10-Q 1 d229090d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

Or

 

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

Commission File No. 000-50886

 

 

VIRGIN MEDIA INC.

(Exact name of registrant as specified in its charter)

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

(Additional Registrant)

VIRGIN MEDIA INVESTMENTS LIMITED

(Additional Registrant)

 

 

 

Delaware   59-3778247

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

909 Third Avenue, Suite 2863

New York, New York

  10022
(Address of principal executive offices)   (Zip Code)

(212) 906-8440

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer    ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

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

As of October 31, 2011, there were 300,920,949 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.

The Additional Registrants meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this report with the reduced disclosure format. See “Note Concerning the Additional Registrants” in this Form 10-Q.

 

 

 


Table of Contents

VIRGIN MEDIA INC.

FORM 10-Q

QUARTER ENDED September 30, 2011

INDEX

 

     Page  

PART I—FINANCIAL INFORMATION

     5   

Item 1. Financial Statements

     5   

Virgin Media Inc.

  

Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010

     5   

Condensed Consolidated Statements of Operations—Three and Nine Months ended September  30, 2011 and 2010

     6   

Condensed Consolidated Statements of Cash Flows—Nine Months ended September 30, 2011 and 2010

     7   

Notes to Condensed Consolidated Financial Statements

     8   

Virgin Media Investment Holdings Limited

  

Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010

     45   

Condensed Consolidated Statements of Operations— Three and Nine Months ended September  30, 2011 and 2010

     46   

Condensed Consolidated Statements of Cash Flows— Nine Months ended September 30, 2011 and 2010

     47   

Virgin Media Investments Limited

  

Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010

     48   

Condensed Consolidated Statements of Operations— Three and Nine Months ended September  30, 2011 and 2010

     49   

Condensed Consolidated Statements of Cash Flows— Nine Months ended September 30, 2011 and 2010

     50   

Virgin Media Investment Holdings Limited and Virgin Media Investments Limited

  

Combined Notes to Condensed Consolidated Financial Statements

     51   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     66   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     91   

Item 4. Controls and Procedures

     93   

PART II—OTHER INFORMATION

     94   

Item 1. Legal Proceedings

     94   

Item 1A. Risk Factors

     94   

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

     95   

Item 3. Defaults Upon Senior Securities

     95   

Item 4. (Removed and Reserved)

     95   

Item 5. Other Information

     95   

Item 6. Exhibits

     96   

SIGNATURES

     101   

In this quarterly report on Form 10-Q, unless we have indicated otherwise, or the context otherwise requires, references to “Virgin Media,” “the Company,” “we,” “us,” “our” and similar terms refer to the consolidated business of Virgin Media Inc. and its subsidiaries (including Virgin Media Investment Holdings Limited, or VMIH, Virgin Media Investments Limited, or VMIL, and their respective subsidiaries).

 

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“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

Various statements contained in this document constitute “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. Words like “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “think,” “strategy,” and similar expressions identify these forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by these forward-looking statements. These factors, among others, include the following:

 

   

the ability to compete with a range of other communications and content providers;

 

   

the effect of rapid and significant technological changes on our businesses;

 

   

the effect of a decline in fixed line telephony usage and revenues;

 

   

the ability to maintain and upgrade our networks in a cost-effective and timely manner;

 

   

possible losses of revenues or customers due to systems failures;

 

   

the ability to control unauthorized access to our network;

 

   

our reliance on third-party suppliers and contractors to provide necessary hardware, software or operational support;

 

   

our reliance on our use of the “Virgin” name and logo and any adverse publicity generated by other users of the Virgin name and logo;

 

   

the ability to manage customer churn;

 

   

the ability to provide attractive programming at a reasonable cost;

 

   

general economic conditions;

 

   

the ability to implement our restructuring plan successfully and realize the anticipated benefits;

 

   

currency and interest rate fluctuations;

 

   

our reliance on third parties to distribute our mobile telephony products;

 

   

the functionality or market acceptance of new products;

 

   

tax risks;

 

   

our reliance on Everything Everywhere to carry our mobile voice and non-voice services;

 

   

the ability to effectively manage complaints, litigation and adverse publicity;

 

   

our ability to retain key personnel;

 

   

changes in laws, regulations or governmental policy;

 

   

capacity limits on our network;

 

   

the ability to fund debt service obligations and refinance our debt obligations;

 

   

the ability to comply with restrictive covenants in our indebtedness agreements; and

 

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Virgin Media’s dependence on cash flow from subsidiaries.

These and other factors are discussed in more detail under “Risk Factors” and elsewhere in our annual report on Form 10-K for the year ended December 31, 2010, or the 2010 Annual Report, as filed with the U.S. Securities and Exchange Commission, or SEC, on February 22, 2011. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements.

Note Concerning the Additional Registrants

VMIH is a wholly owned subsidiary of Virgin Media Finance PLC, or Virgin Media Finance, and a wholly owned indirect subsidiary of Virgin Media Inc. VMIH is a guarantor of the unsecured senior notes issued by Virgin Media Finance. VMIH is also a guarantor of the senior secured notes issued by Virgin Media Secured Finance PLC. VMIH carries on the same business as Virgin Media.

VMIL is a wholly owned subsidiary of VMIH and a wholly owned indirect subsidiary of Virgin Media Inc. VMIL is also a guarantor of the unsecured senior notes issued by Virgin Media Finance and the senior secured notes issued by Virgin Media Secured Finance PLC. VMIL carries on the same business as Virgin Media.

As the guarantees granted by VMIH and VMIL are not deemed to be unconditional, separate financial statements for these wholly owned indirect subsidiaries of Virgin Media Inc. have been included in this quarterly report pursuant to the rules and regulations of the SEC. Unless otherwise indicated, the discussion contained in this report applies to Virgin Media as well as VMIH and VMIL. Both VMIH and VMIL are incorporated in England and Wales, with their respective registered offices at Media House, Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UP. Neither VMIH nor VMIL is an accelerated filer.

Financial Information and Currency of Financial Statements

All of the financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The reporting currency of our consolidated financial statements is U.K. pounds sterling.

 

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   £ 438.3      £ 479.5   

Restricted cash

     2.2        2.2   

Accounts receivable - trade, less allowances for doubtful accounts of £9.9 (2011) and £6.4 (2010)

     428.4        431.2   

Inventory for resale

     20.1        26.4   

Derivative financial instruments

     18.0        0.8   

Prepaid expenses and other current assets

     89.5        89.0   
  

 

 

   

 

 

 

Total current assets

     996.5        1,029.1   

Fixed assets, net

     4,612.6        4,763.1   

Goodwill and other indefinite-lived assets

     2,017.5        2,017.5   

Intangible assets, net

     28.1        118.4   

Equity investments

     0.0        359.2   

Derivative financial instruments

     348.0        394.6   

Deferred financing costs, net of accumulated amortization of £40.3 (2011) and £23.8 (2010)

     79.0        98.6   

Other assets

     51.7        52.7   
  

 

 

   

 

 

 

Total assets

   £ 8,133.4      £ 8,833.2   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities

    

Accounts payable

   £ 296.3      £ 295.9   

Accrued expenses and other current liabilities

     358.2        391.5   

Derivative financial instruments

     24.4        13.3   

Restructuring liabilities

     37.6        57.6   

VAT and employee taxes payable

     77.7        88.6   

Interest payable

     115.2        126.5   

Deferred revenue

     313.8        301.7   

Current portion of long term debt

     111.5        222.1   
  

 

 

   

 

 

 

Total current liabilities

     1,334.7        1,497.2   

Long term debt, net of current portion

     5,717.9        5,798.3   

Derivative financial instruments

     63.9        62.0   

Deferred revenue and other long term liabilities

     188.8        207.9   

Deferred income taxes

     0.0        3.2   
  

 

 

   

 

 

 

Total liabilities

     7,305.3        7,568.6   
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Shareholders’ equity

    

Common stock - $0.01 par value; authorized 1,000.0 (2011 and 2010) shares; issued and outstanding 300.8 (2011) and 322.0 (2010) shares

     1.6        1.8   

Additional paid-in capital

     4,051.3        4,375.2   

Accumulated other comprehensive income

     52.5        86.5   

Accumulated deficit

     (3,277.3     (3,198.9
  

 

 

   

 

 

 

Total shareholders’ equity

     828.1        1,264.6   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   £ 8,133.4      £ 8,833.2   
  

 

 

   

 

 

 

See accompanying notes.

