e20vf
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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o |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended 30 June 2005
OR
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
OR
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o |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number:
1-13488
British Sky Broadcasting Group plc
(Exact name of Registrant as specified in its charter)
England & Wales
(Jurisdiction of incorporation or organisation)
Grant Way, Isleworth, Middlesex, TW7 5QD, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
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Title of each |
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Name of each exchange |
Class |
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on which registered |
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Ordinary shares (nominal value 50p per share)
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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) |
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New York Stock Exchange |
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(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.
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Ordinary shares (nominal value 50p per share)
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1,867,523,599 |
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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
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes
o No
x
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 20-F contains certain
forward-looking statements within the meaning of the United
States Private Securities Litigation Reform Act of 1995 with
respect to our financial condition, results of operations and
business, and our strategy, plans and objectives. These
statements include, without limitation, those that express
forecasts, expectations and projections with respect to the
potential for growth of free-to-air and pay television,
advertising growth, DTH subscriber growth and Multiroom and Sky+
penetration, DTH and other revenues, profitability and margin
growth, cash flow generation, programming and other costs,
subscriber acquisition costs and marketing expenditure, capital
expenditure programmes and proposals for returning capital to
shareholders.
These statements (and all other forward-looking statements
contained in this Annual Report on Form 20-F) 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 implied or forecast
in the forward-looking statements. These factors include, but
are not limited to, the fact that we operate in a highly
competitive environment, the effects of laws and government
regulation upon our activities, our reliance on technology,
which is subject to risk, change and development, our ability to
continue to obtain exclusive rights to movies, sports events and
other programming content, risks inherent in the implementation
of large-scale capital expenditure projects, our ability to
continue to communicate and market our services effectively, and
the risks associated with our operation of digital television
transmission in the United Kingdom (UK) and Republic
of Ireland (Ireland).
Information on some of the risks and uncertainties associated
with our business are described in Item 3 Key
Information Risk Factors in this Annual Report
on Form 20-F. All forward-looking statements in this Annual
Report on Form 20-F are based on information known to us on
the date hereof. Except as required by law, we undertake no
obligation publicly to update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
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 30 June
2005 and as at 30 June 2005, 2004, 2003, 2002 and 2001.
The information contained in the following tables should be read
in conjunction with Item 5 Operating and Financial
Review and Prospects, and the Groups current and
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
each of the years in the three year period ended 30 June
2005 and the balance sheet data at 30 June 2005 and 2004,
are derived from the 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
significant 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 27 to the Consolidated Financial
Statements. The selected consolidated profit and loss account
data for the years ended 30 June 2002 and 2001, and the
balance sheet data at 30 June 2003, 2002 and 2001, are
derived from the audited Consolidated Financial Statements
appearing in our historical Annual Reports on Form 20-F
filed with the Securities and Exchange Commission
(SEC).
4
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Year ended 30 June | |
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2005(1) | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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(In millions except per share data) | |
Profit and Loss Account:
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Amounts in accordance with UK GAAP
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DTH subscribers revenues
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$ |
5,322 |
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|
£2,968 |
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|
£2,660 |
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|
£2,341 |
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£1,929 |
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|
£1,537 |
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Cable and DTT subscribers
revenues(2)
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|
|
393 |
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|
219 |
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|
215 |
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|
202 |
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|
279 |
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|
299 |
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Advertising revenues
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590 |
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329 |
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|
312 |
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|
284 |
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|
251 |
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271 |
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Sky
Bet(3)
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468 |
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261 |
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191 |
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|
117 |
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|
95 |
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|
78 |
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|
Sky
Active(3)
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|
165 |
|
|
|
92 |
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|
116 |
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|
101 |
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|
91 |
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|
15 |
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Other revenues
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|
321 |
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|
179 |
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|
162 |
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141 |
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|
131 |
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106 |
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Group turnover
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7,259 |
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4,048 |
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3,656 |
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|
3,186 |
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|
2,776 |
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|
2,306 |
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Operating expenses, net, before amortisation of goodwill and
exceptional items
|
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|
(5,815 |
) |
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(3,243 |
) |
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(3,056 |
) |
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(2,822 |
) |
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(2,590 |
) |
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(2,154 |
) |
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Amortisation and impairment of intangible fixed assets
|
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|
(208 |
) |
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|
(116 |
) |
|
|
(119 |
) |
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(121 |
) |
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(119 |
) |
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|
(44 |
) |
|
Release of provision against (provision against) ITV Digital
programming debtors
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23 |
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13 |
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5 |
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(22 |
) |
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Estimated cost of reorganisation of Sky Interactive
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(23 |
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Release of analogue termination provision
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4 |
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Operating expenses, net
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(6,000 |
) |
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(3,346 |
) |
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(3,175 |
) |
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(2,938 |
) |
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(2,727 |
) |
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(2,221 |
) |
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Operating profit
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1,259 |
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|
702 |
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|
481 |
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|
248 |
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49 |
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85 |
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Share of joint ventures and associates operating
results
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25 |
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14 |
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(5 |
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3 |
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(76 |
) |
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(256 |
) |
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Joint ventures and associates goodwill amortisation
and impairment, net*
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10 |
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(1,070 |
) |
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|
(101 |
) |
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Loss on disposal of investments in joint ventures
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(41 |
) |
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(23 |
) |
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Profit on disposal of fixed asset investments
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|
51 |
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2 |
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Share of joint ventures loss on disposal of fixed asset
investments
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(70 |
) |
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Amounts written back to (written off) fixed asset investments,
net
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24 |
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(15 |
) |
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(60 |
) |
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(39 |
) |
|
Release of provision against (provision against) loss on
disposal of subsidiary
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10 |
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(10 |
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Interest receivable and similar income
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54 |
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|
30 |
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|
10 |
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4 |
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11 |
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18 |
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Interest payable and similar charges
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(165 |
) |
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|
(92 |
) |
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(91 |
) |
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(118 |
) |
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(148 |
) |
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(153 |
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Exceptional finance credit
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3 |
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Profit (loss) on ordinary activities before taxation
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1,132 |
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|
631 |
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|
480 |
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122 |
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(1,282 |
) |
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(523 |
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Tax (charge) credit on profit (loss) on ordinary activities
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|
(369 |
) |
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|
(206 |
) |
|
|
(158 |
) |
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|
62 |
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|
(107 |
) |
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|
(24 |
) |
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Profit (loss) on ordinary activities after taxation
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|
763 |
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|
425 |
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|
322 |
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|
184 |
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|
(1,389 |
) |
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|
(547 |
) |
|
Equity
dividends(4)
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(305 |
) |
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|
(170 |
) |
|
|
(116 |
) |
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Retained profit (loss)
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|
458 |
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|
255 |
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|
206 |
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184 |
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(1,389 |
) |
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(547 |
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Earnings (loss) per share basic
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39.8¢ |
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22.2p |
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16.6p |
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9.6p |
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(73.6p |
) |
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|
(29.6p |
) |
Earnings (loss) per share diluted
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39.8¢ |
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|
22.2p |
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|
16.6p |
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9.5p |
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|
(73.6p |
) |
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(29.6p |
) |
Dividends per
share(4)
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|
9.0p |
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|
6.0p |
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Dividends per
share(4)
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16.5¢ |
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|
10.9¢ |
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* |
Included within joint ventures goodwill amortisation of
£1,070 million for fiscal 2002 is
£971 million in respect of an impairment of KirchPayTV
GmbH & Co KGaA (KirchPayTV) goodwill. |
All results relate to continuing operations.
5
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Year ended 30 June | |
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| |
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|
2005(1) | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
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(in millions except per share data) | |
Amounts in accordance with US GAAP
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Total revenues
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$ |
6,879 |
|
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|
£3,837 |
|
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|
£3,535 |
|
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|
£3,082 |
|
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|
£2,707 |
|
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|
£2,296 |
|
Amortisation and impairment of intangible fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(5 |
) |
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|
(145 |
) |
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|
(58 |
) |
Operating profit (loss)
|
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|
1,485 |
|
|
|
828 |
|
|
|
666 |
|
|
|
370 |
|
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|
(30 |
) |
|
|
(176 |
) |
Joint ventures and associates goodwill amortisation
and impairment, net
|
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|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(712 |
) |
|
|
(71 |
) |
Loss on disposal of investments in joint ventures
|
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|
(25 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
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|
1,422 |
|
|
|
793 |
|
|
|
595 |
|
|
|
260 |
|
|
|
(940 |
) |
|
|
(660 |
) |
Net income (loss)
|
|
|
1,035 |
|
|
|
577 |
|
|
|
434 |
|
|
|
286 |
|
|
|
(1,047 |
) |
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|
(625 |
) |
Basic earnings (loss) per share
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|
54.1¢ |
|
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|
30.2p |
|
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|
22.4p |
|
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|
14.9p |
|
|
|
(55.5p |
) |
|
|
(33.8p |
) |
Diluted earnings (loss) per share
|
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|
54.0¢ |
|
|
|
30.1p |
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|
22.3p |
|
|
|
14.7p |
|
|
|
(55.5p |
) |
|
|
(33.8p |
) |
Basic earnings (loss) per
ADS(5)
|
|
|
216.6¢ |
|
|
|
120.8p |
|
|
|
89.7p |
|
|
|
59.7p |
|
|
|
(221.9p |
) |
|
|
(135.4p |
) |
Diluted earnings (loss) per
ADS(5)
|
|
|
215.9¢ |
|
|
|
120.4p |
|
|
|
89.3p |
|
|
|
58.9p |
|
|
|
(221.9p |
) |
|
|
(135.4p |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
As at 30 June | |
|
|
| |
|
|
2005(1) | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
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(in millions) | |
Balance Sheet:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Amounts in accordance with UK GAAP
|
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Total assets
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|
$ |
4,160 |
|
|
£ |
2,320 |
|
|
£ |
2,364 |
|
|
£ |
1,990 |
|
|
£ |
2,159 |
|
|
£ |
3,858 |
|
Long-term debt
|
|
|
(1,929 |
) |
|
|
(1,076 |
) |
|
|
(1,076 |
) |
|
|
(1,152 |
) |
|
|
(1,577 |
) |
|
|
(1,768 |
) |
Net (liabilities) assets
|
|
|
(61 |
) |
|
|
(34 |
) |
|
|
90 |
|
|
|
(152 |
) |
|
|
(352 |
) |
|
|
1,035 |
|
Capital
stock(6)
|
|
|
4,552 |
|
|
|
2,539 |
|
|
|
2,614 |
|
|
|
3,772 |
|
|
|
3,837 |
|
|
|
3,901 |
|
Number of shares in issue (number)
|
|
|
1,868 |
|
|
|
1,868 |
|
|
|
1,942 |
|
|
|
1,938 |
|
|
|
1,893 |
|
|
|
1,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June | |
|
|
| |
|
|
2005(1) | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Amounts in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
5,527 |
|
|
£ |
3,082 |
|
|
£ |
2,988 |
|
|
£ |
2,810 |
|
|
£ |
2,853 |
|
|
£ |
4,209 |
|
Net assets (liabilities)
|
|
|
1,468 |
|
|
|
818 |
|
|
|
812 |
|
|
|
448 |
|
|
|
(141 |
) |
|
|
850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at 30 June | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Distribution of Sky Channels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DTH homes
|
|
|
7,787 |
|
|
|
7,355 |
|
|
|
6,845 |
|
|
|
6,101 |
|
|
|
5,453 |
|
Cable
homes(7)
|
|
|
3,872 |
|
|
|
3,895 |
|
|
|
3,871 |
|
|
|
4,091 |
|
|
|
3,486 |
|
ITV Digital homes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sky pay homes
|
|
|
11,659 |
|
|
|
11,250 |
|
|
|
10,716 |
|
|
|
10,192 |
|
|
|
10,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DTT
homes(8)
|
|
|
4,940 |
|
|
|
3,084 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Solely for convenience, pounds sterling amounts for the year
ended 30 June 2005 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 30 June 2005, which was
US$1.7930 per £1.00. |
|
(2) |
From fiscal 2003, this relates solely to cable subscribers
revenues. |
|
(3) |
Additional detail has been provided with regard to the analysis
of interactive revenues between the Groups betting and
games revenues Sky Bet and
other interactive revenues Sky
Active and the prior years comparatives have
been reclassified accordingly. |
|
(4) |
An interim dividend of £77 million, representing 4.0p
per share, was paid for the six month period ended
31 December 2004 (7.7¢ in US dollars at date of
payment on 22 April 2005) (six month period ended
31 December 2003: £53 million, representing 2.75p
per share, 4.9¢ in US dollars at date of payment on 23
April 2004). A final dividend of £93 million,
representing 5.0p per share was proposed for the year ended
30 June 2005 (8.8¢ in US dollars at 30 September
2005) (2004: £63 million, |
6
|
|
|
representing 3.25p per share, 6.0¢ in US dollars at date of
payment on 19 November 2004). No interim or final dividends were
paid or proposed for fiscal 2003, 2002 or 2001. |
|
(5) |
In our Annual Reports filed on Form 20-F for fiscal 2002
and 2001, the earnings (loss) per American Depositary Share
(ADS) was calculated using the weighted average
number of ADSs outstanding on the basis of 1 ADS for 6 Ordinary
Shares. On 23 December 2002, the ratio was revised to reflect a
new ratio of 1 ADS representing 4 Ordinary Shares. Therefore,
the current and prior periods earnings (loss) per ADS have been
calculated using a weighted average number of ADSs outstanding
on the basis of 1 ADS for 4 Ordinary Shares. Earnings (loss) per
ADS is not exactly four times earnings (loss) per share due to
rounding differences. |
|
(6) |
Capital stock includes called-up share capital, share premium,
shares to be issued, Employee Share Ownership Plan
(ESOP) reserve, merger reserve, special reserve and
capital redemption reserve. |
|
(7) |
The number of cable subscribers is as reported to us by the
cable operators. |
|
(8) |
The number of DTT homes consists of the Broadcasters
Audience Research Boards (BARBs)
estimate of the number of homes with access to Freeview (the
free DTT offering available in the UK). These figures may
include DTH or Cable homes that already take multichannel
television. |
Factors which materially affect the comparability of the
selected financial data
Accounting changes
During fiscal 2004, US EITF 00-21, Revenue Arrangements
with Multiple Deliverables, was adopted. The impact of the
adoption of this standard is described in note 27 of the
Consolidated Financial Statements included within Item 18.
During fiscal 2003, US Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, was adopted. The impact of the adoption of
this standard is described in the notes to the Consolidated
Financial Statements included within the Groups Annual
Report on Form 20-F for fiscal 2003.
Business combinations
During fiscal 2001, we completed the acquisitions of British
Interactive Broadcasting Holdings Limited (BiB) and
Sports Internet Group plc (now Sports Internet Group Limited)
(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 11 Quantitative and
Qualitative Disclosures about Market Risk Currency
Exchange Rates.
Since any dividends we declare are 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 provided by the
Federal Reserve Bank of New York for pounds sterling expressed
in US dollars per £1.00.
|
|
|
|
|
|
|
|
|
Month |
|
High | |
|
Low | |
|
|
| |
|
| |
April 2005
|
|
|
1.9197 |
|
|
|
1.8733 |
|
May 2005
|
|
|
1.9048 |
|
|
|
1.8205 |
|
June 2005
|
|
|
1.8368 |
|
|
|
1.7930 |
|
July 2005
|
|
|
1.7753 |
|
|
|
1.7303 |
|
August 2005
|
|
|
1.8148 |
|
|
|
1.7695 |
|
September 2005
|
|
|
1.8420 |
|
|
|
1.7620 |
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 30 June |
|
Period end | |
|
Average(1) | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
2001
|
|
|
1.4041 |
|
|
|
1.4509 |
|
|
|
1.5182 |
|
|
|
1.3737 |
|
2002
|
|
|
1.5347 |
|
|
|
1.4479 |
|
|
|
1.5347 |
|
|
|
1.4000 |
|
2003
|
|
|
1.6529 |
|
|
|
1.5915 |
|
|
|
1.6840 |
|
|
|
1.5192 |
|
2004
|
|
|
1.8126 |
|
|
|
1.7491 |
|
|
|
1.9045 |
|
|
|
1.5728 |
|
2005
|
|
|
1.7930 |
|
|
|
1.8596 |
|
|
|
1.9482 |
|
|
|
1.7733 |
|
|
|
(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 30 September 2005, the noon buying rate was US$1.7696
per £1.00.
RISK FACTORS
This section describes the significant risk factors affecting
our business. These should be read in conjunction with our
long-term operating targets, which are set out in Item 5
Operating and Financial Review and Prospects
Overview and Recent Developments. These risks could
materially adversely affect any or all of 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.
Our business is heavily regulated and changes in regulations,
changes in interpretation of existing regulations or failure to
obtain required regulatory approvals or licences could adversely
affect our ability to operate or compete effectively.
We are subject to regulation primarily in the UK and the
European Union. The regimes which affect our business include
broadcasting, telecommunications, competition (anti-trust) and
taxation 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, taxation, or other aspects
of our business, or that of any of our competitors, could have a
material adverse effect on our business and the results of our
operations.
As a result of the European Commissions investigations
into the sale of broadcasting rights to Football Association
Premier League Limited (FAPL) football matches, the
FAPL has provisionally agreed with the European Commission,
inter alia, that after the 2006/07 FAPL football season, the
tendering procedures for television rights will ensure that no
single buyer is able to acquire exclusively all of the
centrally-marketed live FAPL rights packages (and that these
packages will continue to be balanced). The FAPL has also
provisionally agreed to examine, jointly with the European
Commission, the way in which its tender processes are conducted
to ensure that they do not exclude any potential competitors.
The European Commission has consulted publicly on the terms of
this provisional agreement. The outcome of this consultation has
not yet been disclosed. We are not yet able to assess whether
these developments will have a material effect on the Group.
The European Commission has published its concluding report on
its sector inquiry into the provision of audio-visual content
from sports events over 3G networks. The European Commission has
identified a number of commercial practices which it considers
raise competition concerns in relation to the availability of
mobile sports content. The European Commission has stated that
it will take account of the findings of the sector inquiry in
future proceedings in this area. It has also stated that it will
further review, together with the relevant national competition
authorities of Member States, potentially harmful situations
identified during the sector inquiry, and that procedures will
be initiated in cases where behaviour is not adjusted to comply
with the requirements of competition law. At this stage, we are
unable to determine whether the
8
European Commissions concluding report or any subsequent
proceedings might have a material effect on the Group.
We cannot assure you that we will succeed in obtaining all
requisite approvals and licences in the future for our
operations without the imposition of restrictions which may have
an adverse consequence to us, nor that compliance issues will
not be raised in respect of operations conducted prior to the
date of filing of this Annual Report on Form 20-F.
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 providers, digital and analogue terrestrial
television providers, telecommunications providers, home
entertainment products companies, companies developing new
technologies and other suppliers of news, information, sports
and entertainment, as well as other providers of interactive
services. Our competitors include organisations which are
publicly funded, in whole or in part, and which fulfil a public
service broadcasting mandate. Were such mandate to be changed,
this could lead to an increase in the strength of competition
from these organisations. Although we have continued to develop
our services through technological innovation and in licensing,
acquiring and producing a broad range of content, we cannot
predict with certainty the changes that may occur in the future
which may affect the competitiveness of our businesses. In
particular, the means of delivering various of our (and/or
competing) services may be subject to rapid technological change.
Viewers with a Sky+ digibox (or any other personal video
recorder (PVR)) may choose not to view advertising
including that on Sky Channels and Sky Distributed Channels. We
therefore cannot assure you that our advertising revenues or
programming costs will not be negatively impacted by this
behaviour. We also cannot assure you that advertising revenues
for Sky Channels currently offered on other platforms will not
be negatively impacted in the future by the offering of similar
devices by other operators.
Our ability to compete successfully will depend on our ability
to continue to acquire, commission and produce, programming
content that is attractive to our subscribers. The programme
content and third party programme services we have licensed from
others are subject to fixed term contracts which will expire or
may terminate early. We cannot assure you that programme content
or third party programme services (whether on a renewal or
otherwise) will be available to us at all or on acceptable
financial or other terms (including in relation to technical
matters such as encryption, territorial limitation and copy
protection). Similarly, we cannot assure you that such programme
content or programme services will be attractive to our
customers, even if so available.
The future demand and speed of take up of our DTH service will
depend upon our ability to package our content attractively and
offer it to our customers at competitive prices, competitive
pressures from competing services, and our ability to create
demand for our products and to attract and retain customers
through a wide range of marketing activities. In addition, we
operate in a geographic region which has experienced sustained
economic growth for a number of years. The effect of a possible
slowdown in the rate of economic growth and/or a decline in
consumer confidence on our ability to continue to attract and
retain subscribers, is uncertain. We therefore cannot assure you
that the current or future marketing and other activities we
undertake will succeed in generating sufficient demand to
achieve our operating targets.
We cannot guarantee that the anticipated business benefits
associated with the significant investments in the modernisation
of our customer relationship management (CRM)
centres, and the replacement of our CRM systems, that we have
made and continue to make, will be fully achieved.
Throughout the last five fiscal years, we have invested more
than £232 million in our CRM centres and systems. This
expenditure has been focused principally on replacing the
existing customer management and billing systems with new
applications and also on improving the existing physical
infrastructure of the centres. The implementation of the new
systems involves a number of complex activities, including the
9
migration of existing customer data onto the new applications.
As a result, and in common with other projects of this scale,
there is a risk that the implementation may not be completed as
currently envisaged, either within the proposed timescale or
budget, or that the anticipated business benefits, such as
scalability and flexibility in servicing our customers, may not
be fully achieved. In addition, the high level of change
inherent in the implementation of new systems absorbs
considerable management time and may disrupt normal business
operations. The transition to management of new customers on the
new CRM systems commenced in September 2005, and will be
completed in respect of all, or substantially all, subscribers
during the 2006 calendar year.
Our business is reliant on technology which is subject to the
risk of failure, 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, or other broadcasters who
broadcast channels on our DTH platform, 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 results of
operations. Similarly, loss of the transmissions from satellites
that are already operational, or failure of our transmission
systems or uplinking facilities, could have a material adverse
effect on our business and operations.
We are dependent on complex technologies in other parts of our
business, including CRM, broadcast and conditional access
systems, airtime sales and supply chain management systems. Were
any of these technologies to fail, this could have a material
adverse effect on our business.
There is a large existing population of digital satellite
reception equipment used to receive our services, including
digiboxes and ancillary equipment, in which we have made a
significant investment and which is owned by our customers
(other than the software in the digiboxes and smart cards, to
which we retain title). Were a significant proportion of this
equipment to suffer failure, or were the equipment to be
rendered either redundant or obsolete by other technology or
other requirement or by the mandatory imposition of incompatible
technology, or should we need to or wish to upgrade
significantly the existing population of digiboxes and/or
ancillary equipment with replacement equipment, this could have
a material adverse effect on our business.
We are reliant on encryption technologies to restrict
unauthorised access to our services.
Access to our services is restricted through a combination of
physical and logical access controls, including smart cards
which we provide to our individual subscribers. Unauthorised
viewing and use of content may be accomplished by counterfeiting
the smart cards or otherwise overcoming their security features.
A significant increase in the incidence of signal piracy could
require the replacement of smart cards sooner than otherwise
planned. We continue to work with our technology suppliers to
ensure that our encryption technology is as resilient to hacking
as possible, however, there can be no assurance that it will not
be compromised in the future. We are reliant also upon the
encryption or equivalent technologies employed by the cable and
other platform operators for the protection of access to the
services which we make available.
We undertake significant capital expenditure projects,
including technology and property projects.
In August 2004, we announced an incremental capital expenditure
programme of approximately £450 million, which was to
be incurred over four years in support of our growth strategy.
This expenditure is in addition to core capital expenditure,
which is expected to be approximately £100 million per
annum over the next three years. As is common with capital
expenditure projects of this scale, there is a risk that they
may not be completed as envisaged, either within the proposed
timescale or budget, or that the anticipated business benefits
of the projects may not be fully achieved.
10
We, in common with other services providers that include
third party services which we retail, rely on intellectual
property and proprietary rights, including in respect of
programming content, which may not be adequately protected under
current laws or which may be subject to unauthorised use.
Our services largely comprise content in which we own, or have
licensed, the intellectual property rights, delivered through a
variety of media, including broadcast programming, interactive
television services, and the internet. We rely on trademark,
copyright and other intellectual property laws to establish and
protect our rights in this content. 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 or content which we own or license, without our,
or the rightsholders, authorisation. These unauthorised
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 businesses 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). Economic or market factors, or a change
in strategy by ntl or Telewest as it relates to the distribution
of our channels, may adversely influence the wholesale revenue
we receive from ntl or Telewest, which may negatively affect our
business.
In October 2005, NTL Incorporated and Telewest Global, Inc.
jointly announced a definitive merger agreement under which it
is planned ntl will acquire Telewest. The announcement stated
that the transaction is expected to close in the first quarter
of calendar 2006, and is subject to UK regulatory and
shareholder approvals. At this stage, we are not yet able to
access whether such a merger will have a material effect on our
business.
We are subject to a number of medium and long-term
obligations.
We are party to a number of medium and long-term agreements and
other arrangements (including in respect of programming and
transmission, for example, our transponder leases) 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.
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
the leading pay television broadcast service in the UK and
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 in the UK and Ireland. We
also retail our channels, together with channels broadcast by
third parties, to DTH subscribers and retail certain of our
channels (in some cases together with channels broadcast by
third parties) to a limited number of DSL subscribers
(references in this Annual Report on Form 20-F to DTH
subscribers includes DSL subscribers). We also make three
of our channels available free-to-air via the UK DTT platform,
which markets itself under the brand Freeview.
At 30 June 2005, there were 7,787,000 DTH subscribers to
our television service, and 3,872,000 subscribers of the cable
operators to whom we supply certain of our channels, in the UK
and Ireland. According to estimates of BARB, as at 30 June
2005, there were 4,940,000 homes in the UK receiving
11
certain of our channels via DTT. Our total revenues in fiscal
2005 were £4,048 million (2004:
£3,656 million; 2003: £3,186 million), as
set out in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 30 June | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in £ millions) | |
DTH subscribers
|
|
|
2,968 |
|
|
|
2,660 |
|
|
|
2,341 |
|
Cable subscribers
|
|
|
219 |
|
|
|
215 |
|
|
|
202 |
|
Advertising
|
|
|
329 |
|
|
|
312 |
|
|
|
284 |
|
Sky Bet
|
|
|
261 |
|
|
|
191 |
|
|
|
117 |
|
Sky Active
|
|
|
92 |
|
|
|
116 |
|
|
|
101 |
|
Other
|
|
|
179 |
|
|
|
162 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,048 |
|
|
|
3,656 |
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
We are engaged in television broadcasting services and certain
ancillary functions, principally within the UK and Ireland, with
activities conducted principally from the UK. Our turnover
principally arises from services provided to retail and
wholesale customers within the UK, with the exception of
£128 million (2004: £115 million; 2003:
£93 million) which arises from services provided to
customers in Ireland and £11 million (2004:
£9 million; 2003: £9 million) which arises
from services provided to customers in the Channel Islands.
As set forth herein, references to fiscal years are to our
fiscal years which end on the Sunday nearest to 30 June in
each year. We publish our financial statements in British pounds
sterling. References herein to US dollars,
dollars, US$, $ and
¢ are to the currency of the United States
(US), references to Euro and
are
to the currency of the European Community, and references to
pounds sterling, £,
pence and p are to the currency of the
UK. Certain pound 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, US dollar
amounts have been translated from the corresponding pound
sterling amounts at the noon buying rate for cable transfers in
foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York (the noon buying
rate) on 30 June 2005, which was $1.7930 per
£1.00. For information with respect to exchange rates, see
Item 3 Key Information Selected Financial
Data 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 27 to the Consolidated
Financial Statements included within Item 18.
Certain terms used herein are defined in the glossary which
appears at the end of this Annual Report on 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 25 April 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 14 to the
Consolidated Financial Statements included within Item 18.
Programming
We provide subscribers with a broad range of programming
options. Our programming is an important factor in generating
and maintaining subscriptions to our channels. With respect to
the channels we own and operate, we incur significant expense to
acquire exclusive UK and Ireland television rights to films,
exclusive UK and Ireland television rights to broadcast certain
sports events live and television rights to other general
entertainment programming. We are dependent upon the licences
which grant us these
12
rights as well as our Television Licensable Content Service
licences, telecommunication licences and authorisations. We also
produce and commission original entertainment programming and
have acquired the rights to market the television services of
third parties to DTH subscribers. Currently, we own, operate and
distribute 17 Sky Channels via our DTH service (or 28 including
multiplex versions of the Sky Channels, but excluding the
business channels SkyVenue and the Pub Channel). We also
currently retail to our DTH subscribers 109 Sky Distributed
Channels (including multiplex versions of certain channels). A
multiplex of a channel is generally either a
time-shifted version of that channel, or a version that has
predominantly the same theme or content as the primary channel,
but where the content is transmitted at different times. 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 our DTH subscribers the digital
audio services Music Choice and Music Choice Extra, certain
radio services and the Sky Box Office service (a
pay-per-view service offering movies, sporting events and
concerts).
The Sky Channels, and their multiplex versions, as at
7 October 2005, were as follows:
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Sky Channel |
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Multiplex/Multiplexes |
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Channel genre |
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Sky Movies 1
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Sky Movies 3, Sky Movies 5, Sky Movies 7, Sky
Movies 9 |
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Movies |
Sky Movies 2
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Sky Movies 4, Sky Movies 6, Sky Movies 8 |
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Movies |
Sky Cinema 1
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Sky Cinema 2 |
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Movies |
Sky Sports 1
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Sports |
Sky Sports 2
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Sports |
Sky Sports 3
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Sports |
Sky Sports Xtra
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Sports |
Sky One
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Sky Mix |
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Entertainment |
Sky Vegas Live
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Interactive entertainment |
Artsworld
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Entertainment |
Sky News
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News |
Sky Sports News
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Sports News |
Sky Travel
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Sky Travel+1, Sky Travel Extra |
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Entertainment |
Sky Travel Shop
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Shopping |
Flaunt
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Music |
The Amp
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Music |
Scuzz
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Music |
We retail packages of channels to our DTH
subscribers. These are combinations of channels at varying
prices. Various combinations of the Sky Basic Channels and the
Sky Distributed Channels (other than the Premium Sky Distributed
Channels) are available as basic tiers of programming, which
since 1 September 2005 range from 21 to 89 television
channels (as well as certain music audio and radio services).
These basic packages are collectively called the Basic
Packages.
We introduced a new style of packaging for new DTH subscribers
from 1 September 2005. Existing DTH subscribers at that
date will remain with their pre 1 September 2005 packaging
until they are transferred across to the new packaging during
2006. The new packaging offers subscribers a choice of up to six
mixes of both Sky Basic Channels and Sky Distributed
Channels, each mix representing a genre of interest. The six
mixes are Variety, Kids, Knowledge, Style and Culture, Music,
and News and Events. Subscribers choose either two, four or six
mixes to create their Basic Package, to which they have the
option to add a combination of one or more Sky Premium Channels,
and one or more Premium Sky Distributed Channels.
Prior to 1 September 2005, our DTH subscribers subscribed
to one of a number of stand alone Basic Packages, to which they
could have added, if they chose, one or more of the Sky Premium
Channel Packages, and one or more of the Premium Sky Distributed
Channels.
13
We also offer Sky Box Office to all our 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
are encrypted in order to limit access to paying subscribers
only.
Both ntl and Telewest currently carry versions of all of the Sky
Premium Channels (including multiplex channels) and our PremPlus
pay-per-view service (see description in
Pay-Per-View below) on their digital networks (see
Distribution Cable Distribution below).
We also broadcast versions of three of our channels, Sky News,
Sky Sports News and Sky Travel, unencrypted free-to-air via DTT
in the UK as part of the Freeview offering (see
Distribution DTT Distribution below).
In September 2005, we announced that we plan to launch
Sky Three, in October 2005, available on our DTH service
and which it is intended will be the new name for
Sky Travel on DTT. Sky Travel will continue to be
available to our DTH subscribers and on ntls digital
network. We also announced that, simultaneously with the launch
of Sky Three, it is planned that our existing channel,
Sky Mix, will be renamed Sky Two.
According to surveys produced by BARB, as of 30 June 2005,
an estimated 30% of the estimated 24.9 million television
homes in the UK were equipped with digital satellite reception
equipment; 13% subscribed to a cable television 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 19% had digital terrestrial television (the
percentage figures given above for each delivery means include
homes which receive television services via more than one of
such delivery means). According to BARB estimates, during the
52 weeks ended 30 June 2005, the Sky Channels
accounted for an estimated 24% of viewing of all satellite and
cable channels (excluding BBC1, BBC2, ITV1, Channel 4 (and S4C,
not Channel 4, in Wales only) and five
(collectively the traditionally analogue terrestrial
channels)) in homes that are able to receive those
channels in the UK (Multi-Channel Homes) (or an
overall 10% viewing share of all channels (including the
traditionally analogue terrestrial channels) available within
Multi-Channel Homes during the same period). The Sky Distributed
Channels accounted for the majority of the balance of viewing of
satellite and cable channels in such homes.
For the 52 weeks ended 30 June 2005, BARB estimates
that 51.4% of all viewing in UK homes with digital satellite
reception equipment (digital satellite homes) was of
channels available via the satellite platform other than the
traditionally analogue terrestrial channels. BARB estimates
that, in the same period, Sky Channels accounted for 28% of
multi-channel viewing (i.e. viewing of all channels excluding
the traditionally analogue terrestrial channels) in UK digital
satellite homes, with an overall 14% viewing share across all
channels available (including the traditionally analogue
terrestrial channels) within UK digital satellite homes.
In addition to owning the Sky Channels, we hold equity interests
in ventures that own 12 (not including time-shifted multiplex
versions) of the Sky Distributed Channels (including certain
Premium Sky Distributed Channels) which are operated and
distributed in the UK, Ireland and the Channel Islands namely
Attheraces, Nickelodeon, Nick Jr., Nicktoons TV, National
Geographic Channel, Adventure One, Chelsea TV, MUTV, Paramount
Comedy, Paramount Comedy 2, The History Channel and the
Biography Channel. In addition to the ventures that own the
12 Sky Distributed Channels, we also have a 33.33% equity
interest in the venture operating the Sky News Australia
Channel, which is based in Australia. In September 2005, we
disposed of our 35.8% equity interest in the UK listed company
which operates the audio services, Music Choice and Music Choice
Extra.
Premium Channels
Sky Premium Channels
Sky Movies 1, Sky Movies 2 and Sky Cinema 1
Sky Movies 1 and Sky Movies 2 operate 24-hours per day, seven
days a week and principally show the output of recent release
movies, made-for-television movies and certain library movies
(in respect of which
14
we are typically granted exclusive UK and Ireland rights to
broadcast during the relevant pay television window) by major
Hollywood and independent US and European licensors. There are
four Sky Movies 1 multiplexes (see Programming
above) which are provided free to DTH and digital cable
subscribers who subscribe to Sky Movies 1, and three Sky
Movies 2 multiplexes (see Programming above) which
are provided free to digital subscribers who subscribe to Sky
Movies 2.
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 multiplex, Sky
Cinema 2, which is available free to DTH and digital cable
subscribers who receive Sky Cinema 1.
As of 30 June 2005, there were approximately
4.9 million UK and Irish DTH and cable subscribers to
either Sky Movies 1 or Sky Movies 2 and over 98% of
movie subscribers subscribed to both Sky Movies 1 and Sky
Movies 2.
Sky Sports 1, Sky Sports 2, Sky Sports 3 and Sky
Sports Xtra
Sky Sports 1 and Sky Sports 2 each provide, on average,
22 hours or more of sports programming per day, including
live coverage of certain popular sports events. As at
30 June 2005, there were approximately 5.7 million UK
and Ireland DTH and cable subscribers to either Sky
Sports 1 or Sky Sports 2 and over 98% of these sports
subscribers subscribed to both Sky Sports 1 and Sky Sports 2.
Sky Sports 3 currently offers, on average, 18 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.
Sky Sports Xtra is available as a premium à la carte
service as well as being provided free as an additional channel
to DTH and digital cable subscribers to both Sky Sports 1 and
Sky Sports 2. Sky Sports Xtra currently offers, on average,
16 hours of sports programming per day.
Our programming rights for the Sky Sports channels include
exclusive live rights to broadcast, in the UK and Ireland, a
number of football, rugby, cricket, motorsport, 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.
