Officer are separate and have been so since the Company obtained its listing in 1994. In prior years the Board did not deem it necessary to appoint a Senior Independent Director and as such was not compliant with the Code. However, last year the Board confirmed its commitment to make an appointment and on November 7, 2002, Lord St John of Fawsley was appointed as the Senior Independent Director of the Company. Following the appointment of Lord Rothschild as a Director and Deputy Chairman of the Company on November 17, 2003, it was announced that he would assume the role of Senior Independent Director.
The Board currently comprises 14 Directors, made up of two Executive Directors and 12 Non-Executive Directors, eight of whom are Independent Non-Executive Directors. In the previous year the Board noted that there was not a majority of Independent Non-Executive Directors as required by the Code. Following the appointments of Gail Rebuck and Jacques Nasser at the November 2002 Annual General Meeting, the Company was compliant with the Code.
In previous years the Articles of Association of the Company permitted News Corporation or a subsidiary of News Corporation to appoint a number of Directors dependent on their shareholding in the Company. BSkyB Holdco Inc. (Holdco) a subsidiary of News Corporation had the right to appoint five Directors to the Board. The Directors so appointed were not subject to election by shareholders, nor did they have to retire by rotation as required by the Code.
At the Companys November 2002 Annual General Meeting a resolution was put to the shareholders of the Company whereby new Articles of Association would be adopted, canceling News Corporations special right to appoint Directors to the Board and the five Directors so appointed by News Corporation would be put forward for appointment by shareholders. These Directors would then be subject to the normal retirement by rotation provisions that are applicable to all other Directors. These resolutions were also conditional on another three Independent Non-Executive Directors being appointed to the Board. The
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On November 14, 2003 the Company announced that the Board had established an ad-hoc committee to be chaired by Lord Wilson of Dinton to review all applicable corporate governance requirements, codes and guidelines with a view to making recommendations to the Board as to Board processes and the composition of its committees.
All the Directors of the Company now comply with the Code requirement for Directors to retire and offer themselves for re-election at least once every three years.
Other areas of non-compliance with the Code are discussed in further detail in this Item (see Remuneration Committee and Service Contracts).
BOARD PRACTICES
The Board is scheduled to meet at least six times a year to review appropriate strategic, operational and financial matters as required. A schedule of items reserved for the full Boards approval is in place, which includes, inter alia, the approval of annual and interim results, significant transactions, agreements or arrangements between us and members of News Corporation, major capital expenditure, the business plan and yearly budget.
The Board has also delegated specific responsibilities to Board committees, notably the Audit, Remuneration and Nomination Committees. Directors receive Board and Committee papers several days in advance of Board and Committee meetings. The Board members have access to external professional advice should they require it.
The Group Executive Committee generally meets more regularly than the Board to allow prompt decision making and discussion of relevant business issues. It is chaired by the Chief Executive Officer and comprises the Chief Financial Officer and other senior executives from within the Group.
Board Committees
The Articles of Association formerly contained certain rights for Holdco, dependent on its shareholding in the Company, to appoint and remove members of any standing Committee established by the Board. Holdco had the right to appoint two members to any such Committee. These rights were also canceled upon the adoption of the new Articles of Association by a Special Resolution of the Company at the Annual General Meeting which was effective from February 13, 2003.
Remuneration Committee
The Remuneration Committee, on behalf of the Board, is responsible for recommending to the Board the framework and policy for Executive Directors remuneration and remuneration for any Executive of our Company earning a base salary in excess of £250,000 per annum. The Remuneration Committee meets not less than once a year and takes advice from the Chief Executive Officer and independent consultants as appropriate in carrying out its work.
The Committee is chaired by John Thornton, an Independent Non-Executive Director and its members are David Evans, an Independent Non-Executive Director, Jacques Nasser, an Independent Non-Executive Director, Rupert Murdoch, a Non-Executive Director and David DeVoe, a Non-Executive Director. The Company notes that the composition of the Remuneration Committee does not comply with the Code. The Board considers that Messrs Murdoch and DeVoe, along with the other members of the Committee, have provided a valuable contribution to the Remuneration Committee, and believes that they will continue to do
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Audit Committee
The Audit Committee consists exclusively of Non-Executive Directors. The Audit Committee is chaired by Allan Leighton, and its members are Gail Rebuck, David DeVoe and Arthur Siskind. It meets not less than four times a year to review all significant judgments made in the preparation of the quarterly, half yearly and annual financial results before they are submitted to the Board. The Audit Committee reviews all related party transactions with a cumulative value of £100,000 and above. It reviews with the external auditors the nature, scope and cost of their work, discusses with them the results thereof, and reviews the audit plans and findings of our internal audit function, together with any related party transactions entered into by us. The Audit Committee has the power to seek external advice as and when required. Following Philip Bowmans resignation at the Annual General Meeting on November 14, 2003, the composition of the Audit Committee no longer complies with the Code in that there is no longer a majority of Independent Directors on the committee.
The US Securities and Exchange Commission has recently adopted final rules implementing the provisions of the US Sarbanes-Oxley Act of 2002 relating to the composition and authority of audit committees of listed companies. Among other things, the rules require that all members of the audit committee be independent. Listed foreign private issuers, such as the Company, are not required to be in compliance with the rules until July 31, 2005. The SEC rules provide certain exemptions applicable to audit committees of foreign private issuers, including an exemption permitting such audit committees to include representatives of affiliates as non-voting observers. The Company intends to review the composition of its audit committee in order to be in compliance with the SEC rules prior to July 31, 2005.
Nomination Committee
On September 17, 2002, the Company established a Nomination Committee of the Board following the Boards confirmation in the previous years Annual Report that it intended to establish a Nomination Committee. On September 17, 2002, the Company appointed Lord St John of Fawsley and John Thornton as the initial Committee members, and Allan Leighton and Gail Rebuck were appointed to the Committee on September 22, 2003 in relation to the appointment by the Company of a new Chief Executive Officer (the post that was subsequently taken by James Murdoch). Lord St John acts as Chairman of the Committee. During the year, Jacques Nasser, Gail Rebuck, Lord Wilson of Dinton, James Murdoch and Chase Carey were all nominated by the Nomination Committee for appointment to the Board, and Lord Rothschild was nominated in November 2003. The Company has from time to time engaged executive search consultants to assist with the recruitment of Non-Executive Directors.
COMPENSATION
Remuneration for Executive Directors and senior executives consists of basic salary, performance-related bonuses, share incentive schemes and benefits including pension, life assurance, medical insurance and, where appropriate, company cars or company car allowances. The remuneration package is significantly weighted towards variable performance-related incentive arrangements. The policy ensures that a significant proportion of the remuneration of the Executive Directors and the senior executives is aligned with our performance, generating a strong alignment of managements interests with those of shareholders.
Basic salary
The basic salary for each Executive Director and senior executive is determined by the Remuneration Committee taking account of the recommendation of the Chief Executive Officer (other than in respect of his own salary), and information provided from external sources relative to the industry sector in which we operate.
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Senior management bonus scheme
Executive Directors and senior executives participate in a bonus scheme under which awards are made to participants at the discretion of the Remuneration Committee. The level of award is dependent on both personal performance during the relevant financial year and the performance of the Group through the achievement of commercial and strategic objectives.
Pension benefits
We provide pensions to eligible employees through the BSkyB Pension Plan, which is a defined contribution plan. Employees contribute 4% of pensionable salary into the Plan each year and the Group contributes up to a maximum of 8% of pensionable salary. Contributions into the approved Plan are subject to Inland Revenue limits. We do not currently operate a Supplementary Pension Scheme in excess of the Inland Revenue earnings cap.
During the relevant financial year we reviewed the operation of our pension arrangements for Executive Directors and senior executives whose Pension Plan contributions are restricted due to Inland Revenue limits. For these executives, in the first instance, employee contributions are reduced and where the Groups contributions need to be restricted, a cash supplement is paid to the individual equal to the shortfall in the 8% Group contribution rate.
During the year Tony Ball (who was Chief Executive Officer & Managing Director until November 4, 2003) received a one-off payment of £113,883 and a further payment of £10,421 in relation to a shortfall in his pension arrangements that resulted from historical differences between employer contributions, as capped by Inland Revenue limits, and 8% of his pensionable salary. Employer contributions of £31,863 were paid into the BSkyB Pension Plan.
Martin Stewart received a further payment of £4,213 in relation to a shortfall in his pension arrangements, as described above. Employer contributions of £27,473 were paid into the BSkyB Pension Plan.
Long Term Incentive Plan
We operate a Long Term Incentive Plan (LTIP) for Executive Directors and senior executives. An award under the LTIP in previous years comprised a retention element Core Award (which makes up 5% of the award) and a Performance Award (which makes up 95% of the award). The Core Award vests dependent on continued service with the Group for a specified period and is not subject to the performance conditions. It is intended that no future Core Awards will be made under the LTIP. The Performance Award vests, in full or in part, dependent on the satisfaction of specified performance targets. Awards are not transferable or pensionable and are made over a number of our shares determined by the Remuneration Committee. Awards may be in a variety of forms, including grants of shares, nil-priced options or market-value options with a cash bonus, all of which would have the same value to the participant.
Measurements of the extent to which performance targets have been met are reviewed by the Remuneration Committee at the date of vesting of each award, taking account of independent advice as necessary.
Awards may be made to any employee or full time Director of the Group at the discretion of the Remuneration Committee. During the year, awards under the LTIP were made to Tony Ball and Martin Stewart and other key senior executives. All previous awards made under the LTIP take the form of a market value option with a cash bonus equal to the lower of the exercise price and the share price at the date of exercise with the exception of shares awarded as part of an agreement to meet the employers National Insurance obligations, which do not attract a cash bonus. Where the market price of a share at the date of vesting is below the exercise price, awards in this form have been treated as having lapsed and participants have been eligible to receive shares for no consideration, equal to the value of their vested award.
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2002 awards
Performance measures for the 2002 LTIP focus on rewarding performance which results in maximized returns to shareholders. For the award made in 2002, the Remuneration Committee determined that the performance targets should be based on a comparison of our relative total shareholder return (TSR) performance against both the FTSE 100 and the international media and telecommunications sector. The awards only vest in full for outstanding performance against both of these comparator groups. TSR has been selected as the target as it is a clear indicator of the value created for shareholders, and is a widely accepted measure of performance.
Of the awards made in 2002, up to half of the award may vest two years after grant, subject to the achievement of the performance conditions at that date, with the remaining 50% and any unvested portion becoming eligible for vesting after three years, subject to the achievement of the performance conditions at that date. In the 2002 fiscal year Tony Ball and Martin Stewart were awarded rights over 477,155 and 238,576 shares respectively. For further details of the awards made during the year see the LTIP table on page 75.
Tony Ball has agreed to waive his unvested entitlements under the 2002 LTIP as discussed further under the section headed Service contracts.
2001 awards
50% of the award granted in November 2001 vested in full on June 30, 2003 as to 400,000 shares (Tony Ball) and 200,000 shares (Martin Stewart). The additional options which were granted in respect of the National Insurance enhancement, 54,000 (Tony Ball) and 27,000 (Martin Stewart), fell away on exercise on August 12, 2003 as the market price was below the exercise price at that date. The above vesting of the award is as a result of our Company being placed second against the media comparator group in terms of TSR for the period November 2001 to June 2003, and for the achievement of the commercial targets at June 30, 2003 using a number of key business performance measures. The vesting date for this award was amended during the year from an original vesting date of July 31, 2003 to June 30, 2003, in order to align the vesting date with our financial year. The amendment to the vesting date did not affect the proportion of the award that vested during the year. Other than for Tony Ball, the unvested portion of the award made in 2001 will vest on June 30, 2004 subject to the achievement of key business performance measures together with a comparison of our Companys relative TSR performance against the international media and telecommunications sector. The awards only vest in full for outstanding performance against both performance measures. For details of awards made during the year see the LTIP table on page 75.
Tony Ball has agreed to waive his unvested entitlements under the 2001 LTIP as discussed further under the section headed Service contracts.