 

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VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   £ 1,000.0      £ 978.4      £ 2,968.1      £ 2,872.0   

Costs and expenses

        

Operating costs (exclusive of depreciation shown separately below)

     401.7        395.6        1,202.7        1,166.5   

Selling, general and administrative expenses

     200.0        195.5        598.9        598.9   

Restructuring and other charges

     6.2        4.5        7.7        11.4   

Depreciation

     235.6        244.4        694.6        733.4   

Amortization

     28.1        36.7        90.3        110.9   
  

 

 

   

 

 

   

 

 

   

 

 

 
     871.6        876.7        2,594.2        2,621.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     128.4        101.7        373.9        250.9   

Other income (expense)

        

Interest expense

     (107.6     (118.2     (335.3     (359.1

Loss on extinguishment of debt

     (18.3     0.0        (47.2     (70.0

Share of income from equity investments

     3.6        6.7        18.6        21.4   

Loss on disposal of equity investments

     (8.0     0.0        (8.0     0.0   

Loss on derivative instruments

     (59.3     (24.7     (40.5     (52.9

Foreign currency (losses) gains

     (13.0     43.6        0.8        (33.9

Interest income and other, net

     0.5        0.8        83.8        4.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (73.7     9.9        46.1        (238.9

Income tax (expense) benefit

     (0.1     17.7        (17.2     34.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (73.8     27.6        28.9        (204.2

Discontinued operations

        

Gain on disposal, net of tax

     0.0        14.4        0.0        14.4   

(Loss) income from discontinued operations, net of tax

     0.0        (0.2     (1.2     11.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     0.0        14.2        (1.2     25.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   £ (73.8   £ 41.8      £ 27.7      £ (178.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share amounts

        

(Loss) income from continuing operations

        

Basic earnings per share

   £ (0.24   £ 0.08      £ 0.09      £ (0.62
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   £ (0.24   £ 0.08      £ 0.09      £ (0.62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

        

Basic earnings per share

   £ (0.24   £ 0.13      £ 0.09      £ (0.54
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   £ (0.24   £ 0.13      £ 0.09      £ (0.54
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per share (in U.S. dollars)

   $ 0.04      $ 0.04      $ 0.12      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

 

     Nine months ended
September 30,
 
     2011     2010  

Operating activities:

    

Net income (loss)

   £ 27.7      £ (178.5

Loss (income) from discontinued operations

     1.2        (25.7
  

 

 

   

 

 

 

Income (loss) from continuing operations

     28.9        (204.2

Adjustments to reconcile (income) loss from continuing operations to net cash provided by operating activities:

    

Depreciation and amortization

     784.9        844.3   

Non-cash interest

     14.1        31.6   

Non-cash compensation

     17.2        21.4   

Loss on extinguishment of debt, net of prepayment premiums

     31.7        70.1   

Income from equity accounted investments, net of dividends received

     (0.6     (6.8

Unrealized losses on derivative instruments

     29.6        124.5   

Foreign currency losses (gains)

     0.3        (87.9

Loss on disposal of equity investments

     8.0        0.0   

Income taxes

     21.7        (13.9

Other

     5.3        0.3   

Changes in operating assets and liabilities, net of effect from business disposals:

     (86.4     (7.1
  

 

 

   

 

 

 

Net cash provided by operating activities

     854.7        772.3   
  

 

 

   

 

 

 

Investing activities:

    

Purchase of fixed and intangible assets

     (479.3     (478.0

Proceeds from sale of fixed assets

     1.5        35.8   

Principal repayments on loans to equity investments

     108.2        15.0   

Acquisitions, net of cash acquired

     (14.6     0.0   

Disposal of equity investments, net

     241.0        0.0   

Disposal of businesses, net

     0.0        160.0   

Other

     2.5        2.3   
  

 

 

   

 

 

 

Net cash used in investing activities

     (140.7     (264.9
  

 

 

   

 

 

 

Financing activities:

    

New borrowings, net of financing fees

     977.2        3,072.1   

Repurchase of common stock

     (447.0     (122.5

Proceeds from employee stock option exercises

     14.4        9.9   

Principal payments on long term debt and capital leases

     (1,328.4     (3,225.9

Proceeds from settlement of cross currency interest rate swaps

     65.5        0.0   

Dividends paid

     (23.7     (26.0
  

 

 

   

 

 

 

Net cash used in financing activities

     (742.0     (292.4
  

 

 

   

 

 

 

Cash flow from discontinued operations:

    

Net cash used in operating activities

     (10.4     (37.9
  

 

 

   

 

 

 

Net cash used in discontinued operations

     (10.4     (37.9
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (2.8     2.2   

(Decrease) increase in cash and cash equivalents

     (41.2     179.3   

Cash and cash equivalents, beginning of period

     479.5        430.5   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   £ 438.3      £ 609.8   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest exclusive of amounts capitalized

   £ 324.5      £ 331.4   

See accompanying notes.

 

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VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and notes thereto included in Virgin Media Inc.’s annual report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February 22, 2011, or the 2010 Annual Report.

Note 2—Recent Accounting Guidance

In September 2011, the FASB issued guidance permitting companies to first assess qualitative factors as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The guidance is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. We adopted this guidance effective October 1, 2011 and will apply it to the performance of our annual goodwill impairment test.

In June 2011, the Financial Accounting Standards Board, or FASB, issued new guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The new standard will require companies to retrospectively present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of other comprehensive income in the statement of stockholders’ equity. This new guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2011. The adoption of this standard will not have a material impact on our consolidated financial statements.

On January 1, 2011 we adopted new accounting guidance issued by the FASB for revenue arrangements with multiple-elements. We adopted this guidance on a prospective basis applicable for transactions originating or materially modified after the date of adoption. This guidance changed the criteria for separating units of accounting in multiple-element arrangements and the way in which an entity is required to allocate revenue to these units of accounting.

Prior to the adoption of this guidance and with the exception of mobile revenue transactions, bundled revenue arrangements in our Consumer and Business segments generally did not contain separate units of accounting. Subsequent to the adoption of this guidance, these bundled revenue arrangements generally have the following units of accounting: an up-front installation element and an ongoing service provision element. Both prior and subsequent to the adoption of this guidance, mobile revenue transactions involving bundled equipment and service revenue have separate units of accounting.

 

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VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 2—Recent Accounting Guidance (continued)

 

Revenue is allocated to each unit of accounting based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Currently, we do not sell installation services or ongoing rental separately on a regular basis and therefore we do not have the evidence to support VSOE for these deliverables. We use evidence of the amounts that third parties charge for similar or identical services, when available, to establish selling price. In some cases, when we are unable to establish VSOE or TPE, we use our best estimate of selling price. Our objective in determining the best estimate of selling price is to establish the price at which we would transact a sale if the deliverable were sold regularly on a stand-alone basis. We consider all reasonably available information including both market data and conditions, as well as entity specific factors. In addition we consider all factors contemplated in negotiating the arrangement with the customer and our own normal pricing practices. These considerations include competitor pricing, customization of the product, profit objectives and cost structures.

Once we have established the selling price of each deliverable, we allocate total arrangement consideration by applying the relative selling price methodology. Prior to the adoption of this guidance, where the fair value of the delivered element could not be determined reliably but the fair value of the undelivered element could be determined reliably, the fair value of the undelivered element was deducted from total consideration and the net amount was allocated to the delivered element based on the “residual value” method. This methodology is no longer permitted under the new guidance and we now allocate revenue for all multiple-element arrangements based on the relative selling price methodology. We recognize revenue on each deliverable in accordance with our policies for product and service revenue recognition.

The adoption of this guidance is not expected to have a material impact on our consolidated financial statements for the year ended December 31, 2011. This is principally due to the fact that although prior to the adoption of this guidance we were unable to meet the criteria to separate the units of accounting for our residential customer arrangements, the Cable Television Topic of the FASB ASC required us to recognize initial hookup revenues to the extent we had incurred direct selling costs. The impact of the adoption of this guidance may be material in future years if we make material changes to product or service offerings, pricing structures, the components of bundled arrangements or if we enter into material new arrangements in our Business segment.

Note 3—Disposal of Equity Investment

On September 30, 2011, we completed the sale to Scripps Network Interactive, Inc. (“Scripps”), of our interest in the UKTV joint venture with BBC Worldwide Limited. The aggregate consideration was £344.6 million, which includes approximately £98.1 million for Scripps’ acquisition of preferred equity, loan stock and other debt. After the inclusion of associated fees, this transaction resulted in a loss on disposal of £8.0 million, in the consolidated statement of operations.

The terms of the sale agreement include working capital adjustments which may be recognized during the fourth quarter and impact the loss on disposal. Other than an insignificant amount of U.S. alternative minimum tax, no income tax is due as a result of this transaction due to our ability to offset net operating losses against taxable income.

Note 4—Long Term Debt

On February 15, 2011, we amended our senior credit facility to increase operational flexibility including, among other things, changing the required level of total net leverage ratio, increasing certain financial indebtedness baskets, and eliminating certain restrictions on the use of proceeds of secured indebtedness. This amendment did not have an impact on the amount of debt included on our consolidated balance sheet as of September 30, 2011 but did serve to modify the amortization schedule by extending £192.5 million of our June 30, 2014 scheduled amortization payment to June 30, 2015.

 

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VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 4—Long Term Debt (continued)

 

On March 3, 2011, our wholly owned subsidiary, Virgin Media Secured Finance PLC issued $500 million aggregate principal amount of 5.25% senior secured notes due 2021 and £650 million aggregate principal amount of 5.50% senior secured notes due 2021. Interest is payable on January 15 and July 15 each year, beginning on July 15, 2011. The senior secured notes due 2021 rank pari passu with and, subject to certain exceptions, share in the same guarantees and security which have been granted in favor of our senior credit facility and senior secured notes due 2018.

In March 2011, we used the net proceeds from our senior secured notes due 2021 to prepay £532.5 million of the Tranche A outstanding under our senior credit facility, thus eliminating scheduled amortization in 2011 through 2014, and £367.5 million of the Tranche B outstanding under our senior credit facility that was scheduled for payment in 2015, with the remainder of the proceeds being used for general corporate purposes.

On May 20, 2011, we entered into two new additional facilities under the senior credit facility, comprising an additional revolving facility with total commitments of £450 million, which replaced the previous £250 million revolving facility, and an additional term facility with commitments of £750 million. We used the new term facility of £750 million and £25 million of cash to repay the loan balance from the previous term loan which was comprised of a £467.5 million Tranche A and £307.5 million Tranche B. The maturity date of the facilities remains at June 30, 2015. Further changes to the senior credit facility to increase operational flexibility were also effected on May 27, 2011.