In fiscal 2004, the Group successfully bid for all four packages
of exclusive live UK television rights to Football Association
Premier League (FAPL) football, two near
live packages of delayed UK rights (television and
internet respectively) to FAPL football, four of the five
packages of live television rights for broadcast in Ireland and
two near live packages of delayed rights (television
and internet respectively) in Ireland from the beginning of the
2004/05 season to the end of the 2006/07 season. See
Government Regulation Competition (Anti-Trust)
Law European Union Regime Effect on our
Affairs European Commission
Investigation Football Association Premier League
Limited below for details of the European Commission
investigation in relation to the sale of FAPL football broadcast
rights.
Since July 2004, the Group has successfully bid for a number of
sporting events including (i) exclusive live rights to
Englands primary domestic cricket matches and all of
Englands home test matches and one day internationals for
the 2006 to 2009 domestic cricket seasons; (ii) exclusive
live rights to Football League matches and the Carling Cup for
the 2006/07 to 2008/09 domestic football seasons; (iii) a
number of rugby union matches including all Autumn international
matches, Guinness Premiership matches, England A Team matches
from the 2005/06 to 2009/10 seasons and Heineken Cup matches
from 2006/07 to 2009/10; (iv) broadcast rights to the UEFA
Champions League for a further three seasons from the 2006/07
season; (v) exclusive live rights to the inaugural A1 Grand
Prix Series for the 2005/06, 2006/07 and 2007/08 seasons, and;
(vi) exclusive live rights to the 32nd Americas Cup
yachting event to be staged in 2007.
15
Premium Sky Distributed Channels
The Disney Channel
Under an agreement with The Walt Disney Company Limited, we have
the exclusive rights to distribute, via DTH in the UK and
Ireland, the Disney Channel and three themed multiplexes to the
core Disney Channel, as a bonus channel to those of our DTH
subscribers receiving both of our Sky Movies channels, and to
other DTH subscribers on an à la carte basis.
Chelsea TV
Chelsea Digital Media Limited (a company in which we own a 20%
equity interest), operates a digital subscription pay television
channel dedicated to showing certain programming relating to
Chelsea Football Club (Chelsea TV). We offer Chelsea
TV to our DTH subscribers solely on an à la carte basis.
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 Limited) which operates a digital
subscription pay television channel dedicated to showing certain
programming relating to Manchester United Football Club
(MUTV). We offer MUTV to our DTH subscribers solely
on an à la carte basis and also act as agent for the
distribution of the channel to cable operators in the UK and
Ireland.
FilmFour
We offer FilmFour, a pay television film channel operated by
Channel 4, focusing on original British, independent and
cult films, together with its two multiplexes,
FilmFour+1 and FilmFour Weekly, to our
DTH subscribers solely on an à la carte basis.
Music Choice Extra
In addition to Music Choice, which is included in certain of our
Basic Packages (see Basic Channels Music
Choice below), we offer Music Choice Extra, which consists
of 30 digital audio channels, to our DTH subscribers solely on
an à la carte basis.
Basic Channels
Sky Basic Channels
Sky One is the general entertainment flagship channel of the Sky
Channels. It is targeted primarily at a 16-44 age group audience
and includes first-run US entertainment programmes and
UK-commissioned factual and drama series and is broadcast on a
24-hour per day basis. According to BARB surveys, during the
52 weeks ended 30 June 2005, Sky One was viewed by
approximately 47% of individuals in all UK television homes. Sky
Mix (which we plan to rename Sky Two in October 2005) is a
multiplex version of Sky One. We plan to launch a new channel,
Sky Three, in October 2005. It is envisaged that Sky Three
will include a mixed schedule of programming from Sky Ones
library as well as original lifestyle commissions and travel
documentaries from Sky Travel.
Sky News provides 24-hour national and international news
coverage. Sky News is broadcast unencrypted and can be seen by
any DTH viewer 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, by certain cable and
satellite operators outside the UK and in the UK on DTT as part
of the Freeview offering.
Sky Sports News provides 24-hour national and international
sports news coverage. It is currently available to our DTH
subscribers, to subscribers to ntl and Telewests digital
cable television services, subscribers to certain other smaller
cable operators and in the UK on DTT as part of the Freeview
offering.
16
Sky Travel is a travel entertainment and retail business
incorporating four travel channels and a web-site. The primary
channel, Sky Travel, broadcasts travel entertainment and
teleshopping programming and is currently available to our DTH
subscribers, on ntls digital cable television services and
in the UK on DTT as part of the Freeview offering. Sky Travel
Extra is a multiplex of Sky Travel and is available on DTH and
ntls digital cable television services. Sky Travel +1
was launched in November 2004 as a multiplex of Sky Travel and
is available on DTH. Sky Travel Shop is a teleshopping service
available on DTH. Viewers of the teleshopping programming and
users of the skytravel.co.uk web-site are able to purchase a
wide range of flights, hotels and holiday packages by the
telephone or internet.
Flaunt, The Amp and Scuzz are music channels currently available
to our DTH subscribers and to subscribers to ntls digital
cable television services. In September 2004 we contracted with
a third party for it to provide all day-to-day operational
services for these channels, though we still retain ultimate
editorial control over the content of the channels.
In March 2004, we launched Sky Vegas Live, an interactive
entertainment and gambling channel, which currently broadcasts
on a 24 hour per day basis and which is currently available
to our DTH subscribers.
In March 2005, we acquired the remaining 50% equity interest in
Artsworld Channels Limited that we did not already own.
Artsworld broadcasts arts oriented programming, including
classical music, opera and dance. It is currently available to
our DTH subscribers as part of certain Basic Packages.
Basic Sky Distributed Channels
Our agreements with the owners of the Sky Distributed Channels
typically grant us the exclusive right to offer these channels
to residential DTH subscribers in the UK and Ireland.
We currently act as an agent for The History Channel, the
Biography Channel and MUTV for the sale of these channels and
their multiplexes (where they exist) to cable operators in the
UK and Ireland. The owners of the Sky Distributed Channels
generally sell their own advertising time on their channels,
although we act as an advertising sales agent for certain of
these channels (see Advertising below).
Music Choice
We offer Music Choice, a 24-hour digital audio service
consisting of ten digital audio channels, to DTH subscribers.
This is included in some of our Basic Packages.
Pay-Per-View
Our Sky Box Office service currently offers our DTH
subscribers over 50 screens of television 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 Hollywood and independent distributors, which enable
us to show their movies on Sky Box Office. We also offer
seven screens of adult movies, between 10.00 pm and 6.00 am, to
our DTH subscribers via our 18 Plus Movies service.
Following our purchase of exclusive rights to all of the four
live television packages of FAPL football (for the seasons
2004/05 to 2006/07 inclusive), approximately 50 additional live
matches (over and above those matches broadcast on our Sky
Sports channels) are available on a pay-per-view basis via our
PremPlus service for the same seasons, for either a
per-match price or for a one-off season ticket
price. We also wholesale PremPlus to ntl, Telewest, ntl Ireland,
Chorus Communications (Chorus) and Video Networks
Limited (VNL), as well as a number of smaller cable
operators, for them to distribute to subscribers to their
respective networks.
In addition to our own pay-per-view services, we retail to our
DTH subscribers eight third-party adult services on a
pay-per-night basis.
17
Distribution
We distribute our programming services directly to DTH
subscribers through the packages described above. 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 and distribute to their
subscribers. DTT viewers must have either an integrated digital
television set or an appropriate set-top box and do not pay a
monthly subscription unless they subscribe to the Top Up TV
service (see Competition Digital Terrestrial
Television Top Up TV below).
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As at 30 June | |
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2005 | |
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2004 | |
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2003 | |
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(in thousands) | |
Distribution of Sky Channels
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DTH homes
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7,787 |
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7,355 |
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6,845 |
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Cable homes
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3,872 |
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3,895 |
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3,871 |
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Total Sky pay homes
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11,659 |
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11,250 |
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10,716 |
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DTT
homes(1)
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4,940 |
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3,084 |
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1,510 |
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(1) |
The number in respect of DTT homes consists of BARBs
estimate of the number of homes in the UK with access to
Freeview services. |
DTH Distribution
During fiscal 2005, there were 1,225,000 new subscribers to Sky
digital, whilst DTH churn in that same period was 793,000
subscribers, resulting in a net 432,000 increase in our DTH
subscriber base for the fiscal year. DTH churn in total was
10.3% in fiscal 2005 (2004: 9.7%; 2003: 9.4%). We define DTH
churn as the number of DTH subscribers over a given period who
terminate their subscription in its entirety, net of former
subscribers who reinstate their subscription in that period
(where such reinstatement is within a twelve month period of the
termination of their original subscription). In fiscal 2005, we
derived £2,968 million of our revenues from DTH
subscription revenues (2004: £2,660 million; 2003:
£2,341 million).
As at 30 June 2005, we had a total of 7,787,000 DTH subscribers,
with over 48.3% of subscribers taking the Sky World with Family
Pack package (the channel package option containing all of the
Sky Premium Channels and the largest number of Sky Basic
Channels).
The future demand and speed of take up of our DTH service will
depend upon its attractiveness, the marketing initiatives
adopted both by us and others, and the competitive pressures
resulting from the availability of competing services such as
analogue and digital terrestrial television, and analogue and
digital cable television.
The prices (inclusive of VAT, where applicable) to a residential
DTH subscriber in the UK and Ireland of our pre 1 September 2005
basic package containing the largest number of basic channels
(known as the Family Pack), and the range of prices
(inclusive of VAT, where applicable) to a DTH subscriber of
taking Sky Premium Channels with the Family Pack (which varies
depending upon the number of Sky Premium Channels taken) since
the beginning of fiscal 2003, and currently, are shown in the
table below:
18
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Range of prices | |
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for Sky Premium | |
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Channel Packages | |
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when taken with | |
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Price of Family Pack | |
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Family Pack | |
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(per month) | |
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(per month) | |
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UK
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As of 1 September
2005(1)
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£21.00 |
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£30-£42.50 |
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1 September 2004 to 31 August 2005
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£19.50 |
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£28-£41 |
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1 January 2004 to 31 August 2004
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£19.50 |
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£27-£40 |
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1 January 2003 to 31 December 2003
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£18.50 |
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£27-£38 |
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1 July 2002 to 31 December 2002
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£16.00 |
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£26-£37 |
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Ireland
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As of 1 September
2005(1)
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30.50 |
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41.50-64.50 |
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1 September 2004 to 31 August 2005
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28.50 |
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38.50-62.50 |
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1 January 2004 to 31 August 2004
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28.50 |
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40-61 |
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1 September 2002 to 31 December 2003
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26.99 |
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42-60 |
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1 July 2002 to 31 August 2002
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27.00 |
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37-53 |
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(1) |
The price (inclusive of VAT, where applicable) to a residential
DTH subscriber in the UK and Ireland of our post
1 September 2005 basic package containing all six genre
mixes and therefore the largest number of basic channels (known
as the Entertainment Pack) is currently £21.00
and 30.50 per
month respectively. The range of prices (inclusive of VAT, where
applicable) to a DTH subscriber in the UK and Ireland of taking
the Entertainment Pack with Sky Premium Channels (which varies
depending upon the number of Sky Premium Channels taken) is
currently £32.00 to £42.50, and
41.50 to
64.50
respectively. |
We also offer a number of our DTH services to commercial DTH
subscribers in the UK and Ireland under a range of contracts.
The types of contract, and the channels, which are available to
any particular commercial subscriber will depend primarily upon
the type of business premises within which they wish to show our
services. Our commercial DTH subscribers include offices, retail
outlets, hotels, pubs and clubs. Commercial DTH subscribers also
include those commercial subscribers that operate a SMATV system
(for example in a hotel or office), who are considered as being
one commercial DTH subscriber, rather than a number of cable
subscribers equal to the number of individual units to which the
television signal is distributed. As at 30 June 2005, there
were approximately 45,700 subscribers to our commercial DTH
services in the UK and Ireland (including approximately 4,500
commercial DTH subscribers operating a SMATV system).
The majority of our UK DTH commercial customers are subscribers
under our pubs and clubs subscription agreement. Under that
agreement, the subscription prices range from £66 to
£2,210 per month (exclusive of VAT). In Ireland, prices to
pubs and clubs subscribers range from
190 to
474 per month
(exclusive of VAT).
As at 30 June 2005, residential and commercial DTH
subscribers represented approximately 67% of the total number of
UK and Ireland subscribers to our services (the balance being
made up of subscribers to our wholesale customers).
19
Digital Satellite Reception Equipment
UK
In order to receive our DTH service, subscribers are required to
have a digital satellite system which includes a satellite dish
and LNB (low noise block converter), a digibox and a remote
control. We have worked with a number of manufacturers and
continue to work closely with selected manufacturers to develop
digital satellite digiboxes based upon our specifications. In
1999, we began an 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 Sky digital service was required.
However, from 1 January 2003, we offered free digiboxes without
a requirement to subscribe to one of our services (which was
also the case prior to 2002).
Standard installation for all DTH subscribers is currently free
(having either been free or costing up to £100 during
fiscal 2005 depending on the package taken), whereas
non-subscribers to our services taking up the free digibox offer
(which is different to purchasing our freesat proposition, see
Distribution Free-to-view Satellite
Proposition below) during fiscal 2005 were, and currently
are, charged £120.
The services received by a non-subscriber to our services taking
up the free digibox offer depend upon the number of unencrypted
services and free encrypted services available on the Astra
satellite system, and also on whether they receive encrypted
channels from third party broadcasters on a subscription or
pay-per-view basis.
We also offer our subscribers the opportunity to purchase up to
three extra digiboxes for use at the same residence as their
original digibox, which enables them to watch different
satellite programmes in different rooms at the same time using
just one satellite dish (known as Multiroom). As
well as the cost of the extra digibox (which is currently
£99), a monthly subscription charge of £10 is also
payable by the subscriber for each additional digibox purchased.
Standard installation of the additional boxes has been free
since 24 September 2004 (having been £60 from 1 July 2004
until that date). With each additional subscription the
subscriber is able to obtain all the channels included in the
package in his or her subscription for the original digibox on
one extra digibox.
During fiscal 2005, we have continued to offer Sky+, a digibox
that we have developed which contains two satellite tuners and
an integrated personal television recorder allowing programming
to be recorded directly on to a hard-disk contained within the
digibox. This enables DTH subscribers to watch one live
satellite programme (or a previously recorded programme) while
simultaneously recording another, to pause or rewind live
television and to record automatically some series of
programmes. In October 2004, we launched a new, premium version
of the Sky+ digibox, called Sky+ 160, to supplement the existing
Sky+ digibox. This digibox has an integrated personal television
recorder with four times the storage capacity of the existing
Sky+ digibox, allowing an average of 80 hours of programming to
be recorded, as well as having all of the other functionality of
the existing Sky+ digibox. Subscribers pay a one-off fee for the
Sky+ and Sky+160 digiboxes, currently ranging from £89 to
£299 (depending on which of the two digiboxes is taken and
the promotional offers that we frequently run). Standard
Installation for the Sky+ and Sky+160 digiboxes during fiscal
2005 was, and currently is, free for new subscribers, £60
for existing subscribers upgrading to Sky+ and £120 for
non-subscribers. Subscribers also pay a monthly subscription fee
to use the Sky+ recording features, however, if a subscriber
subscribes to two or more Sky Premium Channels, no additional
monthly subscription fee is charged.
In the first half of calendar year 2006, we are planning to
launch our High Definition Television (HDTV)
service. A television programme shown in high definition has
four times as much picture information shown on the screen as
programmes shown in standard definition. This service is planned
to be available to customers who take a new version of the Sky+
digibox and the relevant subscription. This new Sky+ digibox
will be designed to be capable of decoding and showing both
standard definition channels and channels in the HDTV format, as
well as having standard Sky+ features and providing access to
our existing services. At launch, Sky plans to transmit a range
of new channels in the HDTV format across sports, movies,
general entertainment and factual programming.
20
In September 2005, we announced the launch of Sky Gnome, a
portable and wireless device that enables DTH viewers to listen
to the audio output from the digital television and radio
channels that they receive through their digibox throughout the
home within approximately 30 metres of the digibox.
Both digital satellite reception equipment and subscriptions to
our DTH services are offered by us directly and through 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 reception equipment
initiative and a 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 promotions and
special offers made available. Installation services are
provided to subscribers by some of the smaller retailers. We
also provide installation and equipment repair services. In
fiscal 2005, 1.0 million digital satellite reception
systems were installed in the UK by or on behalf of one of our
subsidiaries (2004: 0.8 million; 2003: 1.0 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, EPG and navigation technology, as well as
applications and online return path infrastructure to permit us
to offer interactive television services.
Ireland
In Ireland, both satellite equipment and subscriptions to our
DTH services are offered directly by us and through a large
number of Irish retailers. Such retailers, like their UK
counterparts, generally receive payments from us in connection
with the supply of digital satellite reception equipment under
our free digital satellite reception equipment initiative and a
commission for the sale of subscriptions to our DTH services.
Some of the channels offered in Ireland differ from those
offered in the UK.
At 30 June 2005, there were approximately 363,000 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 the free digibox offer to DTH subscribers in
Ireland. To benefit from this offer, customers in Ireland must
subscribe to our services. Since September 2002, a limited range
of online interactive services has been provided to our DTH
subscribers in Ireland.
Sky Active
Our DTH service allows a broadcaster, such as ourselves, to
develop and offer its viewers enhanced and interactive services.
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), Sky
News Active (behind Sky News) and the interactive betting
service available behind Sky Vegas Live. We, and other
broadcasters, are enhancing our channels with interactive
services which can be accessed whilst the programming on the
channel stays in view. In fiscal 2005, we derived
£92 million of Sky Active revenues (2004:
£116 million; 2003: £101 million).
We provide an interactive television platform for the
development and delivery of interactive services. The platform
is also used to deliver the interactive services of third
parties. We currently own and operate four stand alone
interactive portals on our DTH platform (including the main Sky
Active portal) which provide access to a broad range of
interactive services including retail, betting, customer
services and games.
DTH viewers can access these interactive services by means of
either stand alone portals (our Sky Active portal being one of
them) or in conjunction with certain broadcast channels. Such
interactive services include competitions, voting, messaging
services, quizzes, home shopping, holiday bookings, games and
betting, some of which relate to the programme content being
shown on the relevant channel at the time.
Sky Active (in common with other stand alone interactive
portals) is currently offered free of charge to all DTH viewers
and each viewers telephone line is the return path for
these interactive services via a modem in the digibox. We derive
revenues through interactive services principally from
(1) premium rate telephone charges in connection with
viewers usage of our services (such as pay-per-play games,
voting and entries
21
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 who offer services by means of the
platform, including licences of our Wireless Mark-Up Language
adapted for television browser technology (see Emerging
Technologies below) and backend infrastructure to third
party broadcasters on the digital DTH platform. In addition,
interactive revenues are earned from the digibox subsidy
recovery charges (relating to the Groups subsidy of the
cost to customers of our digiboxes) which are included within
the conditional access, access control charges and EPG charges
made to customers on our DTH platform.
We have continued to develop our interactive advertising
technology, deploying advertising applications from July 2003
that make use of our browser technology with a view to enabling
a wider range of interactive advertising services to be offered.
Since our launch of interactive advertising in April 2000, over
700 interactive advertising campaigns have been broadcast by us
and others via our DTH platform. In March 2004, we launched the
new browser Mini DAL (Dedicated Advertiser Location) template,
and to date more than 40 different advertisers have taken
advantage of the new functionality offered by this product.
Third party channels (and third party stand alone interactive
portals such as PlayJam, Teletext Holidays, Directgov, Fancy A
Flutter and YooPlay) make use of the interactive potential of
the digital DTH platform. Third party broadcasters such as the
British Broadcasting Corporation (BBC), ITV,
Channel 4, five, Flextech, UK TV, Discovery,
MTV, Nickelodeon, QVC, Cartoon Network, TV-X and the Disney
Channel have successfully launched interactive services on our
DTH platform, as have a number of third party providers of stand
alone interactive services (which are separate from those
offered in conjunction with any television channel). These
services include enhanced television, information services,
games, betting, shopping, voting, holiday bookings, ringtone
services and quizzes. Third party channels may offer such
interactivity in conjunction with Sky Interactive or provide
their interactive services independently, including making use
of competing interactive infrastructures connected to our DTH
platform.
In April 2005, we launched SkyCard in conjunction with Barclays
Bank plc as Barclaycard, an interactive televison credit
card backed by a loyalty scheme with a range of rewards for
cardholders. SkyCard works like any other credit card but can
also be inserted in the interactive slot on the Sky digibox
(including Sky+ digiboxes), enabling customers to manage their
credit card account via their television.
Sky Bet
The Group offers a range of betting and gaming services under
the Sky Bet, Sky Bet Vegas and Sky
Vegas brands. The Sky Bet fixed odds sports betting
service is available across multiple platforms, including by
means of Sky digiboxes (including Sky+ digiboxes), by telephone
and on the internet. An on-line casino, licensed in Alderney in
the Channel Islands, is offered by us on the internet and can be
accessed at www.skybetvegas.com. Sky Bet also continues to
develop a range of popular fixed odds numbers betting products
offered under its UK bookmakers permit on our DTH
platform, through both the Sky Vegas 24/7 games service and the
Sky Vegas Live interactive television channel. In fiscal 2005,
we derived £261 million of Sky Bet revenues (2004:
£191 million; 2003: £117 million).
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 analogue and digital cable services
across the majority of their systems and each accounts for a
substantial proportion of our wholesale revenues, which are
revenues derived from the supply of Sky Channels to UK and Irish
cable platforms. In fiscal 2005, we derived
£219 million in subscription fees from cable operators
(2004: £215 million; 2003: £202 million). We
estimate that, as of 30 June 2005, 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, as reported to us by the
cable operators).
22
UK cable subscribers demonstrated growth in fiscal 2004,
increasing from a total of 3,266,000 subscribers to 3,321,000
subscribers. This growth reversed in fiscal 2005, which saw a
net decline of 34,000 UK cable subscribers during the period. As
at 30 June 2005, there were approximately 3,287,000 UK
cable subscribers (including broadband, narrowband and SMATV
subscribers) of whom all but a very small proportion take
programming from us.
Cable operators pay us a monthly per subscriber fee per channel
in respect of their subscribers to the Sky Basic Channels and a
monthly per subscriber fee per channel package for the Sky
Premium 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
each cable operator for the carriage of these channels.
Both ntl and Telewest currently carry versions of all of the Sky
Premium Channels (including multiplex channels) and our PremPlus
pay-per-view service on their digital networks. Distribution of
Sky Premium Channels to their remaining analogue cable
subscribers is more limited. Neither ntl or Telewest offers our
Sky Sports Xtra, PremPlus or movie multiplex channels to
analogue subscribers and Telewest now only distributes our main
Sky Movies channels on a limited basis in analogue.
Additionally, ntl distributes all of the Sky Basic Channels
other than Artsworld, Sky Travel+1, Sky Travel Shop and Sky
Vegas Live on its digital networks and both Sky One and Sky News
on its analogue networks. Telewest only carries the Sky Basic
Channels Sky One and Sky News on its analogue and digital
networks, and Sky Sports News on its digital network. Both ntl
and Telewest also carry some Sky Box Office events for
re-transmission to their digital cable subscribers, but neither
carries the Sky Box Office movies service.
Most narrowband cable networks (these are generally smaller
cable companies) have a more limited channel capacity than
digital satellite or digital cable and do not generally carry
all of the Sky Channels.
Ireland
In Ireland, cable subscriber fees for the 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 30 June 2005, there were approximately 585,000 (2004:
574,000) cable subscribers (including SMATV) to our programming
in Ireland. 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
We broadcast versions of three of our channels, Sky News, Sky
Sports News and Sky Travel (which it is planned will be renamed
Sky Three in October 2005), unencrypted free-to-air via DTT
in the UK. These channels are broadcast on a DTT multiplex for
which the licence is held by Crown Castle UK Limited (which owns
and operates shared wireless communications and broadcast
infrastructure). The channels broadcast via DTT by us, together
with a number of other channels broadcast free-to-air via DTT by
other broadcasters, are marketed to consumers under the generic
brand Freeview.
DSL Distribution
See Emerging Technologies below in relation to our
arrangements with Kingston Communications and VNL.
23
Free-to-view Satellite Proposition
In October 2004, we launched a new freesat proposition, offering
purchasers access to over 200 free-to-view television and radio
channels (including regional variants) and interactive services,
without a monthly subscription fee. Consumers can purchase a
package of digital satellite reception equipment, including a
digital satellite viewing card and standard installation, for
£150. The free-to-view channels on DTH include Sky News,
the BBCs portfolio of digital television and radio
services, digital versions of the five traditionally analogue
terrestrial channels and their all-digital television services
(ITV2, ITV3 and E4). Access to the encrypted signals of ITV1,
Channel 4 and five is available as a result of the
provision of a digital satellite viewing card which we provide
as part of the package. There is no obligation for purchasers of
this proposition to subscribe to a pay television service;
however, the proposition offers an easy upgrade path to a DTH
subscription with us for those customers who choose subsequently
to add a pay television service to their viewing options.
Seasonality
New subscriptions to our channels have tended to be highest in
the second quarter of our fiscal year, the pre-Christmas period.
As a result, our marketing costs have tended to be highest in
the second quarter of each fiscal year. There is no assurance
that these trends will continue in the future.
Marketing Channels
The principal marketing channels used by us to promote our
products and services are press (including both national and
regional newspapers and magazines), media inserts, door drops,
direct mailings, outdoor activity (such as billboards and bus
backs), on air advertising on both national and regional radio
and television channels (on both promotional and commercial
airtime), outbound calling, on-line advertising on both third
party websites and on sky.com, advertising in our customer
magazine and point of sale advertising in retail outlets which
sell our products and services.
Advertising
In fiscal 2005, we derived £329 million of our
revenues from advertising sales revenue (2004:
£312 million; 2003: £284 million).
In the UK, advertising agencies plan campaigns on behalf of
their clients and allocate a proportion of each clients
proposed television spend to the divisions of broadcasters that
specialise in the sale of television advertising, which are
known as sales houses. The principal broadcasters in the UK with
sales houses aside from us are ITV, Channel 4,
five, Flextech (whose sales house is known as
Interactive Digital Sales (IDS)) and Viacom Brand
Solutions (VBS).
Normally, advertising agencies do not buy specific spots
(defined as 30-second commercials) within particular programmes.
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 spot. The amount of advertising spend a broadcaster
receives is proportionate to its share of audience viewing and
the perceived quality of that audience, judged on the
demographic profile and the propensity of the audience to buy or
use the product or service. The Contract Rights Renewal remedy
applicable to ITV plc (CRR see
Competition Advertising below) has
resulted in the perceived quality of the audience a broadcaster
delivers having less relevance now than in the past, and any
increase or decrease in investment year on year from an
advertiser tends to be based purely on the growth or decline in
share of commercial audiences.
We sell advertising for all of the 17 Sky Channels (as well as
for their multiplexes) around all programmes that are broadcast
on these channels, irrespective of whether the programming was
produced in-house or licensed from a third party. We also act as
the advertising sales agent for the National Geographic Channel,
Adventure One, Hallmark, The History Channel, Biography, MUTV,
Chelsea TV, eight Discovery Channels
24
(Discovery, Real Time, Travel & Living, Wings, Science,
Civilisations, Home & Health and Animal Planet), FX,
Fashion TV, Chart Show music channels (Chart Show TV, The Vault
and B4) and the seven EMAP channels (Q, Kiss, Magic, Kerrang,
Smash Hits, The Box and The Hits) as well as for those
channels multiplexes where applicable. We sell advertising
time across all of our channels, and tailor distribution
according to the target audience an advertiser is trying to
reach, but can sell on a specific channel basis where requested.
According to BARB estimates, across all UK Multi-Channel Homes,
our share (for all of the Sky Channels) of commercial audiences
(excluding those of the BBC) at 30 June 2005 was 15.0%, a
decrease from 17.0% at the end of the previous fiscal year
(2003: 17.5%). Our subscribers households tend to be
younger and more affluent than the average UK household and tend
to over-represent the 16-34 year old, ABC1 (i.e. upmarket)
and male demographic profiles sought by many advertisers.
In fiscal 2006, we are launching a major new research tool,
SkyView, which combines viewing data collected from digiboxes
with data collected regarding product purchase. It will give
advertisers a greater understanding of viewing patterns and how
to target their consumers in homes that subscribe to our DTH
service.
Sponsorship
In fiscal 2005, we derived £23 million from
sponsorship revenue (2004: £21 million; 2003:
£19 million), which is included in advertising sales
revenue.
We acquire programme sponsors for the Sky Channels and work
alongside the sales teams of partner channels (such as National
Geographic Channel, Adventure One, The History Channel and
Hallmark) to help secure broadcast sponsors for their channels.
Programme Sponsorship is defined as either title
sponsorship (e.g. Ford Super Sunday or
Gillette Soccer Saturday) or in
association sponsorships (e.g. The Simpsons/
Dominos Pizza or 24/ Nissan).
According to our internal estimates and an independent report
into the television sponsorship sector, our share (for all of
the Sky Channels) of the total broadcast sponsorship business
conducted in the UK was approximately 20%, more than any other
broadcast sales house, other than ITV, which trades with
approximately 45% of the sector. Our broadcast sponsorship
revenue is split between over 50 brands on almost 100
programmes, and where possible, broadcast sponsorship
accreditation is integrated with spot, interactive and online
campaigns.
Competition
We are a channel provider, a distributor of television services
and a DTH platform operator. We therefore compete with a number
of communications and entertainment companies to obtain
programming, for distribution, for viewers and for advertising
sales.
Competition from other Television Channels
The Sky Channels compete with other television channels for the
acquisition of programming, for viewers, for distribution and
for advertising and sponsorship revenue.
In both the UK and Ireland, the television channels with the
largest audience shares are the traditionally analogue
terrestrial channels, which are broadcast free-to-air. In the
UK, these channels are BBC1, BBC2, ITV1, Channel 4 and
five, while in Ireland these are RTE1 and
Network 2, the Irish language channel TG4, and the
commercial channel TV3. In the UK, as well as being available
via analogue terrestrial television, the five traditionally
analogue terrestrial channels are also available via DTH, cable,
DTT and DSL, and, in the case of DTH and DTT, on a free-to-air
basis.
In addition to these channels we compete with both the Sky
Distributed Channels and with other television channels
broadcast via satellite, cable, DTT and/or via DSL. These other
channels may be broadcast by satellite free-to-air (either
encrypted or unencrypted) or they may be independently-retailed
pay television
25
channels. The free-to-air encrypted and unencrypted channels
(which, as at August 2005, amounted to more than 240 digital
satellite channels (including radio services)) can be received
by anyone with appropriate satellite reception equipment
(including the necessary conditional access equipment for the
reception of encrypted channels) without payment of a
subscription fee. Other than the digital satellite versions of
the traditionally analogue terrestrial channels, none of these
channels individually has a viewing share in the UK that
approaches the combined Sky Channels share. However, the
popularity of the non-Sky Channels available on our DTH platform
can make our DTH offering more attractive to subscribers and
potential customers.
As at 7 October 2005, there were 29 encrypted digital
satellite pay television channels for DTH reception retailed
independently of us available on a subscription basis, plus 13
such channels available on a pay-per-view basis, and five such
channels available either on a pay-per-view or subscription
basis. Those channels available only on a pay-per-view, or a
pay-per-view and subscription basis, were all adult channels
except for two Setanta Sport pay-per-view channels.
As we and other broadcasters all require some combination of
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 which could mean
that certain programming in which we are interested may not be
available to us.
Cable Operators
Cable operators compete with us as an alternative service to DTH
distribution and carry the majority of the Sky Channels. There
are areas in the UK and Ireland where it may not be economically
feasible to offer cable television services, including some
rural areas. Equally, there are also certain areas in the UK and
Ireland, such as conservation areas, where, due to planning and
local regulations, DTH satellite equipment may not be installed.
Both ntl and Telewest provide analogue and digital cable
services in the UK. ntl Ireland and Chorus offer both analogue
and digital cable and multipoint microwave distribution system
(MMDS) television services in Ireland. According to
the Office of Communications (Ofcom), cable networks
currently cover approximately 50% of UK homes, whilst, according
to the Commission for Communications Regulation
(Comreg) (the telecommunications regulator in
Ireland), cable and MMDS services cover nearly 93% of Irish
homes. Approximately 13% of UK homes currently subscribe to a
cable television service, whilst 41% of Irish homes currently
subscribe to cable and MMDS television services.
In January 2005, ntl and Telewest launched Video-on-Demand
(VoD) services in the UK. The services are currently
being rolled out across the operators networks. ntls
VoD service is branded ntl On Demand, whilst
Telewests service is branded Teleport. ntl
expects to roll out its product to be available across the whole
of its network by 2007, while Telewest expects Teleport to be
available across the whole of its network by 2006. Movies
content for both services is provided by Filmflex, a joint
venture between Disney, Sony and the On Demand Group (of which
ntl and Telewest are the major shareholders). The cable VoD
services also include television programme content, and provide
viewers with pause and rewind functionality. Digital cable
subscribers to whom the services are available do not need to
upgrade their equipment to receive the services.
In October 2005, NTL Incorporated and Telewest Global, Inc.
jointly announced a definitive merger agreement under which it
is planned ntl will acquire Telewest. The announcement stated
that the transaction is expected to close in the first quarter
of calendar 2006, and is subject to UK regulatory and
shareholder approvals.
Cable distribution of the Sky Channels represents a source of
additional operating income for us. A reduction in, or the loss
of, such operating income could negatively affect our business.
26
Digital Terrestrial Television
Freeview
Take-up of Freeview services has grown quickly since its launch
in October 2002. According to BARB estimates, as at 30 June
2005, there were 4,940,000 homes in the UK with access to
Freeview services.
It is likely that as a result of the availability of free-to-air
television channels via DTT, beyond the five traditionally
analogue terrestrial channels, some consumers will choose to
take such free-to-air DTT services in preference to a pay
service, just as some customers may remain satisfied with
analogue free-to-air services.
There is currently no DTT service in Ireland. In 2001, the Irish
Government sought to introduce a commercial DTT service with a
free-to-air component in Ireland, but in the absence of any
viable bids to operate the network, the proposal was withdrawn
in 2002. In 2004, the Irish Government commenced a re-evaluation
of the options for the roll-out of a DTT network in Ireland. As
part of this process, it has announced its intention to
establish a pilot DTT service. In June 2005, the Irish
Government issued a document inviting expressions of interest in
the provision of multiplexing and networking infrastructure
required for the pilot DTT service.
Top Up TV
Top Up TV (which launched in March 2004) offers a pay television
service via DTT. Top Up TV comprises five DTT channels, on which
programming from eleven digital television channels is broadcast
(for example, programming from one digital television channel is
broadcast on one of Top Up TVs DTT channels between 6 am
and midday, whilst programming from a different digital
television channel is broadcast on the same DTT channel during
other hours of the day). A subscription to the service costs
£7.99 per month. A subscription to programming from an
adult digital television channel, which is broadcast on one of
Top Up TVs DTT channels late at night, costs
£9.99 per month.
The service can be received only by households with a DTT
set-top box (or an integrated digital television set) which has
conditional access technology within it, or with a Conditional
Access Module (CAM) plugged into a set-top box (or
integrated digital television set) which has a Common Interface
Socket. Common Interface Sockets are a mandatory feature on all
integrated digital television sets; however, the majority of DTT
set-top boxes that have been sold to date do not include such
technology.
Free-to-view Satellite Propositions
The introduction by us in October 2004 of our freesat
proposition (see Distribution Free-to-view
Satellite Proposition above) has provided an alternative
multichannel television service to households, which might elect
to take up such service instead of our pay-television offerings.
In September 2005, ITV announced that it is working together
with the BBC to develop a free digital satellite service to
complement Freeview, entitled Freesat and to be
operational within the first half of calendar 2006. ITV
announced that this new service will enable viewers to access
subscription free digital television via satellite and will be
aimed primarily at people in the UK currently unable to access
Freeview.
Other Technologies (Competition)
Other technologies, such as third generation cellular telephone
networks (3G) and DSL networks, provide additional
means by which video content can be delivered to viewers. All
major cellular network operators in the UK and Ireland now offer
3G services to consumers. However, 3G services have yet to make
a significant impact. Although the volume of subscribers to 3 UK
(who only operate a 3G mobile network) has shown strong growth
(increasing to over 3.2 million by the end of August 2005),
3G penetration amongst more established operators remains low.
For example, at the end of June 2005, Vodafone had only 282,000
registered 3G devices amongst a UK subscriber base of
15.5 million.