2000 awards
50% of the awards granted in November 2000 vested in full on November 3, 2002 as to 400,000 shares (Tony Ball) and 200,000 shares (Martin Stewart). The additional options which were granted in respect of the National Insurance enhancement, 54,000 (Tony Ball) and 27,000 (Martin Stewart), fell away on exercise on August 12, 2003 as the market price was below the exercise price at that date. The above vesting of the award is as a result of the Company being placed first against the media comparator group in terms of TSR for the period November 2000 to November 2002, and for the achievement of the commercial targets at November 3, 2002 using a number of key business performance measures.
The balance of the awards granted in November 2000 vested in full on June 30, 2003 as to 400,000 shares (Tony Ball) and 200,000 shares (Martin Stewart). The additional options which were granted in respect of the National Insurance enhancement, 54,000 (Tony Ball) and 27,000 (Martin Stewart), fell away on exercise on August 12, 2003 as the market price was below the exercise price at that date. The above vesting of the award is as a result of our Company being placed first against the media comparator group
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Other broadly similar arrangements are operated for certain senior management not participating in the LTIP under the terms of a Key Contributor Plan (KCP). Shares used to satisfy KCP awards are acquired by the Employee Share Ownership Plan (ESOP) in the market.
On August 12, 2003, Tony Ball and Martin Stewart exercised those vested 2000 and 2001 awards described above and subsequently disposed of the ordinary shares received, being 1,200,000 and 600,000 ordinary shares respectively, at a share price of 710.5 pence per ordinary share.
Equity Bonus Plan
We operate an Equity Bonus Plan (EBP) for Executive Directors and senior executives. This plan rewards performance against key commercial measures over the financial year, with stretching targets derived from the Groups business plan. Awards were first made under the EBP in 2002 in the form of BSkyB shares, subject to performance achieved in the financial year. For the 2002 EBP, other than for Tony Ball, the awards of these shares are deferred in equal amounts for a further one and two years, subject to continuing employment. EBP awards may be made to any employee or full time Director of the Group at the discretion of the Remuneration Committee. Shares used to satisfy these awards are acquired by the ESOP in the market.
At June 30, 2003, the commercial measures for the awards made over 104,000 shares for Tony Ball and 52,000 shares for Martin Stewart in August 2002 were achieved in full. The award granted to Martin Stewart will vest in equal amounts subject to him remaining in continued employment with the Group at July 31, 2004 and July 31, 2005. For details of awards made during the year see the Equity Bonus Plan table on page 76.
Tony Ball as agreed to waive his unvested entitlement under the award made in August 2002 as discussed further under the section headed Service contracts.
Share awards were made under the LTIP and the EBP on August 13, 2003, at a nil cost per ordinary share. The maximum number of shares that may be acquired under these awards are as follows: Tony Ball 400,000 shares (LTIP), 100,000 shares (EBP); Martin Stewart 220,000 shares (LTIP), 55,000 (EBP). These awards made to Martin Stewart will vest in full in July 2006, provided that certain performance criteria are satisfied. Since these awards were made Tony Ball has agreed to waive his unvested entitlements under the LTIP and EBP as discussed further under the section headed Service contracts.
Additional Executive Bonus Scheme
We operate an Additional Executive Bonus Scheme in which beneficiaries who participate have the right to receive the growth in value on a number of notional shares. No awards have been made under this scheme since 1999 when awards were made to Tony Ball on his commencement of employment as Chief Executive Officer. These vested during the year and will lapse if not exercised within seven years from the date of grant. On exercise, we will pay a cash sum equal to accrued gains on the notional shares, subject to deduction of any tax. Accrued gains will be calculated by reference to the difference between the middle market price of the shares at the date of exercise and the price at which the notional shares were granted. Alternatively, we may elect to transfer to the holders shares of equal value to the accrued gains, in satisfaction of our obligation to pay any accrued gains.
Tony Ball had rights over 600,000 notional shares which were exercised on August 12, 2003, resulting in a gain of £288,000.
71
Share option schemes
We operate both an Approved and an Unapproved Executive Share Option Scheme (the Executive Schemes). The Company also operates a Sharesave Scheme (the Sharesave Scheme).
With the exception of ad hoc awards made to certain individuals on hiring, grants under the Executive Schemes have been made, and continue to be made, on an annual basis. Executive Directors who participate in the LTIP and EBP do not participate in the Executive Schemes annual options award. No options were granted to any of the Executive Directors under the Executive Schemes during the financial year.
We follow a policy of granting options to employees linked to salary. This is then subject to approval by the department heads who may recommend that the individual receives an additional allocation for exceptional performance. There is no limit on the number of share options that may be granted to an individual (other than for the purposes of granting Inland Revenue approved options), however, any proposal to make a one-off grant of share options of over four times salary would require the prior approval of the Remuneration Committee (irrespective of the employees level of salary). No such grant has been made to date.
The performance conditions for option awards granted before August 2002 were based on key strategic measures for our Company, including subscriber growth measures, profit before tax and earnings per share (EPS) targets.
For awards made during the year ended June 30, 2003, the performance target was based on EPS. The use of EPS as a performance measure for the awards aligns the interests of employees with shareholders. Growth in EPS will have to exceed Retail Price Index plus 3% per annum in order for awards to vest. Given that EPS was negative at the date of grant, growth is to be measured from the actual EPS achieved for the year to June 30, 2003.
Measurement of the extent to which performance targets have been met are reviewed by the Remuneration Committee at the date of vesting of each award, taking account of independent advice as necessary.
In June 2002 options over 600,000 shares were granted to Tony Ball at an exercise price of £7.35 as part of the arrangements agreed on the renewal of his service contract. The Company has agreed that these options will remain capable of exercise to the fullest extent applicable under the rules of the Executive Schemes.
Following approval by shareholders at the 2000 Annual General Meeting, options granted after November 2000, may be exercised over a phased period of years, provided that, in normal circumstances, no part of an option will be capable of exercise earlier than one year from the date of grant. Awards made during the year ended June 30, 2003 become capable of vesting over a period of four years, with one third of the award capable of vesting annually in each of years two, three and four, subject to the achievement of the performance target.
In accordance with an agreement with the Inland Revenue, we can, with the consent of the employee, pass on to the employee the cost of employers National Insurance Contributions on the exercise of share options granted to UK employees under the Unapproved Executive Share Option Scheme. In order to compensate employees for this extra cost, additional options can be granted under the Unapproved Executive Share Option Scheme to ensure that the employees, as far as possible, are no worse off than if the National Insurance cost was not passed to them.
In addition to the awards set out above, in December 2000, we made a Millennium award over 500 shares to all employees who had not been granted options or awards under the LTIP or the Executive Schemes in that year. These awards were made under the Approved Executive Share Option Scheme and become exercisable three years from the date of grant. There are no performance conditions attached to this award.
72
On August 12, 2003, Tony Ball exercised an option under the Executive Schemes as to 5,145 ordinary shares under the Approved Executive Share Option Scheme at an exercise price of £5.83 per share and 594,855 ordinary shares under the Unapproved Executive Share Option Scheme at an exercise price of £5.83 per share. These shares were subsequently sold on August 12, 2003, at a price of 710.5 pence per ordinary share.
The Sharesave Scheme is open to all employees, including Executive Directors. Options are normally exercisable after three, five or seven years from the date of grant. The price at which options are offered is not less than 80% of the middle-market price on the dealing day immediately preceding the date of invitation. It is our policy to invite employees to participate in the scheme following the announcement of the end of year results.
The number of shares which may be allocated under the Executive and Sharesave Schemes on any day shall not, when added to the aggregate of the number of shares which have been allocated in the previous 10 years under the Schemes and any other Employees Share Scheme adopted by our Company, exceed such number as represents five percent of the ordinary share capital of our Company in issue immediately prior to that day. In determining this limit no account shall be taken of any shares where the right to acquire such shares was released, lapsed or otherwise became incapable of exercise. Options, which will be satisfied by ESOP shares do not fall within these headroom limits.
Service contracts
James Murdochs service contract with the Company is currently being negotiated with the Remuneration Committee. Once negotiated his service contract will be retrospective from November 4, 2003.
Martin Stewart has an employment contract with our Company, which was deemed to commence on December 1, 1998, and shall continue unless, or until, terminated by either party giving to the other not less than 12 months notice in writing. Martin Stewarts remuneration consists of a base salary of £400,000 per annum and an annual discretionary bonus to be agreed by the Remuneration Committee. He is also entitled to other benefits, namely pension benefits, company car, life assurance equal to four times base salary and medical insurance. He also participates in the LTIP and EBP.
Mr. Ball was employed as Chief Executive Officer pursuant to an employment contract with our Company until November 4, 2003. Mr. Balls remuneration under the contract consisted of a base salary of £762,134, plus an annual cost of living provision and an annual bonus based on performance criteria agreed by the Remuneration Committee but to be no less than £500,000 annually. Mr. Ball was also entitled to other benefits, namely pension benefits, company car, life assurance equal to four times base salary and medical insurance. He also participated in the LTIP, EBP, Additional Executive Bonus Scheme and Executive Schemes.
The Company will pay Mr. Ball £10.7 million on or before May 31, 2004 in return for Mr. Ball agreeing with the Company a two-year non-compete restriction from June 1, 2004 in respect of free and pay television services in the UK and waiving all of his unvested entitlements under the LTIP and EBP. Mr. Ball has also agreed to forgo the contractual entitlement within his service contract of a one-year payment of salary, bonus and benefits that would have been paid had his contract not been extended on expiry on May 31, 2004. The Company has agreed that the Executive share options granted to Mr. Ball will remain capable of exercise following the expiry of his service contract to the fullest extent applicable under the rules of the Executive Share Option Scheme. Mr. Ball has agreed to remain available to give advice and assistance to the Company under his service agreement until the end of May 2004. Mr. Ball also resigned his position as director of the Company, effective November 4, 2003.
Non-Executive Directors
The basic fees payable to the Non-Executive Directors are set by the Board and were £36,750 each during the year. This amount may be increased on an annual basis by 5% or Retail Price Index, whichever
73
Directors emoluments
The emoluments of the Directors for the year ended June 30, 2003 are shown below:
Total | Total | Total | ||||||||||||||||||||||||||||||
emoluments | emoluments | Total | emoluments | |||||||||||||||||||||||||||||
including | including | emoluments | including | |||||||||||||||||||||||||||||
pensions | pensions | Salary | Bonus | before | pensions | |||||||||||||||||||||||||||
2001 | 2002 | and fees | schemes | Benefits | pensions | Pensions | 2003 | |||||||||||||||||||||||||
£ | £ | £ | £ | £ | £ | £ | £ | |||||||||||||||||||||||||
Executive
|
||||||||||||||||||||||||||||||||
Tony Ball(i)
|
1,964,383 | 2,049,343 | 762,134 | 1,500,000 | 41,436 | 2,303,570 | 156,167 | 2,459,737 | ||||||||||||||||||||||||
Martin Stewart
|
821,451 | 713,517 | 400,000 | 500,000 | 24,750 | 924,750 | 31,686 | 956,436 | ||||||||||||||||||||||||
Non-Executive
|
||||||||||||||||||||||||||||||||
Rupert Murdoch
|
| | 17,741 | | | 17,741 | | 17,741 | ||||||||||||||||||||||||
Philip Bowman(ii)
|
30,750 | 45,000 | 46,750 | | | 46,750 | | 46,750 | ||||||||||||||||||||||||
Chase Carey(iii)
|
| | 13,946 | | | 13,946 | | 13,946 | ||||||||||||||||||||||||
David DeVoe
|
| | 17,741 | | | 17,741 | | 17,741 | ||||||||||||||||||||||||
David Evans
|
| 27,057 | 39,994 | | | 39,994 | | 39,994 | ||||||||||||||||||||||||
Allan Leighton
|
25,500 | 39,698 | 41,750 | | | 41,750 | | 41,750 | ||||||||||||||||||||||||
James Murdoch(iv)
|
| | 13,946 | | | 13,946 | | 13,946 | ||||||||||||||||||||||||
Jacques Nasser(v)
|
| | 26,923 | | | 26,923 | | 26,923 | ||||||||||||||||||||||||
Gail Rebuck(vi)
|
| | 25,596 | | | 25,596 | | 25,596 | ||||||||||||||||||||||||
Arthur Siskind
|
| | 15,843 | | | 15,843 | | 15,843 | ||||||||||||||||||||||||
Lord St John of Fawsley
|
25,500 | 35,000 | 40,673 | | | 40,673 | | 40,673 | ||||||||||||||||||||||||
John Thornton
|
28,125 | 49,522 | 53,744 | | | 53,744 | | 53,744 | ||||||||||||||||||||||||
Lord Wilson of Dinton(vii)
|
| | 13,946 | | | 13,946 | | 13,946 | ||||||||||||||||||||||||
Leslie Hinton(viii)
|
| | | | | | | | ||||||||||||||||||||||||
Martin Pompadur(ix)
|
| | | | | | | | ||||||||||||||||||||||||
Former directors
|
120,268 | | | | | | | | ||||||||||||||||||||||||
Total emoluments
|
3,015,977 | 2,959,137 | 1,530,727 | 2,000,000 | 66,186 | 3,596,913 | 187,853 | 3,784,766 |
(i) | Tony Ball resigned as a Director of the Company on November 4, 2003. |
(ii) | Philip Bowman resigned as a Director of the Company on November 14, 2003. |
(iii) | Chase Carey was appointed a Director of the Company on February 13, 2003. |
(iv) | James Murdoch was appointed a Director of the Company on February 13, 2003. |
(v) | Jacques Nasser was appointed a Director of the Company on November 8, 2002. |
(vi) | Gail Rebuck was appointed a Director of the Company on November 8, 2002. |
(vii) | Lord Wilson of Dinton was appointed a Director of the Company on February 13, 2003. |
(viii) | Leslie Hinton resigned as a Director of the Company on February 13, 2003. |
(ix) | Martin Pompadur resigned as a Director of the Company on February 13, 2003. |
74
Executive bonuses
The amounts received by the Directors under bonus schemes for the year are shown below:
Additional | Senior | |||||||||||
Executive | Management | |||||||||||
Bonus | Bonus | |||||||||||
Scheme(i) | Scheme(ii) | Total | ||||||||||
£ | £ | £ | ||||||||||
Executive
|
||||||||||||
Tony Ball
|
| 1,500,000 | 1,500,000 | |||||||||
Martin Stewart
|
| 500,000 | 500,000 |
(i) | Additional Executive Bonus Scheme |
During the year to June 30, 2003 no shares (notional or actual) were awarded or exercised under this scheme.