On July 26, 2011, we redeemed in full the outstanding balance of our $550 million 9.125% senior notes due 2016 using £355.8 million of cash from our balance sheet as part of our 2010 capital structure optimization program. We recognized a loss on extinguishment of £15.5 million as a result of this redemption. Refer to note 8 for additional discussion of the capital structure optimization program.

On September 12, 2011 we borrowed £50 million under the revolving credit facility. This was repaid on October 12, 2011.

If the trading price of our common stock exceeds 120% of the conversion price of the convertible senior notes for 20 out of the last 30 trading days of a calendar quarter, holders of the convertible notes may elect to convert their convertible notes during the following quarter. This condition was achieved in the three months ended September 30, 2011. If conversions of this nature occur, we may deliver cash, common stock, or a combination of both, at our election, to settle our obligations. We have classified this debt as long-term debt in the condensed consolidated balance sheet as of September 30, 2011 because we determined, in accordance with the Derivatives and Hedging Topic of the FASB ASC, that we have the ability to settle the obligations in equity in all circumstances, except in the case of a fundamental change (as defined in the indenture governing the convertible senior notes). This condition must be fulfilled on 20 of the last 30 trading days of each calendar quarter. If the condition is not met during that time period, the notes will not be convertible in the following quarter.

 

10


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 4—Long Term Debt (continued)

 

Long term debt repayments, excluding capital leases, as of September 30, 2011, were due as follows (in millions):

 

Period ending September 30:

      

2012

   £ 50.3   

2013

     0.1   

2014

     0.0   

2015

     750.0   

2016

     1,021.0   

Thereafter

     3,861.8   
  

 

 

 

Total debt payments

   £ 5,683.2   
  

 

 

 

On October 27, 2010, we entered into capped call option transactions, or conversion hedges, with certain counterparties relating to our $1.0 billion 6.50% convertible senior notes due 2016. The conversion hedges are intended to offset a portion of the dilutive effects that could potentially be associated with conversion of the convertible senior notes at maturity and provide us with the option to receive the number of shares of our common stock (or in certain circumstances cash) with a value equal to the excess of (a) the value owed by us (up to the cap price of $35.00 per share) to convertible senior note investors pursuant to the terms of the notes on conversion of up to 90% of the notes over (b) the aggregate face amount of such converted notes upon maturity of the convertible senior notes. The conversion hedges also provide various mechanisms for settlement in our common stock and/or cash in certain circumstances, based primarily on the settlement method elected for the notes. These conversion hedges have an initial strike price of $19.22 per share of our stock, which is the conversion price provided under the terms of our convertible senior notes, and a cap price of $35.00 per share of our stock. We paid £205.4 million in respect of the conversion hedges during 2010. The cost of these transactions was not deductible for U.S. federal income tax purposes, and the proceeds, if any, received upon exercise of the options will not be taxable for U.S. federal income tax purposes.

The conversion hedges do not qualify for equity classification under the authoritative guidance as there are potential circumstances in which cash settlement may be required at the discretion of the counterparties. As such, the fair value of the conversion hedges, which was approximately £156.3 million as of September 30, 2011, has been included as a non-current derivative financial asset in the condensed consolidated balance sheets. Refer to note 5 for additional discussion of the fair value measurement of the conversion hedges.

 

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Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 5—Fair Value Measurements

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

 

Level 1    Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2    Unadjusted quoted prices in active markets for similar assets or liabilities, or
unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset or liability
Level 3    Unobservable inputs for the asset or liability

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The table below presents our assets and liabilities measured at fair value as at September 30, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in millions):

 

     Balance at September 30, 2011  
     Level 1      Level 2      Level 3      Total  

Assets

           

Derivative financial instruments, excluding conversion hedges

   £ 0.0       £ 194.9       £ 14.8       £ 209.7   

Conversion hedges

     0.0         0.0         156.3         156.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   £ 0.0       £ 194.9       £ 171.1       £ 366.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative financial instruments

   £ 0.0       £ 88.3       £ 0.0       £ 88.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   £ 0.0       £ 88.3       £ 0.0       £ 88.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

In estimating the fair value of our financial assets and liabilities, we used the following methods and assumptions:

Derivative financial instruments: As a result of our financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest and foreign currency exchange rate fluctuations through the use of derivative financial instruments. The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are valued using internal models based on observable inputs, counterparty valuations, or market transactions in either the listed or over-the-counter markets, adjusted for non-performance risk. As such, these derivative instruments are classified within level 2 in the fair value hierarchy.

As discussed in note 8 the capped Accelerated Stock Repurchase (ASR) agreement was accounted for as an initial treasury stock transaction and a forward stock purchase contract. The forward stock purchase contract is classified as a derivative financial instrument in our condensed consolidated balance sheet as of September 30, 2011. The fair value of this contract is determined using an internal model and falls within level 3 of the fair value hierarchy.

The fair values of our derivative financial instruments are disclosed in note 6.

 

12


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 5—Fair Value Measurements (continued)

 

Valuation of conversion hedges: Because the conversion hedges do not qualify for equity classification, the fair values have been included as a non-current derivative financial asset in the consolidated balance sheet. The conversion hedges may only be exercised by us upon maturity of the convertible senior notes. The fair value of these instruments was estimated to be £156.3 million as of September 30, 2011, using the Black-Scholes Merton valuation technique. In accordance with the authoritative guidance, fair value represents an estimate of the exit price that would be received upon disposal of the conversion hedges as of the balance sheet date. The fair values of the conversion hedges are primarily impacted by our stock price but are also impacted by the duration of the options, the strike price ($19.22 per share) of the instrument, the cap price ($35.00 per share) of the instrument, expected volatility of our stock price, the dividend yield on our stock, exchange rates, and counterparty non-performance risk. The table below presents the estimated impact on the September 30, 2011 fair value of a hypothetical 20% increase and decrease in our stock price, holding all other inputs constant (in millions):

 

     September 30,
2011
 

Estimated fair value of conversion hedges as reported

   £ 156.3   
  

 

 

 

Estimated fair value of conversion hedges assuming a 20% increase in our stock price

   £ 187.3   
  

 

 

 

Estimated fair value of conversion hedges assuming a 20% decrease in our stock price

   £ 120.1   
  

 

 

 

Changes in fair values of the conversion hedges are reported as gains (losses) on derivative instruments in the condensed consolidated statements of operations.

We have determined that the overall valuation of the conversion hedges falls within level 3 of the fair value hierarchy as the assumption for the expected volatility of our stock price over the term of the options is based on an unobservable input and is deemed to be significant to the determination of fair value. Non-performance risk is based on quoted credit default spreads for counterparties to the contracts. The inclusion of counterparty non-performance risk resulted in a decrease to the fair values of the conversion hedges of £30.9 million as of September 30, 2011 and an increase in the loss on derivative instruments of £13.0 million in the three months ended September 30, 2011.

 

13


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 5—Fair Value Measurements (continued)

 

The following table presents a reconciliation of the beginning and ending balances of the conversion hedges (in millions):

 

Balance at December 31, 2010

   £  191.9   

Unrealized gain included in gain (loss) on derivative instruments

     10.2   

Unrealized currency translation adjustment included in other comprehensive income

     (4.7
  

 

 

 

Balance at March 31, 2011

   £ 197.4   
  

 

 

 

Unrealized gain included in gain (loss) on derivative instruments

     4.6   

Unrealized currency translation adjustment included in other comprehensive income

     (0.7
  

 

 

 

Balance at June 30, 2011

   £ 201.3   
  

 

 

 

Unrealized loss included in gain (loss) on derivative instruments

     (49.1

Unrealized currency translation adjustment included in other comprehensive income

     4.1   
  

 

 

 

Balance at September 30, 2011

   £ 156.3   
  

 

 

 

Long term debt: The fair values of our senior notes, convertible senior notes and senior secured notes in the following table are based on the quoted market prices in active markets and incorporate non-performance risk. The carrying values of the $500 million 5.25% and £650 million 5.50% senior secured notes due 2021 include adjustments of £40 million and £60 million, respectively, as a result of our application of fair value hedge accounting to these instruments.

The carrying amounts and fair values of our long term debt are as follows (in millions):

 

     September 30,
2011
     December 31,
2010
 
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

9.125% U.S. dollar senior notes due 2016

   £ 0.0       £ 0.0       £ 352.6       £ 380.3   

6.50% U.S. dollar convertible senior notes due 2016

     545.5         991.6         535.4         1,050.8   

9.50% U.S. dollar senior notes due 2016

     845.3         933.6         843.2         990.5   

9.50% euro senior notes due 2016

     150.6         169.2         148.5         182.1   

8.375% U.S. dollar senior notes due 2019

     379.1         410.3         378.8         421.5   

8.875% sterling senior notes due 2019

     345.1         362.3         344.8         397.7   

6.50% U.S. dollar senior secured notes due 2018

     632.9         686.0         632.3         677.5   

7.00% sterling senior secured notes due 2018

     864.0         905.6         863.1         925.3   

5.25% U.S. dollar senior secured notes due 2021

     347.6         321.6         0.0         0.0   

5.50% sterling senior secured notes due 2021

     705.6         705.3         0.0         0.0   

Senior credit facility

     750.0         750.0         1,675.0         1,672.5   

Revolving credit facility

     50.0         50.0         0.0         0.0   

Capital leases and other

     213.7         213.7         246.7         246.7   

 

14


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities

Strategies and Objectives for Holding Derivative Instruments

Our results are materially impacted by changes in interest rates and foreign currency exchange rates. In an effort to manage these risks, we periodically enter into various derivative instruments including interest rate swaps, cross-currency interest rate swaps and foreign exchange forward rate contracts. We are required to recognize all derivative instruments as either assets or liabilities at fair value on our consolidated balance sheets, and to recognize certain changes in the fair value of derivative instruments in our consolidated statements of operations.