27
DSL services have grown significantly in the UK in the
recent past, both in terms of the number of providers, and the
number of users. According to British Telecom, as at June 2005,
there were approximately 5.7 million subscribers to DSL
services in the UK. Only a very limited number of these
subscribers currently use these services for digital television.
Although consumer broadband DSL access remains focused on
the provision of internet access, two operators have developed
DSL networks with the capacity to deliver digital
television services to homes: Kingston Communications in
Kingston-upon-Hull and VNL in parts of London. However, we
expect several companies to launch similar services over the
next 12 months. According to Ofcom, as at the end of
December 2004, approximately 20,000 television homes in the
UK were viewing television via a DSL platform.
In the UK, the average speed of internet connections continues
to grow with typical speeds of approximately 1-2 Megabits
per second (Mbit/s). However, some operators are offering
substantially higher rates in selected areas. The increase in
the average speed of internet connections and the emergence of
new codecs such as MPEG-4 and WM9 means consumers can
increasingly download video over the internet. Additionally, the
use of peer to peer technology for both legitimate and
illegitimate video downloading is growing.
Competition in Programming
The operators of such networks compete with us for the
acquisition of programming rights. For example, in 2003,
Vodafone UK and 3 UK secured the mobile rights to show near live
clips of FAPL football for the three seasons beginning with the
2004/05 season, for which we also bid.
Competition in Distribution
The operators of such networks also compete with us as an
alternative service to DTH distribution. For example, VNL uses
DSL technology to provide broadcast and video-on-demand
television services in the London area. Currently, none of the
Sky Channels are sold by us to such third party DSL operators on
a wholesale basis for distribution by them on their networks
(although we wholesale the PremPlus service to VNL (see
Programming Pay-Per-View above)). We do
however, retail certain of our channels directly to homes
connected to Kingston Communications and VNLs DSL
networks, having contracted for a network access service with
each platform operator (see Emerging Technologies
below). In addition, we provide content, such as news and sports
clips, for inclusion in the broadband internet services offered
by the operators of certain of such networks.
Digital Switchover
The UK Government has indicated that it intends to switch off
the transmission of analogue terrestrial television in the UK
between 2008 and 2012. On switching off analogue transmission,
the coverage of the core multiplexes of the existing
DTT network (those carrying the main analogue terrestrial
channels) will rise from its current level of approximately 73%
to an estimated 98.5%. The licence conditions for
Channels 3, 4 and 5 require those channels to achieve
substantially the same DTT coverage as is currently
achieved in analogue. Following a consultation on planning
options for digital switchover which took place in February
2005, Ofcom issued a statement in June 2005 in which it
indicated that DTT coverage for the main analogue
terrestrial channels should match the existing analogue core
coverage of 98.5%. Switching off analogue terrestrial
transmission will, in any event, enable DTT to be made available
to households who cannot currently receive it.
In March 2005, the UK Government published a green paper
entitled Review of the BBCs Royal
Charter A strong BBC, independent of
government, in which it proposes to give the BBC a new
purpose of building digital Britain. In particular,
it proposes that the BBC should replicate in digital form
substantially the same coverage for its television services as
in analogue (98.5%), and that the BBC should help to implement
and pay for schemes to assist the most vulnerable people to
switch from analogue to digital television. A white paper
setting out what the Government intends to put in the next BBC
Charter is expected before the end of the 2005 calendar year.
28
Following analogue terrestrial transmission being switched off,
all analogue households wishing to continue to receive
television services will need to convert to digital television.
Current options for digital television reception are DTT,
digital satellite via our DTH service (either as a subscriber,
or as a non-subscriber) or ITVs proposed Freesat service,
and, in some areas, cable or DSL, as well as a combination of
these services. There may be other options for digital
television available in the future. The extent to which
households may choose another service in preference to our
DTH service is difficult to predict.
Home Videos and DVDs
Home video sales and rentals (including DVDs) have historically
been strong in the UK. In addition to offering consumers an
alternative source of programming to terrestrial, cable and
satellite television, the video window (which includes DVDs) for
new films generally starts before both the pay television window
and the pay-per-view television window. The video window
typically commences approximately four to six months following a
films UK cinema release. Currently, the pay-per-view
television window generally commences four to six months later.
We have, to date, been able to develop a significant customer
base for our pay-per-view services and movie channels,
notwithstanding competition from the home video industry and
increased competition from DVDs which may increase further as
DVD prices fall and a new HD-DVD standard emerges.
Advertising
Our primary competitors for television advertising sales are ITV
plc (formed by the merger of Granada plc (Granada)
and Carlton Communications plc (Carlton), which
completed in February 2004) which sells advertising on ITV1,
ITV2, and ITV3, Channel 4 (which also sells advertising for E4),
five, IDS (which sells advertising on behalf of the
UKTV group of channels and the Flextech channels (Living,
Bravo, Trouble and Challenge)), and VBS (which sells advertising
on behalf of Viacom, MTV and Nickelodeon). In October 2003, the
Secretary of State for Trade and Industry confirmed that the
proposed merger between Carlton and Granada could proceed if
certain undertakings could be agreed between Granada, Carlton
and the Office of Fair Trading. Undertakings were agreed on
14 November 2003 and the CRR remedy was introduced to
protect media buyers and advertisers from the increased market
power enjoyed by the merged ITV. CRR allows media buyers and
advertisers that contracted directly with Carlton and Granada to
renew the terms of their existing share deals without change and
new advertisers to contract on fair and reasonable terms. In
addition, in respect of agreements that include a share
commitment, the advertisers/media buyers are able to reduce the
share committed to ITV commensurate with any decline in
ITVs share of impacts year on year.
Based upon the latest BARB survey estimates, ITV1 and Channel 4
were available to approximately 24.7 and 24.6 million
television homes, respectively, in the UK (both digital and
analogue), with approximately 88% of the estimated
24.9 million television homes in the UK receiving an
acceptable five terrestrial analogue signal. In
addition, according to BARB survey estimates, as at June 2005,
approximately 15.1 million UK homes have access to
satellite, cable, or digital terrestrial television. Both ITV1
and Channel 4 have a significantly greater overall UK television
viewing share than any individual Sky Channel. As a result of
the ability of ITV1 and Channel 4 to reach almost all UK
television 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
television advertising sales.
Within UK Multi-Channel Homes, however, the Sky Channels in
aggregate attract viewing levels which are comparable to some of
the traditionally analogue terrestrial channels. This suggests
to us that, as the number of Multi-Channel Homes increases, our
competitive position with respect to advertising revenues may
improve. Additional growth from the free-to-view offerings,
Freeview and our freesat proposition, should also improve the
revenue share of the Sky Channels which are available as part of
these offerings. The Sky Channels jointly have an overall
viewing share (within Multi-Channel Homes) significantly greater
than each of Channel 4 and five in those homes,
although the Sky Channels combined viewing share is still
less than that of ITV1 in these homes. Based upon BARB surveys
for the 52 weeks ended 30 June 2005, the viewing
shares in UK Multi-Channel Homes of the traditionally analogue
terrestrial channels and
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the combined Sky Channels were, respectively, BBC1 19.6%, BBC2
6.8%, ITV1 18.5%, Channel 4 7.5%, five 5.2%, and the
Sky Channels 10.1% (of which Sky One accounted for 26% of the
Sky Channels viewing share (and had an individual viewing
share of 2.6%)). The remaining 32.4% of viewing in UK
Multi-Channel Homes was of other (non-Sky) satellite, cable and
DTT channels.
Technology and Infrastructure
We control access to DTH channels through the use of a
conditional access system, VideoGuard (see Encryption of
Digital Services below). Apart from the smart card (a
credit card size plastic card containing a chip that provides
conditional access functionality) and the software in the
digibox, to which we retain title, we do not own the satellite
reception equipment in DTH subscribers homes (this
equipment is owned by viewers, whether or not they are
subscribers). 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.
Underpinning the EPG in the digibox is an operating system which
we license from OpenTV, Inc. (OpenTV). The OpenTV
operating system provides a virtual machine interface which
enables applications to be authored once, yet still be capable
of running on all our different types of DTH digiboxes once the
application is downloaded to the digiboxes. This simplifies the
development of applications for the digibox and ensures
universal availability of services to all DTH digiboxes. The
operating system in each digibox is fully licensed upon payment
of a per digibox royalty by the digibox manufacturer to OpenTV.
The deployed digiboxes contain finite memory resources that are
used by the operating system and other software components such
as the conditional access system, EPG, and interactive
applications. We have, to date, been able to carry out software
downloads from time to time to reconfigure the memory
utilisation in these digiboxes in order to accommodate
additional and increasingly complex services. We cannot be
certain that this course of action will always be available to
us.
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-subscription channels and encrypted digital pay
and pay-per-view television and audio channels broadcast on
digital satellite for reception in the UK and/or Ireland.
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 restrict
unauthorised DTH reception of our services. We take appropriate
measures to counter unauthorised reception, including
implementing over-the-air countermeasures altering authorised
smart cards in a manner which then renders counterfeit smart
cards obsolete 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. The first periodic
replacement of digital smart cards since our digital launch in
October 1998 was successfully completed in November 2003.
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 (in relation to both
analogue and digital cable services). We are unable to quantify
this loss, including whether or not such loss 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 recognised within our Consolidated Financial Statements.
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The two principal UK cable operators (together with ntl Ireland
in respect of certain Sky Channels) receive our signal via
secure landlines. In respect of other operators, we generally
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, which
the operator in turn distributes to those of its subscribers who
are authorised 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 television service within the
UK and Ireland 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.
In addition to providing broadcast conditional access services,
both for our own DTH offerings and those of third parties, we
provide digital access control services for interactive services
produced by us and others, including using a telephone return
path to carry out transactions between suppliers and viewers.
These broadcast conditional access and access control services
are regulated by Ofcom. See Government
Regulation Broadcasting and Telecommunications
Regulation European Union Electronic
Communications Directives.
Satellites
We contract for the majority of the satellite transponders that
we use for digital transmissions for reception by both DTH
viewers and cable operators from SES ASTRA (SES),
the operator of the Astra satellites. SES is 100% owned by SES
GLOBAL, a Luxembourg company in which the Luxembourg State and
GE Capital hold interests of 11.58% and 24.58%, respectively,
with the balance held by other international financial
institutions, communications groups, institutional and private
investors and Luxembourg public institutions. We have also
contracted, via an agreement with BT, for four transponders on
the Eurobird satellite, which is owned and operated by Eutelsat.
For the transmission of our DTH service, we have contracted for
31 transponders from SES on SES satellites Astra 2A, 2B and 2D.
All but seven of our digital transponder agreements (on SES
satellites) are for a period of ten years with varying end dates
between 2008 and 2011. We have rights to extend certain of the
initial lease periods. Four of the remaining seven transponder
agreements have recently been extended; three of these
agreements now expire in 2017, and the fourth in 2015. The three
remaining transponder agreements were entered into in calendar
2005 to provide additional capacity to facilitate the launch of
our HD service. These three agreements expire in 2020. The term
of the digital leases on the Eurobird satellite expires in 2013.
We use some of the transponders that we have contracted for the
Sky Channels. Some transponder capacity (and in some cases all
of the capacity on a particular transponder) is sub-contracted
to third parties for the transmission of other channels or
services, including certain of the Sky Distributed Channels.
We have been designated a non pre-emptible customer
under each of our transponder agreements. This means that, in
the event of satellite or transponder malfunction, our use of
these transponders cannot be suspended or terminated by SES or
Eutelsat in favour of another broadcaster which has pre-emption
rights over capacity in preference to some other customers. In
addition, in the event of satellite or transponder malfunction,
we have arrangements in place with SES pursuant to which back-up
capacity may be available for some of our transponders based on
an agreed satellite back-up plan.
We have also put in place disaster recovery plans in the event
that we experience any significant disruption of our transponder
capacity. To date, we have not experienced any such significant
disruption. However, the operation of both the Astra and
Eutelsat satellites is outside our control and a disruption of
31
transmissions could have a material adverse effect on our
business, depending on the number of transponders affected and
its duration.
Our transponder agreements with SES provide that our rights are
subject to termination by SES in the event that SESs
franchise is withdrawn by the Luxembourg government.
Capital Expenditure Programme
In addition to the core capital expenditure on information
systems infrastructure, broadcast infrastructure and new product
development (which in fiscal 2005 was £72 million and
is expected to be approximately £100 million per annum
over the next three years), we continue to invest in our
infrastructure, properties and facilities, required to support
our growth strategies, in accordance with the capital
expenditure programme of approximately £450 million
over 4 years announced in August 2004. The capital
expenditure programme includes further investment in our
CRM centres and systems, increasing contact centre
capacity, and building and/or acquiring new facilities and
properties. We expect to finance the programme from operating
cash flows.
Capital expenditure on our CRM centres and systems and on our
Advanced Technology Centre (ATC) is described in
further detail below. The remaining expenditures are required in
order to service future subscriber growth more effectively, as
well as maintain and enhance our broadcasting facilities. In
fiscal 2005, the costs incurred in relation to the refurbishment
of existing properties and facilities was approximately
£75 million. Included in this cost was the acquisition
of buildings at our Osterley (Isleworth) campus, the creation of
a Sky News Centre and refurbishment of new office headquarters.
As is common with capital expenditure projects of this scale,
there are risks that they may not be implemented as envisaged;
or that they may not be completed either within the proposed
timescale or budget; or that the anticipated business benefits
of the projects may not be fully achieved.
The Customer Relationship Management Centres and Sky
In-Home Service Limited
Our CRM centres are based in Scotland. The centres
functions include the handling of orders from subscribers, the
establishing and maintaining of customer accounts, invoicing and
revenue collection, telemarketing and customer service. These
functions permit the centres to play a key role in both customer
acquisition and customer retention. We provide customer
management services for the Sky Channels, the Sky Distributed
Channels and for two third party channels, North American Sports
Network and Setanta Sports. We also deliver customer services
for both our own, and certain third party, interactive
television services, our telephony services, our video-streaming
services, and the personal video recorder TiVo.
The CRM centres also provide the distribution of ordered
customer installations into Sky In-Home Service Limited which
then provides nationwide installation and servicing of digital
satellite reception equipment directly in customer homes. Sky
In-Home Service Limited also provides an aftercare service to
the DTH subscriber base in relation to digital satellite
reception equipment which is both in, and out of, warranty.
During the course of the last five fiscal years, we have
invested more than £232 million in our CRM centres.
This expenditure has been focused principally on completely
replacing the centres existing customer management and
billing systems with new applications and also on improving the
existing physical infrastructure of the centres. The replacement
of the customer management and billing systems will also involve
the migration of all existing customer data onto the new
applications. This project is ongoing and in accordance with
other projects of this size and complexity, there is a risk that
the implementation may not be completed as currently envisaged,
either within the proposed timescale or budget, or that the
anticipated business benefits may not be fully achieved. In
addition, the high level of change inherent in the
implementation of the new systems absorbs considerable
management time and may disrupt normal business operations. The
implementation of the new applications has been delayed several
times over the lifetime of the project. During fiscal 2005
management made the decision to reduce the risk involved with
the implementation by re-phasing the cut-over plan to the new
system to begin with new customers only
32
which commenced on 1 September 2005, completing the
migration of all, or substantially all, remaining customers in
the 2006 calendar year.
See Item 8 Financial Information
Consolidated Statements and Other Financial
Information Legal Proceedings for details of a
claim by us against Electronic Data Systems Corporation and
Electronic Data Systems Limited in respect of the systems
integration, software development and business implementation
services provided to the Group as part of the Groups
investment in CRM software and infrastructure.
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. This is backed up by a second facility which was
completed in 2003.
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 fibre link, which is backed up by a diversely
routed secondary link in case of any malfunction in the primary
fibre route. This route passes through the second facility so
that, in the case of Chilworth being unavailable, the services
can be uplinked directly from the second facility. The
compression facilities for the majority of services have been
re-engineered to allow this to be achieved. The re-engineering
for the remainder of the services is expected to be completed by
December 2005. In the event of failure of our primary playout
site, we have alternative facilities available, though at the
present time, the restoration of services would not be
immediate. However, we have completed the construction and
commissioning of the ATC which provides a complete alternative
playout facility. Over the course of the next 12 months, we
will bring it into live operation, providing a playout and
broadcast systems disaster recovery capability and gradually
evolving this into a live playout facility for our channels,
enabling diversification of the playout of our channels.
Expenditure on the facility to 30 June 2005 was
£39 million, which was funded out of operating cash
flows.
For those third parties to whom we sub-lease transponder
capacity, we usually have agreements in place to provide
uplinking facilities as well.
Emerging Technologies
In the UK, consumer broadband DSL access remains focused on the
provision of internet access with typical speeds of
approximately 1-2 Megabits per second (Mbit/s). Two operators
have developed DSL networks with the capacity to deliver digital
television services to homes: Kingston Communications in
Kingston-upon-Hull and VNL in parts of London. We retail
television services directly to homes connected to both of these
DSL networks (having contracted for a network access service
with each DSL platform operator).
In Kingston-upon-Hull, we have, since 1 November 2002,
retailed certain of the Sky Channels and a number of channels
owned by third parties to subscribers via Kingston
Communications DSL network (as at 30 June 2005, to
approximately 3,200 subscribers).
We began offering subscriptions to certain of the Sky Channels
to households connected to VNLs platform in August 2004.
VNL distributes pay-television and broadband access services via
a DSL platform that it has established in Greater London (as at
31 May 2005 there were approximately 2,300 subscribers to
our services on the VNL network), marketed under the brand
Homechoice. Although the service has existed for
several years, VNL undertook a refinancing in 2003 and has
extensively revised its service as a consequence. The latest
version of the service was launched commercially in May 2004 and
offers access to a range of broadcast channels and
video-on-demand content, including movies packaged together with
broadband internet access. VNL has indicated that it intends,
subject to raising the necessary financing, to extend its DSL
platform throughout the UK. We have entered into an agreement
with VNL which gives us access to VNLs platform to enable
us to retail the Sky Premium Channels to customers who already
subscribe to VNLs services. In addition, VNL provides us
with certain customer management, billing and
33
sales agency services in respect of our subscribers receiving
the Sky Premium Channels via VNLs platform. In return for
these services, we pay VNL a fixed monthly fee per subscriber
who subscribes to a Sky Premium Channel on the VNL platform.
We are currently also evaluating other possible means of
distributing our services other than by DTH, cable, DSL and DTT,
such as by Digital Audio Broadcasting (DAB), Digital Video
Broadcasting Handhelds (DVB-H), the internet,
General Packet Radio Service (GPRS) and 3G.
Subscribers to our current broadband internet services are able
to download an application that provides access to Sky Sports
programming on their PC, including match highlights, interviews,
programme clips and Sky Sports News bulletins (Sky Sports
Broadband). Before the end of calendar 2005, it is
envisaged that DTH subscribers who subscribe to both Sky
Sports 1 and Sky Sports 2, and who have broadband
internet access, will be able to download Sky Sports Broadband
to their PC for free. It is envisaged that subscribers who
subscribe to both Sky Movies 1 and Sky Movies 2, and
who have broadband internet access, will be able to download for
free an application that provides access to a Sky Movies
on demand service (Sky Movies
Broadband). Sky Movies Broadband is planned to include a
selection of approximately 200 movies at launch, which it
is planned will increase over time. It is envisaged that
subscribers taking a Sky World Package (the pre and post
1 September 2005 package containing all of the Sky Premium
Channels), and who have broadband internet access, will be able
to download both Sky Sports Broadband and Sky Movies Broadband
for free.
Also in late calendar 2005, we are planning to launch a streamed
mobile content application service. These plans envisage that
subscribers taking a Sky World package will be able to receive
news and video updates from Sky News and Sky Sports News via
their mobile phone. The application is planned to be available
across multiple mobile networks to subscribers with a compatible
handset.
We are currently developing our HDTV service (see
Distribution DTH Distribution
above) which we plan to launch in the first half of calendar
2006. HDTV delivers a superior picture compared to standard
definition television and is the preferred format for a growing
number of televison productions in various genres including
sports, drama, entertainment and music.
We have developed an internet-compatible microbrowser
application to work with current digital satellite digiboxes
which deploys an enhanced Wireless Mark-Up Language
(WTVML). WTVML is based on internet standards which
are familiar to Web developers, enabling content to be authored
easily, and the nature of the microbrowser makes it suitable for
a broad range of e-television and e-commerce applications,
facilitating greater interoperability between different
television devices and the internet.
WTVML has been published as a European Telecommunications
Standards Institute (ETSI) standard, making it
available for deployment on other devices and platforms. We
launched a new e-business service on our DTH platform in July
2005, which we anticipate will have the effect of stimulating
the conversion of many web services into WTVML-based services.
We have also developed technology allowing WTVML services to be
transcoded into formats suitable for other networks. This will
allow us to manage the deployment and distribution of
interactive e-business services to other small footprint
devices, including mobile phones and other television networks.
We also participate actively in the Digital Video Broadcasting
(DVB) standardisation group and are helping to drive
an activity called The Portable Content Format which
hopes to build on the above interoperability principles, and
create growth in television-based interactive services by
delivering interoperability on a large scale.
Minority Equity Investments
In September 2005, we disposed of our 35.8% equity interest in
Music Choice Europe plc for £1 million.
In November 2004, we disposed of our 49.5% investment in Granada
Sky Broadcasting Limited (GSB) for
£14 million.
34
In March 2005, we acquired 50% of the share capital of Artsworld
Channels Limited for cash consideration of £1 million,
bringing our total shareholding to 100%.
In March 2004, we disposed of our 20% interest in QVC (UK),
operator of QVC The Shopping Channel for
£49 million.
In July 2003, we sold our 9.9% equity interest in Chelsea
Village plc, the parent company of Chelsea Football Club, for
£6 million. In October 2003, we sold our 9.9% equity
interest in Manchester United PLC, with whom (together with
Granada Media Group Limited) we hold an interest in the MUTV
Limited joint venture, for £62 million. Leeds United
PLC, the parent company of Leeds United football club, in which
we hold a 9.1% stake, went into administration in March 2004.
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 Union. The regimes which affect our business include
broadcasting, telecommunications and competition (anti-trust)
laws and regulation.
BROADCASTING AND TELECOMMUNICATIONS REGULATION
UK
Communications Act 2003
The Communications Act 2003 (the Communications Act)
forms the basis of the communications regulatory regime in the
UK which is enforced by a single unified regulator, Ofcom (which
replaced the five previous regulatory bodies responsible for the
sector, including the Office of Telecommunications
(Oftel) and the Independent Television Commission
(ITC)).
Under the Communications Act Ofcom is introducing a new system
for the management of spectrum. This is intended to enhance the
efficiency of spectrum use through liberalisation of use and
trading in spectrum, whilst protecting the quality of spectrum.
This new regime may include a voluntary system of Recognised
Spectrum Access (RSA) which would afford some
protection from interference for satellite downlinks and would
include a charging mechanism for the use of relevant spectrum.
Ofcom intends to consult the public on the application of RSA to
satellite downlinks in the last quarter of calendar 2005.
Ofcom review of public service broadcasting
Ofcom has undertaken, under the Communications Act, a review of
public service broadcasting. In September 2004, Ofcom published
its second report on this review in which it considered the
position of public service broadcasting after digital
switchover. In the report, Ofcom makes a number of proposals,
one of which is the creation of a Public Service
Publisher (PSP), a new publicly-funded
service, which Ofcom considers would ensure a continued
plurality in the provision of public service broadcasting. Ofcom
published its final report on this review in February 2005 in
which it expanded on the PSP concept.
Ofcom considers that the PSP would require around
£300 million funding a year. It contemplates three
possible sources of funding for the PSP: general taxation, an
enhanced television licence fee, or a tax on the turnover of UK
licensed broadcasters. It is therefore possible, if the
Government and Parliament were to accept the PSP proposition and
fund it under the broadcaster tax model, that the Group would be
required to contribute to such funding.
The Government has subsequently proposed (in the green paper
entitled Review of the BBCs Royal Charter
A strong BBC, independent of government
published in March 2005) that a review of whether there is a
case for providing funding to recipients beyond the BBC (such as
Ofcoms proposed PSP) should
35
take place towards the end of the process of digital switchover
(see Competition New Technologies
(Competition) Digital Switchover section
above).
Our Television Services Licences
The broadcasting services provided by us are currently regulated
by Ofcom as Television Licensable Content Services
(TLCS), Digital Television Programme Services
(DPS), and Digital Television Additional Services
(DAS) pursuant to the Broadcasting Act 1990, as
amended and supplemented by the Broadcasting Act 1996 (together,
the Broadcasting Acts) and the Communications Act.
We and our broadcasting joint ventures each currently hold a
TLCS licence for each of our respective channels and for a
number of other broadcasting services, including our EPG on
digital satellite. A TLCS licence permits a channel to be
broadcast on cable or satellite but does not confer on a TLCS
licensee the right to use any specified satellite, transponder
or frequency to deliver the service. TLCS licences are granted
for an indefinite duration (for so long as the licence remains
in force) and new licences are issued by Ofcom if certain
minimum objective criteria are met. We have also been issued a
DPS licence, which is required for the distribution of our
channels via DTT, and a DAS licence for the distribution of
other services (including Sky Text) on DTT.
Ofcom Powers
In common with all television licences issued by Ofcom, our
licences impose on us an obligation to comply with the Codes and
Directions issued by Ofcom 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 were inherited
by Ofcom which took over the responsibility from the ITC (and
other legacy regulators) for regulating broadcast content. In
July 2005, Ofcoms new Broadcasting Code came into force
replacing the six Codes it inherited from the ITC and other
legacy regulators (the Broadcasting Standards Commission
(BSC) Code on Fairness and Privacy, the BSC Code on
Standards, the ITC Programme Code, the ITC Code of Programme
Sponsorship, the Radio Authority (RA) News and
Current Affairs Code and Programme Code, and the sponsorship
rules contained in the RA Advertising and Sponsorship Code). The
changes introduced by the Broadcasting Code include a more
qualified test concerning harm and offence (allowing
greater editorial justification for more challenging material),
and some relaxation of the rules concerning sponsorship and
commercial references in programmes (notably non-promotional
references can be made in programmes to sponsors where
editorially justified). In July 2005, Ofcom also published new
Rules on the Amount and Distribution of Advertising
(RADA) which replaced the ITCs Rules on Amount
and Scheduling of Advertising (RASA). RADA does not,
however, introduce any new significant obligations on
broadcasters in comparison to RASA.
Ofcom may revoke a licence in a range of circumstances,
including licence breach, in order to enforce the restrictions
contained in the Broadcasting Acts (as amended by the
Communications Act) 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 licence. In addition, the
amended Broadcasting Acts prohibit disqualified
persons from holding certain licences. Disqualified
persons include any bodies whose objects are wholly or mainly of
a political nature and advertising agencies. Religious bodies
are prohibited from holding certain licences but can seek
Ofcoms prior approval to hold other types of licences
(including a TLCS or DPS licence).
Media Ownership
The UKs rules in respect of media ownership, which are
contained in the Broadcasting Acts and the Communications Act,
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 any
Channel 3 licence (which covers the 15 regional ITV1 licences
and GMTV). Certain restrictions also apply to the ownership of
local radio businesses by persons that own local newspapers in
the same area (or to
36
persons who are connected to such persons). There are also
certain restrictions on the ownership of multiple radio
multiplex licences. The Communications Act has also introduced a
plurality test for media mergers (see
Competition (Anti-trust) Law UK Competition
Law Regime Enterprise Act 2002
Additional Measures below).
Digital Terrestrial Television
The Broadcasting Act 1996 established a framework for 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 licences to the
BBC and Crown Castle UK Limited for an initial twelve year term.
As part of an agreement with Crown Castle UK Limited, we agreed
to supply initially versions of three channels, namely Sky News,
Sky Sports News and Sky Travel, unencrypted free-to-air via the
DTT platform marketed under the brand Freeview (see
History and Development of the Group and Business
Overview Distribution DTT
Distribution above). In September 2005, we announced that
we plan to launch Sky Three in October 2005, which it is
planned will be the new name for Sky Travel on DTT.
Listed Events Limits on Exclusive Distribution
Rights
The Broadcasting Act 1996 (as amended by the Communications Act)
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 of Ofcom. The
effect of these rules is that many leading sports events cannot
be shown exclusively live on pay television in the UK. In August
2004, Ofcom published a consultation on a draft Code on listed
events which largely seeks to formalise the listed events regime
as previously applied by the ITC. Ofcom has not yet published
the final Code. In September 2005, the Secretary of State for
Culture, Media and Sport indicated that a review of listed
events is likely to take place around 2008/09.
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. The effect of
these rules is that many leading sports events cannot be shown
exclusively live on pay television in Ireland.
Television Access Services
The Communications Act prescribes certain annual targets for
television access services (subtitling, audio description and
signing) broadcasters licensed channels must meet. Ofcom
has set out its guidance on broadcasters compliance with
these requirements in its Code on Television Access Services
which applies to all licensed channels. Under this Code, Ofcom
requires broadcasters to provide quarterly returns to Ofcom
reporting on their licensed channels compliance over the
previous quarter. In August 2005 Ofcom published its first
report on broadcasters compliance in relation to the first
quarter of 2005: it noted that whilst the majority of Skys
channels had exceeded the relevant targets in the first quarter
of 2005, a number of the relevant targets were not. Ofcom
confirmed in this report, however, that it only expects
broadcasters to comply with these targets over the course of
2005 (as a whole) and not in each and every quarter of 2005.
Our Telecommunications Licences
We operated under a number of class licences under the
Telecommunications Act 1984 in relation to the technical side of
our transmissions until 25 July 2003, when these class licences
were revoked by the Communications Act and replaced with
authorisations or continuation notices. The most important of
these relate to conditional access, EPGs and access control
services for digital transmissions. These are discussed further
in the context of the UKs implementation of European Union
legislation (see European Union Electronic
Communications Directives below).
37
European Union
The Television Without Frontiers Directive
The EC Television Without Frontiers Directive 1989 (TWF
Directive), as revised in 1997, sets forth basic
principles for the regulation of television broadcasting
activity in the European Union. 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 to implement the
TWF Directive properly.
The European Commission is currently consulting on the
provisions of the TWF Directive. The principal issue is whether
to extend the scope of the TWF Directive, which currently only
applies to broadcasting, to include all audiovisual content
delivered by electronic means (but excluding private
communications). This could mean that non-linear services (such
as services delivered using the internet) would be required to
meet certain standards including in relation to the protection
of minors and human dignity. Other issues for consultation
include stricter monitoring and enforcement of the programme and
independent production quotas and new provisions in relation to
cross-border access to rights to short programme extracts for
use in informational programmes (such as news programmes). The
Commission expects to put forward proposed legislation to amend
the TWF Directive at the end of 2005. If adopted, amendments are
unlikely to come into effect for several years. At this stage,
the Group is unable to ascertain the outcome of this
consultation process.
Programme and Independent Productions Quotas
Articles 4 and 5 of the TWF Directive require 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 discretion of the Member State, at least 10% of
their programming budget for European works created by producers
who are independent of broadcasters (in relation to (b) an
adequate proportion of such works should be produced within the
five years preceding their transmission). The term where
practicable and by appropriate means is not defined in the
TWF Directive and is left for the interpretation of each Member
State. In applying these requirements, broadcast time covering
news, games, advertisements, sports events, teletext and
teleshopping services are excluded.
A condition requiring licensees to comply with these
requirements of the TWF Directive, where practicable, and having
regard to any guidance issued by Ofcom for the purpose of giving
effect to the relevant provisions of the TWF Directive, was
introduced by Ofcom into all Broadcasting Act licences
(including TLCS and DPS licences) in December 2003. On 10
February 2005, Ofcom published guidance in relation to
compliance with Articles 4 and 5 of the TWF Directive.
Ofcoms guidance requires television broadcasters, who
consider that it would not be practicable to meet one or more of
the quota requirements, to explain why to Ofcom, which will
advise whether any remedial measures are necessary. If Ofcom
does not accept that it is not practicable for a broadcaster to
meet the relevant quota requirements, possible consequences may
include Ofcom issuing a direction under the Broadcasting Act
licence requiring compliance with the licence condition and a
fine for contravention of the licence condition. Ofcom also has
the ultimate power to revoke a broadcasters Broadcasting
Act licence where it is found to be in breach of its licence (if
no other remedies are considered appropriate). Ofcoms
approach to enforcement of the licence conditions is not yet
known and is not addressed in the guidance.
A number of our channels currently meet the relevant quota
requirements for both European works and European independent
productions. Some of our channels only meet one of the relevant
quotas and some do not meet either quota. For those channels
that do not currently reserve the required proportion of
relevant transmission time to European works or to European
independent productions, it may not be practicable to do so, in
which case those channels would still comply with the condition
in their Broadcasting Act licences. Ofcom has not advised that
any remedial measures are necessary in respect of
38
these channels, nor has it advised that it does not accept that
it is not practicable for any of these channels to meet the
relevant quota requirements.
Electronic Communications Directives
The EC Electronic Communications Directives, which include the
Access Directive, Authorisation Directive, Framework Directive
and Universal Services Directive, (together the EC
Directives) provide a framework for the regulation of
electronic communications networks and services and associated
facilities within the European Union. The EC Directives, notably
the Framework and Access Directives, apply to us in relation to
the regulation of conditional access services, access control
services, EPGs and standards for the transmission of television
signals. Their provisions were implemented in the UK by the
Communications Act in July 2003 and which conferred the
regulatory function in the UK on Ofcom. The European Commission
is obliged to undertake a periodical review of the functioning
of the EC Directives by July 2006.
Conditional Access Services and Technology
The regulation of conditional access for digital television
services is carried out in the UK under the Communications Act,
the principal requirements of which include:
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that the provision of conditional access services to other
broadcasters should be on fair, reasonable and
non-discriminatory terms; |
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that providers of conditional access services should co-operate
with cable operators regarding transcontrol (the process of
changing a conditional access system) at cable
head-ends; and |
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that, where conditional access technology is licensed to
manufacturers of digital decoders, such licences should be on
fair, reasonable and non-discriminatory terms. |
These requirements have been applied as conditions imposed under
the Communications Act on our subsidiary Sky Subscribers
Services Limited (SSSL), which has been identified
as a provider of conditional access services.
In May 2002, Oftel published its guidelines entitled The
pricing of conditional access services and related issues
and in October 2002 published revised guidelines on the pricing
of conditional access services. These guidelines set out
Oftels policy towards the regulation of the supply of
conditional access (and access control) sources (including the
structure of tariffs charged for such services). They continue
to be applied by Ofcom, which in May 2005 started a review of
these guidelines. We are co-operating with this review. At this
stage, we are unable to determine whether the review will have a
material effect on the Group.
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, SSSL, is currently designated a
regulated supplier in respect of its activities in providing
access control services to third parties on our DTH 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 favour related companies.
This designation, set out in a continuation notice issued by
Oftel under the Communications Act in July 2003, will remain in
place for as long as SSSL is considered to have significant
market power. In November 2003, Oftel commenced a review under
the Communications Act 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 was in January 2004. Ofcom has yet to
publish its conclusions to this consultation; in the meantime,
SSSL continues to be subject to the regulatory regime under this
continuation notice.
We expect that Ofcoms review of its statement of policy
and revised guidelines regarding the pricing of conditional
access services will also extend to the pricing of access
control services.
39
Regulation of Electronic Programme Guides
In addition to being required to hold a TLCS license in relation
to the broadcasting of our EPG, the provision of EPG services is
also regulated. We are required to provide these services to
other broadcasters on fair, reasonable and non-discriminatory
terms and not to favour related companies. These requirements
have been applied under a continuation notice issued by Oftel in
July 2003. Ofcom has consulted on replacing this continuation
notice with authorisation conditions under the Communications
Act, the deadline for comments on the consultation document
having been in March 2004. Ofcom has yet to replace this
continuation notice following this consultation and therefore
the continuation notice still applies. The Communications Act
does not, however, envisage that the manner of regulation of
EPGs will change.
We are also required to offer listings on our EPG in accordance
with Ofcoms Statement on Code on Electronic Programme
Guides (July 2004) (EPG Code), which applies to all
providers of EPGs licensed under the Broadcasting Acts. This
requires us to give public service channels (which currently
comprise all BBC television channels, ITV1, Channel 4,
five, and S4C Digital and the digital public
teletext service) such degree of prominence as Ofcom considers
appropriate. Ofcoms EPG Code provides guidance as to its
interpretation of this requirement. We are also obliged by
Ofcoms EPG Code, inter alia, to provide EPG
services on fair, reasonable and non-discriminatory terms; not
to give undue prominence to connected channels; to maintain and
publish an objective policy for allocating listings; and not to
require exclusivity on an EPG for any service.