(ii) | Senior Management Bonus Scheme |
SHARE OWNERSHIP
LTIP
Details of outstanding awards receivable under the LTIP are shown below:
Number of shares under award | ||||||||||||||||||||||||||||||||
Market | ||||||||||||||||||||||||||||||||
At | Granted | Exercised | At | price at | Date from | |||||||||||||||||||||||||||
June 30, | during | during | June 30, | Exercise | date of | which | Expiry | |||||||||||||||||||||||||
2002 | the year | the year | 2003 | price | exercise | exercisable | date | |||||||||||||||||||||||||
Name of Directors
|
||||||||||||||||||||||||||||||||
Tony Ball
|
454,000 | (i) | | | 454,000 | £ | 10.04 | N/A | 03.11.02 | 03.11.10 | ||||||||||||||||||||||
454,000 | (i) | | | 454,000 | £ | 10.04 | N/A | 30.06.03 | 03.11.10 | |||||||||||||||||||||||
454,000 | (i) | | | 454,000 | £ | 8.30 | N/A | 30.06.03 | 21.11.11 | |||||||||||||||||||||||
454,000 | (iv) | | | 454,000 | £ | 8.30 | N/A | N/A(iv) | N/A (iv) | |||||||||||||||||||||||
| 227,110 | (iv) | | 227,110 | £ | 5.55 | N/A | N/A(iv) | N/A (iv) | |||||||||||||||||||||||
| 227,110 | (iv) | | 227,110 | £ | 5.55 | N/A | N/A(iv) | N/A (iv) | |||||||||||||||||||||||
| 11,466 | (iv) | | 11,466 | £ | 5.60 | N/A | N/A(iv) | N/A (iv) | |||||||||||||||||||||||
| 11,466 | (iv) | | 11,466 | £ | 5.60 | N/A | N/A(iv) | N/A (iv) | |||||||||||||||||||||||
Martin Stewart
|
227,000 | (i) | | | 227,000 | £ | 10.04 | N/A | 03.11.02 | 03.11.10 | ||||||||||||||||||||||
227,000 | (i) | | | 227,000 | £ | 10.04 | N/A | 30.06.03 | 03.11.10 | |||||||||||||||||||||||
227,000 | (i) | | | 227,000 | £ | 8.30 | N/A | 30.06.03 | 21.11.11 | |||||||||||||||||||||||
227,000 | (ii) | | | 227,000 | £ | 8.30 | N/A | 30.06.04 | 21.11.11 | |||||||||||||||||||||||
| 113,555 | (iii) | | 113,555 | £ | 5.55 | N/A | 31.07.04 | 31.07.12 | |||||||||||||||||||||||
| 113,555 | (iii) | | 113,555 | £ | 5.55 | N/A | 31.07.05 | 31.07.12 | |||||||||||||||||||||||
| 5,733 | (iii) | | 5,733 | £ | 5.60 | N/A | 31.07.04 | 31.07.12 | |||||||||||||||||||||||
| 5,733 | (iii) | | 5,733 | £ | 5.60 | N/A | 31.07.05 | 31.07.12 |
Awards under the LTIP take the form of a market value option with a cash bonus equal to the lower of the exercise price and the share price at the date of exercise, with the exception of shares awarded as part of an agreement to meet the employers National Insurance obligations, which do not attract a cash bonus.
There were no gains made by the Directors under the LTIP during the year (2002: £7,777,500), gains made by the Directors between July 1, 2003 and November 27, 2003 are detailed in note (v) below.
75
Notes:
(i) | These awards vested during the year. |
(ii) | These awards will vest subject to meeting performance conditions on June 30, 2004. The vesting date for this award was amended during the year from an original vesting date of July 31, 2004, in order to align the vesting date with the Companys financial year. |
(iii) | In August 2002, awards were granted over performance periods ending in July 2004 and July 2005. |
(iv) | Tony Ball has agreed to waive his unvested entitlements under the LTIP as discussed further under the section headed Service contracts. |
(v) | On August 12, 2003, Tony Ball and Martin Stewart exercised those vested awards described above and subsequently disposed of the ordinary shares received, being 1,200,000 and 600,000 ordinary shares respectively, at a share price of 710.5 pence per ordinary share. |
(vi) | On August 13, 2003, Tony Ball was awarded 400,000 shares under the LTIP and Martin Stewart was awarded 220,000 shares at a nil cost per share. The awards made to Martin Stewart will vest in full in 2006, provided that certain performance criteria are satisfied. Tony Ball has agreed to waive his unvested entitlements under the 2003 LTIP as discussed further under the section headed Service contracts. |
Equity Bonus Plan
Number of shares under award | ||||||||||||||||||||||||||||||||
Market | ||||||||||||||||||||||||||||||||
At | Granted | Exercised | At | price at | Date from | |||||||||||||||||||||||||||
June 30, | during | during | June 30, | Exercise | date of | which | Expiry | |||||||||||||||||||||||||
2002 | the year | the year | 2003 | price(i) | exercise | exercisable(ii) | date | |||||||||||||||||||||||||
Name of Directors
|
||||||||||||||||||||||||||||||||
Tony Ball
|
| 52,000 | (iii) | | 52,000 | N/A | N/A | N/A(iii) | N/A (iii) | |||||||||||||||||||||||
| 52,000 | (iii) | | 52,000 | N/A | N/A | N/A(iii) | N/A (iii) | ||||||||||||||||||||||||
Martin Stewart
|
| 26,000 | | 26,000 | N/A | N/A | 31.07.04 | 31.07.12 | ||||||||||||||||||||||||
| 26,000 | | 26,000 | N/A | N/A | 31.07.05 | 31.07.12 |
Note:
(i) | Awards under the EBP take the form of a contingent right to acquire existing BSkyB shares at the vesting date, for nil consideration. |
(ii) | At June 30, 2003, the commercial measures for the awards made in August 2002 were achieved in full. The awards granted to Martin Stewart will vest in equal amounts subject to him remaining in continued employment with the Group at July 31, 2004 and July 31, 2005. |
(iii) | Tony Ball has agreed to waive his unvested entitlements under the EBP as discussed further under the section headed Service contracts. |
On August 13, 2003 Tony Ball was awarded 100,000 shares under the EBP and Martin Stewart was awarded 55,000 shares. The award made to Martin Stewart will vest in full in July 2006, provided that certain performance criteria are satisfied. Tony Ball has agreed to waive his unvested entitlements under the 2003 EBP as discussed further under the section headed Service contracts.
76
Executive share options
Details of all outstanding options held under the Executive Schemes and Sharesave Scheme are shown below:
Number of options | ||||||||||||||||||||||||||||||||
Market | ||||||||||||||||||||||||||||||||
At | Granted | Exercised | At | price at | Date from | |||||||||||||||||||||||||||
June 30, | during | during | June 30, | Exercise | date of | which | Expiry | |||||||||||||||||||||||||
2002 | the year | the year | 2003 | price | exercise | exercisable | date | |||||||||||||||||||||||||
Name of Directors
|
||||||||||||||||||||||||||||||||
Tony Ball
|
5,145 | (i)(iii) | | | 5,145 | £5.83 | N/A | 12.08.02 | 12.08.09 | |||||||||||||||||||||||
594,855 | (i)(iii) | | | 594,855 | £5.83 | N/A | 12.08.02 | 12.08.06 | ||||||||||||||||||||||||
600,000 | (iv) | | | 600,000 | £7.35 | N/A | 31.05.04 | (v) | 12.02.07 | |||||||||||||||||||||||
Martin Stewart
|
2,096 | (ii) | | 2,096 | | £4.62 | £6.62 | | |
Note:
(i) | The options, granted to Tony Ball on August 12, 1999, became exercisable during the year. |
(ii) | These options were granted under the Companys Sharesave Scheme and were exercised on May 22, 2003 following their maturity. Options under the Companys Sharesave Scheme are not subject to performance conditions. |
(iii) | On August 12, 2003, Tony Ball exercised an option under the Executive Schemes as to 5,145 ordinary shares under the Approved Executive Share Option Scheme at an exercise price of £5.83 per share and 594,855 ordinary shares under the Unapproved Executive Share Option Scheme at an exercise price of £5.83 per share; these shares were subsequently sold on August 12, 2003, at a price of 710.5 pence per ordinary share. |
(iv) | The Company has agreed that these options will remain capable of exercise to the fullest extent applicable under the rules of the Executive Schemes. |
(v) | On or before May 31, 2004. |
Share interests
The interests of the Directors in our ordinary share capital during the year were:
At | At | |||||||
June 30, | June 30, | |||||||
2003 | 2002 | |||||||
Lord St John of Fawsley
|
2,000 | 2,000 | ||||||
Lord Wilson of Dinton
|
486 | | ||||||
Martin Stewart
|
2,096 | |
Except as disclosed in this Item, no other Director held any interest in our share capital, including options, or in any of our subsidiaries, during the year. David Evans acquired 2,000 ADSs in the Company on November 17, 2003 representing 8,000 ordinary shares. All interests at the date shown are beneficial and except as disclosed in this Item, there have been no other changes between July 1, 2003 and November 27, 2003.
As at November 27, 2003 the ESOP was interested in 1,420,887 of our ordinary shares in which the Directors who are employees are deemed to be interested.
Approximately 30% of the Ordinary Shares of News Corporation are owned by either (i) Mr. Murdoch (ii) Cruden Investment Pty. Limited, a private Australian investment company owned by Mr. Murdoch, members of his family, including James Murdoch, his son and Chief Executive Officer of the Company, and various corporations and trusts, the beneficiaries of which include Mr. Murdoch, members of his family and certain charities, or (iii) corporations, which are controlled by trustees of settlements and trusts set up for the benefit of the Murdoch family, certain charities and other persons.