We have entered into cross-currency interest rate swaps and foreign currency forward rate contracts to manage interest rate and foreign exchange rate currency exposures with respect to our U.S. dollar ($) and euro (€) denominated debt obligations. Additionally, we have entered into interest rate swaps to manage interest rate exposures resulting from variable and fixed rates of interest we pay on our U.K. pound sterling (£) denominated debt obligations. We have also entered into U.S. dollar forward rate contracts to manage our foreign exchange rate currency exposures related to certain committed and forecasted purchases.

Whenever it is practical to do so, we designate a derivative contract as either a cash flow or fair value hedge for accounting purposes. These derivatives are referred to as “Accounting Hedges” below. When a derivative contract is not designated as an Accounting Hedge, the derivative will be treated as an economic hedge with mark-to-market movements and realized gains or losses recognized through gains (losses) on derivative instruments in the statements of operations. These derivatives are referred to as “Economic Hedges” below. We do not enter into derivatives for speculative trading purposes.

In respect to Accounting Hedges, we believe our hedge contracts will be highly effective during their term in offsetting changes in cash flow or fair value attributable to the hedged risk. If we determine it is probable that forecasted transactions to which a hedge contract relates will not occur, we discontinue hedge accounting prospectively and reclassify any amounts accumulated in other comprehensive income to the statement of operations. We perform, at least quarterly, both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the derivative in gains (losses) on derivative instruments in the statement of operations. As a result of our effectiveness assessment at September 30, 2011, we believe our derivative contracts that are designated and qualify for hedge accounting will continue to be highly effective in offsetting changes in cash flow or fair value attributable to the hedged risk.

The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are valued using internal models based on observable inputs, counterparty valuations, or market transactions in either the listed or over-the-counter markets, adjusted for non-performance risk. Non-performance is based on quoted credit default spreads for counterparties to the contracts and swaps. These derivative instruments are classified within level 2 in the fair value hierarchy. Derivative instruments which are subject to master netting arrangements are not offset and we have not provided, nor do we require, cash collateral with any counterparty.

Refer to note 5 for a discussion of the conversion hedges.

 

15


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities (continued)

 

The fair values of our derivative instruments recorded on our condensed consolidated balance sheets were as follows (in millions):

 

     September 30,
2011
     December 31,
2010
 

Included within current assets:

     

Accounting Hedge

     

Foreign currency forward rate contracts

   £ 0.2       £ 0.0   

Economic Hedge

     

Foreign currency forward rate contracts

     2.1         0.8   

Interest rate swaps

     0.9         0.0   

Forward share repurchase contract

     14.8         0.0   
  

 

 

    

 

 

 
   £ 18.0       £ 0.8   
  

 

 

    

 

 

 

Included within non-current assets:

     

Accounting Hedge

     

Interest rate swaps

   £ 62.4       £ 8.0   

Cross-currency interest rate swaps

     80.7         137.9   

Economic Hedge

     

Interest rate swaps

     4.4         3.9   

Cross-currency interest rate swaps

     44.2         52.9   

Conversion hedges

     156.3         191.9   
  

 

 

    

 

 

 
   £ 348.0       £ 394.6   
  

 

 

    

 

 

 

Included within current liabilities:

     

Economic Hedge

     

Interest rate swaps

   £ 11.1       £ 0.0   

Cross-currency interest rate swaps

     13.3         13.3   
  

 

 

    

 

 

 
   £ 24.4       £ 13.3   
  

 

 

    

 

 

 

Included within non-current liabilities:

     

Accounting Hedge

     

Cross-currency interest rate swaps

   £ 8.9       £ 10.3   

Economic Hedge

     

Interest rate swaps

     35.5         32.2   

Cross-currency interest rate swaps

     19.5         19.5   
  

 

 

    

 

 

 
   £ 63.9       £ 62.0   
  

 

 

    

 

 

 

 

16


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities (continued)

 

Cross-Currency Interest Rate Swaps—Hedging the Interest Payments of Senior Notes and Senior Secured Notes

As of September 30, 2011, we had outstanding cross-currency interest rate swaps to mitigate the interest and foreign exchange rate risks relating to the pound sterling value of interest and principal payments on the U.S. dollar and euro denominated senior notes and senior secured notes.

The terms of our outstanding cross-currency interest rate swaps at September 30, 2011, were as follows:

 

Hedged item/Maturity date

   Hedge type    Notional amount
due from
counterparty
     Notional amount
due to
counterparty
     Weighted average
interest rate due
from counterparty
  Weighted average
interest rate due to
counterparty
          (in millions)      (in millions)           

$1,350m senior notes due 2016

             

August 2016

   Accounting    $ 1,350.0       £ 836.0       9.50%   9.99%

$1,000m convertible senior notes due 2016

             

November 2016

   Economic      1,000.0         516.9       6.50%   6.91%

$600m senior notes due 2019

             

October 2019

   Accounting      264.3         159.8       8.38%   9.03%

October 2011

   Economic      335.7         228.0       8.38%   9.23%

October 2011 to October 2019

   Accounting      335.7         203.0       8.38%   9.00%

$1,000m senior secured notes due 2018

             

January 2018

   Accounting      1,000.0         615.7       6.50%   7.02%

$500m senior secured notes due 2021

             

January 2021

   Accounting      500.0         308.9       5.25%   6 month
              LIBOR + 1.94%
     

 

 

    

 

 

      
      $ 4,785.7       £ 2,868.3        
     

 

 

    

 

 

      

€180m senior notes due 2016

             

August 2016

   Accounting    180.0       £ 158.6       9.50%   10.18%
     

 

 

    

 

 

      
      180.0       £ 158.6        
     

 

 

    

 

 

      

Other

             

December 2012

   Economic    56.7       £ 40.3       3 month   3 month
            EURIBOR + 2.38%   LIBOR + 2.69%

December 2013

   Economic      43.3         30.8       3 month   3 month
            EURIBOR + 2.88%   LIBOR + 3.26%
     

 

 

    

 

 

      
      100.0       £ 71.1        
     

 

 

    

 

 

      

December 2012

   Economic    £ 38.8       56.7       3 month   3 month
            LIBOR + 2.40%   EURIBOR + 2.38%

December 2013

   Economic      29.7         43.3       3 month   3 month
            LIBOR + 2.90%   EURIBOR + 2.88%
     

 

 

    

 

 

      
      £ 68.5       100.0        
     

 

 

    

 

 

      

All of our cross-currency interest rate swaps include exchanges of the notional amounts at the start and end of the contract except for the contract maturing in November 2016 hedging the $1,000 million convertible senior notes due 2016.

 

17


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities (continued)

 

On July 26, 2011 we settled the cross-currency interest rate swaps hedging the $550 million senior notes due 2016 and received cash of £65.5 million which approximated the fair value of these swaps as of June 30, 2011. The proceeds received upon settlement are classified as a financing activity in the condensed consolidated statement of cash flows.

Interest Rate Swaps—Hedging of Interest Rate Sensitive Obligations

As of September 30, 2011, we had outstanding interest rate swap agreements to manage the exposure to variability in future cash flows on the interest payments associated with our senior credit facility, which accrue at variable rates based on LIBOR. We have also entered into interest rate swap agreements to manage our exposure to changes in the fair value of certain debt obligations due to interest rate fluctuations. The interest rate swaps allow us to receive or pay interest based on three or six month LIBOR in exchange for payments or receipts of interest at fixed rates.

The terms of our outstanding interest rate swap contracts at September 30, 2011 were as follows:

 

Hedged item/Maturity date

   Hedge type    Notional
amount
     Weighted average
interest rate due from

counterparty
    Weighted average
interest rate due to
counterparty
 
          (in millions)               

Senior credit facility

          

July 2012 to December 2015

   Economic    £ 200.0         6 month LIBOR        2.91%   

July 2012 to December 2015

   Economic      200.0         6 month LIBOR        2.87%   

July 2012 to December 2015

   Economic      200.0         6 month LIBOR        2.79%   

£650m senior secured notes due 2021

          

January 2021

   Accounting    £ 650.0         5.50%        6 month LIBOR   
             +1.84%   

Other

          

March 2013

   Economic    £ 300.0         3 month LIBOR          3.28%   

October 2013

   Economic      300.0         1.86%        3 month LIBOR   

September 2012

   Economic      600.0         3 month LIBOR          3.09%   

September 2012

   Economic      600.0         1.07%        3 month LIBOR   

Foreign Currency Forward Rate Contracts—Hedging Committed and Forecasted Transactions

As of September 30, 2011, we had outstanding foreign currency forward rate contracts to purchase U.S. dollars to hedge committed and forecasted purchases. The terms of our outstanding foreign currency forward rate contracts at September 30, 2011 were as follows:

 

Hedged item/Maturity date

   Hedge type    Notional
amount due
from
counterparty
     Notional
amount due  to
counterparty
     Weighted
average
exchange rate
 
          (in millions)      (in millions)         

Committed and forecasted purchases

           

October 2011 to December 2011

   Accounting    $ 6.3       £ 3.9         1.6245   

October 2011 to December 2011

   Economic    $ 28.7       £ 17.7         1.6251   

January 2012 to June 2012

   Economic    $ 72.0       £ 44.7         1.6099   

 

18


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities (continued)

 

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow accounting hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. In our consolidated statement of cash flows, we recognize the cash flows resulting from derivative contracts that are treated as Accounting Hedges in the same category where the cash flows from the underlying exposure are recognized. Cash flows from derivative contracts that are not designated as accounting hedges are recognized as operating activities in the condensed consolidated statement of cash flows. If we discontinue hedge accounting for an instrument, subsequent cash flows are classified based on the nature of the instrument.

Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized as gains or losses on derivative instruments in the condensed consolidated statement of operations in the period in which they occur. During the three and nine months ended September 30, 2011, we recognized no gain or loss relating to ineffectiveness on our cash flow hedges.

The following table presents the effective amount of gain or (loss) recognized in other comprehensive income (loss) and amounts reclassified to earnings during the three and nine months ended September 30, 2011 (in millions):

 

     Total     Interest rate
swaps
    Cross-
currency
interest  rate

swaps
    Forward
foreign
exchange
contracts
    Tax Effect  

Balance at December 31, 2010

   £ (9.2   £ 8.0      £ 16.6      £ 0.1      £ (33.9

Amounts recognized in other comprehensive income (loss)

     (57.0     2.9        (60.3     0.4        0.0   

Amounts reclassified as a result of cash flow hedge discontinuance

     (7.8     (7.6     (23.5     0.0        23.3   

Amounts reclassified to earnings impacting:

          

Foreign exchange loss

     45.4        0.0        45.4        0.0        0.0   

Interest expense

     1.3        0.0        1.3        0.0        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   £ (27.3   £ 3.3      £ (20.5   £ 0.5      £ (10.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive income (loss)

     (8.5     0.0        (8.3     (0.2     0.0   

Amounts reclassified to earnings impacting:

          

Foreign exchange loss

     2.6        0.0        2.6        0.0        0.0   

Interest expense

     0.6        0.0        0.6        0.0        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   £ (32.6   £ 3.3      £ (25.6   £ 0.3      £ (10.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive income (loss)

     41.5        0.0        41.6        (0.1     0.0   

Amounts reclassified to earnings impacting:

          

Foreign exchange loss

     (40.4     0.0        (40.4     0.0        0.0   

Interest expense

     0.6        0.0        0.6        0.0        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   £ (30.9   £ 3.3      £ (23.8   £ 0.2      £ (10.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 6—Derivative Financial Instruments and Hedging Activities (continued)

 

We reclassified gains of £31.1 million accumulated in other comprehensive income to gain (loss) on derivatives in the condensed consolidated statement of operations for the nine months ended September 30, 2011 because we discontinued hedge accounting for the cross-currency interest rate swaps associated with the $550 million 9.125% senior notes due 2016 and two of the interest rate swaps associated with the senior credit facility. As a result of the recognition of these gains in the condensed consolidated statement of operations, we reclassified tax expense of £23.3 million from other comprehensive income to income from continuing operations in the nine months ended September 30, 2011.

Assuming no change in interest rates or foreign exchange rates for the next twelve months, the amount of pre-tax losses that would be reclassified from other comprehensive income (loss) to earnings would be £0.0 million and £2.4 million relating to interest rate swaps and cross-currency interest rate swaps, respectively, and pre-tax gains of £0.2 million relating to forward foreign exchange contracts.

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value accounting hedges, the gain or loss on the derivative is reported in earnings along with offsetting changes in the value of the hedged debt obligations due to changes in the hedged risks. In our condensed consolidated balance sheet, changes in the value of the hedged debt obligations due to changes in the hedged risks are included as adjustments to the carrying value of the debt. In our condensed consolidated statement of cash flows, we recognize the cash flows resulting from derivative contracts that are treated as Accounting Hedges in the same category where the cash flows from the underlying exposure are recognized. All other cash flows from derivative contracts are recognized as operating activities in the condensed consolidated statement of cash flows.

Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized as gains or losses on derivative instruments in the statement of operations in the period in which they occur. During the three and nine months ended September 30, 2011, we recognized ineffectiveness totaling £6.1 million and £7.9 million, respectively.

Note 7—Restructuring and Other Charges

The following tables summarize our historical restructuring accruals, which are comprised of historic restructuring accruals prior to 2006 and the restructuring accruals resulting from the acquisitions made by us during 2006, and the accruals for our restructuring plan announced in 2008 (in millions):

 

     Historical
Restructuring
Accruals
    2008
Restructuring Accruals
       

Three months ended September 30, 2011

   Lease
Exit Costs
    Involuntary
Employee
Termination
and Related
Costs
    Lease and
Contract
Exit Costs
    Total  

Balance at June 30, 2011

   £ 31.9      £ 1.4      £ 13.0      £ 46.3   

Charged to expense

     1.1        5.3        2.9        9.3   

Revisions

     (1.7     (1.4     0.0        (3.1

Utilized

     (11.7     (2.0     (1.2     (14.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   £ 19.6      £ 3.3      £ 14.7      £ 37.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 7—Restructuring and Other Charges (continued)

 

     Historical
Restructuring
Accruals
    2008
Restructuring Accruals
       

Nine months ended September 30, 2011

   Lease
Exit Costs
    Involuntary
Employee
Termination
and Related
Costs
    Lease and
Contract
Exit Costs
    Total  

Balance at December 31, 2010

   £ 35.8      £ 1.1      £ 20.7      £ 57.6   

Charged to expense

     1.8        9.6        4.1        15.5   

Revisions

     (3.9     (2.0     (1.9     (7.8

Utilized

     (14.1     (5.4     (8.2     (27.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   £ 19.6      £ 3.3      £ 14.7      £ 37.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

In connection with our 2008 restructuring program, in total we expect to incur operating expenditures of between £150 million to £170 million and capital expenditures of between £50 million to £60 million.

Note 8—Shareholders’ Equity and Share Based Compensation

During 2010, we announced our intention to undertake a range of capital structure optimization actions, including the application of, in aggregate, up to £700 million, in part towards repurchases of up to £375 million of our common stock until August 2011, and in part towards transactions relating to our debt and convertible debt, including related derivative transactions. During the first quarter, we increased the 2010 capital structure optimization program to permit full redemption of the $550 million 9.125% senior notes due 2016, which occurred on July 26, 2011. See note 4 for a discussion of the conversion hedges related to our convertible senior notes, which were entered into as part of the 2010 capital structure optimization program.

On July 27, 2011, we announced a new capital structure optimization program which includes the application of, in aggregate, up to £850 million for purposes of repurchasing our common stock and debt and for effecting associated derivative transactions until December 31, 2012. Our new capital structure optimization program consists of the application of up to £625 million in repurchases of our common stock and up to £225 million for transactions relating to our debt and convertible debt, including related derivative transactions. Our capital structure optimization programs may be effected through open market, privately negotiated, and/or derivative transactions, and may be implemented through arrangements with one or more brokers. Any shares of common stock acquired in connection with these programs will be held in treasury or cancelled.

During the three months ended September 30, 2011, our open market repurchases under the 2011 capital structure optimization program comprised 5.1 million shares of common stock, at an average purchase price per share of $24.85 ($126.9 million in aggregate). The shares of common stock acquired in connection with the 2011 capital structure optimization program were cancelled.

During the nine months ended September 30, 2011, we repurchased 12.0 million shares of common stock in connection with the 2010 capital structure optimization program, at an average purchase price per share of $28.83 ($345.5 million in aggregate), through open market repurchases, and we repurchased 5.1 million shares of common stock in connection with the 2011 capital structure optimization program, at an average purchase price per share of $24.85 ($126.9 million in aggregate), through open market repurchases. The shares of common stock acquired in connection with both the 2010 and 2011 capital structure optimization programs were cancelled.

 

21


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 8—Shareholders’ Equity and Share Based Compensation (continued)

 

During the three months ended September 30, 2011, we entered into a capped Accelerated Stock Repurchase (ASR) to purchase $250.0 million (£156.6 million) of our common stock. We received approximately 9.1 million shares of common stock during the quarter and the stock so acquired was cancelled. The specific number of shares that we will ultimately repurchase in the ASR Program will be based generally on the daily volume-weighted average share price of our common stock over the duration of the ASR Program, subject to a provision that establishes a minimum number of repurchased shares. The final settlement of the repurchase contemplated by the ASR Program is to occur no later than December 8, 2011, although the completion date may be accelerated at the option of the counterparty or, under certain circumstances, extended. At settlement, under certain circumstances, we may be entitled to receive additional shares of our common stock from the counterparty, or, under certain limited circumstances, we may be required to deliver shares or make a cash payment (at its option) to the counterparty. As of September 30, 2011, based on the daily volume-weighted average price of our common stock since the effective date of the agreement, the counterparty would be required to deliver approximately 1.3 million shares to us.

The ASR agreement was accounted for as an initial treasury stock transaction and a forward stock purchase contract. The fair value of the 9.1 million shares of common stock that were received during the quarter was recorded as a reduction to shareholders’ equity. The initial repurchase of shares resulted in an immediate reduction to the number of outstanding shares. The fair value of the forward stock purchase contract is reflected as a derivative asset in the condensed consolidated balance sheet as of September 30, 2011 as we concluded that it is not indexed solely to our own stock.

During the three and nine months ended September 30, 2010, we repurchased 9.3 million shares of common stock in connection with the 2010 capital structure optimization program, at an average purchase price per share of $20.78 ($194.0 million in aggregate), through open market repurchases. The shares of common stock acquired in connection with the 2010 capital structure optimization program were held in treasury as of September 30, 2010.

Total share based compensation expense included in selling, general and administrative expenses in the condensed consolidated statements of operations was £2.9 million and £6.2 million for the three months ended September 30, 2011 and 2010, respectively, and £17.2 million and £21.4 million for the nine months ended September 30, 2011 and 2010, respectively.