Transmission Standards
The use of standards for the transmission of television signals
is also governed by the EC Directives (notably the Access and
Universal Services Directives) which required Member States to
impose transmission standards on broadcasters of television
services. These requirements on technical standards have been
implemented in the UK by The Advanced Television Services
Regulations 2003 and are administered by Ofcom.
Interoperability
Under the terms of the Framework Directive, the European
Commission published its review of progress towards facilitating
access for content providers to multiple platforms in July 2004.
The European Commission found that there was no case for
mandating the use of technical standards for the delivery of
interactive services at present, but that Member States should
continue to promote open and interoperable standards for
interactive digital television. The European Commission will
review whether there is sufficient progress again in the second
half of the 2005 calendar year.
Ireland
We are currently not regulated by the Irish national
communications regulatory authority, the Commission for
Communications Regulation (ComReg), as the services
offered by us fall under the jurisdiction of Ofcom in the UK.
All of the EC Directives were also implemented in Ireland on 25
July 2003. During the consultations concerning the
implementation of the EC Directives in Ireland, ComReg indicated
that it would be seeking to regulate our Irish operations.
However, in June 2003, ComReg clarified 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 EC Directives.
The Irish Governments Department of Communications has
indicated an intention to introduce new legislation which we
understand may, inter alia, seek to introduce new
consumer protection measures in relation to retailing of
broadcasting services to customers in Ireland. A draft
legislative bill has not yet been published or laid before the
Irish Parliament and no indication has yet been given as to when
publication can be expected or what the bill will contain. At
this stage, we are therefore unable to ascertain its potential
applicability to, or its effect on, the Group.
40
Environmental
We are subject to environmental regulations that require our
compliance. Failure to meet the requirements of such regulations
may lead to fines being incurred or damage to our brand image.
Recent regulations based on European Union Directives, notably
the Waste Electrical and Electronic Equipment Directive
(WEEE Directive) and the Restriction on the use of
certain Hazardous Substances in electrical and electronic
equipment Directive (RoHS Directive) necessitate the
removal of stipulated hazardous substances from products placed
on the market after mid 2005 within set timeframes and the
recovery and recycling of electrical products to specified
levels. Both apply to our purchase and supply of digiboxes and
related equipment and require registrations to be completed by
us, our suppliers and retailers.
Other changes in the categorisation, segregation, storage and
removal of certain hazardous wastes require us to register sites
that produce such wastes. Without registration, hazardous wastes
are not able to be removed from site for disposal. Incorrect
disposal may lead to regulatory action.
We track draft environmental directives and regulations to
establish their applicability to the business and enable an
appropriate response to be planned and implemented.
COMPETITION (ANTI-TRUST) LAW
We are subject to the European competition law regime
(administered by the European Commission and by the competition
authorities and 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 Ofcom under powers
contained in the Communications Act.
UK Competition Law Regime
The Competition Act 1998
On 1 March 2000, the Competition Act 1998
(Competition Act) came into force in the UK. It
aligns UK domestic competition law with European law, in
particular Articles 81 and 82 of the EC Treaty.
Anti-Competitive Agreements
The Chapter I prohibition of the Competition Act prohibits
agreements which have the object or effect of preventing,
restricting or distorting competition in the UK. An agreement
will only infringe the Chapter I prohibition if it is
likely to have an appreciable effect on competition.
Agreements which fall within the scope of the Chapter I
prohibition will not be prohibited where they meet specific
statutory criteria, that is, where they produce beneficial
effects in improving production or distribution or promoting
technical or economic progress, 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.
Abuse of a Dominant Position
The Chapter II prohibition of the Competition Act prohibits
abusive behaviour by dominant firms.
Infringement of Chapter I or Chapter II may result in
significant consequences including fines, voidness or
unenforceability of all or part of infringing agreements,
prohibition of infringing conduct and potential liability to
affected third parties (notably for damages).
Effect on Our Affairs
In November 2001, the arrangements relating to the Attheraces
(ATR) joint venture (made between Arena Leisure plc,
the Group, Channel Four Television Corporation and The
Racecourse Association Limited (RCA)) were notified
to the Office of Fair Trading (OFT) seeking either a
clearance or exemption
41
under Chapter I of the Competition Act. In April 2004, the
OFT issued its decision in which it found that the
Chapter I prohibition of the Competition Act 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 ATR. The OFT did not impose a penalty on the
notifying parties. The RCA and the British Horseracing Board
appealed the OFTs decision to the Competition Appeal
Tribunal (CAT) which issued its judgment in August
2005. The CAT found that the OFT had erred in its decision and
was wrong to find an infringement of the Chapter I
prohibition. The OFTs infringement decision was therefore
set aside.
Enterprise Act 2002
Market Investigations
The market investigation provisions of the Enterprise Act 2002
(Enterprise Act) 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. Ofcom has
market investigation powers, concurrent with the OFT, in
relation to the communications sector. Instead of making a
reference to the CC, the OFT or Ofcom may accept remedial
undertakings from the companies concerned.
Where the OFT (or, in relation to the communications sector,
Ofcom) makes a market investigation reference to the CC, the CC
will conduct a detailed inquiry. The CC may decide that remedial
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.
Any decision by the OFT, the CC or Ofcom relating to market
investigations can be appealed to the CAT (on a judicial review
basis).
Additional Measures
The Enterprise Act has reformed UK competition law in a number
of other ways:
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a criminal cartel offence has been created, applying to
individuals participating in arrangements involving price
fixing, market sharing, bid rigging or limitations of
production. This criminal offence operates alongside the
existing civil regime under the Competition Act. Investigations
are carried out by the OFT and the Serious Fraud Office. The
maximum penalty for infringement (for those individuals found to
have committed the offence) is up to five years
imprisonment 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 European competition law have been introduced; and |
|
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a turnover test has been introduced for establishing
jurisdiction over mergers, together with a competition-based
test to be applied in assessing them. The UK competition
authorities exercise control over mergers that meet a turnover
test or a share of supply test (relevant merger
situations). The OFT has a duty to refer a case to the CC
for investigation where it believes that it is or may be the
case that a relevant merger situation has arisen or is proposed
and that the relevant merger situation results or may be
expected to result in a substantial lessening of competition in
the UK. |
The Communications Act has amended the Enterprise Act merger
control provisions to introduce (among other things) a
plurality test for mergers between broadcasters (or
involving broadcasters and newspaper enterprises). Under the
plurality test, the Secretary of State is able to intervene in,
and take certain decisions concerning, mergers involving
broadcasters, on the basis of the plurality test. The Government
issued guidance in May 2004 stating, however, that its policy is
to consider intervention in mergers involving media enterprises
only where the media ownership rules have been removed by the
Communications Act, save in exceptional circumstances (which
would be where the Secretary of State considers that the merger
would give rise to serious public interest concerns).
42
Effect on our Affairs
Our operations are subject to both the Enterprise Act and the
Communications Act. To date, there have been no market
investigation references made to the CC which concern any sector
in which the Group is active. The Secretary of State has yet to
invoke the media plurality intervention powers in relation to a
media merger.
Ofcom Competition Jurisdiction
In addition to its concurrent powers under the Competition Act
in relation to the communications sector, under the
Communications Act Ofcom has (among others) a duty to further
the interests of consumers, where appropriate, by promoting
competition in relevant markets. It also has powers to use
Broadcasting Act licence conditions to ensure fair and effective
competition in the provision of licensed services and connected
services.
Ofcom has not made any rulings using either its concurrent
Competition Act powers or powers to ensure fair and effective
competition under the Communications Act that have had a
material adverse effect on our business during fiscal 2005.
Irish Competition Law Regime
Our operations in Ireland are subject to the Irish competition
law regime which regulates anti-competitive agreements, abuses
of dominant positions, and mergers.
European Union 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 European Union
collectively). An agreement may infringe Article 81 only if
it is likely to have an appreciable effect on competition.
Agreements which fall within the scope of Article 81(1) EC
Treaty will not be prohibited where they meet specified
statutory criteria, that is, where they produce beneficial
effects in improving production or distribution or promoting
technical or economic progress, 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.
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.
Infringement of Article 81 or Article 82 may result in
significant consequences including fines, voidness or
unenforceability of all or part of infringing agreements,
prohibition of infringing conduct and potential liability to
affected third parties.
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 certain turnover thresholds specified in the EC
Merger Regulation. Such transactions may not 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.
43
Effect On Our Affairs
European Commission Investigation Football
Association Premier League Limited
The European Commissions investigation into the
FAPLs joint selling of exclusive broadcast rights to
football matches has not yet concluded: the Commission published
a notice on 30 April 2004 inviting third party comments on
its intention to adopt a decision making commitments offered by
the FAPL legally enforceable and to close its file. Among other
things, these commitments would address the next auction of
rights by the FAPL for the 2007/08 and subsequent seasons. The
outcome of this consultation has not yet been disclosed and the
Commission has not yet adopted a decision.
The Commission confirmed last year in a comfort
letter that, on the basis of performance by the Group of
certain commitments given by the Group to the Commission, it has
fully and finally settled the Commissions other
investigations in connection with the Groups bids for all
rights in relation to FAPL matches throughout the 2004/05 to
2006/07 FAPL seasons and any resulting agreements between the
Group and FAPL.
European Commission Investigation Movie
Contracts
The European Commission has announced in a press release (dated
26 October 2004) that it has closed its investigations with a
number of major US movie studios into certain terms on which
movies produced by them are supplied to distributors, including
pay television operators, throughout the European Union. The
investigations related to most favoured nations
(MFN) clauses in these studios output agreements. The
studios offered to withdraw the MFN clauses in their output
agreements. The Commission stated in its press release that two
studios had not, however, offered to withdraw such clauses, in
relation to which it appears that the Commissions case
remains open. The Commission has not published any further
statement or (final or provisional) decision indicating the
actual terms on which it has closed its investigation.
European Commission Sector Inquiry New
Media Sports Rights
In September 2005, the European Commission published its
concluding report on its sector inquiry into the provision of
audio-visual content from sports events over 3G networks,
which it had initiated in January 2004.
The European Commission has identified a number of commercial
practices which it considers raise competition concerns in
relation to the availability of mobile sports content and on
which it states that it will focus in the future. Among others,
these include: (i) the sale of what the European Commission
considers to be bundled audiovisual rights for various retail
platforms to one or a few operators, in relation to which the
European Commission has said that it will target situations
where rights to premium sports remain under-exploited through
such bundled sale of rights and subsequent warehousing of rights
by powerful operators; and (ii) restricting the length and
timing of 3G transmissions of sports coverage, which the
European Commission considers may have a negative impact on the
value of 3G rights and the take-up of 3G sports
services by consumers.
The European Commission has stated that it will take account of
the findings of the sector inquiry in future proceedings in this
area. It has also stated that it will further review,
together with the relevant national competition authorities of
Member States, potentially harmful situations identified during
the sector inquiry, and that procedures will be initiated in
cases where behaviour is not adjusted to comply with the
requirements of competition law.
The European Commission has not announced any proceedings
arising from situations identified in the sector inquiry or
publicly indicated which individual companies might be the
subject of proceedings. At this stage, we are unable to
determine whether the European Commissions concluding
report or any subsequent proceedings might have a material
effect on the Group.
44
PROPERTY, PLANT AND EQUIPMENT
Our headquarters are located at leasehold and freehold premises
in Osterley, England.
The principal properties of the Group are as follows:
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Current | |
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annual | |
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Approximate | |
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rent or | |
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square foot | |
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licence | |
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net internal | |
Location |
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Tenure |
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Use |
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Term |
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fee | |
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area | |
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| |
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1, 2, 3a/3b, 4, 5, 6 and 7 Grant Way
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Freehold |
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Offices, studios, |
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n/a |
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n/a |
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272,157 |
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Centaurs Business Park, |
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technology and |
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Osterley, Isleworth, England |
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storage |
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8 Grant Way (Cromwell Centre)
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Leasehold |
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Offices and storage |
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Lease expires |
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£ |
350,000 |
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37,567 |
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Centaurs Business Park, Osterley, |
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1 July 2008 |
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Isleworth, England |
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Athena Court, Centaurs Business
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Leasehold |
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Offices |
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Lease expires |
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£ |
990,000 |
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53,583 |
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Park, Osterley, Isleworth, England |
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23 June 2008 |
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New Horizons Court,
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Leasehold |
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Offices |
|
Lease expires |
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£ |
546,147 |
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22,152 |
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Courtyard Units 1-7 |
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25 June 2007 |
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The Courtyard, Brentford, England |
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New Horizons Court,
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Leasehold |
|
Offices |
|
Lease expires |
|
£ |
2,509,434 |
|
|
|
134,851 |
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|
Units 1-4, Brentford, England |
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25 December 2011 |
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West Cross House,
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Leasehold |
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Offices |
|
Lease expires |
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£ |
1,349,694 |
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72,420 |
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Brentford, England |
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26 March 2019 |
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Unit 7 West Cross Industrial
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Leasehold |
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Offices |
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Lease expires |
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£ |
125,944 |
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|
|
11,248 |
|
|
Estate, Centaurs Business Park, |
|
|
|
|
|
20 May 2014 with |
|
|
|
|
|
|
|
|
|
Osterley, Isleworth, England |
|
|
|
|
|
break options on
21 May 2007,
21 May 2008 and
21 May 2009 |
|
|
|
|
|
|
|
|
|
206 Harlequin Avenue,
|
|
Freehold |
|
Office and storage |
|
n/a |
|
|
n/a |
|
|
|
5,000 |
|
|
Brentford, England |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214 Harlequin Avenue,
|
|
Freehold |
|
Office, industrial and |
|
n/a |
|
|
n/a |
|
|
|
n/a |
|
|
Brentford, England |
|
|
|
car park |
|
|
|
|
|
|
|
|
|
|
|
The Chilworth Research Centre,
|
|
Leasehold |
|
Satellite uplink |
|
Lease expires |
|
£ |
1 |
|
|
|
93,810 |
|
|
Southampton, England |
|
|
|
|
|
25 February 2087 |
|
|
|
|
|
|
|
|
|
Knowle Lane, Fair Oak,
|
|
Freehold |
|
Satellite uplink |
|
n/a |
|
|
n/a |
|
|
|
43,087 |
|
|
Eastleigh, England |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 Buckingham Palace Road,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
£ |
1,834,300 |
|
|
|
36,500 |
|
|
London, England |
|
|
|
|
|
31 March 2017 with an option to terminate at
24 March 2012 |
|
|
|
|
|
|
|
|
|
4 Millbank, Westminster,
|
|
Leasehold |
|
Offices and studio |
|
Lease expires |
|
£ |
281,868 |
|
|
|
4,917 |
|
|
London, England |
|
|
|
|
|
28 September 2014
with a break option on
28 September 2009 |
|
|
|
|
|
|
|
|
|
2nd Floor
A, Central House,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
£ |
56,460 |
|
|
|
5,473 |
|
|
Otley Road, Harrogate, England |
|
|
|
|
|
16 March 2010 |
|
|
|
|
|
|
|
|
|
2nd Floor
B, Central House,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
£ |
121,600 |
|
|
|
11,830 |
|
|
Otley Road, Harrogate, England |
|
|
|
|
|
15 August 2010 |
|
|
|
|
|
|
|
|
|
Marcopolo House and Arches,
|
|
Leasehold |
|
Sub-let |
|
Lease expires |
|
£ |
2,409,900 |
|
|
|
85,509 |
|
|
Queenstown Road, London, England |
|
|
|
|
|
24 December 2013 |
|
|
|
|
|
|
|
|
|
Welby House, 96 Wilton Road,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
£ |
311,250 |
|
|
|
8,138 |
|
|
London, England |
|
|
|
|
|
15 January 2015 |
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current | |
|
|
|
|
|
|
|
|
|
|
annual | |
|
Approximate | |
|
|
|
|
|
|
|
|
rent or | |
|
square foot | |
|
|
|
|
|
|
|
|
licence | |
|
net internal | |
Location |
|
Tenure |
|
Use |
|
Term |
|
fee | |
|
area | |
|
|
|
|
|
|
|
|
| |
|
| |
|
1, 2, 4 and 5 Macintosh Road,
|
|
Freehold |
|
Contact centres |
|
n/a |
|
|
n/a |
|
|
|
128,000 |
|
|
Kirkton Campus, Livingston, Scotland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carnegie Campus,
|
|
Freehold |
|
Contact centre |
|
n/a |
|
|
n/a |
|
|
|
75,431 |
|
|
Dunfermline, Scotland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Logic House,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
|
£222,000 |
|
|
|
13,900 |
|
|
Kirkton South, Livingston, |
|
|
|
|
|
3 October 2017 |
|
|
|
|
|
|
|
|
|
Scotland |
|
|
|
|
|
with a break option on
4 October 2007 |
|
|
|
|
|
|
|
|
Logic House,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
|
£185,833 |
|
|
|
9,219 |
|
|
Kirkton South, Livingston, |
|
|
|
|
|
3 October 2017 |
|
|
|
|
|
|
|
|
|
Scotland |
|
|
|
|
|
with a break option on
30 November 2008 |
|
|
|
|
|
|
|
|
|
Citygate, Dunfermline,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
|
£294,081 |
|
|
|
9,650 |
|
|
Scotland |
|
|
|
|
|
30 June 2007 |
|
|
|
|
|
|
|
|
|
Centrex, Livingston,
|
|
Leasehold |
|
Offices |
|
Lease expires |
|
|
£508,222 |
|
|
|
16,953 |
|
|
Scotland |
|
|
|
|
|
30 June 2006 |
|
|
|
|
|
|
|
|
See History and Development of the Group and Business
Overview Technology and Infrastructure
Capital Expenditure Programme above in relation to our
proposed capital expenditure on property.
|
|
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, included within Item 18. The
financial statements have been prepared in accordance with UK
GAAP, which differs in significant respects from US GAAP.
Note 27 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. The Group will be
reporting its financial results in accordance with International
Financial Reporting Standards (IFRS), as adopted by
the European Union, from 1 July 2005. Details of our
critical accounting policies and information regarding the
transition to IFRS are provided in the Critical Accounting
Policies and Adoption of New Accounting
Standards section below.
OVERVIEW AND RECENT DEVELOPMENTS
We have continued to deliver growth in fiscal 2005, which is
reflected in the 11% increase in total revenues compared to
fiscal 2004 to £4,048 million. Total operating costs
before goodwill and exceptional items increased by 6% to
£3,243 million, generating operating profit before
goodwill and exceptional items of £805 million. Total
operating costs after goodwill and exceptional items increased
by 5% to £3,346 million, generating operating profit
after goodwill and exceptional items of £702 million.
The operating profit margin before goodwill and exceptional
items increased to 20% in fiscal 2005, from 16% for fiscal 2004.
The operating profit margin after goodwill and exceptional items
increased to 17%, from 13% for fiscal 2004. During fiscal 2005,
we maintained our investment grade credit rating and have
returned £551 million to shareholders, through our
ordinary dividend and a share buy-back programme. Profit after
tax for fiscal 2005 grew to £425 million, generating
earnings per share of 22.2 pence, an increase of 34% on fiscal
2004.
At 30 June 2005, the total number of DTH subscribers in the
UK and Ireland was 7,787,000, representing a net increase of
432,000 subscribers in fiscal 2005. During the year, the number
of subscribers to one or more premium channels increased by
252,000 to 5,619,000. We remain on track to achieve our target
of 8,000,000 DTH subscribers by 31 December 2005. DTH churn
for fiscal 2005 was 10.3%, in line with our stated goal of
around 10%. We define DTH churn as the number of DTH subscribers
over a given period
46
that terminate their subscription in its entirety, net of former
subscribers who reinstate their subscription in that period
(where such reinstatement is within a twelve month period of the
termination of their original subscription).
The total number of Sky+ households increased by 491,000 in
fiscal 2005 to 888,000, which represents 11% penetration of
total DTH subscribers. Whilst continuing to penetrate the
existing subscriber base, Sky+ also attracts customers who had
previously not chosen Sky, with 31% of new Sky+ households in
fiscal 2005 being first time subscribers.
The total number of Multiroom households increased by 352,000 in
fiscal 2005, to 645,000, which represents 8% penetration of
total DTH subscribers. The total number of Multiroom
subscriptions reached 682,000 at 30 June 2005, which is in
excess of the total number of Multiroom households, as some
households take more than two subscriptions. Our long-term
target is to achieve 30% Multiroom and 25% Sky+ penetration of
DTH subscribers in 2010.
These figures highlight the operational gearing of our business
and the profitability of adding new subscribers and increasing
the yield per existing subscriber. We have concentrated on
raising the rate of subscriber growth by addressing the
remaining barriers to consumer adoption through the launch of
several initiatives. These have included the re-introduction of
the Sky brand, more targeted marketing, increasing the range of
entry points to pay-television and continued investment in
high-quality programming.
In September 2005, we introduced a simplified pricing and
packaging structure that offers customers increased choice and
flexibility. For further details, see Item 4
Programming. Whilst increasing the number of
available packages fivefold, we have also reduced the number of
price points from 96 to 15.
In October 2004, we added Sky+160 to our product portfolio. This
product offers customers around four times as much storage as
the standard Sky+ box and has two USB connections, increasing
its compatibility for future developments. At the same time, we
launched a new freesat service offering customers around 200
television and radio channels and interactive services, without
a monthly subscription fee. This provides an alternative for
approximately 50% of UK households that cannot receive Freeview
or require an aerial upgrade.
We plan to launch a comprehensive HDTV service in the first half
of calendar year 2006. Good progress was made during fiscal 2005
building the required broadcast infrastructure and facilities
and developing the HDTV digibox, which has the connectivity and
flexibility to offer advanced services in the future. This
premium service is planned to include initially a number of high
definition channels, including sports, movies and documentaries.
Since July 2004, we have successfully bid for a number of
sporting events, including exclusive live rights to
Englands primary domestic cricket matches and all of
Englands home test matches and one day internationals for
the 2006 to 2009 domestic cricket seasons; exclusive live rights
to Football League matches and the Carling Cup for the 2006/07
to 2008/09 domestic football seasons; a number of rugby union
matches including all Autumn international matches, Guiness
Premiership matches, England A Team matches from the 2005/06 to
2009/10 seasons and Heineken Cup matches from 2006/07 to
2009/10; broadcast rights to the UEFA Champions League for a
further three seasons from the 2006/07 season; exclusive live
rights to the inaugural A1 Grand Prix series for the
2005/06, 2006/07 and 2007/08 seasons; and exclusive live rights
to the 32nd Americas Cup yachting event to be staged
in 2007.
Corporate
In August 2004, we commenced proceedings in the High Court of
England and Wales for a material amount against Electronic Data
Systems Corporation and Electronic Data Systems Limited for
damages arising out of deceit, negligent misrepresentation and
breach of contract in respect of the systems integration,
software development and business implementation services
provided to the Group as part of the Groups investment in
CRM software and infrastructure. The amount that may be
recovered by the Group will not be finally determined until
resolution of the claim.
47
On 3 November 2004, we signed a new £1 billion
Revolving Credit Facility (RCF). The new facility
matures in July 2010 and will be used for general corporate
purposes and to refinance our previous, undrawn facility, which
was due to mature in March 2008. The new facility provides us
with an extension to the maturity profile of our previous
financing arrangements which it replaced, and delivers continued
financial flexibility at more favourable rates to us.
OPERATING RESULTS
Revenues
Our principal revenues result from DTH subscribers, cable
subscribers, the sale of advertising on our wholly-owned
channels, the provision of interactive betting and games and
other interactive services.
Our DTH subscription revenues are a function of the number of
subscribers, the mix of services taken and the rates charged.
Revenues from the provision of pay-per-view services, which
include Sky Box Office, are included within DTH or cable
subscriber revenues as appropriate.
Our cable subscription revenues (also referred to as wholesale
revenues), which are revenues derived 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 television programming to cable operators in the UK
and Ireland 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 individuals watching one
thirty-second commercial on a Sky Channel, together with the
quality of impacts delivered, and overall advertising market
conditions.
Our Sky Bet revenues are amounts receivable in respect of bets
placed on events which occur in the year, and net customer
losses in the year in respect of the on-line casino operations
and casino-style interactive roulette games.
Our Sky Active revenues include income from online advertising,
e-mail, telephony income from the use of interactive services
(e.g. voting), interconnect, text services and digibox
subsidy recovery revenues earned through conditional access and
access control charges made to customers on the Sky digital
platform.
Other revenues principally include income from installations,
digibox sale revenues (including the sale of Sky+ and Multiroom
digiboxes), Sky Talk revenues, service call revenue, warranty
revenue, customer management service fees and access control
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) licences 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 subscribers. The methods used to
amortise programming stock are described in the Critical
Accounting Policies section below.
Under our pay television agreements with the US major movie
studios, we generally pay a US dollar-denominated licence
fee per movie calculated on a per movie subscriber basis,
subject to minimum guarantees, which were exceeded some time
ago. During fiscal 2005, we managed our US dollar/pound
sterling exchange risk primarily by the purchase of forward
foreign exchange contracts and currency options
(collars) for up to five years ahead (see Item 11
Quantitative and Qualitative Disclosures about
48
Market Risk Currency Exchange Rates). Offering
multiplexed versions of our movie channels on the
DTH platform and on digital cable incurs no additional
variable 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 a fixed fee or no such fee at all. A number
of our distribution agreements are subject to minimum
guarantees, which are linked to the proportion of the total
number of subscribers receiving specific 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 and/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
functions 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.
Marketing costs include: (i) above-the-line spend (which
promotes our brand and range of products and services
generally); (ii) below-the-line spend (which relates to
growth and maintenance of the subscriber base, including
commissions payable to retailers and other agents directly for
the sale of subscriptions and the costs of our own direct
marketing to our existing and potential DTH subscribers);
and (iii) the cost of providing free or subsidised digital
satellite reception equipment to new customers and the
installation cost in excess of the relevant amount actually
received from the customer.
Subscriber management costs include CRM costs, supply chain
costs and associated depreciation. CRM costs are those
associated with managing the existing subscriber base, including
subscriber handling and DTH subscriber bad debt costs.
Supply chain costs relate to systems and infrastructure and the
installation costs of satellite reception equipment and
installation costs of new products purchased by subscribers such
as Sky+ and Multiroom digiboxes, including smart card costs.
CRM costs and supply chain costs are largely dependent on
DTH subscriber levels. Subscriber management costs exclude
both the cost of free or subsidised digital satellite reception
equipment and the installation cost to us in excess of the
amount actually received from the customer for such equipment
and installation, as these costs are included within marketing
costs.
Administration costs include channel management, facilities and
other operational overhead and central costs, and the cost of
awards granted under our employee share option schemes.
Amortisation of goodwill arising on the acquisitions of BiB and
SIG is included within administrative costs. The goodwill
arising on these acquisitions is being amortised over seven
years from the respective 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 telephone, internet and interactive
betting services under the brand name Sky Bet.
For certain trend information related to our operating expenses,
see the Trends and other information section below.
49
2005 FISCAL YEAR COMPARED TO 2004 FISCAL YEAR
Revenues
The Groups revenues can be analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
£m | |
|
% | |
|
£m | |
|
% | |
DTH subscribers
|
|
|
2,968 |
|
|
|
73 |
|
|
|
2,660 |
|
|
|
73 |
|
Cable subscribers
|
|
|
219 |
|
|
|
6 |
|
|
|
215 |
|
|
|
6 |
|
Advertising
|
|
|
329 |
|
|
|
8 |
|
|
|
312 |
|
|
|
9 |
|
Sky
Bet(i)
|
|
|
261 |
|
|
|
7 |
|
|
|
191 |
|
|
|
5 |
|
Sky
Active(i)
|
|
|
92 |
|
|
|
2 |
|
|
|
116 |
|
|
|
3 |
|
Other
|
|
|
179 |
|
|
|
4 |
|
|
|
162 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,048 |
|
|
|
100 |
|
|
|
3,656 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
Additional detail has been provided with regard to the analysis
of interactive revenues between the Groups betting and
games revenue Sky Bet and
other interactive revenues Sky
Active and the prior year comparatives have
been reclassified accordingly. |
DTH subscriber revenues
The increase of 12% in fiscal 2005 was driven by a
6% increase in the average number of DTH subscribers,
and a 5% increase in average DTH subscription revenue
per subscriber, to £374 at 30 June 2005 from £356
at 30 June 2004.
The total number of UK and Ireland DTH subscribers
increased by 432,000 in fiscal 2005. This was a result of an
increase in gross subscriber additions of 25,000 to 1,225,000 in
fiscal 2005 and the low level of DTH churn. DTH churn
for the year was 10.3% (2004: 9.7%).
The increase in average DTH subscription revenue per
subscriber reflected the change in our UK retail prices in
January and September 2004 and increased Multiroom subscription
revenues.
Cable subscriber revenues
Cable subscriber revenues increased by £4 million
compared to fiscal 2004, driven by an increase of
£10 million due to changes to wholesale prices in
January and September 2004, and the payment for carriage by
cable operators of Sky Sports Xtra and PremPlus, and a decrease
of £6 million due to the receipt of audit monies from
ntl in the prior year, which did not recur in fiscal 2005.
At 30 June 2005, there were 3,872,000
(2004: 3,895,000) UK and Ireland cable subscribers to our
programming.
Advertising revenues
The increase in advertising revenues of 5% reflects the
4% growth in the UK television advertising sector and
continued growth in the Groups share of this sector.
Our share of this sector has increased in recent years as
viewing levels to our portfolio of channels have increased (in
part due to the growth in subscribers to our channels) and as we
have added other third party channels to our sales portfolio.
Sky Bet revenues
Sky Bet revenues increased by 37% compared to fiscal 2004.
Betting gross margin (including duty and levy) (calculated as
Sky Bet revenues less betting costs as a percentage of Sky Bet
revenues) increased
50
from 8% to 10%, driven by the introduction of fixed odds
games during the year, such as roulette and multi-line slot
games.
Sky Active revenues
Sky Active revenues decreased by 21%. This decrease comprised a
reduction due to the winding down and closure of the Sky Buy
retail service and the expiry of a number of historical
interactive contracts and services, partially offset by
increases of 10% in other Sky Active revenue streams (including
interactive advertising, games and third party betting and
gaming), reflecting the growth in these areas.
Other revenues
Other revenues increased by 10% due to the increase in Sky+
digibox sales and installation volumes, and revenues earned
following the commencement of the contract to supply news to
five, partly offset by lower installation charges
for new subscribers.
Operating expenses, net
The Groups operating expenses can be analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, net | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
£m | |
|
% | |
|
£m | |
|
% | |
Programming
|
|
|
1,636 |
|
|
|
49 |
|
|
|
1,711 |
|
|
|
54 |
|
Transmission and related functions
|
|
|
171 |
|
|
|
5 |
|
|
|
146 |
|
|
|
4 |
|
Marketing
|
|
|
515 |
|
|
|
15 |
|
|
|
396 |
|
|
|
12 |
|
Subscriber management
|
|
|
396 |
|
|
|
12 |
|
|
|
371 |
|
|
|
12 |
|
Administration
|
|
|
392 |
|
|
|
12 |
|
|
|
376 |
|
|
|
12 |
|
Betting
|
|
|
236 |
|
|
|
7 |
|
|
|
175 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,346 |
|
|
|
100 |
|
|
|
3,175 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
Programming costs are stated net of amounts receivable from the
disposal to third parties of incidental programming rights not
acquired for use by the Group of £11 million (2004:
£11 million).
Sky Sports channels programming costs decreased by 7% to
£747 million in fiscal 2005 from
£803 million in fiscal 2004. The renegotiation of the
Football Association contract at reduced rates led to this
reduction, which was partly offset by the Ryder Cup, a bi-annual
event, and investment in production costs supporting increased
coverage in a number of sports, most notably football, with an
increase of 32 live Barclays Premiership games and delayed
footage or extended highlights of every Barclays Premiership
match through the Football First service.
Sky Movies channels programming costs decreased by 9% to
£356 million in fiscal 2005 from
£393 million in fiscal 2004, reflecting the impact of
the improved rate at which the Groups US
dollar-denominated movies expenses were amortised as a result of
the weaker dollar. Savings from the renewal of a non-major
studio agreement were offset by the additional costs associated
with an increase in the average number of movie subscribers.
Third party channel costs, which include our costs in relation
to the distribution agreements for the Sky Distributed Channels
and Premium Sky Distributed Channels, increased by 1% to
£362 million in fiscal 2005 from
£360 million in fiscal 2004. This increase was due to
a 6% increase in the average number of DTH subscribers offset by
a 6% reduction in the cost per subscriber. This saving has
been generated by the renewal of certain of our contracts on
improved terms and the termination of our contract with GSB,
offset by new channels joining the pay television line-up
including FX, Turner Classic Movies and UK TV Style
Gardens.
51
News and entertainment programming costs increased by 10% to
£171 million in fiscal 2005 from
£155 million in fiscal 2004, due to the higher
operating costs of Sky News following the commencement of the
contract to supply news to five, the coverage of the
tsunami disaster and the elections in the UK, and increased
investment in acquired and commissioned programming for Sky One.
Transmission and related functions
Transmission and related functions costs are stated net of
amounts receivable for the provision of spare transponder
capacity to third party broadcasters of £28 million in
fiscal 2005 (2004: £28 million). The total increase of
17% includes higher engineering, support and maintenance costs
associated with an expanding broadcast infrastructure following
the build of the new Sky News Centre, the ATC and other
properties at the Osterley site, the impact of movements in the
euro exchange rate on our transponder lease payments and
increased music licence fees, graphics and broadcast computing
costs.
Marketing
The increase in marketing costs of 30% was driven by the launch
of a number of marketing initiatives to attract new subscribers
and drive the penetration of the Sky+ and Multiroom products.
Above-the-line marketing costs for the year were
£74 million, an increase of 50% on the comparable
period as a result of the What do you want to watch?
campaign and marketing of the new Sky One schedule. The
remaining increase reflected increased direct marketing and
installation offers across all product categories, partly offset
by a volume-related reduction in the cost of our free digital
satellite reception equipment offer to new customers.
Subscriber management
Subscriber management costs increased by 7%, reflecting the
growing subscriber base, increased call volumes due to higher
levels of sales activity and a higher level of Sky+ and
Multiroom installations.
Administration
Administration costs, including goodwill amortisation and
operating exceptional items, increased by 4%, due to increased
technology, facility and information systems development costs,
and a charge for restructuring costs following an efficiency and
effectiveness review of the business. This increase was offset
by the current year receipt of £13 million from the
liquidators of ITV Digital as a full and final settlement in
respect of amounts owed to us. These amounts had been fully
provided for in the year ended 30 June 2002, therefore
generating a non-recurring operating exceptional item in the
year, which was included within administration costs. Goodwill
amortisation is discussed below in the Goodwill
section.
Betting
Betting costs increased by 35%, in line with the growth in Sky
Bet revenues.
Operating profit and operating margin
Operating profit after goodwill amortisation and exceptional
items increased by £221 million to
£702 million in fiscal 2005 from
£481 million in fiscal 2004. This increase was driven
by the increase in DTH and Sky Bet revenues and the reduction in
programming costs, as detailed above, partly offset by the
increase in marketing and other operating expenses as detailed
above.
Operating margin (calculated as total revenues less all
operating expenses before goodwill amortisation and exceptional
items as a percentage of total revenues) for fiscal 2005 was
20%, up from 16% in fiscal 2004, as a result of the operational
gearing of our business as total revenues are increasing at a
faster rate than operating costs.
52
Goodwill
Goodwill amortisation decreased by 3% to £116 million
in fiscal 2005 from £119 million in fiscal 2004. This
mainly comprises the amortisation of the £272 million
and £543 million of goodwill arising on the
acquisitions of SIG and BiB respectively, over seven years from
the date of acquisition on a straight-line basis. The reduction
in amortisation of £3 million was due to the
£3 million provision made in fiscal 2004 against the
goodwill that arose on the acquisition of Planetfootball.com
Limited (a company which provides website services to the sports
industry).
Non-operating exceptional items
2005
Loss on disposal of investments in joint ventures
On 1 November 2004, we sold our 49.5% investment in GSB to
ITV plc for £14 million cash consideration. After
deducting the carrying value of the investment in GSB and
writing back the original goodwill relating to the increase of
our interest in GSB to 49.5% in March 1998, which had previously
been eliminated against reserves, the disposal generated an
accounting loss under UK GAAP of £23 million.
2004
Profit on disposal of fixed asset investments
On 7 October 2003, we disposed of our listed investment in
Manchester United plc, realising a profit on disposal of
£2 million.