77
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Our sole outstanding class of voting securities is ordinary shares, nominal value 50p each.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of November 27, 2003, the amount and percentage of ordinary shares owned by each shareholder known to us to own more than 3% (directly and indirectly) of our ordinary shares and by our directors and officers as a group.
Amount | Percent | |||||
Identity of Person or Group | Owned | of Class | ||||
BSkyB Holdco, Inc.(1)
|
686,021,700 | 35.37% | ||||
1300 North Market Street Suite 404 Wilmington DE 19801 USA |
(1) | On June 27, 2000 as part of a group re-organization, News International Television Limited transferred its entire shareholding in us to News International plc (News International). On June 28, 2000, News International sold the entire shareholding in us to Sky Global Networks, Inc., an indirect subsidiary of News Corporation. On June 21, 2001, Sky Global Holdings, Inc. (previously Sky Global Networks, Inc.) transferred its entire shareholding in us to its subsidiary Sky Global Operations, Inc. (SGO). On April 23, 2002, SGO transferred its entire shareholding in us to Holdco, its wholly-owned subsidiary. News International (as the holder of the majority of the shares in Sky Global Holdings, Inc.) remains interested in the shares. |
There has been no significant change in the percentage ownership held by any major shareholders during the past three years, except for the following:
In July 1999, Vivendi S.A. merged with Pathé and acquired its then 12.68% direct stake and 11.80% indirect stake in us, through BSB Holdings Limited.
Between December 22, 2000, and October 3, 2001, shares of the combined stake were sold, leaving the direct stake, then registered to Vivendi Universal S.A., at 11.22% and indirect stake at 10.78%. On October 6, 2001, 21.20% of the combined stake was transferred to Deutsche Bank AG in an equity swap. Deutsche Bank AG announced it ceased to be interested in the shares on May 21, 2002.
The remaining 14,884,888 shares registered to Vivendi were sold directly onto the market by the end of March 2002 and Vivendi thereby ceased to have an interest in us.
In April 2000, we acquired a 24% stake in KirchPayTV, diluted to 22% in fiscal 2001. In return as part of the consideration payable on acquisition, KirchPayTV acquired a 4.27% stake in our Company. In June and August 2000, KirchPayTV sold its shares and thereby ceased to have a notifiable interest in us.
On October 30, 2003, 3,592,010 ADSs were held of record by 12 holders in the US and 686,046,824 ordinary shares (of which 686,021,700 were held by Holdco) were held of record by 51 US persons.
RELATED PARTY TRANSACTIONS
For details of transactions with related parties, see Note 27 to the Consolidated Financial Statements included within Item 18. The Audit Committee reviews all related party transactions with a cumulative value of £100,000 and above.
78
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Financial statements
The financial statements filed as part of this Annual Report filed on Form 20-F are included on pages F-1 to F-86.
Legal proceedings
We are not currently involved in any material legal proceedings. However, certain regulatory proceedings which could have material consequences to us are described within Item 3 and Item 4.
Dividend distributions
On May 5, 1999, it was announced that the Board had decided to suspend dividend payments to shareholders. This was done to facilitate the investment in organic growth following the launch of the Sky digital service, and to maintain gearing at efficient levels. Accordingly, no dividends have been paid or proposed since that date.
SIGNIFICANT CHANGES
Other than those events described in other Items in this Annual Report on Form 20-F, including fluctuations in borrowings and as set out in Note 31 within Item 18, there have not been any significant changes to our financial condition or results of operations since June 30, 2003. Our borrowings fluctuate by season mainly due to the effect of contractual Football Association Premier League payments. Since June 30, 2003, we drew down an additional £160 million on our March 2003 £600 million revolving credit facility (RCF), and had repaid £235 million on the same facility by November 27, 2003, reducing our RCF drawings to nil.
ITEM 9. THE OFFER AND LISTING
LISTING DETAILS AND MARKETS
Our ordinary shares are admitted to the Official List of the London Stock Exchange and our ADSs are listed on the New York Stock Exchange. The principal trading market for our ordinary shares is the London Stock Exchange. Bank of New York is the depositary of the American Depositary Receipts, which evidence the ADSs.
The following tables set forth for the periods indicated the highest and lowest middle market quotations for the ordinary shares as derived from the Daily Official List of the London Stock Exchange and the highest and lowest sales prices of the ADSs as reported on the New York Stock Exchange composite tape.
Shares | ADSs* | |||||||||||||||
(Pence) | ($) | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fiscal year ended June 30,
|
||||||||||||||||
1999
|
621 | 413 | 39 17/100 | 27 37/100 | ||||||||||||
2000
|
2,158 | 550 1/2 | 133 1/3 | 34 3/4 | ||||||||||||
2001
|
1,320 | 642 | 80 2/3 | 37 7/100 | ||||||||||||
2002
|
936 | 544 | 53 | 32 1/100 | ||||||||||||
2003
|
706 | 458 | 47 3/25 | 28 53/100 |
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Shares | ADSs* | |||||||||||||||
(Pence) | ($) | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fiscal year ended June 30,
|
||||||||||||||||
2002
|
||||||||||||||||
First Quarter
|
820 | 544 | 47 1/3 | 32 1/100 | ||||||||||||
Second Quarter
|
936 | 585 | 53 | 34 2/15 | ||||||||||||
Third Quarter
|
832 | 642 | 48 1/3 | 37 | ||||||||||||
Fourth Quarter
|
832 | 618 | 48 61/100 | 37 11/25 | ||||||||||||
2003
|
||||||||||||||||
First Quarter
|
650 | 488 | 40 | 30 3/20 | ||||||||||||
Second Quarter
|
674 1/2 | 458 | 42 | 28 53/100 | ||||||||||||
Third Quarter
|
671 | 550 | 44 13/100 | 36 3/10 | ||||||||||||
Fourth Quarter
|
706 | 624 | 47 3/25 | 39 22/25 | ||||||||||||
2004
|
||||||||||||||||
First Quarter
|
724 | 614 1/2 | 47 6/25 | 40 13/50 |
Shares | ADSs* | |||||||||||||||
(Pence) | ($) | |||||||||||||||
High | Low | High | Low | |||||||||||||
Month ended
|
||||||||||||||||
May 31, 2003
|
683 1/2 | 641 | 45 12/25 | 41 3/4 | ||||||||||||
June 30, 2003
|
706 | 654 1/2 | 47 3/25 | 43 1/5 | ||||||||||||
July 31, 2003
|
710 | 655 | 46 19/50 | 44 13/100 | ||||||||||||
August 31, 2003
|
724 | 656 | 47 6/25 | 42 3/20 | ||||||||||||
September 30, 2003
|
678 | 614 1/2 | 43 1/100 | 40 13/50 | ||||||||||||
October 31, 2003
|
644 1/2 | 614 | 44 1/5 | 41 9/100 |
* | Each ADS represents four ordinary shares (up until December 23, 2002, each ADS represented six ordinary shares). Prior year ADS figures in the above tables have been restated to reflect this change in ratio. |
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
The Memorandum of Association of the Company provides that the Companys principal object is to carry on the business of direct broadcasting by satellite and to carry out the other objects more particularly set out in Clause 4 of the Memorandum of Association of the Company.
The Memorandum and Articles of Association of the Company are registered at Companies House, Crown Way, Maindy, Cardiff, CF14 3UZ, Wales under company number 2247735.
The current Articles of the Company, contain, inter alia, provisions to the following effect:
Directors material interests
Subject to the Companies Act 1985 (and any statutory amendment, modification or re-enactment of it for the time being in force (the Act)), and provided the Director has disclosed to the other Directors the nature and extent of his material interest, a Director may be party to or in any way interested in any arrangement or transaction with the Company or in which the Company is in any way interested and he may hold and be remunerated in respect of any office or place of profit of the Company or any other company in which the Company is in any way interested and he (or any firm of which he is a member) may act in a professional capacity for the Company or any such other body and be remunerated therefore and
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Save as otherwise provided in the Articles, a Director shall be prohibited from voting at a meeting of the Directors on material matters in which he has directly or indirectly a material interest (other than an interest in shares, debentures or other securities of, or otherwise in or through the Company). A Director shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote. Subject to the provisions of the Act and every other statute for the time being in force concerning companies and affecting the Company (the Statutes), a Director shall be entitled to vote (and be counted in the quorum) in respect of any resolution at a meeting of the Directors concerning any of the following matters:
(i) | the giving of any guarantee, security or indemnity to him in respect of money lent to, or obligations incurred by him at the request of, or for the benefit of, the Company or any of its subsidiaries; | |
(ii) | the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security; | |
(iii) | any proposal concerning an offer of any shares or debentures or other securities of or by the Company for subscription, purchase or exchange in which offer he is or is to be interested as a participant in the underwriting or sub-underwriting thereof; | |
(iv) | any proposal concerning a superannuation fund or retirement benefits scheme which has been approved by or is subject to and conditional upon approval by the Board of Inland Revenue for taxation purposes; | |
(v) | any arrangement for the benefit of employees of the Company or any of its subsidiaries including but not limited to, an employees share scheme which has been approved by or is subject to and conditional upon approval by the Board of the Inland Revenue for taxation purposes and which does not accord to any Directors any privilege not accorded to the employees to whom the arrangement relates; | |
(vi) | any proposal concerning the purchase or maintenance of insurance for the benefit of Directors or persons who include Directors. |
The Articles also specifically provide that a Director is to be treated as interested in a matter the subject of a resolution if it relates to a transaction or arrangement with a person or body corporate of or in which he is an officer, employee, shareholder, consultant, advisor, representative or otherwise interested. Any question as to the right of a Director to vote, including whether he has a material interest in a material matter the subject of a resolution, may be decided by a resolution of the majority of those Directors who do not have a like interest to the Director or Directors in question.
The quorum for meetings of the Directors is currently three Directors.
Directors compensation
The ordinary remuneration of the Non-Executive Directors shall not in aggregate exceed £750,000 per annum or such higher amount as may from time to time be determined by ordinary resolution of the Company. Such remuneration shall be divisible among the Directors as they may agree or, failing agreement, equally, except that any Directors who shall hold office for part only of the period in respect of which such remuneration is payable shall be entitled only to rank in such division for a proportion of remuneration related to the period during which he has held office.
Under the current Articles the Directors may also be paid all expenses properly incurred by them in attending meetings of the Directors or any committee of the Directors or general meetings of the Company or otherwise in connection with the discharge of their duties as Directors. Any Director who holds any
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The Directors have the power to provide benefits whether by payment of gratuities, pensions or otherwise to (or to any person in respect of) any Directors or ex-Directors and for the purpose of providing any such benefits, to contribute to any scheme or fund or to pay premiums. The Directors may purchase and maintain insurance for, or for the benefit of, any persons who are or were Directors, officers, employees of the Company or an associated company or who are or were trustees of any pension fund in which employees of the Company or any such other associated company are interested.
The Directors may from time to time appoint one or more of their number to any executive office on such terms and for such periods as they may (subject to the provisions of the Statutes) determine.
Borrowing powers
The Directors shall restrict the borrowings of the Company and exercise all powers of control exercisable by the Company in relation to its subsidiary undertakings so as to secure (as regards subsidiary undertakings so far as by such exercise they can secure) that the aggregate principal amount outstanding of all money borrowed by the Group (excluding amounts borrowed by any member of the Group from any other member of the Group), shall not at any time, save with the previous sanction of an ordinary resolution of the Company, exceed an amount equal to the higher of (i) £1.5 billion and (ii) an amount equal to four times the aggregate turnover of the Group as shown in the then latest audited consolidated profit and loss accounts of the Group.
No age disqualification for Directors
No person shall be disqualified from being appointed or re-appointed as a Director and no Director shall be requested to vacate that office by reason of his attaining the age of seventy or any other age.
No share qualification for Directors
Directors shall not be required to hold any shares in the Company by way of qualification. A Director who is not a member shall nevertheless be entitled to attend and speak at any general meeting.
Dividends
Subject to the Act, the Company may by ordinary resolution declare dividends to be paid to members of the Company according to their rights, but no such dividend shall exceed the amount recommended by the Directors. If, in the opinion of the Directors, the profits of the Company available for distribution justify such payments, the Directors may from time to time pay interim dividends on the shares of such amounts and on such dates and in respect of such periods as they think fit. The profits of the Company available for distribution and resolved to be distributed shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion of the period in respect of which the dividend is paid.