 

22


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 9—Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing the net income (loss) for the three and nine months ended September 30, 2011 and 2010 by the weighted average number of shares outstanding during the respective periods. Diluted net income per common share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for options, sharesave options, shares of restricted stock held in escrow, restricted stock units and warrants, and the if-converted method for shares potentially issuable under our convertible senior notes.

Basic and diluted income from discontinued operations per share for the three and nine months ended September 30, 2010 was £0.04 and £0.08 respectively.

The weighted average number of shares outstanding for the three and nine months ended September 30, 2011 and 2010 is computed as follows (in millions):

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2011     2010     2011     2010  

Number of shares outstanding at start of period

     313.2        331.1        321.3        329.4   

Issue of common stock (average number outstanding during the period)

     1.3        0.2        3.3        1.2   

Purchase of treasury shares

     (4.1     (5.7     (9.1     (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

     310.4        325.6        315.5        328.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the components of basic and diluted income (loss) per common share (in millions):

 

     Three months  ended
September 30,
     Nine months ended
September 30,
 
     2011     2010      2011      2010  

Numerator for basic income (loss) per common share from continuing operations

   £ (73.8   £ 27.6       £ 28.9       £ (204.2

Interest on senior convertible notes, net of tax

     0.0        0.0         0.0         0.0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Numerator for diluted income (loss) per common share from continuing operations

   £ (73.8   £ 27.6       £ 28.9       £ (204.2
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average number of shares:

          

Denominator for basic income (loss) per common share

     310.4        325.6         315.5         328.7   

Effect of dilutive securities:

          

Share based awards to employees

     0.0        5.2         4.7         0.0   

Shares issuable under senior convertible notes

     0.0        0.0         0.0         0.0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Denominator for diluted income (loss) per common share

     310.4        330.8         320.2         328.7   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 9—Income (Loss) Per Common Share (continued)

 

The following table sets forth the number of potential common shares excluded from the calculation of the denominator for diluted income (loss) per common shares (in millions):

 

     Three months  ended
September 30,
     Nine months  ended
September 30,
 
     2011      2010      2011      2010  

Stock options

     10.9         6.8         6.7         17.3   

Sharesave options

     0.8         0.0         0.3         1.4   

Restricted stock held in escrow

     0.6         0.7         0.6         0.7   

Restricted stock units

     3.6         5.2         3.6         5.2   

Warrants

     0.0         25.8         0.0         25.8   

Shares issuable under convertible senior notes

     52.0         52.0         52.0         52.0   

Each of these instruments are excluded from the calculation of diluted net income per common share in periods in which there is a loss, because the inclusion of potential common shares would have an anti-dilutive effect.

In the nine months ended September 30, 2011, certain share based awards to employees have been excluded from the calculation of the diluted weighted average number of shares because their exercise prices exceeded our average share price during the calculation period.

In the nine months ended September 30, 2011, certain restricted stock held in escrow and certain restricted stock units have been excluded from the calculation of the diluted weighted average number of shares because these shares are contingently issuable based on the achievement of performance and/or market conditions that have not been achieved as of September 30, 2011.

In the nine months ended September 30, 2011, the common shares issuable under our convertible notes have been excluded from the calculation of the diluted weighted average number of shares because the effect of their inclusion would be anti-dilutive based on the application of the if-converted method, which assumes that interest charges applicable to the convertible notes, net of the income tax effect, are added to income (loss) for the period and that the common shares issuable upon conversion of the convertible notes are added to the number of weighted average shares outstanding.

Stock Option Grants

All options granted under our stock incentive plans have a ten year term and vest and become fully exercisable within five years of continued employment. We have historically issued new shares upon exercise of the options. For performance-based option grants, the performance objectives are based upon quantitative and qualitative objectives, including earnings and stock price performance, amongst others. These objectives may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range.

Sharesave Option Grants

All options granted under the Virgin Media Inc. Sharesave Plan enable eligible employees to purchase shares of our common stock at a discount. Employees are invited to take out savings contracts that last for three years. At the end of the contract, employees use the proceeds of these savings to exercise the options granted under the plan. We intend to issue new shares upon exercise of the options.

 

24


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 9—Income (Loss) Per Common Share (continued)

 

Restricted Stock Grants

The shares of restricted stock granted under our stock incentive plans have a term of up to three and a half years and vest based on time or performance, subject to continued employment. For performance-based restricted stock grants, the performance objectives are based upon quantitative and qualitative objectives, including earnings, operational performance and achievement of strategic goals, amongst others, and vest after a one to three year period. These objectives may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range.

Restricted Stock Unit Grants

The restricted stock units granted under our stock incentive plans have a term of up to three and a half years and vest based on performance, subject to continued employment. These targets may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range. The final number of restricted stock units vesting will be settled in either common stock or an amount of cash equivalent to the fair market value at the date of vesting.

Convertible Senior Notes

Holders of our U.S. dollar denominated 6.50% convertible senior notes due 2016 may tender their notes for conversion at any time on or after August 15, 2016 through to the second scheduled trading date preceding the maturity date. Prior to August 15, 2016, holders may convert their notes, at their option, only under the following circumstances: (i) in any quarter, if the closing sale price of Virgin Media Inc.’s common stock during at least 20 of the last 30 trading days of the prior quarter was more than 120% of the applicable conversion price per share of common stock on the last day of such prior quarter; (ii) if, for five consecutive trading days, the trading price per $1,000 principal amount of notes was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate; (iii) if a specified corporate event occurs, such as a merger, recapitalization, reclassification, binding share exchange or conveyance of all, or substantially all, of Virgin Media Inc.’s assets; (iv) the declaration by Virgin Media Inc. of the distribution of certain rights, warrants, assets or debt securities to all, or substantially all, holders of Virgin Media Inc.’s common stock; or (v) if Virgin Media Inc. undergoes a fundamental change (as defined in the indenture governing the convertible senior notes), such as a change in control, merger, consolidation, dissolution or delisting.

The initial conversion rate is equal to 52.0291 shares of Virgin Media Inc.’s common stock per $1,000 of convertible senior notes, which represents an initial conversion price of approximately $19.22 per share of common stock. The conversion rate is subject to adjustment for stock splits, stock dividends or distributions, the issuance of certain rights or warrants, certain cash dividends or distributions or stock repurchases where the price exceeds market values.

 

25


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 10—Comprehensive Income (Loss)

 

Comprehensive income (loss) comprises (in millions):

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2011     2010     2011     2010  

Net (loss) income for period

   £ (73.8   £ 41.8      £ 27.7      £ (178.5

Currency translation adjustment

     (11.2     (7.3     (11.8     3.3   

Net unrealized gains (losses) on derivatives, net of tax

     41.5        (62.0     (24.0     46.2   

Reclassification of derivative (gains) losses to net income, net of tax

     (39.8     69.2        2.3        (18.2

Pension liability adjustment, net of tax

     (0.5     0.0        (0.5     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 
   £ (83.8   £ 41.7      £ (6.3   £ (147.2
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of accumulated other comprehensive income, net of taxes, were as follows (in millions):

 

     September 30,
2011
    December 31,
2010
 

Foreign currency translation

   £ 150.8      £ 162.6   

Pension liability adjustment

     (67.4     (66.9

Net unrealized losses on derivatives

     (30.9     (9.2
  

 

 

   

 

 

 
   £ 52.5      £ 86.5   
  

 

 

   

 

 

 

Note 11—Contingent Liabilities

We are involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employee and employee benefits which arise in the ordinary course of our business. In accordance with the Contingencies Topic of the FASB ASC, we recognize a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We believe we have adequate provisions for any such matters. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Additionally, when we believe it is at least reasonably possible that a liability has been incurred in excess of any recorded liabilities we provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. While litigation is inherently unpredictable, we believe that we have valid defenses with respect to legal matters pending against us.

Our revenue generating activities are subject to Value Added Tax, or VAT. During the second quarter of 2011, we reached an agreement with the U.K. tax authorities regarding our VAT treatment of certain of these activities. The U.K. tax authorities provided us with a refund of £81.5 million, which was collected during the second quarter of 2011 and £77.6 million of which is included in interest income and other, net in the condensed consolidated statement of operations for the nine months ended September 30, 2011.

Our VAT treatment of certain other revenue generating activities remains subject to challenge by the U.K. tax authorities. As a result, we have estimated contingent losses totaling £26.2 million as of September 30, 2011 that are not accrued for, as we deem them to be reasonably possible, but not probable, of resulting in a liability. We currently expect an initial hearing on these matters to take place in 2012.

 

26


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 12—Industry Segments

 

Our reporting segments are based on our method of internal reporting along with the criteria used by our chief executive officer, who is our chief operating decision maker (CODM), to evaluate segment performance, the availability of separate financial information and overall materiality considerations. We have two reporting segments, Consumer and Business, as described below.

Our Consumer segment is our primary segment, consisting of the distribution of television programming, broadband and fixed line telephone services to residential customers on our cable network, the provision of broadband and fixed line telephone services to residential customers outside of our cable network, and the provision of mobile telephony and mobile broadband to residential customers.

Our Business segment comprises our operations carried out through Virgin Media Business which provides voice, data and internet solutions to businesses, public sector organizations and service providers in the U.K.

Segment contribution, which is operating income before network operating costs, corporate costs, depreciation, amortization, goodwill and intangible asset impairments and restructuring and other charges, is management’s measure of segment profit. Segment contribution excludes the impact of certain costs and expenses that are not directly attributable to the reporting segments, such as the costs of operating the network, corporate costs and depreciation and amortization. Restructuring and other charges, and goodwill and intangible asset impairments are excluded from segment contribution as management believes they are not characteristic of our underlying business operations. Assets are reviewed on a consolidated basis and are not allocated to segments for management reporting since the primary asset of the business is the cable network infrastructure, which is shared by our Consumer and Business segments.