On 1 March 2004, we sold our 20% shareholding in
QVC (UK), operator of QVC The Shopping Channel,
for £49 million in cash, realising a profit on
disposal of £49 million.
Amounts written back to fixed asset investments, net
In accordance with the accounting treatment required by UK GAAP,
the £33 million provision held against our investment
in Manchester United plc was released during fiscal 2004,
following the sale of our shareholding as described above. In
fiscal 2004, we made a further provision against our remaining
minority equity investments in football clubs, leading to a
non-cash exceptional charge of £9 million. The
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.
Joint ventures and associates
Joint ventures are entities in which we hold a long-term
interest and share control under a contractual arrangement. Our
share of the net operating results from joint ventures and
associates before goodwill increased to a £14 million
net profit in fiscal 2005 from a £5 million net loss
in fiscal 2004. The increase in our share of net operating
results is due to an increase in net operating profits of
£8 million, generated primarily from ATR, and a
write-down of £11 million by ATR in fiscal 2004, which
did not recur in fiscal 2005.
Joint ventures and associates goodwill
amortisation, net
In fiscal 2005, joint ventures and associates
goodwill amortisation, net, was nil. In fiscal 2004, Sky and
Arena Leisure plc acquired Channel 4s shares and loan
notes in ATR, increasing the Groups shareholding to 50%
(subsequently reduced to 47.5%, following the issue of shares by
ATR in October 2004). At the same time, the shareholder loans
were capitalised, giving rise to negative goodwill of
£11 million, which was immediately released to the
profit and loss account in fiscal 2004. The remaining joint
ventures goodwill amortised during fiscal 2004 of
£1 million related to goodwill that arose from the
purchase of a 50% stake in Artsworld in December 2003.
53
Net interest payable
Interest payable and similar charges, net of interest receivable
and similar income, decreased by 23%, primarily as a result of
an increase in interest receivable due to higher levels of cash
on deposit at higher interest rates.
Taxation
The total net tax charge for fiscal 2005 of
£206 million includes a current tax charge of
£159 million, a deferred tax charge of
£68 million and an exceptional tax charge of
£4 million, partly offset by a £25 million
adjustment in respect of prior years. Excluding the effect of
goodwill, joint ventures and exceptional items, the Groups
underlying effective tax rate on ordinary activities for the
year was 30%. This underlying tax rate is a non-GAAP measure
that has been provided as it provides a more relevant indication
of the Groups underlying operating performance. A
reconciliation of the Groups current tax charge to the UK
statutory rate is given in note 8 of the Consolidated
Financial Statements included within Item 18.
The net £25 million adjustment in respect of prior
years comprises a £7 million benefit in respect of
consortium relief on losses purchased from ATR, and the
favourable settlement of some prior year items.
The total net tax charge of £158 million for fiscal
2004 included a current tax charge of £127 million and
a deferred tax charge of £34 million, offset by a
£3 million net adjustment in respect of prior years.
Excluding the effect of goodwill, joint ventures and exceptional
items, this resulted in an underlying effective tax rate on
ordinary activities of 30%.
The increase in the total net tax charge in fiscal 2005 of 30%
is due to the increased profitability of the Group.
Profit after taxation
Profit after taxation for fiscal 2005 was £425 million
compared with £322 million in fiscal 2004, mainly as a
result of an increase in operating profit of
£221 million, offset by an exceptional loss on
disposal of investments in joint ventures, the absence of a
non-operating net exceptional gain relating to fixed asset
investments which occurred in the prior year and a
£48 million increase in the tax charge, as described
above.
Equity dividends
An interim dividend of £77 million (4.0p per share) in
respect of the six month period ended 31 December 2004 (six
month period ended 31 December 2003: £53 million,
representing 2.75p per share) was paid to shareholders on 22
April 2005. In August 2005, the Directors proposed to pay
shareholders a final dividend of £93 million (5.0p per
share) in respect of the year ended 30 June 2005 (2004:
£63 million, representing 3.25p per share), payable on
18 November 2005 to shareholders on the register on 28
October 2005, subject to approval of shareholders at the Annual
General Meeting (AGM) on 4 November 2005.
Earnings per share
Basic earnings per share increased by 5.6p to 22.2p in fiscal
2005 from 16.6p in fiscal 2004, due to the improvement in profit
after taxation described above. Similarly, diluted earnings per
share increased by 5.6p to 22.2p in fiscal 2005 from
16.6p in fiscal 2004.
54
2004 FISCAL YEAR COMPARED TO FISCAL YEAR
Revenues
The Groups revenues can be analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
£m | |
|
% | |
|
£m | |
|
% | |
DTH subscribers
|
|
|
2,660 |
|
|
|
73 |
|
|
|
2,341 |
|
|
|
74 |
|
Cable subscribers
|
|
|
215 |
|
|
|
6 |
|
|
|
202 |
|
|
|
6 |
|
Advertising
|
|
|
312 |
|
|
|
9 |
|
|
|
284 |
|
|
|
9 |
|
Sky
Bet(i)
|
|
|
191 |
|
|
|
5 |
|
|
|
117 |
|
|
|
4 |
|
Sky
Active(i)
|
|
|
116 |
|
|
|
3 |
|
|
|
101 |
|
|
|
3 |
|
Other
|
|
|
162 |
|
|
|
4 |
|
|
|
141 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,656 |
|
|
|
100 |
|
|
|
3,186 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
Additional detail has been provided with regard to the analysis
of interactive revenues between the Groups betting and
games revenue Sky Bet and
other interactive revenues Sky
Active and the prior year comparatives have
been reclassified accordingly. |
DTH subscriber revenues
The increase of 14% in fiscal 2004 was driven by a 10% increase
in the average number of DTH subscribers, and a 3% increase in
average DTH subscription revenue per subscriber, to £356 at
30 June 2004 from £344 at 30 June 2003.
The total number of UK and Ireland DTH subscribers increased by
510,000 in fiscal 2004. This was a result of gross subscriber
additions of 1,200,000 and the low level of DTH churn. DTH churn
for the year was 9.7% (2003: 9.4%).
The increase in average DTH subscription revenue per subscriber
reflected the change in our UK retail prices in January 2004,
along with increased subscription revenues from products such as
Sky+ and Multiroom digiboxes.
Cable subscriber revenues
The 6% increase in cable subscriber revenues in fiscal 2004 was
attributable to the receipt of £6 million of audit
monies from ntl and increases in the average revenue per
subscriber resulting from changes to wholesale pricing from
January 2004.
At 30 June 2004, there were 3,895,000
(2003: 3,871,000) UK and Ireland cable subscribers to our
programming.
Advertising revenues
Advertising revenues increased by 10%, reflecting the growth in
the UK television advertising sector, growth in Skys
viewing share, the growth in agency commissions earned on the
sale of advertising on behalf of those channels that appointed
Sky Sales to represent their airtime sales during fiscal 2004
and the growth of airtime sales in Ireland.
Our share of this sector has increased as viewing levels to our
channels have increased (in part due to the growth in
subscribers to our channels) and as we have added other third
party channels to our sales portfolio.
55
Sky Bet revenues
Sky Bet revenues increased by 63% due to the increase in the
total number of bets placed across all platforms from fiscal
2003.
Sky Active revenues
Sky Active revenues increased by 15% due to a combination of
increases in retail revenues through Sky Buy, interactive
television gaming, third party betting, revenues from
interactive advertising, premium rate telephony revenues and
platform access fees paid by third party broadcasters and
interactive service providers.
Other revenues
Other revenues increased by 15% due to the sale of a greater
volume of Sky+ and Multiroom digiboxes and associated
installation revenues.
Operating expenses, net
The Groups operating expenses can be analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, net | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
£m | |
|
% | |
|
£m | |
|
% | |
Programming
|
|
|
1,711 |
|
|
|
54 |
|
|
|
1,604 |
|
|
|
54 |
|
Transmission and related functions
|
|
|
146 |
|
|
|
4 |
|
|
|
143 |
|
|
|
5 |
|
Marketing
|
|
|
396 |
|
|
|
12 |
|
|
|
400 |
|
|
|
14 |
|
Subscriber management
|
|
|
371 |
|
|
|
12 |
|
|
|
324 |
|
|
|
11 |
|
Administration
|
|
|
376 |
|
|
|
12 |
|
|
|
359 |
|
|
|
12 |
|
Betting
|
|
|
175 |
|
|
|
6 |
|
|
|
108 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,175 |
|
|
|
100 |
|
|
|
2,938 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
Programming costs are stated net of amounts receivable from the
disposal to third parties of programming rights not acquired for
use by the Group of £11 million (2003:
£12 million).
Sky Sports channels programming costs increased by 11% to
£803 million in fiscal 2004 from
£723 million in fiscal 2003. This increase was driven
by contractual increases in rights costs and the addition of
UEFA Champions League football from the 2003/04 season.
Sky Movies channels programming costs decreased by 1% to
£393 million in fiscal 2004 from
£397 million in fiscal 2003, reflecting continued
weakness of the US dollar and therefore a favourable movement in
the average rate at which the Group was able to purchase dollars
compared to fiscal 2003. These savings were partially offset by
increased subscriber volumes and pricing increases in certain
studio contracts.
Third party channel costs increased by 3% to
£360 million in fiscal 2004 from
£351 million in fiscal 2003. This increase was due to
the 10% increase in the average number of DTH subscribers
and new channels added to the platform, partially offset by
savings resulting from contractual renegotiations as we renewed
carriage deals with MTV, Nickelodeon, Paramount, Music Choice,
E4, FilmFour and Eurosport.
News and entertainment programming costs increased by 17% to
£155 million in fiscal 2004 from
£133 million in fiscal 2003 due to the regular review
of programme stock balances during fiscal 2004, which resulted
in the acceleration of certain amortisation charges totalling
£28 million, in accordance with the Groups
policy in respect of programme stock accounting.
56
Transmission and related functions
Transmission and related functions costs, which were stable in
fiscal 2004 compared to fiscal 2003, are stated net of amounts
receivable for the provision of spare transponder capacity to
third party broadcasters of £28 million in fiscal 2004
(2003: £26 million).
Marketing
Marketing costs decreased by 1%, driven by a
£22 million reduction in acquisition marketing costs
to £256 million, due to lower digibox unit prices and
fewer installations. Retention marketing also decreased by
£2 million from fiscal 2003 to £32 million.
These decreases were partly offset by increased above-the-line
expenditure, up £10 million from fiscal 2003 to
£49 million, and other marketing costs up
£10 million to £59 million, as a result of
the Sky+ and programming campaigns which ran in fiscal 2004.
Subscriber management
Subscriber management costs increased by 15% in fiscal 2004 from
fiscal 2003. Supply chain costs, including the cost of goods
sold in respect of Sky+ and Multiroom digiboxes, increased by
24% to £173 million in fiscal 2004 from
£140 million in fiscal 2003, reflecting the growth in
Sky+ customers during fiscal 2004. Also included within supply
chain costs is the cost of stock for Sky Buy, the Groups
retail operation, which increased by £12 million in
fiscal 2004 to £18 million. CRM costs increased
by £9 million to £157 million in fiscal 2004
from £148 million in fiscal 2003, due to the growing
subscriber base. However, CRM cost per subscriber declined
by 3% as the associated costs were offset by continued
efficiencies achieved in the contact centres. Depreciation costs
increased by £5 million to £41 million in
fiscal 2004 from £36 million in fiscal 2003, due to
increased depreciation in respect of CRM assets developed
and capitalised over the previous three years.
Administration
Administration costs, including goodwill amortisation and
operating exceptional items, increased by 5%, mainly as a result
of increased technology and facilities costs, costs resulting
from increased compliance obligations, and the release in fiscal
2003 of a £5 million provision against ITV Digital
programming debtors. Goodwill amortisation is explained below in
the Goodwill section.
Betting
Betting costs increased by 62%, directly as a result of the
growth in Sky Bet revenues.
Operating profit and operating margin
Operating profit after goodwill amortisation and exceptional
items increased by £233 million to
£481 million in fiscal 2004 from
£248 million in fiscal 2003. This increase was driven
by the increase in revenues, as detailed above, partly offset by
the increase in operating expenses, primarily due to the
increase in programming costs and betting costs as detailed
above.
Operating margin for fiscal 2004 was 16%, up from 11% in fiscal
2003, largely as a result of total revenues increasing at a
faster rate than programming costs.
Goodwill
Goodwill amortisation decreased by 2% to £119 million
in fiscal 2004 from £121 million in fiscal 2003. The
reduction in amortisation of £2 million was due to the
£5 million provision made in fiscal 2003 against
goodwill which originally arose on the acquisition of Opta Index
Limited (Opta) (a sports media and information
company, a subsidiary of SIG, which provided statistics on the
sports industry), partly offset by the £3 million
provision made in fiscal 2004 against the goodwill that arose on
the acquisition of Planetfootball.com Limited (a company which
provides website services to the sports industry).
57
Non-operating exceptional items
2004
A description of the non-operating exceptional items for fiscal
2004 is included in the 2005 fiscal year compared to 2004
fiscal year Non-operating exceptional items
section above.
2003
Amounts written off fixed asset investments, net
At 31 December 2002, we made a further provision against
our minority equity investments in football clubs, leading to a
non-cash exceptional charge of £21 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 30 June 2003, we reduced our provision against
our investment in Chelsea Village plc by
£3 million, following the agreement to sell our
minority interest in July 2003.
At 31 December 2002, we reduced our deferred revenue
balance by £5 million relating to minority investments
in new media companies, and reduced both our investment and
provision against our investment by £5 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 31 December 2002, we made a provision against our
investment in OpenTV, leading to a non-cash exceptional charge
of £3 million, bringing the carrying value of our
investment in OpenTV to nil. Between 12 February 2003 and
24 March 2003, we disposed of our entire investment in
OpenTV shares, leading to a nil profit or loss on disposal.
In March 2003, we disposed of our investment in Streetsonline
for total consideration of £1 million, which had been
held at a cost of £6 million less provision of
£6 million. These amounts were written back upon
disposal of our investment in Streetsonline, leading to an
exceptional credit of £1 million.
Joint ventures and associates
Our share of the net operating results from joint ventures and
associates before goodwill decreased to a £5 million
net loss in fiscal 2004 from a £3 million net profit
in fiscal 2003. This reflected a write down of
£11 million by ATR in respect of capitalised
infrastructure costs and media rights prepayments, partly offset
by an improvement of £3 million due to the improved
performance of certain programming joint ventures, including
National Geographic Channel and Music Choice Europe.
Joint ventures and associates goodwill
amortisation, net
A description of the fiscal 2004 joint ventures and
associates goodwill and amortisation, net credit is
included in the 2005 fiscal year compared to 2004 fiscal
year joint ventures and associates
goodwill amortisation, net section above. In fiscal 2003,
joint ventures and associates goodwill amortisation,
net, was nil.
Net interest payable
Interest payable and similar charges, net of interest receivable
and similar income, decreased by 29% as a result of a reduction
in average gross debt to £1,102 million for fiscal
2004 from £1,461 million for fiscal 2003 as well as an
increase in interest receivable due to higher levels of cash
held.
Taxation
The total net tax charge of £158 million for fiscal
2004 included a current tax charge of £127 million and
a deferred tax charge of £34 million, offset by a
£3 million net credit adjustment in respect of prior
years.
58
Excluding the effect of goodwill, joint ventures and exceptional
items, this resulted in an underlying effective tax rate on
ordinary activities of 30%.
The total net tax credit of £62 million for fiscal
2003 included a current pre-exceptional tax charge of
£85 million, a tax charge on exceptional items of
£2 million, a deferred tax credit of
£151 million and our share of joint ventures tax
charge of £2 million. Excluding the effect of
goodwill, joint ventures and exceptional items, this resulted in
an underlying effective tax rate on ordinary activities of 31%,
slightly higher than the UK statutory rate due to a number
of standard disallowable items.
As a result of the significant investment made in digital, and
the resultant losses incurred, the Group accumulated significant
tax losses within different Group companies. Under the
UK Accounting Standard FRS 19 Deferred
Tax, a deferred tax asset in respect of these tax losses
may only be recognised 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 capitalised.
As the Groups and individual entities profitability
continued to rise, it was increasingly possible to satisfy the
requirements of FRS 19. During the six months ended
31 December 2002, the Group recognised a
£40 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 utilisation of
tax losses within the Group, and as a consequence of a planned
reorganisation of certain assets within the Group, the Directors
were able to conclude that the required FRS 19 conditions
had been satisfied in respect of other tax losses in the Group,
permitting the Group to recognise a further deferred tax asset
of £123 million, which was treated as an exceptional
tax credit due to its size. This brought the total deferred tax
asset recognised within fiscal 2003 to £151 million,
net of utilisation and an adjustment arising from the prior
period.
Profit after taxation
Profit after taxation for fiscal 2004 was £322 million
compared with £184 million in fiscal 2003, mainly as a
result of an increase in operating profit of
£233 million, a non-operating net exceptional credit
in fiscal 2004 compared to a charge in fiscal 2003 relating to
fixed asset investments, a decrease in net interest payable in
fiscal 2004, offset by an increased tax charge in fiscal 2004,
compared to a tax credit in fiscal 2003.
Equity dividends
An interim dividend of £53 million (2.75p per share)
in respect of the six month period ended 31 December 2003
(six month period ended 31 December 2002: nil) was paid to
shareholders on 23 April 2004. In August 2004, the
Directors proposed to pay shareholders a final dividend of
£63 million (3.25p per share) in respect of the year
ended 30 June 2004 (2003: nil), paid on 19 November
2004 to shareholders on the register on 29 October 2004,
and which was approved by shareholders at the AGM on
12 November 2004.
Earnings per share
Basic earnings per share increased by 7.0p to 16.6p in
fiscal 2004 from 9.6p in fiscal 2003, due principally to the
improvement in profit after taxation described above. Similarly,
diluted earnings per share increased by 7.1p to 16.6p in
fiscal 2004 from 9.5p in fiscal 2003.
2005 BALANCE SHEET COMPARED TO 2004 BALANCE SHEET
Intangible assets decreased by £116 million to
£301 million at 30 June 2005 from
£417 million at 30 June 2004, due to amortisation
of goodwill.
Tangible fixed assets increased in the year by
£150 million to £526 million at 30 June 2005
from £376 million, due to £244 million of
additions, including further investment in CRM, property, the
ATC and increased customer contact and staff training
facilities, partly offset by depreciation of
£92 million. Included
59
within tangible fixed assets are assets in the course of
construction, which increased by £153 million in the
year, mainly due to the investment in CRM and the ATC.
Investments in joint ventures decreased by £10 million
due to the sale of the Groups investment in GSB.
Net current assets decreased by £138 million, from
£366 million at 30 June 2004 to
£228 million at 30 June 2005, reflecting a number
of movements. Current liabilities increased by
£70 million due to an increased tax liability as a
result of a higher tax charge in fiscal 2005, a higher final
dividend creditor and increased accruals, offset by a reduction
in trade creditors due to timing of payments. Deferred tax
assets reduced by £51 million due to utilisation in
the year, offset by a prior period adjustment. Stock balances
decreased by £35 million due to decreases in both
volumes and prices. Other debtors decreased by
£32 million due to the timing of receipts, partly
offset by increased debtors resulting from higher DTH revenues.
The remaining movement in current assets resulted from an
increase in cash and liquid resources of £50 million.
FOREIGN EXCHANGE
For details of the impact of foreign currency fluctuations on
our results of operations, see Item 11 Quantitative
and Qualitative Disclosures about Market Risk
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 and National Geographic Channel UK. The
Directors do not expect any material loss to arise from the
above contingent liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In addition to our cash and liquid resources balance
(30 June 2005: £697 million), our long-term
funding comes primarily from US dollar and sterling-denominated
public bond debt, which was raised in 1996 and 1999. For further
details see note 19 of the Consolidated Financial
Statements, included within Item 18. We launched Sky
digital, our digital DTH service, in October 1998 and we
terminated our analogue service in September 2001. As a result,
the peak of our funding requirements was in the six month period
ended 31 December 2001, when our period end net debt
reached £1,833 million. As at 30 June 2005, net
debt had been reduced to £379 million. The public bond
debt is partly repayable in 2006, with the remainder repayable
in 2009, and we currently believe that our financial position at
those dates will enable us to meet our repayment requirements.
For details of our facilities and long-term funding see
note 19 of the Consolidated Financial Statements, included
within Item 18. For details of our treasury policy and use
of financial instruments see note 20 of the Consolidated
Financial Statements, included within Item 18.
We periodically review the terms upon which financing is likely
to be available from public and private sources, as well as our
anticipated cash needs. On the basis of this review, we may
raise additional long-term financing during the remainder of
fiscal 2006. Any such financing will be subject to the
negotiation of terms and conditions acceptable to us, and we can
give no assurance that such financing will occur.
Our principal source of liquidity is our operating cash flow,
combined with access to the £1 billion (2004:
£600 million) RCF, which we entered into in November
2004. Our operating cash inflow for the current year was
£978 million (2004: £882 million) (for
further details, see Cash flows below). We expect to
continue to generate significant operating cash inflow in fiscal
2006 (for further details, see Trends and other
information and Tabular disclosure of contractual
obligations below), subject to the factors detailed below.
As at 30 June 2005, our RCF was undrawn
(2004: undrawn).
Our liquidity and working capital may be affected by a material
decrease in cash flow from operations due to factors, among
others, such as infringement of intellectual property and
proprietary rights, increased competition, failure to obtain
required regulatory approvals, long-term obligations, loss of
wholesale
60
revenues and failure of technology. See Item 3 Key
Information Risk Factors for a more detailed
discussion of our risk factors.
Cash flows
During the year, there was an operating cash inflow of
£978 million, compared with an operating cash inflow
of £882 million in fiscal 2004. The operating cash
inflow was driven by an improvement in operating profits of
£221 million, offset by a lower movement in working
capital, which decreased by £55 million in fiscal 2005
compared to a decrease of £182 million in fiscal 2004.
During the year, net interest payments were
£63 million, compared to £82 million in
fiscal 2004. This reduction in payments resulted from increased
interest receivable due to higher levels of funds under
investment at higher interest rates. Absent any change in the
level of net debt, we currently expect the net interest charge
for the coming year to be broadly similar to fiscal 2005.
During the year, tax payments were £103 million,
compared to £58 million in fiscal 2004. This increase
in payments is due to the increased profitability of the Group
and the utilisation in the prior year of the Groups paid
but unrecovered advanced corporation tax. We currently expect
that tax payments will continue to increase as the Group becomes
increasingly profitable.
During the year, payments for capital expenditure were
£230 million, compared with £132 million in
fiscal 2004, following progress on a number of capital
expenditure and infrastructure projects. The Group spent
£75 million on a combination of infrastructure
projects, including the acquisition of four freehold properties
previously leased at our Osterley Campus and the construction of
the Sky News centre. In addition, the Group continued work on
the CRM programme to upgrade its customer service systems,
investing £59 million during fiscal 2005 (for further
details, see Item 4 The Customer Relationship
Management Centres). As part of the Groups business
continuity plan, £24 million was invested to build and
fit out the ATC building. The remaining £72 million,
regarded as core capital expenditure, was spent on
information systems infrastructure, broadcast equipment and new
product development, including HDTV. We currently expect to
continue to invest in capital expenditure across the business,
in line with our previously announced plans to spend
£450 million over the four years to 30 June 2008.
This is in addition to ongoing core maintenance capital
expenditure, which is expected to be approximately
£100 million per annum over the next three years (for
further details, see Item 4 Capital Expenditure
Programme).
During the year, non-recurring receipts from the sale of fixed
asset investments of £1 million comprised proceeds
from the sale of our shareholdings in certain investments. This
compared to £116 million in fiscal 2004, which
comprised proceeds from the sale of our shareholding in
Manchester United plc of £62 million, proceeds
from the sale of our shareholding in Chelsea Village plc of
£6 million and proceeds from the sale of our
shareholding in QVC (UK) of £49 million.
During the year, non-recurring receipts from the sale of
investments in joint ventures of £14 million comprised
proceeds from the sale of our shareholding in GSB.
During the year, we made equity dividend payments of
£138 million, compared to £53 million in
fiscal 2004. We expect that future year payments will increase
in line with the Boards expected dividend policy described
in the Trends and other information
section below.
During the year, we also made payments of £416 million
to repurchase 74 million shares as part of the share
buy-back programme, in line with the authority to
repurchase 97 million shares approved by the
shareholders at the Companys AGM on 12 November 2004.
The buy-back of shares under this programme was completed during
the first half of fiscal 2006. The Board currently intends to
propose resolutions at the AGM in November 2005 to renew the
annual authority to buy back up to a further 5% of its issued
share capital.
The above cash flows, in addition to other net cash inflows of
£7 million, resulted in a decrease in net debt of
£50 million to £379 million.
61
Major non-cash transactions
2005
Corporate reorganisation
On 13 April 2005, the High Court approved a reduction in
the share capital of BSkyB Investments Limited, a 100% owned
subsidiary. This formed part of a corporate reorganisation,
allowing the Company access to additional distributable reserves.
Disposal of GSB
In accordance with FRS 10 Goodwill and Intangible
Assets (FRS 10), the Group has included
the write off of £32 million of unamortised goodwill
in the calculation of the loss on disposal of GSB, the effect of
which has been included in the profit for the financial year.
The goodwill arose on the increase of our interest in GSB to
49.5% in March 1998 and had previously been written off to the
profit and loss reserve as permitted prior to FRS 10.
Accordingly, an adjustment has been made to write back the
£32 million charge to the profit and loss reserve.
2004
Share premium reduction
On 10 December 2003, the High Court approved a reduction in the
Companys share premium account of
£1,120 million, as approved by the Companys
shareholders at the AGM held on 14 November 2003. The
reduction had the effect of eliminating the Companys
deficit on its profit and loss account as at 30 September
2003 of £1,106 million, and creating a
non-distributable special reserve of £14 million,
which represents the excess of the share premium reduction over
the deficit. The Companys stand alone balance sheet and
profit and loss account are not presented within this Annual
Report on Form 20-F.
WAPTV
On 30 September 2003, the Company issued 338,755 (2003:
169,375) Ordinary Shares to satisfy the remaining contingent
consideration in respect of the acquisition of the remaining 5%
in WAPTV Limited which occurred in May 2001.
2003
Issue of shares deferred consideration for BiB
On 11 November 2002, the Company issued 43.2 million shares
with a fair value of £253 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.
62
Tabular disclosure of contractual obligations
A summary of our contractual obligations and commercial
commitments at 30 June 2005 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
Between | |
|
Between | |
|
More than | |
|
|
Total | |
|
1 year | |
|
1-3 years | |
|
3-5 years | |
|
5 years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
£m | |
|
£m | |
|
£m | |
|
£m | |
|
£m | |
Obligation or commitment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television programme
rights(1)
|
|
|
2,260 |
|
|
|
801 |
|
|
|
1,070 |
|
|
|
380 |
|
|
|
9 |
|
Digiboxes and related equipment
|
|
|
155 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
payments(2)
|
|
|
14 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
36 |
|
|
|
25 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Long-term
debt(3)
|
|
|
1,069 |
|
|
|
|
|
|
|
189 |
|
|
|
880 |
|
|
|
|
|
Interest costs
|
|
|
294 |
|
|
|
84 |
|
|
|
146 |
|
|
|
57 |
|
|
|
7 |
|
Operating lease
obligations(4)
|
|
|
444 |
|
|
|
95 |
|
|
|
155 |
|
|
|
100 |
|
|
|
94 |
|
Capital lease
obligations(5)
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
|
4,289 |
|
|
|
1,177 |
|
|
|
1,578 |
|
|
|
1,418 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the avoidance of doubt, this table does not include
commitments relating to employee costs.
|
|
(1) |
Purchase obligations Television programme
rights |
|
|
|
At 30 June 2005 we had minimum television programming
rights commitments of £2,260 million (2004:
£2,489 million), of which £642 million
(2004: £766 million) related to commitments payable in
US dollars for periods of up to eight years (2004: nine years),
£45 million (2004: £87 million) related to
commitments payable in Swiss francs for periods of up to one
year (2004: two years), and £3 million (2004:
£6 million) related to commitments payable in Euros
for periods of up to one year (2004: two years). |
|
|
An additional £302 million (US$535 million) of
commitments (2004: £265 million (US$483 million))
would also be payable in US dollars over a period of five years
(2004: six years), assuming that movie subscriber numbers
remained unchanged from current levels. The pounds sterling
television programme rights commitments include similar per
subscriber based price clauses that would result in additional
commitments of £10 million (2004:
£3 million) over a period of three years (2004: two
years), assuming that movie subscriber numbers remained
unchanged from current levels. |
|
|
The total decrease in our minimum television programming rights
commitments of £229 million compared to 30 June
2004, is the result of a decreased average period remaining on
our commitments for sports channels and movie
channels programming, partly offset by the extension of
contracts with certain movie studios and the acquisition of the
England Cricket Board, Rugby Union and Football League rights. |
|
|
(2) |
Purchase obligations Third party
payments |
|
|
|
The third party payment commitments are in respect of
distribution agreements for Sky Distributed Channels and are for
periods of up to four years (2004: five years). The extent of
the commitment is largely dependent upon the number of DTH
subscribers to the relevant Sky Distributed Channels, and in
certain cases, upon inflationary increases. If both the DTH
subscriber levels to these channels and the rate payable for
each Sky Distributed Channel were to remain at 30 June 2005
levels, the additional commitment would be
£522 million (2004: £844 million). |
63
|
|
|
Further information concerning long-term debt is given in
note 19 of the Consolidated Financial Statements included
within Item 18. |
|
|
(4) |
Operating lease obligations |
|
|
|
At 30 June 2005, our operating lease obligations totalled
£444 million (2004: £447 million), the
majority of which related to property and transponder leases. |
|
|
(5) |
Capital lease obligations |
|
|
|
At 30 June 2005, our obligations under capital leases were
£7 million (2004: £7 million). This
represents financing arrangements in connection with the CRM
centre in Dunfermline, Scotland. The CRM centre lease bears
interest of 8.5% and expires in September 2020. |
Trends and other information
The significant trends which have a material effect on our
financial performance are outlined below.
The number of DTH homes increased by 432,000 in fiscal 2005 to
7,787,000, compared to growth of 510,000 in fiscal 2004. We
expect growth in subscriber numbers to continue as a result of
the implementation of our current marketing strategy, consistent
with achieving our target of 8,000,000 DTH subscribers by 31
December 2005 and our longer term target of 10,000,000 DTH
subscribers in 2010. Sky+ and Multiroom subscribers both
increased substantially in fiscal 2005 by 124% and 120%
respectively, representing a penetration of total DTH
subscribers of 11% and 8% respectively. We expect Sky+ and
Multiroom subscriber growth to continue, consistent with
achieving our targets of 25% Sky+ and 30% Multiroom penetration
of DTH subscribers in 2010. Retail price increases, the
increased number of subscribers to our Multiroom product and the
launch of new services, such as HDTV, are expected to generate
additional revenue on a per subscriber basis.
The operating margin for fiscal 2005 was 20%, up from 16% in
fiscal 2004. We currently expect our operating margin to grow in
the long-term, as a result of our strategy to improve subscriber
and revenue growth.
During fiscal 2005, the number of cable homes receiving Sky
Channels in the UK and Ireland decreased by 23,000 to 3,872,000
following an increase of 24,000 in fiscal 2004. We currently
expect cable subscriber numbers to remain stable in the
foreseeable future. We currently have agreements with ntl and
Telewest for the supply of certain Sky Basic Channels which
expire in fiscal 2007.
Advertising revenues increased in fiscal 2004 and 2005. The
increase in fiscal 2005 reflects growth of 4% in UK television
advertising revenue in the year and continued growth in our
share of UK television advertising revenue. We expect that our
share of the UK television advertising revenue will continue to
increase year on year as a result of increasing subscriber
numbers leading to growth in Skys commercial impacts.
Sky Bet revenues increased in the current and prior year. This
growth is expected to continue, with interactive betting and
gaming via television being the main contributor to growth. Our
growth assumption takes into account the impact of
liberalisation of the UK gambling laws following the passing
into law of the Gambling Act in April 2005. The Gambling Act is
currently expected to become effective in 2007.
The Sky Buy retail service was wound down and closed during the
year. This, together with the expiry of a number of historical
interactive contracts and services, led to a reduction in Sky
Active revenues in fiscal 2005 against fiscal 2004. We currently
expect increases in Sky Active revenues from core interactive
services such as games, live interactive programming, enhanced
television applications (e.g. voting and competitions) and
partnered content sites (mainly due to the increase in
prevalence of betting and gaming sites).
Programming costs decreased during fiscal 2005, primarily due to
renegotiation of the Football Association contract at reduced
rates and the impact of the improved rate at which the
Groups US dollar-denominated
64
movies were amortised as a result of the weaker dollar. 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. However, we do expect minor fluctuations
depending upon the timing of individual programming agreements.
We currently expect that total programming costs will increase
in future years, but at a slower rate than our revenues.
Transmission and related functions costs increased during fiscal
2005, after remaining stable in fiscal 2004, resulting in an
increased cost per subscriber. Transmission and related
functions costs are expected to continue to increase in future
years, but the transmission and related functions costs per
subscriber are expected to remain stable. The increased costs
reflect the costs of launching and operating our planned HDTV
service, higher forecast utilities costs and increased
depreciation charges.
Marketing costs as a percentage of revenues during fiscal 2005
were in line with the average over fiscals 2002 to 2004. We
expect marketing costs to remain around this level in the next
few years in line with our marketing initiatives. Marketing
costs include above-the-line marketing expenditure, which
increased by 50% in fiscal 2005. We expect above-the-line
marketing expenditure to remain relatively stable. Also included
within marketing costs are the costs of providing free digital
satellite reception equipment and installation costs in excess
of the relevant amount actually received from customers. It
remains our current intention to continue the practice of
providing free digital satellite reception equipment and
subsidising installation to new subscribers.
Subscriber management costs increased during fiscal 2005 at a
lower rate than in fiscal 2004. We expect that subscriber
management costs will increase at a higher rate over the next
few years due to a greater proportion of Sky+ customers, whose
installations carry higher hardware costs than the standard
installations, partly offset by a reduction in the cost of
standard digiboxes. Additionally, the new CRM system has gone
into use in September 2005, which will result in increased
depreciation charges in future years. We are also investing in
increasing the capacity of our contact centres, which is
expected to result in an associated increase in the cost of
subscriber management.
Administration costs before goodwill amortisation increased in
fiscal 2005 and fiscal 2004, and are expected to continue
increasing in the foreseeable future due to the growth in our
overall business and to higher depreciation charges relating to
investment at the main site in Osterley, including expenditure
on the broadcasting infrastructure.
The trends described above reflect our current expectations
based on UK GAAP. We do not currently expect that, based on the
current standards, the impact of the transition to IFRS, which
we are required to adopt in the preparation of our Consolidated
Financial Statements from 1 July 2005 (see Adoption
of New Accounting Standards Adoption of IFRS
below), will materially impact the magnitude and/or the
direction of these trends, with the exception of administration
costs, which are expected to be lower in future years upon
adoption of IFRS. This is due to decreased administration costs
following the change in the treatment of goodwill, which is not
amortised under IFRS, partly offset by increased charges under
IFRS for share-based payments when compared to UK GAAP (see
Adoption of New Accounting Standards Adoption
of IFRS Share-based payments below for further
details). This expected net decrease in administration costs
under IFRS is also expected to result in an increase in
operating profit under IFRS in comparison with the equivalent
operating profit under UK GAAP.
The Group continues to consider the appropriate financial
strategy and capital structure for the next phase of the
Groups growth. This financial strategy will be consistent
with the Groups desire to maintain an investment grade
credit rating and retain financial flexibility going forward.
It remains the overall financial policy of the Group to achieve
an appropriate balance between distributions to shareholders
arising from strong free cash flow generation and maintaining a
prudent degree of strategic and financial flexibility. The Group
currently intends that the ordinary dividend in fiscal 2006 will
grow broadly in line with Group earnings. During fiscal 2005,
74 million Ordinary Shares were purchased by the Company
and subsequently cancelled. The Board considers that an
on-market share repurchase scheme which is incremental to the
ordinary dividend is a flexible, equitable and tax-efficient
means by which to
65
make distributions to shareholders. As a result, the Board
intends to propose resolutions at the AGM in November 2005 to
renew the annual authority last granted by shareholders in 2004
to buy back up to a further 5% of its issued share capital.