No dividend shall be paid otherwise than out of profits available for distribution under the provisions of the Statutes.
Any dividend unclaimed after a period of 12 years from the date of declaration of such dividend shall be forfeited and shall revert to the Company.
Directors appointment and removal
The Directors and the Company (by Ordinary Resolution) may appoint a person who is willing to act as a Director, either to fill a vacancy or as an additional Director. A Director appointed by the Directors shall retire at the next Annual General Meeting and will put himself forward to be elected by the shareholders.
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At each Annual General Meeting, there shall retire from office by rotation:
(a) | all Directors of the Company who are subject to retirement by rotation who held office at the time of the two preceding Annual General Meetings and who did not retire by rotation at either of them; and | |
(b) | such additional number of Directors as shall, when aggregated with the number of Directors retiring under paragraph (a) above, equal either one third of the number of Directors, in circumstances where the number of Directors is three or a multiple of three, or in all other circumstances, the whole number which is nearest to but does not exceed one-third of the number of Directors (the Relevant Proportion) provided that: |
(i) | the provisions of this paragraph (b) shall only apply if the number of Directors retiring under paragraph (a) above is less than the Relevant Proportion; and | |
(ii) | subject to the provisions of the Act and to the following provisions of these Articles, the Directors to retire under this paragraph (b) shall be those who have been longest in office since their last appointment or reappointment, but as between persons who became or were last reappointed Directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot. |
Winding-up
If the Company commences liquidation, the liquidator may, with the sanction of an extraordinary resolution of the Company and any other sanction required by the Act and the Insolvency Act 1986:
(i) | divide among the members in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and, for that purpose, set such values as he deems fair upon any property to be divided and determine how the division shall be carried out between the members; and | |
(ii) | vest the whole or any part of the assets in trustees upon such trusts for the benefit of members as the liquidator shall think fit, |
but no member shall be compelled to accept any share or other assets upon which there is any liability.
Redemption
None of the shares of the Company has been issued on the basis that it may be redeemed or is liable to be redeemed at the option of the shareholders or the Company. The Company is therefore under no obligation to create a sinking fund or redemption reserve. However, subject to the provisions of the Statutes, the Company may purchase any of its own shares (including any redeemable shares).
Further capital calls
The Directors may only make calls upon the members in respect of amounts unpaid on the shares (whether in respect of nominal value or premium).
Variation of rights
Subject to the Act, the rights attached to any class of shares may (unless otherwise provided by the terms of the issue of shares of that class) be varied with the consent in writing of the holders of three-quarters in nominal value of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the shares of the class (but not otherwise) and may be so varied either whilst the Company is a going concern or during or in contemplation of a winding-up. At every such separate general meeting the necessary quorum shall be at least two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class (but so
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General meetings
The Directors may call general meetings whenever and at whatever time and location they so determine. At a general meeting called to pass a special resolution at least 21 clear days notice must be given, and all other extraordinary general meetings shall be called by at least 14 clear days notice. Two persons entitled to vote upon the business to be transacted shall be a quorum.
Subject to any terms as to voting upon which any shares may be issued and to the provisions of the Articles, every member present in person shall have one vote on a show of hands and on a poll every member present in person or by proxy shall have one vote for each share of which he is the holder. No member shall be entitled to vote in respect of any share held by him if any call or other sum payable by him to the Company remains unpaid.
If a member or any person appearing to be interested in shares has been duly served with a notice under section 212 of the Act and is in default for the prescribed period in supplying to the Company information thereby required, unless the Directors otherwise determine, the member shall not be entitled to vote at any general or class meeting of the Company in respect of the shares in relation to which the default occurred.
Limitations on non-resident or foreign shareholders
English law and the Memorandum and Articles of Association of the Company treat those persons who hold shares and are neither UK residents nor nationals in the same way as UK residents or nationals. They are free to own, vote on and transfer any shares they hold.
Transfer of shares
Any member may transfer all or any of his shares by instrument of transfer in the usual common form or in any other form which the Directors may approve. The instrument of transfer of a share shall be signed by or on behalf of the transferor and, except in the case of fully-paid shares, by or on behalf of the transferee.
Where any class of shares is for the time being a participating security, title to shares of that class which are recorded as being held in uncertificated form, may be transferred by the relevant system concerned. The Directors may in their absolute discretion and without giving any reason refuse to register any transfer of shares (not being fully paid shares). The Directors may also refuse to register a transfer of shares unless the instrument of transfer:
(i) | is lodged at the transfer office accompanied by the relevant share certificate(s); | |
(ii) | is in respect of only one class of share; and | |
(iii) | is in favor of not more than four persons jointly. |
The Directors of the Company may refuse to register the transfer of a share in uncertificated form to a person who is to hold it thereafter in certificated form in any case where the Company is entitled to refuse (or is excepted from the requirements) under the Uncertificated Securities Regulations 2001 to register the transfer; and they may refuse to register any such transfer in favor of more than four transferees. The Directors may refuse to register any transfer if it is their opinion that such transfer would or might (i) prejudice the Groups right to hold, be awarded or granted or have renewed or extended, any license granted under the Broadcasting Acts or (ii) give rise to or cause a variation to be made to, or a revocation or determination of, any such license by the ITC.
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If the Directors determine following registration of a transfer of shares:
(i) | and following consultation with the ITC that, inter alia, by reason of the interest of a person in any shares of the Company transferred, the ITC may vary, revoke, determine or refuse to award, grant, renew or extend a license granted under the Broadcasting Acts; or | |
(ii) | that any person has an interest in the shares of the Company which, inter alia, makes the Company a disqualified person under the Broadcasting Acts or which contravenes, or would cause a contravention of, the restrictions set out in Parts III, IV or V of Schedule 2 to the Broadcasting Act 1990 or any order made pursuant to the Broadcasting Acts or such other restrictions as may be applied by the ITC from time to time to disqualify certain persons or bodies from having interests in such a license and to restrict the accumulation of interests in relevant services as defined in Schedule 2 to the Broadcasting Act 1990, |
the Directors shall be entitled to serve written notice (a Disposal Notice) on the relevant transferee in respect of the shares transferred stating that they have so determined, specifying their grounds in general terms and calling for the disposal of such transferred shares as are specified in the Disposal Notice within 21 days of the date of such notice or such longer period as the Directors may consider reasonable and which they may extend. If the Disposal Notice is not complied with to the satisfaction of the Directors, they shall, so far as they are able, dispose of the relevant shares for the best price reasonably obtainable in all the circumstances. In addition, a member who has been served with a Disposal Notice shall not, with effect from the expiration of such period as the Directors shall specify in such notice (not being longer than 30 days from the date of service of the notice), be entitled to receive notice of, or to attend or vote at, any general meeting of the Company by reason of his holding the shares specified in the Disposal Notice.
Untraced shareholders
The Company shall be entitled to sell at the best price reasonably obtainable the shares of a member or the shares to which a person is entitled by transmission if, during a period of 12 years, no check for amounts payable in respect of the share has been cashed and no communication has been received by the Company from the member or the person entitled by transmission and at least three dividends have been paid in relation to such shares during those 12 years and no such dividend has been claimed and, within a further period of three months from the date of advertisements giving notice of its intention to sell such shares placed after the expiry of the period of 12 years, the Company has not received any communication from the member or the person entitled by transmission and notice has been given by the Company to the London Stock Exchange of its intention to make such sale. The Company shall be obligated to account to the former member or person entitled by transmission for the net proceeds of the sale of such shares but no trust shall be created in respect of the debt and no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds.
Alteration of share capital
The authorized share capital of the Company currently consists of 3,000,000,000 ordinary shares of 50p each.
The Company may from time to time by ordinary resolution:
(i) | increase its share capital by such sum to be divided into shares of such amounts as the resolution shall prescribe; | |
(ii) | consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; | |
(iii) | cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so canceled; or |
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(iv) | sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association (subject, nevertheless, to the provisions of the Statutes). |
Subject to the provisions of the Act, the Company may reduce its share capital redemption reserve, share premium account or other undistributable reserve in any way.
At the Annual General Meeting of the Company held on November 14, 2003 shareholders approved a special resolution, authorizing the Directors to reduce the Companys share premium account by £1.120 billion. In addition to the approval of the reduction by shareholders the Company requires the approval of the High Court, for which it has applied. Whilst it is not possible to state with any certainty when this will occur, it is currently anticipated that the reduction will become effective by the end of the current calendar year.
Issue of shares
Subject to the provisions of the Statutes relating to authority, pre-emption rights and otherwise and of any resolution of the Company passed in general meeting, all unissued shares shall be at the disposal of the Directors and they may allot (with or without conferring a right to renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.
Disclosure of interests in the Companys shares
There are no provisions in the Articles whereby persons acquiring, holding or disposing of a certain percentage of the Companys shares are required to make disclosure of their ownership percentage, although there are such requirements under the Companies Act.
The basic disclosure requirement under Sections 198 to 211 of the Companies Act imposes upon a person interested in the shares of the Company a statutory obligation to notify the Company in writing and containing details set out in the Companies Act where:
(a) | he acquires (or becomes aware that he has acquired) or ceases to have (or becomes aware that he has ceased to have) an interest in shares comprising any class of the Companys issued and voting share capital; and | |
(b) | as a result, either he obtains, or ceases to have: |
(i) | a material interest in 3%, or more; or | |
(ii) | an aggregate interest (whether material or not) in 10%, or more of the Companys voting capital; or | |
(iii) | the percentage of his interest in the Companys voting capital remains above the relevant level and changes by a whole percentage point. |
A material interest means, broadly, any beneficial interest (including those of a spouse or a child or a step-child, those of a company which is accustomed to act in accordance with the relevant persons instructions or in which one third or more of the votes are controlled by such person and certain other interests set out in the Companies Act) other than those of an investment manager or an operator of a unit trust/ recognized scheme/ collective investment scheme/open-ended investment company.
Sections 204 to 206 of the Companies Act set out particular rules of disclosure where two or more parties (each a concert party) have entered into an agreement to acquire interests in shares of a public company, and the agreement imposes obligations/ restrictions on any concert party with respect to the use, retention or disposal of the shares in the company and an acquisition of shares by a concert party pursuant to the agreement has taken place.
Under Section 212 of the Companies Act, the Company may by notice in writing require a person that the Company knows or has reasonable cause to believe is or was during the preceding three years
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Sections 324 to 329 of the Companies Act further deal with the disclosure by persons (and certain members of their families) of interests in shares or debentures of the companies of which they are directors and certain associated companies.
There are additional disclosure obligations under Rule 3 of the Substantial Acquisitions Rules where a person acquires 15% or more of the voting rights of a listed company or when an acquisition increases his holding of shares or rights over shares so as to increase his voting rights beyond that level by a whole percentage point. Notification in this case should be to the Company, the Panel on Takeovers and Mergers and the UK Listing Authority through one of its approved regulatory information services no later than 12 noon on the business day following the date of the acquisition.
The City Code on Takeovers and Mergers also contains strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also to their respective associates during the course of an offer period.
MATERIAL CONTRACTS
We have entered into the following contracts outside the ordinary course of business during the two year period immediately preceding the date of this Annual Report.
Acquisition of British Interactive Broadcasting Holdings Limited (BiB)
On July 17, 2000, we announced an agreement with British Telecommunications plc (BT), HSBC Bank plc (HSBC) and Matsushita Electric Europe (Headquarters) Limited (Matsushita), to increase our holding in BiB from 32.5% to 80.1%. Completion of the transaction was subject, inter alia, to regulatory approval. The acquisition was completed on May 9, 2001.
Following our agreement to meet BiBs future funding requirements, BTs holding was diluted from 32.5% to 19.9%. BT was granted a one-off option to exit, on the same pro-rata terms (including deferred and contingent consideration) as those given to HSBC and Matsushita, at any time. We acquired BTs holding on June 28, 2001, increasing our holding in BiB from 80.1% to 100%.