Segment information for the three and nine month periods ended September 30, 2011 and 2010 was as follows (in millions):

 

     Three months  ended
September 30, 2011
     Three months ended
September 30, 2010
 
     Consumer      Business      Total      Consumer      Business      Total  

Revenue

   £ 846.0       £ 154.0       £ 1,000.0       £ 826.2       £ 152.2       £ 978.4   

Segment contribution

   £ 493.5       £ 90.1       £ 583.6       £ 500.9       £ 89.1       £ 590.0   
     Nine months  ended
September 30, 2011
     Nine months  ended
September 30, 2010
 
     Consumer      Business      Total      Consumer      Business      Total  

Revenue

   £ 2,503.8       £ 464.3       £ 2,968.1       £ 2,427.2       £ 444.8       £ 2,872.0   

Segment contribution

   £ 1,473.0       £ 274.5       £ 1,747.5       £ 1,470.8       £ 252.8       £ 1,723.6   

 

27


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 12—Industry Segments (continued)

 

The reconciliation of total segment contribution to consolidated operating income and net income (loss) is as follows (in millions):

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2011     2010     2011     2010  

Total segment contribution

   £ 583.6      £ 590.0      £ 1,747.5      £ 1,723.6   

Other operating and corporate costs

     185.3        202.7        581.0        617.0   

Restructuring and other charges

     6.2        4.5        7.7        11.4   

Depreciation

     235.6        244.4        694.6        733.4   

Amortization

     28.1        36.7        90.3        110.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     128.4        101.7        373.9        250.9   

Other income (expense)

        

Interest expense

     (107.6     (118.2     (335.3     (359.1

Loss on extinguishment of debt

     (18.3     0.0        (47.2     (70.0

Share of income from equity investments

     3.6        6.7        18.6        21.4   

Loss on disposal of equity investments

     (8.0     0.0        (8.0     0.0   

Loss on derivative instruments

     (59.3     (24.7     (40.5     (52.9

Foreign currency (losses) gains

     (13.0     43.6        0.8        (33.9

Interest income and other, net

     0.5        0.8        83.8        4.7   

Income tax (expense) benefit

     (0.1     17.7        (17.2     34.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (73.8     27.6        28.9        (204.2

Income (loss) from discontinued operations, net of tax

     0.0        14.2        (1.2     25.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   £ (73.8   £ 41.8      £ 27.7      £ (178.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes

 

We present the following condensed consolidating financial information as of September 30, 2011 and December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010 as required by Rule 3-10(d) of Regulation S-X.

Virgin Media Finance is the issuer of the following senior notes:

 

   

$1,350 million aggregate principal amount of 9.50% senior notes due 2016

 

   

€180 million aggregate principal amount of 9.50% senior notes due 2016

 

   

$600 million aggregate principal amount of 8.375% senior notes due 2019

 

   

£350 million aggregate principal amount of 8.875% senior notes due 2019

Virgin Media Inc. and certain of its subsidiaries, namely Virgin Media Group LLC, Virgin Media Holdings Inc., Virgin Media (UK) Group, Inc. and Virgin Media Communications Limited, have guaranteed the senior notes on a senior basis. Each of Virgin Media Investment Holdings Limited, or VMIH, and Virgin Media Investments Limited, or VMIL, are conditional guarantors and have guaranteed the senior notes on a senior subordinated basis.

 

     September 30, 2011  

Balance sheets

   Company      Virgin
Media
Finance
    Other
guarantors
    VMIH      VMIL      All  other
subsidiaries
    Adjustments     Total  
     (in millions)  

Cash and cash equivalents

   £ 11.1       £ 1.9      £ 0.4      £ 0.3       £ 0.0       £ 424.6      £ 0.0      £ 438.3   

Restricted cash

     0.0         0.0        0.0        0.0         0.0         2.2        0.0        2.2   

Other current assets

     15.5         0.0        0.0        13.7         0.0         526.8        0.0        556.0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     26.6         1.9        0.4        14.0         0.0         953.6        0.0        996.5   

Fixed assets, net

     0.0         0.0        0.0        0.0         0.0         4,612.6        0.0        4,612.6   

Goodwill and intangible assets, net

     0.0         0.0        (15.0     0.0         0.0         2,060.6        0.0        2,045.6   

Investments in, and loans to, parent and subsidiary companies

     1,202.1         288.9        (901.1     1,457.1         2,150.9         (3,008.7     (1,189.2     0.0   

Other assets, net

     164.3         0.0        0.0        205.3         0.0         109.1        0.0        478.7   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   £ 1,393.0       £ 290.8      £ (915.7   £ 1,676.4       £ 2,150.9       £ 4,727.2      £ (1,189.2   £ 8,133.4   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities

   £ 19.4       £ 42.7      £ 7.9      £ 135.7       £ 0.0       £ 2,167.9      £ (1,038.9   £ 1,334.7   

Long-term debt, net of current portion

     545.5         1,720.1        0.0        0.0         0.0         3,452.3        0.0        5,717.9   

Other long-term liabilities

     0.0         0.0        1.1        44.6         0.0         207.0        0.0        252.7   

Shareholders’ equity (deficit)

     828.1         (1,472.0     (924.7     1,496.1         2,150.9         (1,100.0     (150.3     828.1   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity (deficit)

   £ 1,393.0       £ 290.8      £ (915.7   £ 1,676.4       £ 2,150.9       £ 4,727.2      £ (1,189.2   £ 8,133.4   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     December 31, 2010  

Balance sheets

   Company      Virgin
Media
Finance
    Other
guarantors
    VMIH      VMIL      All  other
subsidiaries
    Adjustments     Total  
     (in millions)  

Cash and cash equivalents

   £ 101.3       £ 1.8      £ 0.4      £ 4.5       £ 0.0       £ 371.5      £ 0.0      £ 479.5   

Restricted cash

     0.0         0.0        0.0        0.0         0.0         2.2        0.0        2.2   

Other current assets

     0.4         0.0        0.0        8.7         0.0         538.3        0.0        547.4   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     101.7         1.8        0.4        13.2         0.0         912.0        0.0        1,029.1   

Fixed assets, net

     0.0         0.0        0.0        0.0         0.0         4,763.1        0.0        4,763.1   

Goodwill and intangible assets, net

     0.0         0.0        (15.0     0.0         0.0         2,150.9        0.0        2,135.9   

Investments in, and loans to, parent and subsidiary companies

     1,506.5         586.0        (988.0     1,288.9         1,764.4         (3,790.6     (8.0     359.2   

Other assets, net

     201.1         0.0        0.0        275.8         0.0         69.0        0.0        545.9   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   £ 1,809.3       £ 587.8      £ (1,002.6   £ 1,577.9       £ 1,764.4       £ 4,104.4      £ (8.0   £ 8,833.2   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities

   £ 9.3       £ 64.2      £ 17.2      £ 127.1       £ 0.0       £ 2,091.2      £ (811.8   £ 1,497.2   

Long-term debt, net of current portion

     535.4         2,068.1        0.0        0.0         0.0         3,194.8        0.0        5,798.3   

Other long-term liabilities

     0.0         0.0        (0.1     42.5         0.0         230.7        0.0        273.1   

Shareholders’ equity (deficit)

     1,264.6         (1,544.5     (1,019.7     1,408.3         1,764.4         (1,412.3     803.8        1,264.6   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity (deficit)

   £ 1,809.3       £ 587.8      £ (1,002.6   £ 1,577.9       £ 1,764.4       £ 4,104.4      £ (8.0   £ 8,833.2   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     Three months ended September 30, 2011  

Statements of operations

   Company     Virgin
Media
Finance
    Other
guarantors
    VMIH     VMIL      All other
subsidiaries
    Adjustments     Total  
     (in millions)  

Revenue

   £ 0.0      £ 0.0      £ 0.0      £ 0.0      £ 0.0       £ 1,000.0      £ 0.0      £ 1,000.0   

Operating costs

     0.0        0.0        0.0        0.0        0.0         (401.7     0.0        (401.7

Selling, general and administrative expenses

     (1.2     0.0        0.0        0.0        0.0         (198.8     0.0        (200.0

Restructuring and other charges

     0.0        0.0        0.0        0.0        0.0         (6.2     0.0        (6.2

Depreciation and amortization

     0.0        0.0        0.0        0.0        0.0         (263.7     0.0        (263.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1.2     0.0        0.0        0.0        0.0         129.6        0.0        128.4   

Interest expense

     (15.6     (45.4     (7.6     (90.5     0.0         (263.4     314.9        (107.6

Loss on extinguishment of debt

     0.0        (15.5     0.0        18.1        0.0         (20.9     0.0        (18.3

Share of income from equity investments

     0.0        0.0        0.0        0.0        0.0         3.6        0.0        3.6   

Loss on disposal of equity investments

     0.0        0.0        0.0        0.0        0.0         (8.0     0.0        (8.0

Loss on derivative instruments

     (53.6     0.0        0.0        (3.9     0.0         (1.8     0.0        (59.3

Foreign currency (losses) gains

     0.0        1.9        (5.6     9.2        0.0         (18.5     0.0        (13.0

Interest income and other, net

     0.2        44.9        8.5        45.1        0.0         216.7        (314.9     0.5   

Income tax (expense) benefit

     0.0        0.0        (1.2     0.0        0.0         1.1        0.0        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (70.2     (14.1     (5.9     (22.0     0.0         38.4        0.0        (73.8

Equity in net (loss) income of subsidiaries

     (3.6     9.6        2.4        31.7        134.9         0.0        (175.0     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net (loss) income