Dividends are paid between Group companies out of profits
available for distribution subject to, inter alia, the
provisions of our Articles of Association and the Companies Act
1985 (as amended). There are restrictions over the distribution
of any profits which are not generated from external cash
receipts as defined in Technical Release 7/03, issued by the
Institute of Chartered Accountants in England and Wales. The
interim dividend of the Company of £77 million in
February 2005, relating to the period ended 31 December
2004, and the final dividend of £93 million proposed
in August 2005, relating to the year ended 30 June 2005,
were resolved or proposed to be paid out of profits available
for distribution generated from external cash receipts.
We currently 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, including our contractual obligations and commercial
commitments described above, our approved capital expenditure
requirements and any dividends and/or share buy backs proposed.
OFF-BALANCE SHEET ARRANGEMENTS
At 30 June 2005, the Company did not have any undisclosed
off-balance sheet arrangements that require disclosure as
defined under the applicable rules of the Securities and
Exchange Commission.
RESEARCH AND DEVELOPMENT
The Group did not incur significant research and development
expenditure in fiscal 2004 or 2003. During fiscal 2005, the
Group made payments totalling £11 million to a third
party for development of encryption technology. The Group did
not incur any other significant research and development
expenditure in fiscal 2005.
US GAAP RECONCILIATION
Net profit after tax under UK GAAP in fiscal 2005 was
£425 million (2004: £322 million; 2003:
£184 million). Under US GAAP net profit after tax was
£577 million (2004: £434 million; 2003:
£286 million). Net liabilities under UK GAAP at
30 June 2005 were £34 million (2004: net assets
of £90 million). Under US GAAP, net assets were
£818 million (2004: £812 million).
The principal differences between US GAAP and UK GAAP, as they
relate to the Group, arise from the methods of accounting for
goodwill, employee stock-based compensation, derivatives,
capitalisation of interest, fixed asset investments, development
costs, deferred taxation and proposed equity dividends. For a
further explanation of the differences between US GAAP and UK
GAAP, see note 27 of the Consolidated Financial Statements
included within Item 18.
CRITICAL ACCOUNTING POLICIES
The application of UK GAAP often requires our judgement 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, judgement 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 recognised. A description of our significant
accounting policies is disclosed in the notes to the
Consolidated Financial Statements within Item 18, 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.
66
We consider that our accounting policies in respect of the
following are critical:
Goodwill
Where the cost of acquisition of an entity exceeds the fair
value attributable to the net assets acquired, the difference is
treated as purchased goodwill and capitalised on our balance
sheet in the year of acquisition. Determining the fair value of
assets acquired and liabilities assumed requires our judgement
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 1 July 1998
is capitalised. Prior to 1 July 1998, goodwill arising on
acquisitions was eliminated against reserves.
Where capitalised goodwill is regarded as having a limited
useful economic life, FRS 10 provides that the cost is amortised
on a straight-line basis over that life, of up to 20 years.
All goodwill currently held on our balance sheet is being
amortised over periods of up to seven years on a straight-line
basis. Goodwill is reviewed for impairment if events or
circumstances indicate that the carrying value may not be
recoverable. Any amortisation or impairment write-down is
charged to the profit and loss account.
At 30 June 2005, the carrying value of goodwill amounted to
£301 million (2004: £417 million) and
represented 13% (2004: 18%) of our total assets. Applying the
lives referred to in the previous paragraph has resulted in this
years charge for amortisation amounting to
£116 million (2004: £119 million; 2003:
£121 million). The charge in fiscal 2004 included a
provision of £3 million against goodwill which arose
on the acquisition of Planetfootball.com Limited (a company
which provides website services to the sports industry). The
charge in fiscal 2003 included a provision of
£5 million against goodwill which arose on the
acquisition of Opta (a sports media and information company, a
subsidiary of SIG, which provided statistics on the sports
industry).
Goodwill impairment reviews are also an area requiring our
judgement, 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 completed two
significant acquisitions in fiscal 2001. These were the
acquisitions of the 67.5% of BiB not previously owned by us and
100% of SIG (a company that we acquired in July 2000, which owns
a bookmaker which operates telephone and interactive betting
services under the brand name Sky Bet). In
accordance with FRS No. 11, Impairment of Fixed
Assets and Goodwill, impairment reviews were performed on
the carrying values of BiB and SIG goodwill balances at the end
of the first full financial year after acquisition, at
30 June 2002, which did not indicate impairment. Consistent
with our strategy, the business plans on which these reviews
were based reflect significant projected increases in betting
and other interactive revenues over the subsequent five years
and the carrying value of the goodwill is therefore heavily
dependent on the forecast performance of, and projections for,
these businesses. The Group continues to monitor the performance
of these businesses and is satisfied that no impairment of
goodwill has occurred.
The treatment of goodwill under US GAAP differs significantly
from that under UK GAAP. Under US GAAP, goodwill is not
amortised over its useful life; instead, it is tested for
impairment on an annual basis and whenever indicators of
impairment arise. As is the case under UK GAAP, goodwill
impairment reviews are an area requiring our judgement,
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. Furthermore, the goodwill
arising on the increase of our interest in GSB to 49.5% in March
1998, which was included in the calculation of the loss on
disposal, had previously been eliminated against reserves under
UK GAAP, but was held as an intangible asset under US GAAP (see
note 27 of the Consolidated Financial Statements included
within Item 18 for further details).
Revenues and bad debt provisions
The main source of our revenue is from subscribers. Revenues
from the provision of DTH subscription services are charged to
contract customers in advance on a monthly basis. Revenues are
invoiced and recorded as part of a periodic billing cycle, and
are recognised as the services are provided. Pay-per-view
67
revenue is recognised when the event, movie or football match is
viewed. Cable revenue is recognised as the services are provided
to the cable companies and is based on the number of subscribers
taking the Sky Channels, as reported to us by the cable
companies, and the applicable wholesale prices. The overriding
principle followed is to recognise revenues in line with the
provision of service, and accordingly, this leaves little scope
for subjectivity. In fiscal 2005, subscription revenues from DTH
subscribers and cable companies comprised 79% of total turnover
(2004: 79%; 2003: 80%).
Management judgement is required to evaluate the likelihood of
collection of customer debt. This evaluation requires estimates
to be made, and a provision is made for those amounts which we
determine are unlikely to be recovered. Currently, our provision
is partly based upon the historical trends in the percentage of
total subscriber debts which are not recovered. As DTH
subscriber revenues are billed in advance and corrective action
is taken early within the billing cycle, bad debts are a
relatively low percentage of sales. Additionally, more detailed
reviews are carried out in respect of more significant balances,
which include cable subscriber revenues, whereby specific
provisions are made where deemed appropriate.
The remaining 21% of turnover (2004: 21%; 2003: 20%) comprises
advertising, Sky Bet, Sky Active and other revenues. Recognition
of these revenues takes place once the advertising is broadcast,
or when the relevant goods or services have been delivered or
provided. Sky Bet revenues represent amounts receivable in
respect of bets placed on events which occur in the year and net
customer losses in the year in respect of the on-line casino
operations and casino-style interactive roulette games.
Under UK GAAP, betting costs from on-line casino operations and
casino-style interactive roulette games 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 on-line casino operations and casino-style
interactive roulette games, differs from that under UK GAAP (see
note 27 of the Consolidated Financial Statements included
within Item 18 for further details).
Tangible fixed assets
Tangible fixed assets represented 23% of our total assets (2004:
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 of the Consolidated Financial
Statements included within Item 18. We estimate the useful
life of these assets based on their periods of expected use and
this estimation is judgemental. We review the period of expected
use on a regular basis. We begin amortisation of these assets
when they become available for use. Tangible fixed asset
impairment reviews are also an area requiring our judgement in
determining whether the carrying value of our tangible fixed
assets can be supported by the net present value of future cash
flows derived from the asset using cash flow projections, and
discounted 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 material impairments in the current year.
FRS No. 15, Tangible Fixed Assets, specifies
criteria for the recognition of tangible fixed assets, including
a detailed definition of costs that are capitalised in relation
to self-constructed assets. As at 30 June 2005, the net
book value of costs capitalised on the balance sheet in respect
of our CRM project was £160 million (2004:
£118 million). Capitalised costs include technology
hardware and software assets, site preparation and development
costs, and associated consultancy expenditures. All of the CRM
project costs capitalised during the year were associated with
the CRM systems (2004: 100%). These assets are being depreciated
over periods of between three and four years. All CRM-related
assets were brought into use in September 2005. The only
difference between UK GAAP and US GAAP relates to the
capitalisation of interest costs on funds invested in the
construction of major capital assets (see note 27 of the
Consolidated Financial Statements included within Item 18
for further details).
68
Amortisation of programme stock
A significant proportion of programming costs relate to the
amortisation of television programme rights. Programming costs
constituted 49% of operating expenses after goodwill and
exceptional items in the year (2004: 54%; 2003: 55%). Our
investments in television programme rights are amortised over
the planned number of showings according to the type of
programme right, with the exception of movie rights and certain
sports rights, which are discussed below. The amortisation
methods used are based on programme genre and have been based on
the repeatability and value to us of showing the programme. This
basis is regularly reviewed. The principle followed is to match
the benefit received from the showing of the programme to the
cost of the programme rights. Acquired movie rights are
amortised on a straight-line basis over the period of the
transmission rights. Our own in-house movie productions are
amortised in line with anticipated revenue over a maximum of
five years. Where contracts for sports rights provide for
multiple seasons or competitions, the amortisation of each
contract was previously based on anticipated revenue. From
fiscal 2005, these contracts are now amortised on a
straight-line basis across the season or competition as our
estimate of the benefits received from these rights was
determined to be more appropriately aligned with a straight-line
amortisation profile. This change in estimate did not have any
impact on the amortisation charge for fiscal 2005, as all
associated programme stock would be fully amortised over the
fiscal year under either method. Provisions are made for any
programme 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 amortisation of programme stock
between UK GAAP and US GAAP.
Deferred tax
We recognise 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 the average tax rates that are expected
to apply in the periods in which the timing differences are
expected to reverse, based on tax rates and laws that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax assets are recognised when, on the basis of all
available evidence, it is regarded as more likely than not that
there will be suitable taxable profits against which to recover
carried forward tax losses and from which the future reversal of
underlying timing differences can be deducted.
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 to recognise additional deferred
tax assets, resulting in a decrease in our effective tax rate
and a positive impact on our financial results.
At 30 June 2005, we have recognised a deferred tax asset of
£100 million (2004: £151 million) and have
unrecognised deferred tax assets of £330 million
(2004: £450 million) in respect of capital losses
related to the Groups holding of KirchPayTV,
£24 million (2004: £21 million) in respect
of capital losses in respect of football clubs and other
investments, £14 million (2004: £13 million)
on UK losses in the Group and £64 million (2004:
£64 million) on trading losses in the Groups
German holding companies of KirchPayTV. The Directors consider
that at 30 June 2005 there was sufficient evidence to
support the recognition of our deferred tax asset on the basis
that it was more likely than not that there would be suitable
taxable profits against which this asset could be utilised and
from which future reversals of underlying timing differences
could be deducted.
The treatment of deferred tax under US GAAP differs from that
under UK GAAP (see note 27 of the Consolidated Financial
Statements included within Item 18 for further details).
69
Exceptional items
Operating exceptional items are those that, in managements
judgement, are items that arise from events or transactions that
fall within the ordinary activities of the Group but which
individually or, if of a similar type, in aggregate, need to be
disclosed separately because of their size or incidence if the
financial statements are to properly reflect the results for the
period. These items are included in the line of the profit and
loss account to which they relate, but are disclosed in a
separate column to provide the reader with a better
understanding of the ongoing performance of the business.
The determination of which items should be separately disclosed
as operating exceptional items requires a degree of judgement
based on the materiality and nature of the items.
Non-operating exceptional items are defined by UK GAAP, although
management judgement is required in determining whether such
items are individually sufficiently material or if of a similar
type, in aggregate, to warrant separate disclosure. These items
are included below operating profit in the profit and loss
account, within the same separate column as the operating
exceptional items.
The treatment of exceptional items under US GAAP differs from
that under UK GAAP (see note 27 of the Consolidated
Financial Statements included within Item 18 for further
details).
ADOPTION OF NEW ACCOUNTING STANDARDS
No new UK GAAP accounting standards were adopted during fiscal
2005.
In fiscal 2004, the following UK GAAP accounting standard came
into force and was adopted by us:
UITF abstract 38 Accounting for ESOP trusts
(UITF 38)
This abstract requires that the Companys shares held by
the Groups ESOP, which were previously held within fixed
asset investments, be presented as a deduction from
shareholders funds. In addition, the charge to the profit
and loss account in relation to awards under the Long-Term
Incentive Plan (LTIP), the Key Contributor Plan
(KCP) and the Equity Bonus Plan (EBP),
which was previously based on the cost of shares held by the
ESOP, is now based on the difference between the market price on
the date of grant and the exercise price. The adoption of UITF
38 was treated as a prior year adjustment with comparative
figures being restated accordingly.
No new UK GAAP accounting standards were adopted during fiscal
2003.
Details of new US GAAP accounting standards issued during the
year are given in note 27 of the Consolidated Financial
Statements included within Item 18.
Adoption of IFRS
The Group will be reporting its financial results in accordance
with IFRS, as adopted by the European Union (EU),
from 1 July 2005. The transition date for the Groups
adoption of IFRS of 1 July 2004 is determined in accordance
with IFRS 1 First-time Adoption of International Financial
Reporting Standards. This transition date complies with
the Securities and Exchange Commissions (SEC)
decision to provide an exemption from the provision of a second
year of comparative financial information for foreign
registrants in the first year in which they adopt IFRS. In
subsequent years, the Group will produce two years of
comparative financial information for SEC reporting purposes.
As noted in the 2004 Annual Report on Form 20-F, the Group
established an IFRS transition steering committee to oversee the
transition to IFRS. The Committees main responsibilities
have been monitoring the progress of a dedicated transition
working group, making key decisions relating to the transition,
and reporting to the Audit Committee in relation to the
transition. Implementation plans have been completed to modify
the Groups procedures, systems and controls, and an IFRS
training programme for the Groups finance function has
also been completed.
70
Some uncertainties remain as to whether the International
Accounting Standards Board (IASB) and other related
bodies will issue new or revised standards that, subject to
their adoption by the EU, will either be mandatory for the
Groups 30 June 2006 financial statements, or may be
adopted early voluntarily. Such uncertainties limit the
Groups current ability to assess the final impact of IFRS
on its financial statements.
Particular uncertainty surrounds IAS 39 Financial
Instruments: Recognition and Measurement, which has been
adopted by the EU on a partial basis, with certain requirements
of the standard issued by the IASB having been removed (the
carve-outs). The carve-outs relate to the use of the
full fair value option in accounting for certain types of
financial liabilities that the Group does not currently hold and
a method of hedging interest rate risk that the Group currently
does not employ. Therefore the current modifications to IAS 39
have not affected the Group and we expect that the Group will be
compliant with both the IASB and the EU versions of the
standards.
The adoption of IFRS will lead to some significant changes in
the Groups accounting policies, results, and the
presentation of its financial statements, and other disclosures
within the Annual Report on Form 20-F, which are currently
in accordance with UK GAAP. Based on the Groups assessment
of current IFRS requirements, the principal effects on the
Groups financial statements are as follows:
Share-based payments
Under UK GAAP, the Group recognises a charge in the profit and
loss account for its LTIP, EBP and KCP based on the difference
between the exercise price of the award and the market price of
a BSkyB share on the date of grant (the intrinsic
value). No charge is recognised in respect of the
Executive Share scheme, as the awards had an intrinsic value of
nil, nor in respect of the Sharesave scheme due to a specific
exemption under UK GAAP for such schemes.
Under IFRS 2 Share-based Payment, the Group is
required to recognise a charge in the income statement for all
share options and awards, based on the fair value of the awards
as calculated at the grant date using an option-pricing model.
This method of valuation is used to calculate the charge for all
share option schemes, including the Executive and Sharesave
Schemes, resulting in an additional charge under IFRS compared
to UK GAAP.
Financial instruments and hedge accounting
The Group manages its interest rate and foreign currency
exposures using a combination of interest rate swaps,
cross-currency interest rate swaps, options on interest rate
swaps (swaptions), forward exchange contracts and
currency options (collars).
Under UK GAAP, where the Group has taken out financial
instruments to provide an economic hedge for foreign currency
exposures, the rates inherent in the hedging contracts are used
to translate the hedged items. The derivative financial
instruments are not recognised on the balance sheet, and the
gain or loss on the instrument is not recognised in the profit
and loss account until maturity of the instrument.
Under IFRS, the Group is required to record all foreign currency
transactions at spot exchange rates at the transaction date, and
to state all foreign currency monetary assets and liabilities at
closing exchange rates at each balance sheet date. This results
in foreign currency creditors, programming additions and
amortisation, US dollar debt and accrued interest thereon being
initially recorded at the spot exchange rates at the transaction
date, with restatement of foreign currency creditors, US dollar
debt and accrued interest at each balance sheet date. The Group
is required to recognise its derivative financial instruments on
the balance sheet at fair value from inception of the contract,
with changes in fair value being recognised in the income
statement. Where hedge accounting of cash flows is achieved, the
portion of the gain or loss on the hedging instrument (i.e. the
change in its fair value) that is determined to be an effective
hedge is initially recognised through equity in a hedging
reserve, and is then reclassified to the income statement during
the same periods in which the underlying hedged exposure affects
the income statement.
The Groups foreign exchange hedging policy was revised
during the year to extend the maturity profile of hedging
instruments to match the time horizon of the underlying
contracts more appropriately, and to
71
extend the range of permitted instruments to protect exposures
rather than fix transaction rates. The Group does not see a
requirement to change its current hedging policy as a result of
the new requirements for achieving hedge accounting under IAS 39
and expects to be able to achieve hedge accounting for the
majority of its derivative financial instruments.
Goodwill
Under UK GAAP, the Group amortises goodwill on a straight-line
basis over periods of no longer than 20 years. Under IFRS,
the Groups goodwill balances that existed at the date of
transition to IFRS are no longer amortised and instead are
subject to annual impairment testing.
Furthermore, under UK GAAP, goodwill arising on acquisition
which had been written off to reserves is recycled to the profit
and loss account on disposal of the investment. Under IFRS, any
such goodwill remains written off against reserves, resulting in
a different gain or loss on disposal of such investments.
Dividends
Under UK GAAP, a dividend declared after the balance sheet date,
but before the date of signing the financial statements, is
treated as an adjusting post balance sheet event, and the
associated dividend payable is recorded as a liability within
the year end balance sheet. Under IFRS, such a dividend is
recorded as a liability in the accounting period in which it is
approved.
Intangible assets
Certain assets, principally software acquired and developed that
is not integral to a related item of hardware, which are
classified as tangible fixed assets under UK GAAP must instead
be classified as intangible assets under IFRS. These assets are
reclassified on transition to IFRS, and continue to be amortised
over their useful economic lives, which have not changed as a
result of the reclassification. In addition, under IFRS, certain
smartcard development expenditure that was expensed under
UK GAAP, must be capitalised.
Presentation of the financial statements
IAS 1 Presentation of Financial Statements
(IAS 1) does not provide definitive guidance on the
format of the income statement or balance sheet, but stipulates
certain line items that, as a minimum, must be disclosed.
Additional line items, headings and subtotals are presented on
the face of the Groups income statement and balance sheet
where such presentation is relevant to the understanding of the
Groups financial performance. IAS 1 includes a requirement
that all deferred tax assets must be classified as non-current
assets under IFRS.
72
ITEM 6. DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
Our Directors are as follows:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position with the Company |
|
|
| |
|
|
Chase Carey
|
|
|
51 |
|
|
*Director |
Jeremy Darroch
|
|
|
43 |
|
|
Director (Chief Financial
Officer)(i) |
David DeVoe
|
|
|
58 |
|
|
*Director |
David Evans
|
|
|
65 |
|
|
**Director |
Nicholas Ferguson
|
|
|
57 |
|
|
**Director |
Andrew Higginson
|
|
|
48 |
|
|
**Director(ii) |
Allan Leighton
|
|
|
52 |
|
|
**Director (Audit Committee Chairman) |
James Murdoch
|
|
|
32 |
|
|
Director (Chief Executive Officer) |
Rupert Murdoch
|
|
|
74 |
|
|
*Chairman |
Jacques Nasser
|
|
|
57 |
|
|
**Director (Remuneration Committee Chairman) |
Gail Rebuck
|
|
|
53 |
|
|
**Director |
Lord Rothschild
|
|
|
69 |
|
|
**Director (Deputy Chairman & Senior Independent
Non-Executive Director) |
Arthur Siskind
|
|
|
67 |
|
|
*Director |
Lord St John of Fawsley
|
|
|
76 |
|
|
*Director |
Lord Wilson of Dinton
|
|
|
63 |
|
|
**Director (Corporate Governance & Nominations
Committee Chairman) |
|
|
* |
Non-Executive |
|
** |
Independent Non-Executive |
|
(i) |
Jeremy Darroch was appointed as Chief Financial Officer
(CFO) of the Company with effect from 16 August
2004, following Martin Stewarts resignation from the Board
of the Company on 4 August 2004. |
|
(ii) |
Andrew Higginson was appointed as a Director of the Company on
1 September 2004. |
Our senior executives who are not members of the Board of
Directors (Senior Executives) are as follows:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position with the Company |
|
|
| |
|
|
Dawn Airey
|
|
|
44 |
|
|
Managing Director, Sky Networks |
James Conyers
|
|
|
40 |
|
|
General Counsel |
Beryl Cook
|
|
|
44 |
|
|
Director for People and Organisational Development |
Robin Crossley
|
|
|
47 |
|
|
Strategic Adviser, Technology |
Mike Darcey
|
|
|
40 |
|
|
Group Director of Strategy |
Julian Eccles
|
|
|
47 |
|
|
Director of Corporate Communications and Corporate Affairs |
Jon Florsheim
|
|
|
45 |
|
|
Chief Marketing Officer |
Richard Freudenstein
|
|
|
40 |
|
|
Chief Operating Officer |
David Gormley
|
|
|
42 |
|
|
Company Secretary |
Jeff Hughes
|
|
|
35 |
|
|
Group Director for IT and Strategy |
Nick Milligan
|
|
|
44 |
|
|
Managing Director, Sky Media |
Vic Wakeling
|
|
|
62 |
|
|
Managing Director, Sky Sports |
Alun Webber
|
|
|
39 |
|
|
Group Director of Engineering and Platform Technology |
None of the Senior Executives listed above hold more than 1% of
the issued share capital in the Company.
Further information with respect to the Directors and Senior
Executives is set forth below.
73
Board of Directors
Chase Carey was appointed as a Director of the Company on
13 February 2003. Mr Carey has been a Non-Executive
Director of News Corporation since 2002 and was an Executive
Director from 1996 until 2002. Mr Carey is President and
Chief Executive Officer (CEO) of The DIRECTV Group,
Inc. (DIRECTV) and serves on the Boards of Gateway,
Inc. and Yell Group plc. Mr Carey previously served as
Co-Chief Operating Officer of News Corporation and as a Director
and Co-Chief Operating Officer of Fox Entertainment Group
(FEG). Mr Carey has also held the positions of
Chairman and CEO of Fox Television, Director of Star Group
Limited (Star), Director of NDS Group plc
(NDS) and Director of Gemstar-TV Guide
International, Inc. (Gemstar).
Jeremy Darroch was appointed as Chief Financial Officer
(CFO) and a Director of the Company on 16 August
2004. Mr Darroch joined Dixons Group plc
(Dixons) in January 2000 as Retail Finance Director,
rising to the position of Group Finance Director in February
2002. Prior to Dixons, Mr Darroch spent 12 years at
Procter & Gamble in a variety of roles in the UK and
Europe, latterly as European Finance Director for its Health
Care businesses. Mr Darroch is a member of the 100 Group of
Finance Directors.
David DeVoe was appointed as a Director of the Company on
15 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,
CFO 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 International
(NAI) since January 1991 and a Director of Star
since July 1993. Mr DeVoe has also been a Director of FEG
since 1991 and a Senior Executive Vice President and CFO since
August 1998. Mr DeVoe has been a Director of NDS since 1996
and a Director of Gemstar since June 2001.
David Evans was appointed as a Director of the Company on
21 September 2001. Mr Evans is President and CEO of Crown
Media Holdings, Inc (Crown). Mr Evans was
previously President and CEO of Crowns predecessor,
Hallmark Entertainment Networks, from 1 March 1999. Prior
to that, Mr Evans was President and CEO of
Tele-Communications International, Inc. (TINTA) from
January 1998. Mr Evans 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 CEO of Sky Entertainment
Services Latin America, LLC.
Nicholas Ferguson was appointed as a Director of the
Company on 15 June 2004. Mr Ferguson is Chairman of
SVG Capital, a publicly-quoted private equity group, and was
formerly Chairman of Schroder Ventures. He is also Chairman of
the Courtauld Institute of Art and the Institute of Philanthropy.
Andrew Higginson was appointed as a Director of the
Company on 1 September 2004. Mr Higginson is Finance
and Strategy Director of Tesco plc (Tesco).
Mr Higginson was appointed to the Board of Tesco in 1997,
having previously been the Group Finance Director of the Burton
Group plc. Mr Higginson is a member of the 100 Group of
Finance Directors and Chairman of Tesco Personal Finance.
Allan Leighton was appointed as a Director of the Company
on 15 October 1999. Mr Leighton joined ASDA Stores
Limited as Group Marketing Director in March 1992. In September
1996 he was appointed Chief Executive and in November 1999 he
was appointed President and CEO of Wal-Mart Europe.
Mr Leighton resigned all of these positions in September
2000. Mr Leighton is Non-Executive Chairman of BHS Limited
and Royal Mail Group plc and is a Non-Executive Director of
George Weston Limited and Selfridges & Co Limited.
James Murdoch was appointed as a Director of the Company
on 13 February 2003 and CEO with effect from 4 November 2003.
Until Mr Murdochs appointment as CEO, he was Chairman
and CEO of Star from May 2000. Prior to 4 November 2003,
Mr Murdoch was Executive Vice President of News Corporation
and a member of News Corporations Board of Directors and
Executive Committee and served on the Board of NDS.
Mr Murdoch serves on the Board of YankeeNets and the Board
of Trustees of the Harvard Lampoon. Mr Murdoch attended
Harvard University. James Murdoch is the son of Rupert Murdoch.
74
Rupert Murdoch was appointed as a Director of the Company
in November 1990, when he founded British Sky Broadcasting, and
was appointed Chairman in June 1999. Mr Murdoch has been
CEO of News Corporation since 1979, Chairman since 1991 and was
Managing Director from 1979 until November 2004. Mr Murdoch
has also served as a Director of FEG and its predecessor
companies since 1985, Chairman since 1992 and CEO since 1995. In
addition, Mr Murdoch has been a Director of Star since
1993, Gemstar since 2001, DIRECTV since 2003 and China Netcom
Group Corporation (Hong Kong) Limited since October 2004.
Jacques Nasser was appointed as a Director of the Company
on 8 November 2002. Mr Nasser is a Senior Partner of One
Equity Partners. In addition, Mr Nasser serves on the Board
of Quintiles Transnational Corporation, Brambles Industries and
the International Advisory Board of Allianz A.G. Mr Nasser
served as a Member of the Board of Directors, and as President
and CEO of Ford Motor Company from 1998 to 2001. Mr Nasser
has received an honorary Doctorate of Technology and graduated
in Business from the Royal Institute of Melbourne. Because of
Mr Nassers significant contributions to the wellbeing
of humanity and to the country of Lebanon, he has received the
Order of the Cedar. In recognition of Mr Nassers work
for Australian industry, as an adviser to government, and for
education in the area of technology, he has been awarded an
Order of Australia and a Centenary Medal.
Gail Rebuck was appointed as a Director of the Company on
8 November 2002. Ms Rebuck is Chairman and Chief Executive of
The Random House Group Limited (Random House), the
UKs largest trade publishing company. In 1982, Ms Rebuck
became a founder Director of Century Publishing
(Century). 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. Ms Rebuck was a Trustee of the Institute for
Public Policy Research from 1993 to 2003 and was for three years
a member of the Governments Creative Industries Task
Force. Ms Rebuck is on the Board of The Work Foundation, a
member of the Court of the University of Sussex, on the Advisory
Board of the Cambridge Judge Institute, and the Council of the
Royal College of Art. Ms Rebuck was awarded a CBE in the 2000
New Years Honours List.
Lord Rothschild was appointed as a Director, Deputy
Chairman and Senior Independent Non-Executive Director of the
Company on 17 November 2003. Lord Rothschild is Chairman of RIT
Capital Partners plc and Five Arrows Limited. He co-founded
Global Asset Management, which is now part of UBS, and J
Rothschild Assurance, the life assurance company now part of
St Jamess Place Capital plc. From Oxford University
Lord Rothschild 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 his interests in the financial sector. In
addition to his career in the world of finance, he has been
involved in philanthropy and public service.
Arthur Siskind was appointed as a Director of the Company
on 19 November 1991. Mr Siskind has been the Senior Advisor
to the Chairman of News Corporation since January 2005.
Mr Siskind has been an Executive Director of News
Corporation since 1991 and was Group General Counsel of News
Corporation from March 1991 until December 2004. Mr Siskind
was Senior Executive Vice President of News Corporation from
January 1996 until December 2004 and an Executive Vice President
of News Corporation from February 1991 until January 1996.
Mr Siskind has been a Director of NDS since 1996 and was a
Director of NAI from 1991 until January 2005 and a Director of
Star from 1993 until January 2005. Mr Siskind was Senior
Executive Vice President and General Counsel of FEG from August
1998 until January 2005 and a Director from August 1998 to March
2005. Mr Siskind has been a member of the Bar of the State
of New York since 1962.
Lord St John of Fawsley was appointed as a Director
of the Company on 20 November 1991. Lord St John 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. Lord St John 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
75
Commons and Chancellor of the Duchy of Lancaster. Lord
St John has also been Master of Emmanuel College,
Cambridge. Lord St John is a regular commentator on
television and radio.
Lord Wilson of Dinton was appointed as a Director of the
Company on 13 February 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. Lord Wilson subsequently served in a number of
departments, including 12 years in the Department of
Energy, where his responsibilities included nuclear power
policy, the privatisation of Britoil, personnel and finance.
Lord Wilson headed the Economic Secretariat in the Cabinet
Office under Mrs Thatcher from 1987 to 1990 and, after two
years in the Treasury, was appointed Permanent Secretary of the
Department of the Environment in 1992. Lord Wilson became
Permanent Under Secretary of the Home Office in 1994 and
Secretary of the Cabinet and Head of the Home Civil Service in
January 1998. Since his retirement in September 2002, Lord
Wilson has been Master of Emmanuel College, Cambridge. Lord
Wilson was made a peer in November 2002.
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 the Company
Secretary signed by the appointer 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, each has appointed Leslie Hinton to act as his
Alternate Director. David Evans has appointed Allan Leighton as
his Alternate Director.
Leslie Hinton served as a Director of the Company from
15 October 1999 until 13 February 2003. Following his
resignation as a Director, Mr Hinton was immediately appointed
as an Alternate Director of the Company. Mr Hinton was appointed
President of Murdoch Magazines in the US in 1990, two years
later becoming CEO of Fox Television Stations and in 1995 he
became Executive Chairman of News International Limited. Mr
Hinton is a member of News Corporations Executive
Committee. In 1996 he joined the board of the Press Association
in Britain, and this year was appointed a Non-Executive Director
of Johnston Press plc.
Senior Executives
Our Senior Executives 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).
James Conyers joined us in April 1993 as Assistant
Solicitor. During 1998 he was appointed as our Deputy Head of
Legal and Business Affairs. In January 2004 he was appointed as
our Head of Legal and Business Affairs, and in September 2005 he
was appointed as our General Counsel.
Beryl Cook joined us in April 2004 as our Director for
People and Organisational Development.
Robin Crossley joined Sky in 1988 and was appointed
National Operations Manager in 1989. He left in 1991 but
subsequently rejoined us in June 1995 as Director of Digital
Development. In January 2001 he was appointed Strategic Adviser,
Technology.
Mike Darcey joined us in February 1998 as our Head of
Strategic Planning and has served as our Group Director of
Strategy since July 2002.
76
Julian Eccles joined us in March 2000 as our Director of
Communications and Corporate Affairs. He will be leaving the
Company following the transition to a new Group Director of
Communications, who will be appointed with effect from
1 November 2005.
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 and in March 2005 he was appointed as Chief
Marketing Officer.
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.
Jeff Hughes joined us in May 2005 as our Group Director
for IT and Strategy.
Nick Milligan joined us in June 2004 as Managing Director
of Sky Media.
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.
Except as set forth in this item, 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 Senior Executive.
EMPLOYEES
The average monthly number of full time equivalent persons
(including temporary employees) employed by us during the
previous three fiscal years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Programming
|
|
|
1,424 |
|
|
|
1,295 |
|
|
|
1,106 |
|
Transmission and related functions
|
|
|
1,403 |
|
|
|
1,394 |
|
|
|
1,383 |
|
Marketing
|
|
|
238 |
|
|
|
209 |
|
|
|
199 |
|
Subscriber management
|
|
|
5,662 |
|
|
|
5,418 |
|
|
|
5,381 |
|
Administration
|
|
|
1,079 |
|
|
|
1,051 |
|
|
|
954 |
|
Betting
|
|
|
152 |
|
|
|
133 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,958 |
|
|
|
9,500 |
|
|
|
9,132 |
|
|
|
|
|
|
|
|
|
|
|
There were approximately 278 temporary staff included
within the average number of full time equivalent people
employed by the Group during the 2005 fiscal year.
CORPORATE GOVERNANCE
The Company, as a foreign issuer with American Depositary Shares
listed on the New York Stock Exchange (NYSE), is
obliged to disclose any significant ways in which its corporate
governance practices differ from the NYSEs corporate
governance listing standards. Furthermore, the Company must
comply fully with the provisions of the listing standards which
relate to the composition, responsibilities and operation of
audit committees. These provisions incorporate the rules
concerning audit committees implemented by the SEC and the NYSE
under the US Sarbanes-Oxley Act of 2002.
The Company has reviewed the NYSEs listing standards and
believes that its corporate governance practices are generally
consistent with the standards, with the following exception. The
standards state that companies must have a nominating/corporate
governance committee composed entirely of
77
independent directors. The Companys Corporate
Governance & Nominations Committee is made up of a
majority of Independent Non-Executive Directors.
In July 2003, the UK Financial Services Authority issued the
revised code on Corporate Governance (the Combined
Code). The Combined Code applies to companies listed on
the London Stock Exchange for reporting years beginning on or
after 1 November 2003, and therefore in relation to the
Company from the financial year ended 30 June 2005.
Accordingly, this Annual Report on Form 20-F explains the
Companys compliance with the Combined Code during the
financial year ended 30 June 2005.
The Company is committed to high standards of corporate
governance and, except as noted below, has complied throughout
the year with the best practice provisions of the Combined Code.
THE BOARD
The Board currently comprises fifteen Directors, made up of the
CEO and CFO (the Executive Directors) and thirteen
Non-Executive Directors, nine of whom are deemed to be
independent under the provisions of the NYSEs corporate
governance listing standards and eight under the provisions of
the Combined Code. The Non-Executive Directors of the Company
bring a wide range of experience and expertise to the
Companys affairs, and they carry significant weight in the
Boards decisions.
The roles of the Chairman and CEO are separate and have been
since the Company obtained its listing in 1994. Lord Rothschild
holds the position of Senior Independent Non-Executive Director
and Deputy Chairman.
BOARD PRACTICES
The Board is scheduled to meet at least six times a year to
review appropriate strategic, operational and financial matters
as required. During the financial year, one of these meetings
was held over two days when the Board met to review the future
strategy and direction of the Group. A schedule of matters
reserved for the full Boards determination and/or approval
is in place, which includes:
|
|
|
approval of the annual budget and any changes to it; |
|
|
a major change in the nature, scope or scale of the business of
the Group; |
|
|
approval of the interim and final financial results; |
|
|
approval of any dividend policy; |
|
|
changes relating to the Groups capital structure,
including reductions of capital and share buy-backs; |
|
|
the entering into by the Group of a commitment or arrangement
(or any series of related commitments or arrangements) which,
whether budgeted or unbudgeted, involves or could reasonably
involve, the payment or receipt by the Group of amounts equal to
or in excess of £100 million in aggregate value; |
|
|
the entering into by the Group of a commitment or arrangement
(or any related series of commitments or arrangements) with News
Corporation, any of its subsidiaries, or a related party which
involves, or could reasonably involve, the payment or receipt by
the Group of amounts equal to or in excess of
£25 million in aggregate value. |
The Board has also delegated specific responsibilities to Board
Committees, notably the Audit, Remuneration and Corporate
Governance & Nominations Committees, as set out below.