Consideration was satisfied by the issue to HSBC, Matsushita and BT of 39.7 million new BSkyB shares and deferred consideration estimated at £253 million, through the issue of new BSkyB shares or loan notes in November 2002. In addition, if the valuation of BiB, based on agreed criteria, was £3 billion or greater, either at 30 or 36 months from the date of the purchase agreement, an additional estimated £253 million would be payable to HSBC and Matsushita through the issue of new BSkyB shares or loan notes.
On November 11, 2002, we issued 43.2 million shares with a fair value of £253.1 million to HSBC, Matsushita and BT in respect of the deferred consideration. We also agreed certain other terms, including the waiver of the selling shareholders rights under the earn out provisions.
Revolving Credit Facilities
In March 2003 the Group entered into a new £600 million RCF and voluntarily cancelled £100 million of the £300 million March 2001 RCF. These agreements have been included as exhibits as part of this Annual Report on Form 20-F and are also described in note 20 within Item 18.
EXCHANGE CONTROLS
There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest and other payments to non-resident holders of our securities, except as otherwise described under Taxation below.
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Under English law (and the Companys Memorandum and Articles of Association), persons who are neither residents nor nationals of the UK may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals.
TAXATION
The discussion summarizes basic UK and US tax consequences of the acquisition, ownership and disposition of shares and shares represented by ADSs evidenced by ADRs by a US Holder. For purposes of this summary, a US Holder is a beneficial owner of shares or ADSs who is (i) an individual who is a citizen or resident of the US for US income tax purposes, (ii) a corporation organized under the laws of the US or any state thereof or the District of Columbia, (iii) a domestic partnership, (iv) an estate the income of which is subject to US federal income taxation regardless of its source or (v) a trust if a court within the US is able to exercise primary supervision over the administration of the trust and one or more US persons have the authority to control all substantial decisions of the trust. However, in the case of a partnership, estate or trust, this discussion applies only to the extent such entitys income is taxed to the entity or its partners or beneficiaries on a net income basis under US tax law. This summary is based (i) upon current UK law, UK Inland Revenue practice, (ii) upon the US Internal Revenue Code, Treasury Regulations, cases and Internal Revenue Service rulings, all of which are subject to change, possibly with retroactive effect, (iii) upon the UK-US Income Tax Convention currently in effect (the Treaty) and (iv) in part upon representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement and any related agreement will be performed in accordance with their respective terms.
The summary of UK tax consequences relates to the material aspects of the UK taxation position of US Holders and does not address the tax consequences to a US Holder (i) that is resident (or, in the case of an individual, ordinarily resident) in the UK for UK tax purposes, (ii) whose holding of shares or ADSs is effectively connected with a permanent establishment in the UK through which such US Holder carries on business activities or, in the case of an individual who performs independent personal services, with a fixed base situated therein, or (iii) that is a corporation which alone or together with one or more associated companies, controls directly or indirectly, 10% or more of the voting stock of the Company. The discussion set forth below is only a general summary and does not purport to be a technical analysis nor a description of all possible tax consequences.
The summary of US tax consequences may not completely or accurately describe tax consequences to all US Holders. For example, special rules may apply to US Holders of stock representing 10% or more of the total combined voting power of the Company, US expatriates, insurance companies, tax-exempt organizations, banks and other financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, traders in securities that elect to mark-to-market, and persons holding their shares or ADSs as part of a straddle, hedging or conversion transaction, among others.
Tax consequences to each US Holder will depend upon the particular facts and circumstances of each such holder. Accordingly, each person should consult with his own professional advisor with respect to the tax consequences of his ownership and disposition of shares or ADSs. This summary does not discuss any tax rules other than UK tax and US federal income tax rules. The UK and US tax authorities and courts are not bound by this summary and may disagree with its conclusions.
US Holders of ADSs will be treated as owners of the shares underlying the ADSs. Accordingly, except as noted, the UK tax consequences discussed below apply equally to US Holders of ADSs and shares.
Taxation of dividends
Under current UK taxation legislation, no tax is withheld from dividend payments by the Company and generally no UK tax is payable by Eligible US Holders on dividends declared on the shares.
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For dividends paid on or after April 6, 1999, Eligible US Holders ceased to be entitled to receive a UK/US Double Tax Treaty Payment in relation to dividends declared on the shares because of reductions in the tax credit attaching to dividends provided for in the Finance (No. 2) Act 1997.
US Holders who are not resident or ordinarily resident for tax purposes in the UK with no other source of UK income are not required to file a UK income tax return.
For US federal income tax purposes, the gross amount of a dividend will be included in a US Holders gross income as dividend income when payment is actually or constructively received by the US Holder in the case of shares or the Depositary in the case of ADSs, to the extent they are paid out of the Companys current or accumulated earnings and profits as calculated for US federal income tax purposes (subject to the discussion below under United States passive foreign investment company rules). Dividends paid by the Company will not give rise to any US dividends received deduction. Dividends will generally constitute foreign source passive income for foreign tax credit purposes. See US tax rate change for the rate of US tax applicable to qualified dividend income.
Also for US federal income tax purposes, the amount of any dividend paid in non-US currency will be equal to the US dollar value of such currency on the date the dividend is included in income, regardless of whether the payment is in fact converted into US dollars. A US Holder will generally be required to recognize US source ordinary income or loss when such US Holder sells or disposes of non-US currency. The US Holder will have a tax basis in this non-US currency equal to the US dollar value of the currency on the date the dividend is included in the US Holders income. This foreign currency gain or loss will generally be US source ordinary income or loss.
To the extent that any distribution paid exceeds the Companys current and accumulated earnings and profits as calculated for US federal income tax purposes, the distribution will be treated as follows:
(i) | first, as a tax-free return of capital, which will cause a reduction in the adjusted tax basis of the US Holders shares or ADSs. This adjustment will increase the amount of gain, or decrease the amount of loss, that such US Holder will recognize on a later disposition of those shares or ADSs; and | |
(ii) | second, the balance of the dividend in excess of the adjusted tax basis in a US Holders shares or ADSs will be taxed as a capital gain recognized on a sale or exchange. |
Taxation of capital gains
US Holders who are not resident or ordinarily resident for tax purposes in the UK will not be liable for UK tax on capital gains realized on the disposal of their ADSs or shares unless such ADSs or shares are used, held or acquired for the purposes of a trade or professional vocation carried on in the UK through a branch or agency.
The surrender of ADSs in exchange for shares will not be a taxable event for the purposes of UK corporation tax or UK capital gains tax. Accordingly, US Holders will not recognize any gain or loss for such purposes upon such surrender.
In general, for US federal income tax purposes, a US Holder will recognize capital gain or loss if such US Holder sells or exchanges shares or ADSs, provided that such shares or ADSs are capital assets in the hands of such US Holder (subject to the discussion below under United States passive foreign investment company rules). Any gain or loss will generally be US source gain or loss. For an individual, any capital gain will generally be subject to US federal income tax at preferential rates if the individual has held the shares or ADSs for more than one year. See US tax rate change for the rate of US tax applicable to long-term capital gains.
US tax rate change
Under recently enacted legislation, which is generally effective for tax years beginning after December 31, 2002 through tax years beginning on or before December 31, 2008, the individual tax rates
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United States passive foreign investment company rules
The Company believes that it will not be treated as a passive foreign investment company (PFIC) for US federal income tax purposes for the current taxable year or for future taxable years. However, an actual determination of PFIC status is factual and cannot be made until the close of the applicable taxable year. The Company will be a PFIC for any taxable year in which either:
(i) | 75% or more of its gross income is passive income; or | |
(ii) | its assets that produce passive income or that are held for the production of passive income amount to at least 50% of the value of its total assets on average. |
For purposes of this test, the Company will be treated as directly owning its proportionate share of the assets, and directly receiving its proportionate share of the gross income, of each corporation in which the Company owns, directly or indirectly, at least 25% of the value of the shares of such corporation.
If the Company were to become a PFIC, the tax applicable to distributions on shares or ADSs and any gains a US Holder recognizes on disposition of shares or ADSs may be less favorable to such US Holder. Accordingly, each person should consult with his own professional advisor regarding the PFIC rules.
Inheritance and gift taxes
An individual who is domiciled in the US for the purposes of the United Kingdom-United States Estate and Gift Tax Convention (the Estate Tax Treaty) and who is not a national of the UK for the purposes of the Estate Tax Treaty will generally not be subject to UK inheritance tax in respect of the shares or ADSs on the individuals death or on a gift of the shares or ADSs during the individuals lifetime provided that any applicable US federal gift or estate tax liability is paid, unless the shares or ADSs are part of the business property of a permanent establishment of an enterprise in the UK or pertain to a fixed base in the UK of an individual used for the performance of independent personal services. Where the ADSs or shares have been placed in trust by a settlor who, at time of settlement, was a US Holder, the ADSs or shares will generally not be subject to UK inheritance tax unless the settlor, at the time of settlement, was not domiciled in the US and was a UK national. In the exceptional case where the shares are subject both to UK inheritance tax and to US federal gift or estate tax, the Estate Tax Treaty generally provides for the tax paid in the UK to be credited against tax paid in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set out in that Treaty.
United Kingdom stamp duty and stamp duty reserve tax
A transfer for value of the shares executed on or after October 1, 1999 will generally be subject to UK ad valorem stamp duty, normally at the rate of 0.5% rounded up (if necessary) to the nearest multiple of £5 of the amount or value of the consideration given for the transfer. Stamp duty is normally a liability of the purchaser.
An agreement to transfer shares or any interest therein for money or moneys worth will normally give rise to a charge to stamp duty reserve tax (SDRT) at the rate of 0.5% of the amount or value of the consideration for the shares or interest therein (with no rounding up or down). However, if a duly stamped
90
Stamp duty or SDRT charges at the rate of 1.5% (in the case of both stamp duty and SDRT) of the amount or value of the consideration, or in some circumstances, the value of the shares, may arise on a transfer of shares to the Depositary or the Custodian of the Depositary or to certain persons providing a clearance system (or their nominees or agents) and will be payable by the Depositary or such other persons. It is possible for persons operating clearance services to make an election to the Inland Revenue subject to certain conditions, pursuant to which, instead of the 1.5% stamp duty or SDRT charge applying on entry as described above, a 0.5% SDRT charge would apply to transfers of securities made within the system.
In accordance with the terms of the Deposit Agreement, any tax or duty payable by the Depositary or the Custodian of the Depositary on any subsequent deposit of shares will be charged by the Depositary to the holder of the ADS or any deposited security represented by the ADS.
No UK stamp duty will be payable on the acquisition or transfer of an ADS or beneficial ownership of an ADS, provided that the ADS and any separate instrument of transfer or written agreement to transfer remains at all times outside the UK, and provided further that any instrument of transfer or written agreement to transfer is not executed in the UK. An agreement to transfer ADSs will not give rise to a liability for SDRT.
Any transfer for value of the underlying shares represented by ADSs (which will exclude a transfer from the Custodian of the Depositary or the Depositary to an ADS holder on a cancellation of the ADSs), may give rise to a liability to UK stamp duty. The amount of UK stamp duty payable is generally calculated at the rate of 0.5% rounded up (if necessary) to the nearest multiple of £5 of the amount or value of the consideration on a transfer from the Custodian of the Depositary to a US Holder or registered holder of an ADS. Upon cancellation of the ADS, however, only a fixed UK stamp duty of £5 per instrument of transfer will be payable.
United States information reporting and backup withholding
Dividend payments on the shares or ADSs and proceeds from the sale, exchange or other disposition of the shares or ADSs may be subject to information reporting to the Internal Revenue Service and possible US backup withholding at a rate of 28%. US federal backup withholding generally is imposed on specified payments to persons that fail to furnish required information. Backup withholding will not apply to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding. Any US persons required to establish their exempt status generally must file Internal Revenue Service Form W-9, Request for Taxpayer Identification Number and Certification.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a US Holders US federal income tax liability. A US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information.
DOCUMENTS ON DISPLAY
Certain documents referred to in this annual report can be inspected at our offices at Grant Way, Isleworth, Middlesex.
