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Virgin Media 10-K 2007

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

 

x

 

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

 

 

For the fiscal year ended December 31, 2006

 

 

or

o

 

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

 

 

For the transition period from                    to                   

 

Commission File No. 000-50886

VIRGIN MEDIA INC.
(Exact name of registrant as specified in its charter)

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED
(Additional Registrant)

Delaware
(State or other jurisdiction of
incorporation or organization)

 

59-3778247
(I.R.S. Employer Identification No.)

909 Third Avenue, Suite 2863 New York, New York
(Address of Principal Executive Office)

 

10022
(Zip Code)

(212) 906-8440

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

Series A Warrants to purchase shares of Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes
x   No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o   No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   o

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

Large accelerated filer   x      Accelerated filer   o      Non-accelerated filer   o

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

The aggregate market value of the registrant’s voting stock held by non-affiliates as of June 30, 2006 based on the closing price for the registrant’s common stock on the Nasdaq National Market on such date, was £6,606,720,611.

As of February 26, 2007, there were 323,940,887 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding, excluding shares of the registrant’s common stock issuable upon the exercise of Series A Warrants to purchase 25,769,060 shares of the registrant’s common stock and shares of restricted stock held in escrow.

The Additional Registrant meets the conditions set forth in the General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. See “Note Concerning VMIH” on page 4 in this Form 10-K.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes
x   No o

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2007 Annual Meeting of Stockholders are incorporated by reference into Part III.

 




VIRGIN MEDIA INC. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

 

 

Item 1.

 

Business

 

7

Item 1A.

 

Risk Factors

 

27

Item 1B.

 

Unresolved Staff Comments

 

39

Item 2.

 

Properties

 

39

Item 3.

 

Legal Proceedings

 

39

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

39

PART II

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

40

Item 6.

 

Selected Financial Data

 

42

Item 7.

 

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

 

45

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

71

Item 8.

 

Financial Statements and Supplementary Data

 

73

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

73

Item 9A.

 

Controls and Procedures

 

73

Item 9B.

 

Other Information

 

75

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

76

Item 11.

 

Executive Compensation

 

76

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

76

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

 

76

Item 14.

 

Principal Accountant Fees and Services

 

76

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

76

Index to Consolidated Financial Statements and Financial Statement Schedules

 

F-1

SIGNATURES

 

 

EXHIBIT INDEX

 

 

 

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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,” “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 ability to compete with a range of other communications and content providers;

·       the ability to control customer churn;

·       the effect of technological changes on our businesses;

·       the ability to use the Virgin name and logo;

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

·       possible losses in revenues due to systems failures;

·       the ability to provide attractive programming at a reasonable cost;

·       the reliance on single-source suppliers for some equipment, software and services and third party distributors of our mobile services;

·       the functionality or market acceptance of new products that we may introduce;

·       the failure to obtain and retain expected synergies from the merger of our legacy NTL and Telewest businesses and the acquisition of Virgin Mobile;

·       rates of success in executing, managing and integrating key acquisitions, including the merger with Telewest and the acquisition of Virgin Mobile;

·       the ability to achieve business plans for the combined company;

·       the ability to fund debt service obligations through operating cash flow;

·       the ability to obtain additional financing in the future and react to competitive and technological changes;

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

·       the extent to which our future earnings will be sufficient to cover our fixed charges.

These and other factors are discussed in more detail under “Risk Factors” and elsewhere in this Form 10-K. 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 Corporate Name Changes

We entered into a license agreement with Virgin Enterprises Limited under which we are licensed to use certain Virgin trademarks within the United Kingdom and the Republic of Ireland. As a result, in February 2007, we rebranded our consumer and a large part of our content businesses to “Virgin Media”. We also changed the name of our corporate parent from NTL Incorporated to Virgin Media Inc. and the corporate names of certain of our subsidiaries, including:

·       NTL Investment Holdings Limited, the principal borrower under our senior credit facility, to Virgin Media Investment Holdings Limited;

3




·       NTL Cable PLC, the issuer of our public bonds, to Virgin Media Finance PLC;

·       NTL Group Limited, a principal operating subsidiary, to Virgin Media Limited;

·       Flextech Television Limited, our content subsidiary, to Virgin Media Television Limited;

·       NTL Communications Limited to Virgin Media Communications Limited; and

·       NTL Holdings Inc. to Virgin Media Holdings Inc.

For the purposes of this annual report, the new names will be used where applicable. In this annual report, unless we have indicated otherwise, or the context otherwise requires, references to:

·       “Virgin Media,” “the Company,” “we,” “us,” “our” and similar terms refer to Virgin Media Inc. and its subsidiaries (which include Telewest Global, Inc., or Telewest, and its subsidiaries and Virgin Mobile and its subsidiaries);

·       “NTL” refers to NTL Incorporated and its subsidiaries as they existed prior to the name change to Virgin Media Inc. and prior to the merger with Telewest refers to Virgin Media Holdings Inc. (which was formerly known as NTL Incorporated before the merger); and

·       “Telewest” refers to Telewest Global, Inc. and its subsidiaries as they existed prior to the merger with NTL in March 2006.