Directors receive Board and Committee papers several days in
advance of Board and Committee meetings and also have access to
the advice and services of the Company Secretary. In addition,
the Board members have access to external professional advice at
the Companys expense. Non-Executive Directors serve for an
initial term of three years, subject to election by shareholders
following appointment, subsequent re-election by shareholders,
and Companies Act provisions relating to the removal of
directors. In addition, reappointment
78
for a further term is not automatic, but may be mutually agreed.
All of the Directors are required to retire and offer themselves
for re-election at least once in every three years.
The Board notes that provision A.7.2 of the Combined Code
requires that Directors who have been serving on the Board for
more than nine years should retire and stand for re-election at
each AGM. The Company does not currently comply with this
provision, as Directors who were previously elected by the
shareholders prior to the introduction of this provision shall
only be subject to annual re-election from the expiry of the
current term of office that the Director is serving.
A committee of senior management generally meets on a weekly
basis to allow prompt discussion of relevant business issues. It
is chaired by the CEO and comprises the CFO and other Senior
Executives from within the Group.
Following appointment to the Board, all new Directors receive an
induction tailored to their individual requirements. The
induction process involves a meeting with all of the
Companys Executive Directors and Senior Executives. This
facilitates their understanding of the Group and the key drivers
of the business performance. The Directors are also
provided with copies of the Companys corporate governance
practices and procedures.
Directors regularly receive additional information from the
Company between Board meetings, including a monthly report which
is sent to all the Directors updating them on the performance of
the Group.
Where appropriate, additional training and updates on particular
issues are arranged. For example, over the last financial year
the Audit Committee has received specific briefings on the
introduction of IFRS and its likely impact on future reporting
by the Company. The Board has also received a briefing on the
new Disclosure and Listing Rules which became effective from
1 July 2005.
During the fiscal year, the Directors carried out an evaluation
of the performance of the Board, its Committees and individual
Directors. The process was carried out internally and was driven
by the Corporate Governance & Nominations Committee,
with the assistance of the Company Secretary and members of the
legal department. The evaluation confirmed that the Board was
satisfied with the Boards overall performance but
identified some areas for improvement which are now being
addressed.
During the fiscal year, the Senior Independent Non-Executive
Director held a formal meeting of the Non-Executive Directors,
without Executive Directors present, to discuss the functioning
of the Board. As a result of this meeting certain changes to the
operation of the Board and its Committees will be implemented.
There was also a meeting of the Non-Executive Directors without
the Chairman present to evaluate his performance led by the
Senior Independent Non-Executive Director.
Following this years review the Corporate
Governance & Nominations Committee and Board have
confirmed that all Directors standing for re-election at the
forthcoming AGM continue to perform effectively and demonstrate
commitment to their roles.
Board Committees
Remuneration Committee
The Remuneration Committee, on behalf of the Board, is
principally concerned with the remuneration (in all its forms)
of Executive Directors and other Senior Executives who report
directly to the CEO, as well as the review of the design and
structure of the Groups package of employee incentives.
The Remuneration Committee has clearly defined terms of
reference, meets at least twice a year, and takes advice from
the CEO and independent consultants as appropriate in carrying
out its work.
The members of the Remuneration Committee are Jacques Nasser
(Chairman), David Evans and Nicholas Ferguson, all of whom are
Independent Non-Executive Directors, in compliance with the
Combined Code.
Rupert Murdoch and David DeVoe have a standing invitation to
attend meetings of the Remuneration Committee: their attendance
at these meeting is as observers only and in a non-voting
capacity.
79
Corporate Governance & Nominations Committee
The Corporate Governance & Nominations Committee is
chaired by Lord Wilson of Dinton and its other members are Lord
Rothschild and Arthur Siskind. The Corporate
Governance & Nominations Committee met twice during the
year. Its main duties include:
|
|
|
the identification and nomination, for approval by the Board of
candidates to fill Board vacancies as they arise; |
|
|
the drafting of requirements for a particular appointment to the
Board, taking into consideration the present balance of skills,
knowledge and experience on the Board; |
|
|
the regular review of the structure, size and composition of the
Board and to recommend any changes to the Board or succession
planning; |
|
|
the provision of a formal letter of appointment, setting out
clearly what is expected of new appointees to the Board, in
terms of time commitment, term of office and committee service
as well as their duties and liabilities as a Director, including
details of the Companys Corporate Governance policies and
Directors & Officers Liability Insurance Cover; |
|
|
the monitoring of the Companys compliance with applicable
Codes and other requirements of Corporate Governance; |
|
|
the supervision of the annual review by the Board of the
independence of directors and the performance of the Board and
individual directors. |
Both Andrew Higginson and Jeremy Darroch were appointed as
Directors during the fiscal year. Their nomination and
recruitment to the Board was completed in fiscal 2004 and was
explained in this item in the Companys 2004 Annual Report
on Form 20-F. There have been no nominations to the Board
during the year.
The Corporate Governance & Nominations Committee led
the evaluation of the Board that was completed during the year,
the results of which are discussed earlier in this Item (see
Board Practices above).
The Committee also reviewed the independence of the
Non-Executive Directors and recommended to the Board that there
be no changes to the independence status of the current
Non-Executive Directors as disclosed in the previous year.
The Corporate Governance & Nominations Committee also
reviewed the letter of appointment of the Non-Executive
Directors. All Non-Executive Directors who have been appointed
to the Board of Directors since the introduction of the Combined
Code in 2003, have signed letters of appointment with the
Company. Following the review of the letter it is now in the
process of being signed by the rest of the Non-Executive
Directors.
Audit Committee
The Audit Committee, which consists exclusively of Independent
Non-Executive Directors, has clearly defined terms of reference
as laid out by the Board. The composition of the Audit Committee
is currently Allan Leighton (Chairman), Gail Rebuck and Andrew
Higginson, who joined the Board on 1 September 2004. Until
Mr Higginson joined the Committee, its composition did not
comply with the Combined Code. The CFO and representatives from
the external auditor and the internal auditor attend meetings at
the request of the Audit Committee members. It is also usual
practice for the CEO to attend meetings of the Audit Committee.
Other finance and business risk executives attend meetings from
time to time and the Company Secretary is Secretary to the
Committee. The Audit Committee Chairman reports regularly to the
Board on its activities. David DeVoe and Arthur Siskind have a
standing invitation to attend meetings of the Audit Committee:
their attendance at these meetings is as observers only and in a
non-voting capacity. Following Mr Higginsons appointment,
all three members of the Audit Committee are independent for the
purposes of the Combined Code and rule 10A-3(b)(i) under
the US Securities Exchange Act of 1934. The
80
members have wide ranging experience that they bring to the work
of the Audit Committee. The Audit Committee met seven times
during the year. Its duties include:
|
|
|
making recommendations to the Board in relation to the
appointment, reappointment and removal of the external auditors
and discussing with the external auditors the nature, scope and
fees for the external auditors work; |
|
|
reviewing and making recommendations to the Board regarding the
approval, or any amendment to, the quarterly, half year and
annual financial statements of the Group; |
|
|
reviewing and approving the Groups US Annual Report on
Form 20-F prior to its filing; |
|
|
reviewing the Groups significant accounting policies; |
|
|
reviewing the Groups systems of internal control; |
|
|
reviewing the Groups treasury policies; |
|
|
reviewing the plans, findings and resources of the Groups
internal audit function and assessing its effectiveness annually; |
|
|
monitoring the Groups whistle-blowing policy; |
|
|
approving non-audit services provided by Deloitte &
Touche LLP. |
News UK Nominees Limited, a subsidiary of News Corporation, is a
major shareholder in the Group. The Audit Committee receives, on
a quarterly basis, a schedule of all transactions between
companies within the News Corporation Group and the Group, and
any other related party transactions, showing cumulatively all
transactions which have been entered into during the year and
which exceed £100,000 in value.
Furthermore, Audit Committee approval is required for the
entering into by the Group of a commitment or arrangement (or
any series of related commitments or arrangements) with News
Corporation or any of its subsidiaries, or any other related
party which involves or could reasonably involve the payment or
receipt by the Group of amounts equal to or in excess of
£10 million, but not exceeding £25 million
in aggregate value. Any transaction in excess of
£25 million in aggregate value must be submitted to
the Audit Committee and, if approved by the Audit Committee,
must also be submitted to the full Board for approval.
COMPENSATION
The Executive Directors and Senior Executives
compensation consists of salary, annual bonus, long-term
incentives, pensions and other benefits. This reward structure
is regularly reviewed by the Remuneration Committee (the
Committee) to ensure that it is achieving the
Groups objectives.
Salary
The basic salary for each Executive Director and Senior
Executive is determined by the Committee taking account of the
recommendation of the CEO (other than in respect of his own
salary) and information provided from external sources relative
to the industry sectors in which the Group operates.
Annual bonus
Executive Directors and Senior Executives participate in a bonus
scheme under which awards are made to participants at the
discretion of the 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.
The performance measures that are used in calculating the bonus
of the CEO and the CFO are operating profit, free cash flow and
growth in DTH subscribers. For the Senior Executives these
measures amount to
81
75% of that persons bonus, with the remaining 25% based on
individual Key Performance Indicators pertinent to the Senior
Executives business responsibilities.
Long Term Incentive Plan
The Company operates an LTIP, under which awards may be made to
any Executive Directors and Senior Executives of the Group at
the discretion of the Committee. Awards under the scheme are
made as a nil priced option. Awards are not transferable or
pensionable and are made over a number of shares in the Company,
determined by the Committee.
Design of LTIP plan
During the year the Committee reviewed the operation of the
LTIP. This involved discussions with management, advisors and
consultation with institutional shareholder groups.
In reviewing the design of the LTIP, the Committee adopted a
proposal which they felt reduced Executives reliance on
annual vesting of LTIP awards. The proposal was that, in year
one, an Executive be granted an award of shares that would vest
after three years, subject to performance conditions. In year
two, a further discretionary award, of up to 100% of the year
one award, could be made. This award would vest at the same time
as the year one award.
By granting awards in this way, participants could potentially
receive awards annually but vesting would take place every two
years. Shareholders were consulted initially on these changes
and suggestions they made were adopted in drawing up the
detailed programme, and shareholders were again consulted when
the revised proposals were made.
The awards vest, in full or in part, dependent on the
satisfaction of specified performance targets. Measurements of
the extent to which performance targets have been met are
reviewed by the Committee at the date of vesting of each award.
During the fiscal year, awards under the plan were made to James
Murdoch and Jeremy Darroch. Further information on these awards
can be found in this Item (see 2004 Awards below).
Performance conditions attaching to past LTIP
awards
The Committee noted that awards made in 2004 were subject to new
performance conditions. However, certain Senior Executives held
LTIP awards granted previously which were all subject to
different performance targets. The Committee noted the need for
alignment of performance goals and the possibility of confusion
in respect of awards from different years. The Committee
therefore discussed how outstanding 2003 and 2002 awards might
be aligned to the new performance conditions.
Before making any changes, the Committee consulted with a range
of shareholders on their views about changing the performance
conditions, which ensured that the value of the shares with
legacy conditions equated, broadly, to the value of shares under
the new conditions.
The Committee agreed therefore that, as the awards were due to
vest annually on 31 July, 31 July 2004 would be used
for the date of the switch over of the performance conditions.
For an award that had been made on 31 July 2003 and was
subject to vesting over three years, at 31 July 2004, (the
date that performance conditions were to be switched over), the
award was assumed to be one third through its vesting period.
Therefore, one third of the award would be subject to testing
under the old performance conditions and two thirds of the award
would be subject to testing under the new performance conditions.
In order to calculate a fair estimate of the number of shares
which might have vested under legacy performance conditions, a
recognised option pricing model was employed. This calculated
that, of the one third of 2003 awards being measured at the
switchover date, 20% would have vested and the balance would
have lapsed. Of the two thirds of the 2002 awards being measured
at the switchover date, 43% would have vested and the balance
would have lapsed.
82
Following these changes, further discussions were held with some
of our shareholders to seek feedback on the changes and they
were broadly supportive of the Committees recommendations.
2004 Awards
The performance conditions attaching to the 2004 awards are
subject to 70% on internal measures and 30% on the Total
Shareholder Return (TSR) measures. The internal
measures are DTH subscriber growth, free cash flow per share and
earnings per share. The TSR is measured solely against the
FTSE 100.
Details of outstanding awards under the LTIP are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares under award | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Market | |
|
|
|
|
|
|
|
|
At | |
|
Granted | |
|
Exercised | |
|
Lapsed | |
|
At | |
|
|
|
price at | |
|
|
|
Date from | |
|
|
Name of |
|
30 June | |
|
during the | |
|
during the | |
|
during the | |
|
30 June | |
|
Exercise | |
|
date of | |
|
Date of | |
|
which | |
|
Expiry | |
Director |
|
2004 | |
|
year | |
|
year | |
|
year | |
|
2005 | |
|
price | |
|
exercise | |
|
award | |
|
exercisable | |
|
date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
James Murdoch
|
|
|
|
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
450,000 |
|
|
£ |
0.00 |
|
|
|
|
|
|
|
11.08.04 |
|
|
|
11.08.07 |
|
|
|
11.08.14 |
|
Jeremy Darroch
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
£ |
0.00 |
|
|
|
|
|
|
|
16.08.04 |
|
|
|
16.08.07 |
|
|
|
16.08.14 |
|
Martin Stewart
|
|
|
150,000 |
|
|
|
|
|
|
|
150,000 |
(ii) |
|
|
|
|
|
|
|
|
|
£ |
8.30 |
|
|
£ |
5.71 |
|
|
|
21.11.01 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
113,555 |
|
|
|
|
|
|
|
5,200 |
(ii) |
|
|
|
|
|
|
108,355 |
|
|
£ |
5.55 |
|
|
£ |
5.71 |
|
|
|
02.08.02 |
|
|
|
31.07.05 |
|
|
|
31.07.12 |
|
|
|
|
113,555 |
|
|
|
|
|
|
|
|
|
|
|
113,555 |
(i) |
|
|
|
|
|
£ |
5.55 |
|
|
|
|
|
|
|
02.08.02 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
5,733 |
|
|
|
|
|
|
|
765 |
(ii) |
|
|
|
|
|
|
4,968 |
|
|
£ |
5.60 |
|
|
£ |
5.71 |
|
|
|
13.08.02 |
|
|
|
31.07.05 |
|
|
|
31.07.12 |
|
|
|
|
5,733 |
|
|
|
|
|
|
|
|
|
|
|
5,733 |
(i) |
|
|
|
|
|
£ |
5.60 |
|
|
|
|
|
|
|
13.08.02 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
220,000 |
|
|
|
|
|
|
|
|
|
|
|
220,000 |
(i) |
|
|
|
|
|
£ |
0.00 |
|
|
|
|
|
|
|
13.08.03 |
|
|
|
n/a |
|
|
|
n/a |
|
In previous years, awards under the LTIP took the form of market
value options 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 did
not attract a cash bonus.
The awards granted during 2003 and 2004 took the form of
nil-priced options and were not enhanced to meet the
employers National Insurance obligations.
Notes:
|
|
(i) |
These awards were released on 31 July 2004. Further details
can be found in this Item (see Agreements with Martin
Stewart below). |
|
(ii) |
These awards vested on 31 July 2004 and were exercised by
Martin Stewart during the fiscal year. The aggregate amount that
he received was £890,560. In 2004, the aggregate amount
received by Directors was £12,789,000. |
Equity Bonus Plan
In August 2002, the Company introduced an EBP for Executive
Directors and Senior Executives. This plan is no longer being
used by the Company.
Details of outstanding awards under the EBP are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares under award(i) | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Market | |
|
|
|
|
|
|
At | |
|
Granted | |
|
Exercised | |
|
Lapsed | |
|
At | |
|
|
|
price at | |
|
Date from | |
|
|
Name of |
|
30 June | |
|
during the | |
|
during the | |
|
during the | |
|
30 June | |
|
Exercise | |
|
date of | |
|
which | |
|
Expiry | |
Director |
|
2004 | |
|
year | |
|
year | |
|
year | |
|
2005 | |
|
price(i) | |
|
exercise | |
|
exercisable | |
|
date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Martin Stewart
|
|
|
26,000 |
|
|
|
|
|
|
|
26,000 |
(ii) |
|
|
|
|
|
|
|
|
|
|
n/a |
|
|
|
£5.71 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
|
26,000 |
(iii) |
|
|
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
55,000 |
|
|
|
|
|
|
|
|
|
|
|
55,000 |
(iii) |
|
|
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Notes:
|
|
(i) |
Awards under the EBP take the form of a contingent right to
acquire existing shares in the Company at the vesting date, for
nil consideration. |
83
|
|
(ii) |
These awards vested on 31 July 2004 and were exercised by
Martin Stewart during the fiscal year. The aggregate amount that
he received was £148,460 (2004: nil). |
|
(iii) |
These awards were released on 31 July 2004. Further details
can be found in this Item (see Agreements with Martin
Stewart below). |
Management LTIP
The Company operates a Management LTIP. It is the intention that
designated managers will participate in the Management LTIP,
except for Executive Directors and Senior Executives. Previously
this scheme was only open to a small number of Executives within
the Group but this is to change going forward (see
Executive Schemes below). Awards under this scheme
are made at the discretion of the CEO. The Management LTIP is a
replicate scheme of the LTIP, with the same performance
conditions. Awards that are exercised under the Management LTIP
can only be satisfied by the issue of shares purchased in the
market.
Share option schemes
The Company operates Her Majestys Revenue & Customs
(HMRC) Approved and Unapproved Executive Share
Option Schemes (Executive Schemes) and a Sharesave
Scheme.
Executive Schemes
Previously, grants under the Executive Schemes were made on an
annual basis. The Company has decided that going forward it will
grant awards under the Management LTIP and that no awards will
be issued under the Executive Schemes.
Executive Directors and Senior Executives who participate in the
LTIP do not participate in the Executive Schemes. No options
were granted to any of the Executive Directors or Senior
Executives under the Executive Schemes during the fiscal year
(2004: nil).
The Company followed a policy of granting options to employees,
at the discretion of the relevant Senior Executives.
Awards granted under the Executive Schemes have been based on
Earnings Per Share (EPS) targets. The use of EPS as
a performance measure for the awards aligns the interests of
employees with those of shareholders. Growth in EPS will have to
exceed the Retail Prices Index (RPI) plus
3% per annum in order for awards to vest.
Measurements of the extent to which performance targets have
been met are reviewed by the Committee at the date of vesting of
each award, taking account of independent advice as necessary.
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 since August 2002
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. Awards that do not vest in years two or
three remain capable of vesting in the following years, subject
to the achievement of performance targets.
The Executive Schemes expired on 23 November 2004, and an
ordinary resolution was approved by shareholders at the 2004 AGM
authorising the renewal of the scheme for a further ten years.
Sharesave Scheme
The Sharesave Scheme is open to all employees, including
Executive Directors. Options are normally exercisable after
either three, five or seven years from the date of grant. The
price at which options are offered is not less than 80% of the
middlemarket price on the dealing day immediately preceding the
date of invitation. It is the policy of the Group to make an
invitation to employees to participate in the scheme
84
following the announcement of the end of year results. Jeremy
Darroch was granted an option on 1 October 2004 over
4,281 shares at an exercise price of 386p per share under
the terms of the Sharesave Scheme. This option becomes
exercisable on 1 February 2010 and will lapse on
1 August 2010.
Pensions
The Group provides pensions to eligible employees through the
BSkyB Pension Plan (Pension Plan), which is a
defined contribution plan. Employees may contribute up to 4% of
pensionable salary into the Pension Plan each year and the Group
makes an employers contribution of up to a maximum of 8%
of pensionable salary. Contributions into the approved plan are
subject to HMRC limits. The Group does not currently operate a
Supplementary Pension Scheme in excess of the HMRC earnings cap.
For those Executive Directors and Senior Executives whose
Pension Plan contributions are restricted due to HMRC limits,
employee contributions are reduced and, where employer
contributions need to be restricted, a cash supplement is paid
to the individual equal to the shortfall in the 8% employer
contribution rate. This is currently under review following the
pensions simplification proposals announced by HMRC.
The amounts received by the Executive Directors during the 2005
fiscal year under pension arrangements are detailed below.
Martin Stewart received a payment of £6,365 (2004:
£10,511; 2003: £4,213) in relation to the shortfall in
his pension arrangements. Employer contributions of £16,780
(2004: £25,171; 2003 £27,473) were paid into the
Pension Plan.
James Murdoch received a payment of £23,125 (2004:
£3,854; 2003: nil) in relation to the shortfall in his
pension arrangements. Employer contributions of £36,555
(2004: £6,092; 2003: nil) were paid into the Pension Plan.
Jeremy Darroch received a payment of £6,219 (2004: nil;
2003: nil) in relation to the shortfall in his pension
arrangements. Employer contributions of £26,949 (2004: nil;
2003: nil) were paid into the Pension Plan.
Other benefits
Executive Directors are entitled to a company car, life
assurance equal to two times base salary, increased to four
times base salary when they become members of the Pension Plan
and medical insurance.
Service agreements
Policy
The Committee introduced a policy that Executive Directors
service agreements will contain a maximum notice period of one
year. The Committee will consider on a case by case basis the
terms of employment under which a departing Director is engaged.
A large proportion of each Executive Directors total
direct remuneration is linked to performance and therefore will
not be payable to the extent that the relevant targets are not
met.
James Murdoch
James Murdoch has a service agreement with the Company which was
deemed to commence on 27 November 2003 and shall continue
unless, or until, terminated by either party giving to the other
not less than 12 months notice in writing. James
Murdochs remuneration consists of a base salary of
£825,000 per annum. James Murdoch will be paid a bonus
amount depending upon the performance criteria adopted by the
Committee for each financial year during the continuance of his
service agreement with the Company, including earnings growth,
subscriber growth, magnitude of free cash flow and such other
criteria which may be agreed with James Murdoch. The amount paid
in respect of the fiscal year ended 30 June 2005 was
£1.2 million.
85
James Murdoch is also entitled to other benefits, namely pension
benefits, company car, life assurance equal to four times base
salary, medical insurance, an entitlement to participate in the
LTIP and a relocation allowance (Expense Allowance)
of £200,000 per annum up until 27 November 2006.
James Murdoch has a non-compete clause in his service agreement
specifying that he shall not be able to work for any business or
prospective business carried on within the UK, which wholly or
partially competes with the Groups businesses at the date
of termination of his agreement. Such restriction will be for a
period of six months.
On termination of the agreement, James Murdoch will be entitled
to one years salary, pension and life assurance benefits
from the date of termination, plus his Expense Allowance equal
to the value received over the previous twelve months, except
that the Expense Allowance would be reduced to the extent that
it would have ceased to be payable in the following twelve
months. James Murdoch will also be entitled to a pro-rata bonus
up to the date of termination. James Murdoch would be entitled
to a bonus in full if he terminated his employment for cause.
Jeremy Darroch
Jeremy Darroch has a service contract with the Company that
commenced on 16 August 2004 and shall continue unless, or until,
terminated by either party giving to the other not less than
12 months notice in writing. Jeremy Darrochs
remuneration consists of a base salary of £500,000 per
annum and an annual discretionary bonus to be agreed by the
Committee. The Committee has determined that in respect of the
fiscal year ended 30 June 2005 Jeremy Darrochs bonus
will be £640,000. 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.
Jeremy Darroch has a non-compete clause in his service agreement
specifying that he shall not be able to work for any business or
prospective business carried on within the UK, which wholly or
partially competes with the Groups businesses at the date
of termination of his agreement. Such restriction will be for a
period of twelve months.
On termination of the agreement, Jeremy Darroch will be entitled
to one years salary, pension and life assurance benefits
from the date of termination and a pro-rata bonus up to the date
of termination. Jeremy Darroch would be entitled to a bonus in
full if he terminated his employment for cause.
Agreements with Martin Stewart
Martin Stewart resigned as a Director of the Company on 4 August
2004. The Company agreed with Martin Stewart that he would serve
his one year notice period from 1 August 2004 to
31 July 2005.
During the notice period, the non-compete terms of the agreement
prevented Martin Stewart from taking up another position at a
competing company, but did not stop him seeking employment
elsewhere, with non-competing companies. Components of the
package paid to Martin Stewart during this period were
essentially the same as he would have received during normal
employment except that:
|
|
a) |
His annual bonus was paid out at the 2003 level, as a
proxy for a normal annual bonus, and
paid in two equal instalments on 31 January 2005 and
31 July 2005. |
|
b) |
He also received a sum of £1,273,982 to compensate him for
the loss of the LTIP and EBP awards due to vest in 2005 and
2006. This was paid on 31 August 2004. The total payment
was based on the average closing price of a BSkyB share for the
period 1 January 2004 to 31 July 2004. The payment was
a pro-rated amount as if his employment with the Company had
ended on 31 July 2004, equal to 730/1096 of the LTIP and
EBP award vesting in July 2005 and 365/1096 of the LTIP and EBP
award vesting in August 2006. The balance of the 2002 LTIP award
that did not vest at 31 July 2004 was carried over and
measured at 31 July 2005. |
86
2002 Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys TSR performance | |
|
|
against the FTSE 100 | |
|
|
| |
The Companys TSR |
|
|
|
Median | |
|
Upper | |
|
Upper | |
performance against the |
|
Below | |
|
to upper | |
|
quartile | |
|
decile or | |
Media Comparator Group |
|
median | |
|
quartile | |
|
or above | |
|
above | |
|
|
| |
|
| |
|
| |
|
| |
1st highest TSR
|
|
|
70% |
|
|
|
80% |
|
|
|
100% |
|
|
|
100% |
|
2nd highest TSR
|
|
|
60% |
|
|
|
70% |
|
|
|
95% |
|
|
|
100% |
|
3rd highest TSR
|
|
|
50% |
|
|
|
65% |
|
|
|
80% |
|
|
|
90% |
|
4th highest TSR
|
|
|
45% |
|
|
|
55% |
|
|
|
65% |
|
|
|
75% |
|
5th highest TSR
|
|
|
40% |
|
|
|
50% |
|
|
|
60% |
|
|
|
70% |
|
6th highest TSR
|
|
|
30% |
|
|
|
40% |
|
|
|
50% |
|
|
|
60% |
|
7th highest TSR or lower
|
|
|
5% |
|
|
|
5% |
|
|
|
5% |
|
|
|
5% |
|
At 31 July 2004, the Company was placed seventh against the
Media Comparator Group and was below median against the FTSE
100, and therefore 5% of the award vested to Martin Stewart,
representing 5,965 shares. Shares that did not vest have
rolled over and vested subject to satisfaction of the
performance conditions at 31 July 2005.
At 31 July 2005, the Company was placed eighth against the
Media Comparator Group and was below median against the FTSE
100, and therefore 5% of the award vested to Martin Stewart,
representing 5,666 shares. The remaining shares that Martin
Stewart held under the award lapsed. Subsequent to the vesting
of these shares it was agreed that the new performance
conditions that applied to the 2002 LTIP awards (see
Performance conditions attaching to past LTIP awards
above), should be applied to the awards held by Martin Stewart
and therefore the total number of shares that vested to him was
58,928 shares. The remaining shares that Martin Stewart
held under the award lapsed.
50% of the award granted to Martin Stewart that was due to vest
on 31 July 2005 was released by Martin Stewart on
31 July 2004 and was replaced by a pro-rata payment.
|
|
c) |
During the notice period, Martin Stewart continued to
participate in the Companys pension scheme and received
his company car and certain computer equipment. |
Non-Executive Directors
The basic fees payable to the Non-Executive Directors, set by
the Board of Directors, were £40,600 each for the financial
year. It is intended that in future these will be increased on
an annual basis by 5% or RPI, whichever is the greater, unless
the Board determines otherwise. The basic fees payable to the
Non-Executive Directors for the year ending 30 June 2006
will increase to £42,600. The Non-Executive Directors are
paid an additional £5,000 per annum each, for
membership of each of the Audit Committee, the Remuneration
Committee and the Corporate Governance & Nominations
Committee. The Chairman of the Board, the Audit Committee, the
Remuneration Committee, the Corporate Governance &
Nominations Committee and the Senior Independent Non-Executive
Director each receive an additional £5,000 per annum.
Each Non-Executive Director is engaged by the Company for an
initial term of three years. Re-appointment for a further term
is not automatic, but may be mutually agreed.
During the year, the Committee was asked to review the level of
fees paid to the Non-Executive Directors. The Committee made a
recommendation to the Board which was accepted, that due to the
greater time constraints and increased workload placed on the
Chairman of the Board, the Audit Committee, the Remuneration
Committee, the Corporate Governance & Nominations
Committee and that of the Senior Independent Non-Executive
Director, their additional fees be increased from £5,000 to
£10,000 with effect from 1 July 2005.
87
The dates on which the Non-Executive Directors initial
service agreements/letters of appointment commenced and current
expiry dates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiry date of | |
|
|
|
|
current service | |
|
|
|
|
agreement or letter | |
|
|
Commencement Date | |
|
of appointment | |
|
|
| |
|
| |
Chase Carey(iii)
|
|
|
13 February 2003 |
|
|
|
3 November 2006 |
|
David DeVoe(i) (ii)
|
|
|
15 December 1994 |
|
|
|
4 November 2005 |
|
David Evans(i)
|
|
|
21 September 2001 |
|
|
|
4 November 2005 |
|
Nicholas Ferguson
|
|
|
15 June 2004 |
|
|
|
November 2007 |
* |
Andrew Higginson
|
|
|
1 September 2004 |
|
|
|
November 2007 |
* |
Allan Leighton(i)
|
|
|
15 October 1999 |
|
|
|
4 November 2005 |
|
Rupert Murdoch(i) (ii)
|
|
|
3 November 1990 |
|
|
|
4 November 2005 |
|
Jacques Nasser
|
|
|
8 November 2002 |
|
|
|
November 2007 |
* |
Gail Rebuck
|
|
|
8 November 2002 |
|
|
|
November 2007 |
* |
Lord Rothschild
|
|
|
17 November 2003 |
|
|
|
November 2007 |
* |
Arthur Siskind(ii)
|
|
|
19 November 1991 |
|
|
|
4 November 2005 |
|
Lord St John of Fawsley(iii)
|
|
|
20 November 1991 |
|
|
|
3 November 2006 |
|
Lord Wilson of Dinton(i)
|
|
|
13 February 2003 |
|
|
|
4 November 2005 |
|
|
|
* |
These letters of appointment will expire on the day of the
Companys November 2007 AGM, the date of which has yet to
be agreed. |
All Directors are subject to retirement by rotation and
reappointment by shareholders in accordance with the
Companys current Articles of Association (see Item 10
Memorandum and Articles of Association).
Notes:
|
|
(i) |
Directors retiring by rotation and offering themselves for
reappointment by shareholders at the Companys next AGM, to
be held on 4 November 2005. |
|
(ii) |
Arthur Siskind is subject to annual reappointment by
shareholders in accordance with requirement A.7.2. of the
Combined Code as he has served as a Non-Executive Director for
longer than nine years. For the same reason, and assuming that
they are reappointed at the AGM of the Company to be held on
4 November 2005, Rupert Murdoch and David DeVoe will
thereafter be subject to annual reappointment by shareholders. |
|
(iii) |
Chase Carey and Lord St John of Fawsley will be subject to
retirement by rotation and reappointment by shareholders at the
Companys AGM in 2006, to be held on 3 November 2006.
In accordance with the Companys current Articles of
Association, one-third of the Directors must retire by rotation.
Therefore, assuming that the Board continues to comprise fifteen
directors, five Directors will be required to retire by rotation
at the Companys AGM in 2006 (in addition to those then
subject to annual reappointment). Accordingly, the remaining
three Directors to retire by rotation in 2006 will be selected
by drawing lots from those Directors who would otherwise be due
to retire by rotation at the AGM of the Company to be held in
2007. |
Non-Executive Directors service agreements do not contain
a notice period.
88
Directors emoluments
The emoluments of the Directors for the years ended 30 June
2005, 2004 and 2003 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Total | |
|
Total | |
|
|
|
|
|
|
|
|
Total | |
|
|
|
emoluments | |
|
emoluments | |
|
emoluments | |
|
|
|
|
|
|
|
|
emoluments | |
|
|
|
including | |
|
including | |
|
including | |
|
|
Salary | |
|
Bonus | |
|
|
|
before | |
|
|
|
pensions | |
|
pensions | |
|
pensions | |
|
|
and fees | |
|
scheme | |
|
Benefits | |
|
pensions | |
|
Pensions | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
£ | |
|
£ | |
|
£ | |
|
£ | |
|
£ | |
|
£ | |
|
£ | |
|
£ | |
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Murdoch
|
|
|
750,000 |
|
|
|
1,200,000 |
|
|
|
216,697 |
|
|
|
2,166,697 |
|
|
|
59,680 |
|
|
|
2,226,377 |
|
|
|
1,480,578 |
|
|
|
13,946 |
|
Jeremy
Darroch(i)
|
|
|
440,000 |
|
|
|
640,000 |
|
|
|
14,049 |
|
|
|
1,094,049 |
|
|
|
33,168 |
|
|
|
1,127,217 |
|
|
|
|
|
|
|
|
|
Non-Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chase Carey
|
|
|
40,600 |
|
|
|
|
|
|
|
|
|
|
|
40,600 |
|
|
|
|
|
|
|
40,600 |
|
|
|
38,600 |
|
|
|
13,946 |
|
David Devoe
|
|
|
40,150 |
|
|
|
|
|
|
|
|
|
|
|
40,150 |
|
|
|
|
|
|
|
40,150 |
|
|
|
48,151 |
|
|
|
17,741 |
|
David Evans
|
|
|
45,600 |
|
|
|
|
|
|
|
|
|
|
|
45,600 |
|
|
|
|
|
|
|
45,600 |
|
|
|
43,600 |
|
|
|
39,994 |
|
Nicholas Ferguson
|
|
|
45,600 |
|
|
|
|
|
|
|
|
|
|
|
45,600 |
|
|
|
|
|
|
|
45,600 |
|
|
|
2,012 |
|
|
|
|
|
Andrew
Higginson(ii)
|
|
|
38,000 |
|
|
|
|
|
|
|
|
|
|
|
38,000 |
|
|
|
|
|
|
|
38,000 |
|
|
|
|
|
|
|
|
|
Allan Leighton
|
|
|
50,600 |
|
|
|
|
|
|
|
|
|
|
|
50,600 |
|
|
|
|
|
|
|
50,600 |
|
|
|
46,747 |
|
|
|
41,750 |
|
Rupert Murdoch
|
|
|
45,400 |
|
|
|
|
|
|
|
|
|
|
|
45,400 |
|
|
|
|
|
|
|
45,400 |
|
|
|
48,375 |
|
|
|
17,741 |
|
Jacques Nasser
|
|
|
50,700 |
|
|
|
|
|
|
|
|
|
|
|
50,700 |
|
|
|
|
|
|
|
50,700 |
|
|
|
43,792 |
|
|
|
26,923 |
|
Gail Rebuck
|
|
|
45,600 |
|
|
|
|
|
|
|
|
|
|
|
45,600 |
|
|
|
|
|
|
|
45,600 |
|
|
|
43,600 |
|
|
|
25,596 |
|
Lord Rothschild
|
|
|
50,600 |
|
|
|
|
|
|
|
|
|
|
|
50,600 |
|
|
|
|
|
|
|
50,600 |
|
|
|
29,744 |
|
|
|
|
|
Arthur Siskind
|
|
|
45,400 |
|
|
|
|
|
|
|
|
|
|
|
45,400 |
|
|
|
|
|
|
|
45,400 |
|
|
|
46,010 |
|
|
|
15,843 |
|
Lord St John of
Fawsley(iii)
|
|
|
50,400 |
|
|
|
|
|
|
|
|
|
|
|
50,400 |
|
|
|
|
|
|
|
50,400 |
|
|
|
47,035 |
|
|
|
40,673 |
|
Lord Wilson of Dinton
|
|
|
50,600 |
|
|
|
|
|
|
|
|
|
|
|
50,600 |
|
|
|
|
|
|
|
50,600 |
|
|
|
44,894 |
|
|
|
13,946 |
|
Former Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony
Ball(iv)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,184,745 |
|
|
|
2,459,737 |
|
Philip
Bowman(v)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,069 |
|
|
|
46,750 |
|
Martin
Stewart(vi)
|
|
|
500,000 |
|
|
|
1,773,982 |
|
|
|
20,000 |
|
|
|
2,293,982 |
|
|
|
23,145 |
|
|
|
2,317,127 |
|
|
|
1,059,926 |
|
|
|
956,436 |
|
John
Thornton(vii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,110 |
|
|
|
53,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total emoluments
|
|
|
2,289,250 |
|
|
|
3,613,982 |
|
|
|
250,746 |
|
|
|
6,153,978 |
|
|
|
115,993 |
|
|
|
6,269,971 |
|
|
|
16,271,988 |
|
|
|
3,784,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
(i) |
Jeremy Darroch was appointed CFO of the Company on 16 August
2004. |
|
(ii) |
Andrew Higginson was appointed as a Director of the Company on
1 September 2004. |
|
(iii) |
Lord St John of Fawsley received a payment of £10,000
relating to unpaid fees for the period September 2002 to
November 2003, when he was the Senior Independent Director and
Chairman and member of the Nominations Committee. |
|
(iv) |
Tony Ball resigned as a Director of the Company on 4 November
2003. Details of the emoluments Tony Ball received during the
fiscal year ended 30 June 2004 were disclosed in the
Companys 2004 Annual Report on Form 20-F. |
|
(v) |
Philip Bowman resigned as a Director of the Company on 14
November 2003. |
|
(vi) |
Martin Stewart resigned as a Director of the Company on 4 August
2004. |
|
(vii) |
John Thornton resigned as a Director of the Company on 11 May
2004. |
89
Executive Bonuses
The amounts received by the Directors under bonus schemes for
the year are shown below:
|
|
|
|
|
|
|
Bonus | |
Executive Director |
|
Scheme | |
|
|
| |
|
|
£ | |
James Murdoch
|
|
|
1,200,000 |
|
Jeremy Darroch
|
|
|
640,000 |
|
Martin
Stewart(i)
|
|
|
500,000 |
|
Notes:
|
|
(i) |
Martin Stewart also received a payment of £1,273,982 for
the release of his share awards under the LTIP and EBP at
31 July 2004. |
Executive Directors Bonus
The amounts shown above are those which have been approved by
the Committee for the year ended 30 June 2005.