91
We are subject to the periodic reporting and other informational requirements of the US Securities Exchange Act. Under the Exchange Act, we are required to file reports and other information with the US Securities and Exchange Commission. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information regarding the SECs Public Reference Room by calling the SEC at 1-800-SEC-0330. Our public filings with the SEC are also available on the website maintained by the SEC at www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
Our treasury function provides us with a centralized service for raising finance for the Groups operations, together with managing foreign exchange, interest rate and counter-party risks. Treasury operations are conducted within a framework of policies and guidelines authorized and reviewed by both the Audit Committee and the Board, who receive regular updates of treasury activity. A further quarterly review of Treasury activities and controls is carried out by the Treasury Committee. Derivative instruments are transacted for risk management purposes only, and the internal control environment is reviewed periodically by our internal audit function. The following discussions address market risk only and do not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk.
Our principal market risks are changes in interest rates and currency exchange rates, which arise both from our sources of finance and from our operations. Following evaluation of those positions, we selectively enter into derivative financial instruments to manage these exposures. We use interest rate swaps to hedge interest rate risks, forward foreign exchange agreements to hedge transactional currency exposures and cross currency swaps to hedge exposures on long term foreign currency debt.
It is our policy that all hedging is to cover known risks and that no trading in financial instruments is undertaken. The amount of cash that can be placed with any one institution is restricted to ensure counter-party risks are minimized, and regular and frequent reporting to management is required for all transactions and exposures.
We have formulated our policies for hedging without regard to US GAAP requirements on hedge accounting, and therefore our existing derivative arrangements did not qualify for hedge accounting under US GAAP during the current fiscal year.
Interest rate management
We have financial exposures to both sterling and US dollar interest rates, arising primarily from our bank borrowings and long-term bonds. We manage our exposures by borrowing at fixed and variable rates of interest and by using interest rate swaps and cross-currency swaps to manage exposure to interest rate fluctuations. Under our interest rate swaps, we agree with counter-parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional amount of our sterling borrowings. Under our cross-currency swaps we agree with counter-parties to exchange, at specified intervals, fixed amounts of sterling for fixed amounts of US dollars, thereby fixing the sterling cost of servicing our US dollar-denominated bonds. Our debt exposure is entirely denominated in sterling after cross currency swaps are taken into account. At June 30, 2003, the analysis of aggregate net borrowings in its core currencies was US dollar 84% and sterling 16% (June 30, 2002: US dollar 62% and sterling 38%).
At June 30, 2003, 93% of our borrowings were at fixed rates after taking account of interest rate swaps (June 30, 2002: 87%). The fair value of both interest rate and cross-currency swaps held as of June 30, 2003 was approximately £7.0 million in the Groups favor (June 30, 2002: £60.2 million in the Groups favor).
92
At June 30, 2003, £75.0 million was drawn down on the Groups RCFs (June 30, 2002: £500.0 million). All of the drawings at June 30, 2003 were made under the March 2003 £600 million facility, discussed in more detail in Note 20 within Item 18. The interest rate payable on this £600 million facility is not dependent on the Groups credit rating. Under the terms of the March 2003 £600 million facility interest accrues at rates between 0.6% and 1.125% per annum above LIBOR, depending upon our Net Debt: EBITDA leverage ratio (as defined in the loan agreement). Until June 2004 the rate is fixed at 1.125% and shall not fall below 0.7% per annum above LIBOR prior to March 2006. No funds were drawn on the March 2001 £200 million facility at June 30, 2003 (June 30, 2002: nil).
All of the drawings at June 30, 2002 were made under the July 1999 £750 million facility, discussed in more detail in Note 20 within Item 18. Under this facility, interest accrued at rates between 0.5% and 1.4% per annum above LIBOR dependant upon credit rating. The July 1999 £750 million facility was voluntarily cancelled in March 2003.
At June 30, 2003, based upon the total amount of debt outstanding under the Groups RCF, our annual interest charge would be unaffected by any change to the Groups credit rating in either direction. At June 30, 2002, based upon the total amount of debt outstanding under the Groups RCF, our annual interest charge would have increased by approximately £2.0 million (40 basis points) if the Groups credit rating with either Moodys Investors Services or Standard and Poors Ratings Services had been downgraded by one credit rating category below a long-term debt rating of Ba1/BB+. If the Groups credit rating had been upgraded by one credit rating category the annual interest charge would have been reduced by approximately £1.5 million (30 basis points).
To ensure continuity of funding, our policy is to ensure that available funding matures over a period of years. At June 30, 2003, 47% of our available funding was due to mature in more than five years (2002: 42%).
At June 30, 2003, the Group had outstanding interest rate swap agreements with notional principal amounts totaling £1,154.4 million compared to £1,454.4 million at June 30, 2002.
At June 30, 2003, based upon the total amount of debt outstanding under the Groups RCF, a one percentage point increase in interest rates would increase the Groups annual net interest expense by £0.8 million (2002: £2.0 million). The Groups exposure to interest rate fluctuations has reduced in line with the decrease in net debt during the current year.
Currency exchange rates
Our revenues are substantially denominated in pounds sterling, although a significant proportion of operating costs are denominated in US dollars. In fiscal 2003, 15.0% of operating costs (£423.7 million) were denominated in US dollars (fiscal 2002: 15.2% (£393.0 million)). These costs relate mainly to our long-term programming contracts with US movie licensors.
We currently manage our US dollar/ pound sterling exchange risk exposure by entering into forward foreign exchange agreements for up to 18 months ahead, which substantially hedge our future foreign exchange liabilities in that period. It is our policy that foreign exchange transactions are limited to fixed price instruments.
Our primary euro exposure arises as a result of revenues generated from our subscribers in Ireland, being approximately 3% of total revenue in fiscal 2003. These euro-denominated revenues are offset to a certain extent by euro-denominated costs, relating mainly to certain transponder rentals, which result in a euro surplus. During the year, surplus euros were exchanged for sterling on currency spot markets. In the year to June 30, 2003, euro 59.0 million (2002: euro 55.0 million) has been exchanged at spot rates. A further euro 30.0 million has been retained to meet obligations under forward foreign exchange contracts for the purchase of Swiss francs (see below).
During the period, we acquired the pay TV rights to certain UEFA Champions League football matches from the 2003/04 season to the end of the 2005/06 season. Payments in respect of these rights will be
93
Although these financial instruments and revenue flows can mitigate the effect of short-term fluctuations in exchange rates, there can be no effective or complete hedge against long-term currency fluctuations.
All US dollar-denominated forward foreign exchange agreements and similar financial instruments entered into by us are in respect of firm commitments. It is our policy to hedge in excess of 90% of dollar-denominated expenses for a period of up to 18 months forward. At June 30, 2003, we had entered into 129 forward contracts for a total value of US$902.5 million (2002: US$920.0 million), with a maturity of up to 18 months, to cover commitments for the supply of programming. These contracts, which are individually for less than US$12.5 million (2002: US$12.5 million), are with a variety of counter-parties.
Some £226.2 million of these forward contracts are to hedge liabilities in respect of available programming and hence these liabilities are recorded on the balance sheet at the hedged rate. The remainder is to hedge future payments for programs yet to become available and is therefore disclosed within commitments rather than being recorded within liabilities (see Note 25 within Item 18).
Investments in overseas operations are consolidated or equity accounted for accounting purposes by translating values into sterling, and therefore fluctuations in currency exchange rates affect the sterling values recorded in our financial statements. These investments do not give rise to any foreign currency cash flows. Exchange differences arising on translation of the opening net assets and results of the overseas subsidiaries and joint ventures and on foreign currency borrowings, to the extent that they hedge the Groups investment in these operations, are dealt with through reserves.
Since it is our policy that all anticipated foreign currency exposures are substantially hedged in advance of the fiscal year in which the exposure occurs, using fixed price instruments only, the impact on the Groups annual profit of a 10% movement in sterling against all currencies in which the Group has significant transactions is considered to be negligible for the forthcoming year, which is consistent with the position at the prior year end.
The accounting policies in respect of market risk sensitive instruments are disclosed in Notes 1, 21 and 25 within Item 18. The accounting policies in respect of market risk sensitive instruments under UK GAAP vary in certain significant respects from US GAAP as disclosed in Note 28 within Item 18.
The disclosure on market risk included in Item 11 in the current year has been changed to sensitivity analysis disclosures from tabular presentation. This has been done as the Group believes this presentation provides greater clarity on market risk to users of this Annual Report on Form 20-F.
94
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
The constituent instruments defining the rights of holders of ordinary shares have not been materially modified.
Pursuant to the terms of the Deposit Agreement, The Bank of New York, as Depositary, has agreed to notify holders of ADSs of all actions of the Company in which shareholders of ordinary shares are entitled to exercise voting rights, thus facilitating the exercise of voting rights by holders of ADSs. The address of The Bank of New York is 101 Barclay Street, New York, New York 10286.
ITEM 15. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures at June 30, 2003. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Companys disclosure controls and procedures are effective. No change in the Companys internal control over financial reporting has occurred during the year ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable
ITEM 16B. CODE OF ETHICS
On June 19, 2003 the Group adopted a code of ethics that applies to the Groups principal executive officer and principal financial officer, who also serves as the principal accounting officer. The full text of the code of ethics is included as an exhibit as part of this Annual Report on Form 20-F.
95
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
The registrant has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
The financial statements of British Sky Broadcasting Group plc filed as a part of this Annual Report on Form 20-F are included on pages F-1 through F-86 as follows:
Page | ||||
Report of Independent Auditors, Deloitte &
Touche LLP
|
F-1 | |||
Consolidated Profit and Loss Accounts for the
years ended June 30, 2001, 2002 and 2003
|
F-2 | |||
Consolidated Statements of Total Recognized Gains
and Losses for the years ended June 30, 2001, 2002 and 2003
|
F-2 | |||
Consolidated Balance Sheets at June 30, 2002
and 2003
|
F-3 | |||
Consolidated Cash Flow Statements for the years
ended June 30, 2001, 2002 and 2003
|
F-4 | |||
Notes to Consolidated Financial Statements
|
F-7 |
96
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 20-F.
Exhibit No. | ||||||||
In Document | ||||||||
Incorporated | ||||||||
Number | Description | By Reference | ||||||
1 | * | Memorandum and Articles of Association | A | |||||
2 | ** | Specimen share certificate | 2 | |||||
4.1 | ** | Agreement dated March 8, 2001 with respect to a £300,000,000 Revolving Credit Facility among British Sky Broadcasting Group plc, as borrower, the Toronto-Dominion Bank, as agent, and others | 4.2 | |||||
4.2 | *** | Supplemental Agreement dated April 26, 2002 with respect to 4.1 above | 4.5 | |||||
4.3 | Notice of cancellation of £100,000,000 of availability under the facility referred to in 4.1 above, dated March 21, 2003 | | ||||||
4.4 | Second Supplement Agreement dated May 15, 2003 with respect to 4.1 above | | ||||||
4.5 | Agreement dated March 20, 2003 with respect to a £600,000,000 Revolving Credit Facility among British Sky Broadcasting Group plc, as borrower, Barclays Capital, as agent, and others | | ||||||
8 | List of Subsidiaries | | ||||||
11 | Code of Ethics | | ||||||
12.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | ||||||
12.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | ||||||
13 | Written statement of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | | ||||||
14 | Consent of Deloitte & Touche LLP | |
* | Incorporated by reference to the Special Report on Form 6-K of British Sky Broadcasting Group plc filed with the Securities and Exchange Commission on August 18, 2003. |
** | Incorporated by reference to the Annual Report on Form 20-F of British Sky Broadcasting Group plc for the fiscal year ended June 30, 2001 filed with the Securities and Exchange Commission on October 1, 2001. |
*** | Incorporated by reference to the Annual Report on Form 20-F of British Sky Broadcasting Group plc for the fiscal year ended June 30, 2002 filed with the Securities and Exchange Commission on November 7, 2002. |
97
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
BRITISH SKY BROADCASTING GROUP PLC |
BY: | MARTIN STEWART |
|
|
MARTIN STEWART | |
Chief Financial Officer |
Date: December 5, 2003
98
FINANCIAL STATEMENTS OF BRITISH SKY BROADCASTING GROUP PLC
Page | ||||
Report of Independent Auditors, Deloitte &
Touche LLP
|
F-1 | |||
Consolidated Profit and Loss Accounts for the
years ended June 30, 2001, 2002 and 2003
|
F-2 | |||
Consolidated Statements of Total Recognized Gains
and Losses for the years ended June 30, 2001, 2002 and 2003
|
F-2 | |||
Consolidated Balance Sheets at June 30, 2002
and 2003
|
F-3 | |||
Consolidated Cash Flow Statements for the years
ended June 30, 2001, 2002 and 2003
|
F-4 | |||
Notes to Consolidated Financial Statements
|
F-7 |
99
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Members of:
We have audited the accompanying consolidated balance sheets of British Sky Broadcasting Group plc and subsidiaries (collectively, the Group) as at June 30, 2002 and 2003, and the related consolidated profit and loss accounts, consolidated statements of total recognized gains and losses, and consolidated cash flow statements for each of the three years in the period ended June 30, 2003, and notes thereto, all expressed in pounds sterling. These consolidated financial statements are the responsibility of the Groups management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at June 30, 2002 and 2003, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of consolidated net profit (loss) for each of the three years in the period ended June 30, 2003 and determination of consolidated shareholders funds (deficit) at June 30, 2002 and 2003, to the extent summarized in Note 28 to the consolidated financial statements.