   £ (73.8   £ (4.5   £ (3.5   £ 9.7      £ 134.9       £ 38.4      £ (175.0   £ (73.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     Nine months ended September 30, 2011  

Statements of operations

   Company     Virgin
Media
Finance
    Other
guarantors
    VMIH     VMIL      All other
subsidiaries
    Adjustments     Total  
     (in millions)  

Revenue

   £ 0.0      £ 0.0      £ 0.0      £ 0.0      £ 0.0       £ 2,968.1      £ 0.0      £ 2,968.1   

Operating costs

     0.0        0.0        0.0        0.0        0.0         (1,202.7     0.0        (1,202.7

Selling, general and administrative expenses

     (9.4     0.0        0.0        0.0        0.0         (589.5     0.0        (598.9

Restructuring and other charges

     0.0        0.0        0.0        0.0        0.0         (7.7     0.0        (7.7

Depreciation and amortization

     0.0        0.0        0.0        0.0        0.0         (784.9     0.0        (784.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (9.4     0.0        0.0        0.0        0.0         383.3        0.0        373.9   

Interest expense

     (44.9     (142.4     (29.1     (288.1     0.0         (785.1     954.3        (335.3

Loss on extinguishment of debt

     0.0        (15.5     0.0        0.0        0.0         (31.7     0.0        (47.2

Share of income from equity investments

     0.0        0.0        0.0        0.0        0.0         18.6        0.0        18.6   

Loss on disposal of equity investments

     0.0        0.0        0.0        0.0        0.0         (8.0     0.0        (8.0

Loss on derivative instruments

     (38.8     0.0        0.0        0.0        0.0         (1.7     0.0        (40.5

Foreign currency gains (losses)

     (0.3     0.0        0.7        0.0        0.0         0.4        0.0        0.8   

Interest income and other, net

     3.6        142.5        32.1        129.6        0.0         730.3        (954.3     83.8   

Income tax (expense) benefit

     0.0        0.0        (1.2     (23.3     0.0         7.3        0.0        (17.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (89.8     (15.4     2.5        (181.8     0.0         313.4        0.0        28.9   

Loss on discontinued operations, net of tax

     0.0        0.0        0.0        0.0        0.0         (1.2     0.0        (1.2

Equity in net income of subsidiaries

     117.5        110.0        115.1        291.8        408.7         0.0        (1,043.1     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   £ 27.7      £ 94.6      £ 117.6      £ 110.0      £ 408.7       £ 312.2      £ (1,043.1   £ 27.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     Three months ended September 30, 2010  

Statements of operations

   Company     Virgin
Media
Finance
    Other
guarantors
    VMIH     VMIL      All other
subsidiaries
    Adjustments     Total  
     (in millions)  

Revenue

   £ 0.0      £ 0.0      £ 0.0      £ 0.0      £ 0.0       £ 978.4      £ 0.0      £ 978.4   

Operating costs

     0.0        0.0        0.0        0.0        0.0         (395.6     0.0        (395.6

Selling, general and administrative expenses

     (5.7     0.0        0.0        0.0        0.0         (189.8     0.0        (195.5

Restructuring and other charges

     0.0        0.0        0.0        0.0        0.0         (4.5     0.0        (4.5

Depreciation and amortization

     0.0        0.0        0.0        0.0        0.0         (281.1     0.0        (281.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5.7     0.0        0.0        0.0        0.0         107.4        0.0        101.7   

Interest expense

     (15.2     (51.6     (25.2     (106.3     0.0         (249.2     329.3        (118.2

Share of income from equity investments

     0.0        0.0        0.0        0.0        0.0         6.7        0.0        6.7   

Loss on derivative instruments

     0.0        0.0        0.0        (24.7     0.0         0.0        0.0        (24.7

Foreign currency gains

     0.5        0.0        0.0        18.6        0.0         24.5        0.0        43.6   

Interest income and other, net

     9.1        51.3        26.4        37.2        0.0         206.1        (329.3     0.8   

Income tax benefit

     0.0        0.0        0.5        0.0        0.0         17.2        0.0        17.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (11.3     (0.3     1.7        (75.2     0.0         112.7        0.0        27.6   

Income on discontinued operations, net of tax

     0.0        0.0        0.0        0.0        0.0         14.2        0.0        14.2   

Equity in net income (loss) of subsidiaries

     53.1        45.2        51.8        120.0        119.3         0.0        (389.4     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   £ 41.8      £ 44.9      £ 53.5      £ 44.8      £ 119.3       £ 126.9      £ (389.4   £ 41.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     Nine months ended September 30, 2010  

Statements of operations

   Company     Virgin
Media
Finance
    Other
guarantors
    VMIH     VMIL      All other
subsidiaries
    Adjustments     Total  
     (in millions)  

Revenue

   £ 0.0      £ 0.0      £ 0.0      £ 0.0      £ 0.0       £ 2,872.0      £ 0.0      £ 2,872.0   

Operating costs

     0.0        0.0        0.0        0.0        0.0         (1,166.5     0.0        (1,166.5

Selling, general and administrative expenses

     (15.7     0.0        0.0        0.0        0.0         (583.2     0.0        (598.9

Restructuring and other charges

     0.0        0.0        0.0        0.0        0.0         (11.4     0.0        (11.4

Depreciation and amortization

     0.0        0.0        0.0        0.0        0.0         (844.3     0.0        (844.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (15.7     0.0        0.0        0.0        0.0         266.6        0.0        250.9   

Interest expense

     (45.0     (166.3     (82.7     (321.7     0.0         (688.5     945.1        (359.1

Loss on extinguishment of debt

     0.0        0.0        0.0        (50.6     0.0         (19.4     0.0        (70.0

Share of income from equity investments

     0.0        0.0        0.0        0.0        0.0         21.4        0.0        21.4   

Loss on derivative instruments

     0.0        0.0        0.0        (50.9     0.0         (2.0     0.0        (52.9

Foreign currency (losses) gains

     1.1        (0.3     0.1        (19.1     0.0         (15.7     0.0        (33.9

Interest income and other, net

     30.4        164.3        85.6        102.3        0.0         567.2        (945.1     4.7   

Income tax benefit

     0.0        0.0        0.2        0.0        0.0         34.5        0.0        34.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (29.2     (2.3     3.2        (340.0     0.0         164.1        0.0        (204.2

Income on discontinued operations, net of tax

     0.0        0.0        0.0        0.0        0.0         25.7        0.0        25.7   

Equity in net (loss) income of subsidiaries

     (149.3     (167.9     (152.3     171.9        170.4         0.0        127.2        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net (loss) income

   £ (178.5   £ (170.2   £ (149.1   £ (168.1   £ 170.4       £ 189.8      £ 127.2      £ (178.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

Note 13—Condensed Consolidating Financial Information—Senior Notes (continued)

 

     Nine months ended September 30, 2011  

Statements of cash flows

   Company     Virgin
Media
Finance
    Other
guarantors
    VMIH     VMIL      All
other
subsidiaries
    Adjustments      Total  
     (in millions)  

Net cash provided by (used in) operating activities

   £ (20.2   £ (16.7   £ 0.3      £ 44.9      £ 0.0       £ 846.4      £ 0.0       £ 854.7   

Investing activities:

                  

Purchase of fixed and intangible assets

     0.0        0.0        0.0        0.0        0.0         (479.3     0.0         (479.3

Proceeds from sale of fixed assets

     0.0        0.0        0.0        0.0        0.0         1.5        0.0         1.5   

Principal repayments on loans to equity investments

     0.0        0.0        0.0        0.0        0.0         108.2        0.0         108.2   

Principal drawdowns (repayments) on loans to group companies

     388.7        357.2        0.1        (104.2     0.0         (641.8     0.0         0.0   

Acquisitions, net of cash

     0.0        0.0        0.0        0.0        0.0         (14.6     0.0         (14.6

Disposal of equity investments, net

     0.0        0.0        0.0        0.0        0.0         241.0        0.0         241.0   

Other

     0.0        0.0        0.0        0.0        0.0         2.5        0.0         2.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by investing activities

     388.7        357.2        0.1        (104.2     0.0         (782.5     0.0         (140.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Financing activities:

                  

New borrowings, net of financing fees

     0.0        0.0        0.0        (10.4     0.0         987.6        0.0         977.2   

Common stock repurchases

     (447.0     0.0        0.0        0.0        0.0         0.0        0.0         (447.0

Proceeds from employee stock option exercises

     14.4        0.0        0.0        0.0        0.0         0.0        0.0         14.4   

Principal payments on long term debt and capital leases

     0.0        (340.4     0.0        0.0        0.0         (988.0     0.0         (1,328.4

Proceeds from settlement of cross currency swaps

     0.0        0.0        0.0        65.5        0.0         0.0        0.0         65.5   

Dividends paid

     (23.7     0.0        0.0        0.0        0.0         0.0        0.0         (23.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (456.3     (340.4     0.0        55.1        0.0         (0.4     0.0         (742.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cash flow from discontinued operations:

                  

Net cash used in operating activities

     0.0        0.0        0.0        0.0        0.0         (10.4     0.0         (10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash used in discontinued operations

     0.0        0.0        0.0        0.0        0.0         (10.4     0.0         (10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Effect of exchange rates on cash and cash equivalents

     (2.4     0.0        (0.4     0.0        0.0         0.0        0.0         (2.8

(Decrease) increase in cash and cash equivalents

     (90.2     0.1        0.0        (4.2     0.0         53.1        0.0         (41.2

Cash and cash equivalents at beginning of period

     101.3        1.8        0.4        4.5        0.0         371.5        0.0         479.5