Share interests
The interests of the Directors in the Ordinary Share capital of
the Company during the fiscal year were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
At | |
|
|
30 September | |
|
30 June | |
|
30 June | |
Name of Director |
|
2005 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
David Evans
|
|
|
16,000 |
* |
|
|
16,000 |
* |
|
|
8,000 |
* |
Nicholas Ferguson
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
Andrew Higginson
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
Lord Rothschild
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
100,000 |
|
Lord St John of Fawsley
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
Lord Wilson of Dinton
|
|
|
486 |
|
|
|
486 |
|
|
|
486 |
|
|
|
* |
Held in the form of 4,000 ADRs (2004: 2,000 ADRs), one ADR is
equivalent to four ordinary shares. |
Lord Rothschild is also deemed to be interested in
2 million Ordinary Shares registered in the name of Bank of
New York Nominees, as a result of being a director of RIT
Capital Partners plc; and in 15,250 Ordinary Shares as a result
of being a trustee of a Charitable Foundation where Lord
Rothschild is not a beneficiary and in 3,500 Ordinary Shares of
another Charitable Trust where again Lord Rothschild is not a
beneficiary but is a Trustee.
Except as disclosed in this Item, no other Director held any
interest in the share capital, including options, of the
Company, or of any subsidiary of the Company, during the fiscal
year. All interests at the date shown are beneficial and, except
as disclosed in this Item, there have been no other changes
between 1 July 2005 and 30 September 2005.
At 30 September 2005, the ESOP was interested in 3,235,201
Ordinary Shares in which the Directors who are employees are
deemed to have an interest by virtue of Section 324 of the
Companies Act 1985.
At 30 September 2005 37.19% of the Companys shares
are held by News UK Nominees Limited, a company incorporated
under the laws of England and Wales which is an indirect wholly
owned subsidiary of News Corporation. According to a definitive
proxy statement filed by News Corporation with the SEC on
8 September 2005: (i) AE Harris Trust is the
beneficial owner of 2.6% of the Non-Voting Class A Common
Stock of News Corporation, and 28.9% of the Voting Class B
Common Stock of News Corporation; (ii) Cruden Financial
Services LLC, a Delaware corporation (Cruden Financial
Services), is the corporate trustee of AE Harris Trust,
and has the powers to vote and to dispose or to direct the vote
and disposition of the Voting Class B Common Stock held by
AE Harris Trust. As a result of Rupert Murdochs ability to
90
appoint certain members of the board of directors of Cruden
Financial Services, Rupert Murdoch may be deemed a beneficial
owner of the shares beneficially owned by the AE Harris Trust.
Rupert Murdoch, however, disclaims beneficial ownership of such
shares; and (iii) Rupert Murdoch is the beneficial owner of
3.3% of the Non-Voting Class A Common Stock and 29.9% of
the Voting Class B Common Stock of News Corporation,
consisting of the shares described above held by AE Harris
Trust, as well as shares held in the K. Rupert Murdoch 2004
Revocable Trust and shares held by members of Rupert
Murdochs family.
ITEM 7. MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS
Our sole outstanding class of voting securities is ordinary
shares with a nominal value 50p each.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of 30 September 2005,
the amount and percentage of ordinary shares owned by each
shareholder, including our directors and officers as a group,
known to us to own more than 3% (directly and indirectly) of our
ordinary shares.
|
|
|
|
|
|
|
|
|
|
|
Amount | |
|
Percent | |
Identity of Person or Group |
|
Owned | |
|
of Class | |
|
|
| |
|
| |
News UK Nominees
Limited(1)
|
|
|
686,021,700 |
|
|
|
37.19% |
|
One Virginia Street
London
E98 1XY |
|
|
|
|
|
|
|
|
Franklin Resources, Inc. and its affiliates
|
|
|
168,104,571 |
|
|
|
9.01% |
|
One Franklin Parkway
San Mateo
CA 94403-1906 |
|
|
|
|
|
|
|
|
Janus Capital Management LLC
|
|
|
79,154,541 |
|
|
|
4.08% |
|
151 Detroit St.
Denver
CO 80206 |
|
|
|
|
|
|
|
|
Barclays PLC
|
|
|
77,388,712 |
|
|
|
4.15% |
|
54 Lombard Street
London
EC3P 3AH |
|
|
|
|
|
|
|
|
|
|
(1) |
On 30 June 2004, BSkyB Holdco, Inc. transferred its entire
shareholding in us to News UK Nominees Limited, a wholly-owned
subsidiary of News Corporation which 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:
On 6 June 2005, Barclays PLC notified us that it had a 3.38%
interest in our shares. On 2 August 2005, Barclays PLC further
notified us that its interest in our shares had increased to
4.15%.
Franklin Resources, Inc. notified us of the following changes in
its interest in our shares:
|
|
|
|
|
Date Notified |
|
Percentage Ownership | |
|
|
| |
9 August 2004
|
|
|
3.58% |
|
12 August 2004
|
|
|
4.08% |
|
15 September 2004
|
|
|
5.05% |
|
15 November 2004
|
|
|
6.00% |
|
3 May 2005
|
|
|
7.06% |
|
9 June 2005
|
|
|
8.03% |
|
11 July 2005
|
|
|
9.01% |
|
91
On 16 February 2005, News Corporation notified us that its
interest in our shares had increased to 36.01%. On
13 September 2005, News Corporation further notified us
that its interests in our shares had increased to 37.00%.
These increases were as a result of the Companys share
buy-back programme, the number of shares held by News
Corporation remains unchanged.
On 11 August 2004, Janus Capital Management LLC
(Janus) notified us that it had a 3.01% interest in
our shares. On 11 October 2004, Janus further notified us that
its interest in our shares had increased to 4.08%.
On 16 February 2004, FMR Corp. notified us that it had a 3.01%
interest in our shares. On 28 June 2004, FMR Corp. notified us
that it no longer had a notifiable interest in our shares.
Major shareholders have the same voting rights as all other
shareholders.
On 30 September 2005, 3,874,338 ADSs were held of record by
13 holders in the US and 28,019 ordinary shares were held of
record by 62 US persons.
RELATED PARTY TRANSACTIONS
For details of transactions with related parties, see
note 26 of the Consolidated Financial Statements included
within Item 18. The Audit Committee receives, on a
quarterly basis, a schedule of all transactions between
companies within the News Corporation Group and the Group, and
any other related party transactions, showing cumulatively all
transactions which have been entered into during the year and
which exceed £100,000 in value.
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-81.
Legal proceedings
In August 2004, the Group commenced proceedings in the High
Court of England and Wales for a material amount against
Electronic Data Systems Corporation and Electronic Data Systems
Limited for damages arising out of deceit, negligent
misrepresentation and breach of contract in respect of the
systems integration, software development and business
implementation services provided to the Group as part of the
Groups investment in CRM software and infrastructure. The
amount that may be recovered by the Group will not be finally
determined until resolution of the claim.
Additionally, certain regulatory proceedings which could have
material consequences for us are described within Item 4
Information on the Company.
Dividend distributions
In order to facilitate the investment in organic growth
following the launch of the Sky digital service, and to maintain
operational leverage at efficient levels, the Board announced on
5 May 1999 that it had decided to suspend dividend payments to
shareholders.
Dividend payments were resumed during fiscal 2004, when the
Company paid an interim dividend of 2.75 pence per share to
shareholders on 23 April 2004. A final dividend of 3.25 pence
per share for the year ended 30 June 2004 was paid on 19
November 2004. In fiscal 2005, the Company paid an interim
dividend of 4.0 pence per share to shareholders on 22 April
2005. The Board has also proposed a final dividend for the year
ended 30 June 2005 of 5.0 pence per share, payable on 18
November 2005 to shareholders on the register on 28 October
2005, subject to approval of shareholders at the AGM in
92
November 2005. The Board intends that the total ordinary
dividend in fiscal 2006 will grow broadly in line with Group
earnings.
During fiscal 2005, the Company repurchased for cancellation
74 million shares (representing 4% of share capital at the
beginning of fiscal year 2005) as part of the share buy-back
programme, in line with the authority to repurchase
97 million shares approved by the shareholders at the
Companys AGM on 12 November 2004. The buy-back of
shares under this programme was completed during the first half
of fiscal 2006. The Board currently intends to propose
resolutions at the AGM in November 2005 to renew the annual
authority to buy back up to a further 5% of its issued share
capital. In pursuing a continued buy-back authority, the Board
considers that it was appropriate that the Company conditionally
entered into a voting agreement with News UK Nominees Limited,
dated 21 September 2005, which would limit the exercise of
its voting rights to its current shareholding of 37.19%. The
voting arrangement is conditional on the buy-back proposals
being approved by shareholders.
SIGNIFICANT CHANGES
Other than those events described in other Items in this Annual
Report on Form 20-F, there have not been any significant
changes to our financial condition or results of operations
since 30 June 2005.
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. The 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(i) | |
|
|
| |
|
| |
|
|
(Pence) | |
|
($) | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
Fiscal year ended 30 June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2004
|
|
|
776 |
|
|
|
584 1/2 |
|
|
|
59 6/25 |
|
|
|
40 13/50 |
|
2005
|
|
|
625 |
|
|
|
465 1/2 |
|
|
|
46 33/100 |
|
|
|
33 39/50 |
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
ADSs(i) | |
|
|
| |
|
| |
|
|
(Pence) | |
|
ADSs(i) ($) | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
Fiscal year ended 30 June
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
724 |
|
|
|
614 1/2 |
|
|
|
47 6/25 |
|
|
|
40 13/50 |
|
Second Quarter
|
|
|
709 |
|
|
|
614 |
|
|
|
51 1/4 |
|
|
|
41 9/100 |
|
Third Quarter
|
|
|
776 |
|
|
|
678 1/2 |
|
|
|
59 6/25 |
|
|
|
50 3/5 |
|
Fourth Quarter
|
|
|
696 1/2 |
|
|
|
584 1/2 |
|
|
|
51 3/10 |
|
|
|
43 33/100 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
625 |
|
|
|
465 1/2 |
|
|
|
46 33/100 |
|
|
|
33 39/50 |
|
Second Quarter
|
|
|
570 3/4 |
|
|
|
483 |
|
|
|
44 1/2 |
|
|
|
34 67/100 |
|
Third Quarter
|
|
|
595 |
|
|
|
540 1/2 |
|
|
|
44 93/100 |
|
|
|
40 39/100 |
|
Fourth Quarter
|
|
|
572 1/2 |
|
|
|
509 |
|
|
|
43 63/100 |
|
|
|
36 19/25 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
579 |
|
|
|
522 |
|
|
|
42 11/25 |
|
|
|
36 49/100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
ADSs(i) | |
|
|
| |
|
| |
|
|
(Pence) | |
|
($) | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
Month ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 April 2005
|
|
|
572 1/2 |
|
|
|
540 |
|
|
|
43 63/100 |
|
|
|
41 1/10 |
|
31 May 2005
|
|
|
548 |
|
|
|
515 |
|
|
|
41 43/100 |
|
|
|
38 31/20 |
|
30 June 2005
|
|
|
541 1/2 |
|
|
|
509 |
|
|
|
39 3/5 |
|
|
|
36 19/25 |
|
31 July 2005
|
|
|
547 1/2 |
|
|
|
522 |
|
|
|
38 7/10 |
|
|
|
36 49/100 |
|
31 August 2005
|
|
|
576 |
|
|
|
541 |
|
|
|
41 1/2 |
|
|
|
38 7/20 |
|
30 September 2005
|
|
|
579 |
|
|
|
552 |
|
|
|
42 11/25 |
|
|
|
39 11/25 |
|
|
|
(i) |
Each ADS represents four ordinary shares (up until 23 December
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 Association (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
94
in any such case as aforesaid (save as otherwise agreed by him)
he may retain for his own absolute use and benefit all profits
and advantages accruing to him thereunder or in consequence
thereof.
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 the HMRC 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 HMRC for
taxation purposes and which does not accord to any Directors any
privilege not accorded to the employees to whom the arrangement
relates; and |
|
(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
only part 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 executive
office or who serves on any committee of the Directors, or who
otherwise performs services
95
which in the opinion of the Directors are outside the scope of
the ordinary duties of a Director, may be paid such extra
remuneration by way of bonus, commission or otherwise, as the
Directors may determine.
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 twelve 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 AGM and will
put himself forward to be elected by the shareholders.
At each AGM, there shall retire from office by rotation:
|
|
(i) |
all Directors of the Company who are subject to retirement by
rotation who held office at the time of the two preceding AGMs
and who did not retire by rotation at either of them; and |
96
|
|
(ii) |
such additional number of Directors as shall, when aggregated
with the number of Directors retiring under
paragraph (i) 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: |
|
|
|
|
(a) |
the provisions of this paragraph (ii) shall only apply
if the number of Directors retiring under
paragraph (i) above is less than the Relevant
Proportion; and |
|
|
(b) |
subject to the provisions of the Act and to the relevant
provisions of these Articles, the Directors to retire under this
paragraph (ii) 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 that at
any adjourned meeting any holder of shares of the class present
in person or by proxy shall be a quorum).
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.
97
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 favour 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
favour 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 licence 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 licence by Ofcom.
If the Directors determine following registration of a transfer
of shares:
|
|
(i) |
and following consultation with Ofcom that, inter alia, by
reason of the interest of a person in any shares of the Company
transferred, Ofcom may vary, revoke, determine or refuse to
award, grant, renew or extend a licence 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, any of the restrictions set out in
Parts III, IV or V of Schedule 2 to the Broadcasting
Act 1990 or any order, direction or notice made pursuant to the
Broadcasting Acts or such other restrictions as may be applied
by Ofcom from time to time to disqualify certain persons or
bodies from having interests in such a licence or to restrict
the accumulation of interests in relevant services as defined in
Schedule 2 to the Broadcasting Act 1990; |
98
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 twelve years, no cheque 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 twelve 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 twelve 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 authorised 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 cancelled; or |
|
(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 AGM of the Company held on 14 November 2003, shareholders
approved a special resolution, authorising the Directors to
reduce the Companys share premium account by
£1,120 million. In addition to the approval of the
reduction by shareholders, the Company required the approval of
the High Court, which was granted on 10 December 2003. The
reduction became effective on 11 December 2003.
At the AGM of the Company held on 12 November 2004, shareholders
approved a special resolution allowing the Company to buy-back
up to 97,000,000 ordinary shares in the market, which was
approximately 5% of the issued ordinary share capital at
1 October 2004. The authority expires on 11
99
November 2005, 12 months from the date of the passing of
the special resolution. Buy-backs are by market purchases
through the London Stock Exchange. Any shares purchased are
cancelled thereby reducing the number of shares in issue. As at
27 September 2005, the Company had purchased, and
subsequently cancelled, 97,000,000 ordinary shares of 50p each,
representing approximately 5.26% of the issued share capital of
the Company, for a consideration of £544 million.
At the AGM held on 12 November 2004, shareholders approved
an ordinary resolution in relation to Rule 9 of the City
Code of Takeovers and Mergers (the City Code) which
waived the compulsory bid obligation that arises for News UK
Nominees Limited when the Company repurchases shares under the
authority granted by the special resolution detailed above.
Under Rule 9 of the City Code, any person who acquires
shares which, taken together with the shares already held by him
or acquired by persons acting in concert with him, carry 30% or
more of the voting rights in a company which is subject to the
City Code is normally required to make a general offer to all of
the remaining shareholders to acquire their shares. Similarly,
when any person or persons acting in concert already hold 30% or
more but less than 50% of the voting rights in such a company, a
general offer will normally be required to be made if any
further shares are acquired. An offer under Rule 9 must be
in cash at the highest price paid within the preceding
12 months for any shares acquired in the company by the
person required to make the offer or any person acting in
concert with him. The holding of News UK Nominees Limited as at
the date of the AGM was 686,021,700 ordinary shares,
representing 35.33% of the voting rights in the Company. If the
compulsory bid obligation under Rule 9 had not been waived
and the Company had repurchased shares under the authority
granted by the special resolution detailed above and, at the
time, the voting rights attributable to the aggregate holding of
News UK Nominees Limited had continued to exceed 30% of the
voting rights of the Company or, if, in the meantime, its
holding had fallen below this level and, as a result had
increased to 30% or more of such voting rights, News UK Nominees
Limited would have been required to make a cash offer for the
issued shares of the Company which it did not already own. The
Panel agreed to waive the compulsory bid obligation arising in
respect of a repurchase by the Company of its shares subject to
approval of the ordinary resolution on a poll, subsequently
received at the AGM, from shareholders independent of News UK
Nominees Limited. The waiver in this ordinary resolution, which
is valid only for so long as the authority granted pursuant to
the special resolution detailed above remains in force, applies
only in respect of increases in the percentage interest of News
UK Nominees Limited resulting from market purchases by the
Company of its own shares and not in respect of other increases
in its holding. The authority granted by the special resolution
detailed above has been exercised in full and the holdings of
News UK Nominees Limited and the percentage of the voting rights
in the Company attributable to such holdings now represent
37.19% of the Companys issued share capital.
At the Companys next AGM, to be held on 4 November 2005,
shareholders will be asked to approve a special resolution that
will extend the buy-back authority for a further year, allowing
the Company to buy-back up to 92,000,000 ordinary shares in the
market, which is approximately 5% of the issued share capital of
the Company at 27 September 2005. Shareholders will also be
asked to approve an ordinary resolution in relation to
Rule 9 of the City Code, explained above, which will waive
the compulsory bid obligation whilst the buy-back authority
remains in force. In addition, in pursuing a continued buy-back
authority, the Board considers that it was appropriate that the
Company conditionally entered into a voting agreement with News
UK Nominees Limited, dated 21 September 2005, which would
limit the exercise of its voting rights to its current
shareholding of 37.19%. The voting agreement is conditional on
the buy-back proposals being approved by shareholders.
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.
100
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:
|
|
(i) |
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 |
|
(ii) |
as a result, either he obtains, or ceases to have: |
|
|
|
|
(a) |
a material interest in 3%, or more; or |
|
|
(b) |
an aggregate interest (whether material or not) in
10%, or more of the Companys voting capital; or |
|
|
(c) |
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/recognised 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 interested in the Companys shares to indicate
whether or not that is correct and, if that person does or did
hold an interest in the Companys shares, to provide
certain information as set out in the Companies Act.
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 twelve 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.
Except where otherwise expressly stated, a reference in the
articles to any statute or provision of a statute includes a
reference to any statutory amendment, modification or
re-enactment of it for the time being in force.
101
MATERIAL CONTRACTS
We have entered into the following contract outside the ordinary
course of business during the two years immediately preceding
the date of this Annual Report.
RCFs
In November 2004, the Group entered into a £1 billion
RCF. This agreement has been included as an exhibit as part of
this Annual Report on Form 20-F and is also described in
note 19 of the Consolidated Financial Statements included
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 in the
Memorandum and Articles of Association
Dividends section above, and the Taxation
section below.
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
This section summarises basic UK and US tax consequences of the
acquisition, ownership and disposition of shares and ADSs 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 organised 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 and UK HMRC 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
organisations, banks and other financial institutions, persons
subject to the alternative minimum tax,
102
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 and US
tax consequences discussed below apply equally to US Holders of
ADSs and shares.
Taxation of distributions
Under current UK taxation legislation, no tax is withheld from
dividend payments by the Company and generally no UK tax is
payable by US Holders who are not resident or ordinarily
resident for tax purposes in the UK on dividends declared on the
shares.
For dividends paid on or after 6 April 1999, US Holders who are
not resident or ordinarily resident for tax purposes in the UK
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 any
distribution made by the Company to a US Holder with respect to
any shares or ADSs held by the US Holder generally will be
includable in the income of the US Holder as dividend income to
the extent that such distribution is paid out of the
Companys current or accumulated earnings and profits as
determined under US federal income tax principles (subject to
the discussion below under US passive foreign investment
company rules). Dividends will generally constitute
foreign source passive income for foreign tax credit
purposes. The dividend income generally will not be eligible for
the dividends received deduction allowed to corporations. If the
amount of any distribution exceeds the Companys current
and accumulated earnings and profits as so computed, such excess
first will be treated as a tax-free return of capital to the
extent of the US Holders tax basis in its shares or ADSs,
and thereafter as gain from the sale or exchange of property.
Dividends received by an individual US Holder before
1 January 2009 with respect to such US Holders shares
or ADSs will generally be subject to a reduced rate of US
federal taxation, provided that certain holding period and other
requirements are met, and provided further that the Company is a
qualified foreign corporation. A qualified foreign corporation
includes a foreign corporation that is eligible for the benefits
of certain comprehensive income tax treaties with the US. US
Treasury Department guidance indicates that a foreign
corporation organised in the UK, such as the Company, will
qualify. US Holders should consult their own tax advisors
regarding the application of these rules.
Any non-US withholding tax with respect to a dividend may be
used as a credit against a US Holders US federal income
tax liability, subject to certain conditions and limitations.
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 recognise 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.
103
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 realised on the disposal of their ADSs or shares unless
they carry on a trade in the UK through a branch, agency or
permanent establishment, or a profession or vocation in the UK
through a branch or agency and such ADSs or shares are used,
held or acquired for the purposes of the trade, profession,
vocation, branch, agency or permanent establishment.
The surrender of ADSs in exchange for shares should not usually
give rise to UK corporation tax, or US or UK capital gains tax,
for US Holders.
In general, for US federal income tax purposes, a US Holder will
recognise 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 US 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.
US 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:
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75% or more of its gross income is passive income; or |
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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
recognises on disposition of shares or ADSs may be less
favourable 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 in the UK of an enterprise 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.
UK stamp duty and stamp duty reserve tax
A transfer for value of the shares executed on or after
1 October 1999 will generally be subject to UK ad valorem
stamp duty, normally at the rate of 0.5% of the amount or value
of the consideration given for the
104
transfer, rounded up (if necessary) to the nearest multiple of
£5. 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 instrument of transfer of the shares is executed in
pursuance of the agreement and duly produced within six years of
the date on which the agreement for sale is made (or, if the
agreement is conditional, the date on which the condition is
satisfied) any SDRT paid is generally repayable with interest,
and otherwise the SDRT charge is cancelled. SDRT is in general
payable by the purchaser. The UK Finance Act 1996 makes it clear
that (contrary to previous UK HMRC practice) SDRT will be levied
in respect of agreements to transfer chargeable securities
(which include shares) even where a person not resident in the
UK buys chargeable securities from another non-resident and the
transaction is carried out outside the UK.
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
HMRC 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% 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, rounded up (if necessary) to the
nearest multiple of £5. Upon cancellation of the ADS,
however, only a fixed UK stamp duty of £5 per
instrument of transfer will be payable.
US 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.
105
DOCUMENTS ON DISPLAY
Certain documents referred to in this Annual Report on
Form 20-F can be inspected at our offices at Grant Way,
Isleworth, Middlesex, TW7 5QD, England.
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 SEC. 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
100 F Street, N.E., Washington, D.C., 20549.
The public may obtain information regarding the SECs
Public Reference Room by calling the SEC at 1-202-551-8090. 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 is responsible for raising finance for the
Groups operations, together with associated liquidity
management, and the management of foreign exchange, interest
rate and credit risks. Treasury operations are conducted within
a framework of policies and guidelines authorised and reviewed
by both the Audit Committee and the Board, who receive regular
updates of treasury activity. Derivative instruments are
transacted for risk management purposes only. It is our policy
that all hedging is to cover known risks and that no trading in
financial instruments is undertaken. Regular and frequent
reporting to management is required for all transactions and
exposures, and the internal control environment is subject to
periodic review, both by our internal audit team and by our
Treasury Committee.
Our principal market risks are exposures to 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. The principal
instruments currently used are interest rate swaps and options
on interest rate swaps (swaptions) to hedge interest
rate risks, forward exchange contracts, currency options
(collars) and similar financial instruments to hedge
transactional currency exposures, and cross-currency interest
rate swaps to hedge exposures on long-term foreign currency debt.
From 1 July 2003, we have formulated our policies for
hedging with regard to US GAAP requirements on hedge accounting,
and therefore the majority of our existing derivative
arrangements qualified for hedge accounting under US GAAP during
fiscal years 2005 and 2004; see note 27 of the Consolidated
Financial Statements included within Item 18 for further
details.
Interest rate management
We have financial exposures to both UK and US interest rates,
arising primarily from long-term bonds. We manage our exposures
by borrowing at fixed rates of interest and by using interest
rate swap and swaption agreements to adjust the balance between
fixed and floating rate debt. All of our US dollar-denominated
debt has been swapped to pounds sterling, using cross-currency
swap arrangements, which, in addition to the translation of the
principal amount of the debt to pounds sterling, also provide
for the exchange, at regular intervals, of fixed-rate amounts of
dollars for fixed-rate amounts of pounds sterling. All of our
debt exposure is denominated in pounds sterling after
cross-currency swaps are taken into account; at 30 June
2005, the split of our aggregate net borrowings into their core
currencies was US dollar 91% and pound sterling 9% (30 June
2004: US dollar 90% and pound sterling 10%). We also enter into
pound sterling interest rate swap and swaption arrangements,
which provide for the exchange, at specified intervals, of the
difference between fixed rates and variable rates, calculated by
reference to an agreed notional pounds sterling amount. Certain
of the swaption agreements can be cancelled prior to the
maturity of the bonds. The counterparties have a minimum
long-term rating of A or equivalent with
Moodys and Standard & Poors.
106
Our hedging policy requires that between 50% and 80% of our
borrowings are held at fixed rates after taking account of
interest rate swap and swaption agreements. At 30 June
2005, 72% of our borrowings were at fixed rates after taking
account of interest rate swap and swaption agreements (30 June
2004: 77%). The fair value of interest rate swap and swaption
agreements and cross-currency swaps held, as of 30 June
2005, was £103 million against the Groups
favour, compared to £105 million against the
Groups favour at 30 June 2004.
At 30 June 2005, the Group had outstanding cross-currency
swap, interest rate swap and swaption agreements with net
notional principal amounts totalling £1,018 million,
compared to £968 million at 30 June 2004. This
movement reflects the new interest rate swap and swaption
agreements designed to achieve a more appropriate balance
between fixed and floating rate debt.
In November 2004, we entered into a £1 billion RCF.
This facility was used to cancel an existing
£600 million RCF and is available for general
corporate purposes. At 30 June 2005, the
£1 billion facility was undrawn (2004: undrawn). The
£1 billion facility has a maturity date of July 2010,
and interest accrues at a margin of between 0.45% and
0.55% per annum above the London Inter-Bank Offer Rate
(LIBOR), dependent on our leverage ratio of net debt
to earnings before interest, taxes, depreciation and
amortisation (EBITDA) (as defined in the loan
agreement). The current applicable margin is 0.45%, which is
based on a net debt to EBITDA ratio of 1.00:1 or below. Should
this ratio increase above 1.00:1 and up to 2.00:1, the margin
would increase to 0.50%, and above 2.00:1, the margin increases
to 0.55%. The ratio of net debt to EBITDA at 30 June 2005
was 0.5:1, indicating a margin of 0.45%.
To ensure continuity of funding, our policy is to ensure that
available funding matures over a period of years. At
30 June 2005, 49% of our total available funding was due to
mature in more than five years (2004: 31%).
In order to manage interest rate risk on interest receivable, at
30 June 2005 forward rate agreements with a notional value
of £53 million (2004: nil) were entered into which fix
the interest rate receivable on sterling deposits for three
months from 27 June 2005 at a rate of 5.060% and for three
months from 26 September 2005 at a rate of 5.105%.
At 30 June 2005, a one percentage point increase in
interest rates, from 1 July 2005, would result in a
£3 million increase in our annual net interest expense
(2004: £2 million) generated by our interest
receivable and payable on our bank accounts, RCF and interest
rate swap and swaption agreements and a one percentage point
decrease in interest rates, from 1 July 2005, would result
in a £2 million decrease in the Groups annual
net interest expense (2004: £2 million) generated by
interest receivable and payable on our bank accounts, RCF and
interest rate swap and swaption agreements.
At 30 June 2005, our annual interest charge would be
unaffected by any change to the Groups credit rating in
either direction (2004: nil).
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 2005, 13% of operating
costs (£409 million) were denominated in US dollars
(30 June 2004: 14% (£439 million)). These costs
relate mainly to our long-term programming contracts with US
suppliers.
During the year, we managed our US dollar/pound sterling
exchange risk exposure on US programming contracts by the
purchase of forward exchange contracts, currency options
(collars) and similar financial instruments for up to five
years ahead. All US dollar-denominated forward exchange
contracts, currency options (collars) and similar financial
instruments entered into by us are in respect of firm
commitments only and those instruments maturing over the
12 months following 30 June 2005 represent
approximately 80% (30 June 2004: 80%) of US dollar-denominated
costs falling due in that period. At 30 June 2005, we had
outstanding commitments to purchase, in aggregate,
US$670 million (2004: US$705 million) at average rates
of US$1.79 to £1.00 (2004: US$1.62 to £1.00). In
addition, at 30 June 2005, currency options
(collars) were held relating to the purchase of a total of
US$114 million (2004: nil).
107
As at 30 June 2005, some £187 million (2004:
£250 million) of these forward contracts, currency
options (collars) and similar financial instruments are to
hedge liabilities in respect of available programming and hence
these liabilities are recorded on the balance sheet at the
hedged rate under UK GAAP. The remaining forward contracts,
currency options (collars) and similar financial
instruments are to hedge future payments for programmes yet to
become available and are therefore disclosed within commitments
rather than being recorded within liabilities.
Our primary Euro exposure arises as a result of revenues
generated from our subscribers in Ireland, being approximately
3% of total revenue in fiscal 2005 (2004: 3%). These
Euro-denominated revenues are offset to a certain extent by
Euro-denominated costs, relating mainly to certain transponder
rentals, the net position being a Euro surplus.
Euro 4 million were exchanged for US dollars on currency
spot markets during fiscal 2005 (2004: nil) and no surplus Euros
were exchanged for pounds sterling during fiscal 2005 (2004:
Euro 15 million). At 30 June 2005, Euro
82 million (£56 million) has been retained to
meet obligations under forward exchange contracts for the
purchase of Swiss Francs (2004: Euro 122 million
(£81 million)).
We purchased the programming rights to certain UEFA Champions
League football matches until the end of the 2005/06 season.
Payments in respect of these rights are made pursuant to the
contract in Swiss Francs, which means that we are exposed to the
Swiss Franc/pound sterling exchange rate. In line with our
policy of limiting foreign exchange transactions to fixed price
instruments, 76% of this exposure (CHF 76 million) was
hedged during the year via the use of forward contracts for the
exchange of Euros and pounds sterling for Swiss Francs.
Subsequent to 30 June 2005, 100% of this exposure has been
hedged.
It is our policy that all anticipated foreign currency exposures
are substantially hedged in advance of the fiscal year in which
the exposure occurs. The impact on our annual profit of a 10%
movement in pound sterling, from 1 July 2005, against all
currencies in which we have significant transactions is
estimated to be a £8 million movement (2004:
£4 million) to the profit and loss account, with a
strengthening of pound sterling resulting in a decrease in
profits.
The accounting policies in respect of market risk sensitive
instruments are disclosed in notes 1 and 20 of the
Consolidated Financial Statements included 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 27 of the Consolidated
Financial Statements included within Item 18.
ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
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ITEM 13. |
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable
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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.
108
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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, summarised 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 CEO and CFO, of the effectiveness of
the design and operation of these disclosure controls and
procedures at 30 June 2005. Based on that evaluation, the
CEO and CFO 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 30 June 2005
that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over
financial reporting.
ITEM 16A. AUDIT COMMITTEE
FINANCIAL EXPERT
It is the opinion of the Board that the Audit Committee does not
include an Audit Committee Financial Expert. The Audit Committee
members have considerable financial and business experience and
the Board considers that the membership as a whole has
sufficient recent and relevant financial experience to discharge
its functions without the need to formally designate a member as
the financial expert.
ITEM 16B. CODE OF ETHICS
On 19 June 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
incorporated by reference to the Annual Report on Form 20-F
of British Sky Broadcasting Group plc for the fiscal year ended
30 June 2003 filed with the SEC on 5 December 2003.
ITEM 16C. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
The Group has a policy on the provision by the external auditors
of audit and non-audit services, which categorises such services
between:
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those services which the auditors are prohibited from providing; |
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those services which are acceptable for the auditors to provide
and the provision of which has been pre-approved by the Audit
Committee; and |
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those services for which the specific approval of the Audit
Committee is required before the auditors are permitted to
provide the service. |
The policy defines the types of services falling under each
category and sets out the criteria which need to be met and the
internal approval mechanisms required to be completed prior to
any engagement. An analysis of all services provided by the
external auditors is reviewed by the Audit Committee on a
quarterly basis.
There were no services provided during the year that were not
pre-approved by the Audit Committee in accordance with the Group
policy.
109
Information on our principal accountant fees and services is
analysed below.
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2005 | |
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2004 | |
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2003 | |
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£m | |
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£m | |
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£m | |
Audit fees
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1 |
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1 |
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1 |
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Audit-related fees
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1 |
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1 |
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1 |
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Audit and audit-related fees
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2 |
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2 |
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2 |
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Tax fees
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1 |
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CRM centre development
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7 |
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7 |
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5 |
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Other services
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1 |
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All other fees
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7 |
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7 |
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6 |
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Audit-related fees relate to advice on accountancy matters and
agreed procedures relating to the Groups conversion to
IFRS. Tax fees relate to ad hoc tax advice.
During fiscal 2005, the auditors received £7 million
(2004: £7 million; 2003: £5 million) in
respect of ongoing CRM centre development services. Due to the
complex and long-term nature of the CRM centre development work,
the Group is satisfied that Deloitte & Touche LLP
should continue to provide these services. The Audit Committee
was satisfied throughout the year that the objectivity and
independence of Deloitte & Touche LLP was not in any
way impaired by either the nature of the non-audit related
services undertaken during the year, the level of non-audit fees
charged, or any other facts or circumstances.
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ITEM 16D. |
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
The following table provides information about purchases of
equity securities by the Company during the fiscal year.
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shares purchased as | |
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of shares that may | |
|
|
Total number | |
|
Average price | |
|
part of publicly | |
|
yet be purchased | |
|
|
of shares | |
|
paid per | |
|
announced plans | |
|
under the plans | |
Period |
|
purchased(i) | |
|
share | |
|
or programmes(ii) | |
|
or programmes | |
|
|
| |
|
| |
|
| |
|
| |
July
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
|
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|