Our audits also comprehended the translation of pounds sterling amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 28. Such U.S. dollar amounts are presented solely for the convenience of readers in the United States of America.
As discussed in Note 28 to the consolidated financial statements, the Group was required to adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002.
DELOITTE & TOUCHE LLP
F-1
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
June 30, 2001 | June 30, 2002 | June 30, 2003 | ||||||||||||||||||||||||||||||||||||||
Before | Before | Before | ||||||||||||||||||||||||||||||||||||||
goodwill | Goodwill | goodwill | Goodwill | goodwill | Goodwill | |||||||||||||||||||||||||||||||||||
and | and | and | and | and | and | |||||||||||||||||||||||||||||||||||
exceptional | exceptional | exceptional | exceptional | exceptional | exceptional | |||||||||||||||||||||||||||||||||||
Notes | items | items | Total | items | items | Total | items | items | Total | |||||||||||||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
Turnover: Group turnover and share of joint
ventures turnover
|
2,530.1 | | 2,530.1 | 2,915.3 | | 2,915.3 | 3,262.5 | | 3,262.5 | |||||||||||||||||||||||||||||||
Less: Share of joint ventures turnover
|
(224.1 | ) | | (224.1 | ) | (139.2 | ) | | (139.2 | ) | (76.5 | ) | | (76.5 | ) | |||||||||||||||||||||||||
Group turnover
|
2 | 2,306.0 | | 2,306.0 | 2,776.1 | | 2,776.1 | 3,186.0 | | 3,186.0 | ||||||||||||||||||||||||||||||
Operating expenses, net
|
3 | (2,145.8 | ) | (67.4 | ) | (2,213.2 | ) | (2,584.6 | ) | (136.5 | ) | (2,721.1 | ) | (2,815.3 | ) | (116.7 | ) | (2,932.0 | ) | |||||||||||||||||||||
Operating profit (loss)
|
160.2 | (67.4 | ) | 92.8 | 191.5 | (136.5 | ) | 55.0 | 370.7 | (116.7 | ) | 254.0 | ||||||||||||||||||||||||||||
Share of operating results of joint ventures
|
5 | (239.2 | ) | (16.5 | ) | (255.7 | ) | (76.7 | ) | | (76.7 | ) | 3.4 | | 3.4 | |||||||||||||||||||||||||
Joint ventures goodwill amortization, net*
|
14 | | (101.1 | ) | (101.1 | ) | | (1,069.9 | ) | (1,069.9 | ) | | | | ||||||||||||||||||||||||||
Profit on sale of fixed asset investments
|
4 | | | | | 2.3 | 2.3 | | | | ||||||||||||||||||||||||||||||
Share of joint ventures loss on sale of
fixed asset investment
|
4 | | (69.5 | ) | (69.5 | ) | | | | | | | ||||||||||||||||||||||||||||
Amounts written off fixed asset investments, net
|
4 | | (38.6 | ) | (38.6 | ) | | (60.0 | ) | (60.0 | ) | | (15.1 | ) | (15.1 | ) | ||||||||||||||||||||||||
(Provision) release of provision for loss on
disposal of subsidiary
|
4 | | (10.0 | ) | (10.0 | ) | | 10.0 | 10.0 | | | | ||||||||||||||||||||||||||||
(Loss) profit on ordinary activities before
interest and taxation
|
(79.0 | ) | (303.1 | ) | (382.1 | ) | 114.8 | (1,254.1 | ) | (1,139.3 | ) | 374.1 | (131.8 | ) | 242.3 | |||||||||||||||||||||||||
Interest receivable and similar income
|
6 | 18.2 | 2.7 | 20.9 | 11.1 | | 11.1 | 3.7 | | 3.7 | ||||||||||||||||||||||||||||||
Interest payable and similar charges
|
6 | (153.3 | ) | | (153.3 | ) | (148.0 | ) | | (148.0 | ) | (118.2 | ) | | (118.2 | ) | ||||||||||||||||||||||||
(Loss) profit on ordinary activities before
taxation
|
7 | (214.1 | ) | (300.4 | ) | (514.5 | ) | (22.1 | ) | (1,254.1 | ) | (1,276.2 | ) | 259.6 | (131.8 | ) | 127.8 | |||||||||||||||||||||||
Tax on (loss) profit on ordinary activities
|
9 | (23.3 | ) | (0.8 | ) | (24.1 | ) | (28.6 | ) | (77.8 | ) | (106.4 | ) | (58.7 | ) | 121.2 | 62.5 | |||||||||||||||||||||||
(Loss) profit on ordinary activities after
taxation
|
(237.4 | ) | (301.2 | ) | (538.6 | ) | (50.7 | ) | (1,331.9 | ) | (1,382.6 | ) | 200.9 | (10.6 | ) | 190.3 | ||||||||||||||||||||||||
Equity dividends paid and proposed
|
10 | | | | ||||||||||||||||||||||||||||||||||||
Retained (loss) profit for the financial
year
|
24 | (538.6 | ) | (1,382.6 | ) | 190.3 | ||||||||||||||||||||||||||||||||||
Basic (loss) earnings per share
|
11 | (29.2p | ) | (73.3p | ) | 9.9p | ||||||||||||||||||||||||||||||||||
Diluted (loss) earnings per share
|
11 | (29.2p | ) | (73.3p | ) | 9.8p | ||||||||||||||||||||||||||||||||||
Details of movements on reserves are shown in note 24.
All results relate to continuing operations.
* | Included within fiscal 2002 joint ventures goodwill amortization of £1,069.9 million for the year is £971.4 million in respect of an impairment of KirchPayTV GmbH & Co KGaA (KirchPayTV) goodwill (see notes 4 and 14). |
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
June 30, | June 30, | June 30, | ||||||||||||||
Notes | 2001 | 2002 | 2003 | |||||||||||||
£m | £m | £m | ||||||||||||||
(Loss) profit for the financial year*
|
24 | (538.6 | ) | (1,382.6 | ) | 190.3 | ||||||||||
Net loss on deemed disposals
|
24 | (20.7 | ) | | | |||||||||||
Translation differences on foreign currency net
investment
|
24 | (2.1 | ) | 1.4 | | |||||||||||
Total recognized gains and losses relating to
the year
|
(561.4 | ) | (1,381.2 | ) | 190.3 | |||||||||||
* | Included within the profit (loss) for the year is a £1.5 million profit (2002: £80.9 million loss; 2001: £350.0 million loss) in respect of the Groups share of the results of joint ventures. |
See notes to consolidated financial statements.
F-2
CONSOLIDATED BALANCE SHEETS
June 30, | ||||||||||||
Notes | 2002 | 2003 | ||||||||||
£m | £m | |||||||||||
Fixed assets
|
||||||||||||
Intangible assets
|
12 | 657.4 | 535.9 | |||||||||
Tangible assets
|
13 | 343.0 | 346.2 | |||||||||
Investments:
|
||||||||||||
Investments in joint ventures: Share of gross
assets
|
88.7 | 86.8 | ||||||||||
:
Share of gross liabilities
|
(68.5 | ) | (59.0 | ) | ||||||||
:
Transfer to creditors
|
1.6 | 2.6 | ||||||||||
Total investment in joint ventures
|
14 | 21.8 | 30.4 | |||||||||
Other fixed asset investments
|
15 | 107.1 | 78.5 | |||||||||
Total investments
|
128.9 | 108.9 | ||||||||||
1,129.3 | 991.0 | |||||||||||
Current assets
|
||||||||||||
Stocks
|
16 | 414.2 | 370.4 | |||||||||
Debtors: Amounts falling due within one year
|
||||||||||||
deferred tax assets
|
18 | 13.9 | 30.8 | |||||||||
other
|
387.0 | 363.3 | ||||||||||
17 | 400.9 | 394.1 | ||||||||||
Debtors: Amounts falling due after more than one
year
|
||||||||||||
deferred tax assets
|
18 | 24.9 | 159.0 | |||||||||
other
|
182.1 | 63.9 | ||||||||||
17 | 207.0 | 222.9 | ||||||||||
Cash at bank and in hand
|
50.3 | 46.4 | ||||||||||
1,072.4 | 1,033.8 | |||||||||||
Creditors: Amounts
falling due within one year
|
||||||||||||
short-term borrowings
|
19 | (1.5 | ) | (0.2 | ) | |||||||
other creditors
|
19 | (903.9 | ) | (955.0 | ) | |||||||
(905.4 | ) | (955.2 | ) | |||||||||
Net current assets
|
167.0 | 78.6 | ||||||||||
Total assets less current
liabilities
|
1,296.3 | 1,069.6 | ||||||||||
Creditors: Amounts
falling due after more than one year
|
||||||||||||
long-term borrowings
|
20 | (1,576.9 | ) | (1,151.6 | ) | |||||||
other creditors
|
20 | (16.0 | ) | (20.5 | ) | |||||||
(1,592.9 | ) | (1,172.1 | ) | |||||||||
Provisions for liabilities and
charges
|
22 | (4.1 | ) | (3.2 | ) | |||||||
(300.7 | ) | (105.7 | ) | |||||||||
Capital and reserves
equity
|
||||||||||||
Called-up share capital
|
23 | 946.7 | 968.9 | |||||||||
Share premium
|
24 | 2,409.8 | 2,535.5 | |||||||||
Shares to be issued
|
24 | 255.8 | 2.7 | |||||||||
Merger reserve
|
24 | 266.7 | 299.0 | |||||||||
Profit and loss account
|
24 | (4,179.7 | ) | (3,911.8 | ) | |||||||
Total shareholders deficit
|
24 | (300.7 | ) | (105.7 | ) | |||||||
See notes to consolidated financial statements.
F-3
CONSOLIDATED CASH FLOW STATEMENTS
June 30, | ||||||||||||||||
Notes | 2001 | 2002 | 2003 | |||||||||||||
£m | £m | £m | ||||||||||||||
Net cash inflow from operating
activities
|
a | 38.9 | 249.7 | 663.6 | ||||||||||||
Dividends received from joint
ventures
|
| | 4.0 | |||||||||||||
Returns on investments and servicing of
finance
|
||||||||||||||||
Interest received and similar income
|
4.6 | 8.8 | 3.2 | |||||||||||||
Interest paid and similar charges on external
financing
|
(118.6 | ) | (141.0 | ) | (127.3 | ) | ||||||||||
Interest element of finance lease payments
|
(1.7 | ) | (0.6 | ) | (0.5 | ) | ||||||||||
Net cash outflow from returns on investments
and servicing of finance
|
(115.7 | ) | (132.8 | ) | (124.6 | ) | ||||||||||
Taxation
|
||||||||||||||||
UK corporation tax paid
|
| | (17.6 | ) | ||||||||||||
Consortium relief (paid) received
|
(16.2 | ) | 22.5 | (0.3 | ) | |||||||||||
Net cash (outflow) inflow from
taxation |