Note Concerning VMIH

This annual report on Form 10-K (excepting financial statements responsive to Part IV, Item 15) covers both Virgin Media Inc. and Virgin Media Investment Holdings Limited (“VMIH’’), an English company with an address at 160 Great Portland Street, London, W1W 5QA, United Kingdom, that is a wholly-owned subsidiary of Virgin Media Finance plc and a wholly-owned indirect subsidiary of Virgin Media Inc. VMIH is not an accelerated filer. VMIH is one of the guarantors of Virgin Media Finance PLC’s 9.75% senior notes due 2014 (sterling denominated), 8.75% senior notes due 2014 (euro denominated), 8.75% senior notes due 2014 (U.S. dollar denominated), and 9.125% senior notes due 2016 (U.S. dollar denominated). VMIH’s guarantee of those notes is not deemed to be unconditional.

VMIH carries on the same business as Virgin Media Inc., and is the principal borrower under Virgin Media Inc.’s senior credit facility. In this annual report, unless the context otherwise requires, the terms “Virgin Media,” “the “Company,” “we,” “us,” “our” and similar terms refer to the consolidated business of Virgin Media Inc., including VMIH and its subsidiaries. Unless otherwise indicated, the discussion contained in this report applies to VMIH as well as Virgin Media Inc.

Note Concerning Financial Information and Currency of Financial Statements

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

Note Concerning Historical Structure of the Company

Virgin Media Inc. (formerly known as NTL Incorporated) is a Delaware corporation and is publicly traded on the Nasdaq National Market in the United States. Our historical structure is as follows:

NTL Incorporated was incorporated in 1993 as a Delaware corporation and continued as a publicly traded holding company until February 1999. From February 1999 until January 10, 2003, NTL was a wholly-owned subsidiary of NTL (Delaware), Inc., a Delaware corporation, referred to in this annual report as NTL Delaware, which was incorporated in February 1999 in order to effect a reorganization into

4




a holding company structure. The holding company structure was implemented to pursue opportunities outside of the United Kingdom, or the U.K., and Ireland, and was accomplished through a merger. NTL’s stockholders at the time became stockholders of the new holding company, NTL Delaware. The new holding company took the name NTL Incorporated until May 2000, when its name was changed back to NTL (Delaware), Inc.

In May 2000, another new holding company structure was implemented in connection with the acquisition of the residential assets of Cable & Wireless Communications plc, or CWC (the operations acquired from CWC are called ConsumerCo), and was accomplished similarly through a merger. The stockholders of NTL Delaware became stockholders of the new holding company, NTL Delaware became a subsidiary of the new holding company, and NTL remained a subsidiary of NTL Delaware. The new holding company then took the name NTL Incorporated, which remained its name until January 10, 2003, at which time its name was changed to NTL Europe, Inc., referred to in this annual report as NTL Europe. On February 21, 2001, NTL Europe contributed the assets of ConsumerCo to NTL.

On January 10, 2003, NTL emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the plan of reorganization, which we refer to as the Plan, NTL’s former parent, NTL Europe, and its subsidiaries and affiliates were split into two separate groups, with NTL and NTL Europe each emerging as independent public companies. We were renamed NTL Incorporated and became the holding company for the former NTL group’s principal U.K. and Ireland assets. NTL Europe became the holding company for the former NTL group’s continental European and various other assets. All of the outstanding securities of NTL’s former parent and some of its subsidiaries, including NTL, were cancelled. NTL issued shares of its common stock and Series A warrants, and NTL Europe issued shares of its common stock and preferred stock, to various former creditors and stockholders. As a result, NTL is no longer affiliated with NTL Europe. NTL Europe has since changed its name to PTV Inc., or PTV.

On March 3, 2006, NTL merged into a subsidiary of Telewest, which changed its name to NTL Incorporated. Because this transaction is accounted for as a reverse acquisition, the financial statements included in this Form 10-K for the period through March 3, 2006 are those of NTL, which is now known as Virgin Media Holdings Inc. For the period since March 3, 2006 our financial statements reflect the reverse acquisition of Telewest. See note 1 to the consolidated financial statements of Virgin Media Inc.

On July 4, 2006, we acquired 100% of the outstanding shares and options of Virgin Mobile Holdings (UK) plc, or Virgin Mobile, through a U.K. Scheme of Arrangement.

On February 6, 2007, we changed the name of our corporate parent from NTL Incorporated to Virgin Media Inc., and the names of certain of our subsidiaries. See “Note Concerning Corporate Name Changes”.

5




Summary Corporate Structure

The following chart shows the corporate structure of Virgin Media through which our primary operations are conducted. This is a condensed chart and it does not show all of our operating and other intermediate companies.

GRAPHIC


(1)             Virgin Media Inc. indirectly owns other non-material subsidiaries, which are not shown here in this chart.

(2)             Issuer of our 8.75% U.S. dollar senior notes due 2014, 9.75% Sterling senior notes due 2014, 8.75% Euro senior notes due 2014 and 9.125% U.S. dollar senior notes due 2016.

(3)             Substantially all of the assets of Virgin Media Investment Holdings Limited and its subsidiaries secure our senior credit facility. Virgin Media Investment Holdings Limited is the principal borrower under our senior credit facility.

(4)             Virgin Media Limited is one of our principal operating companies, although significant portions of our operations are conducted through its subsidiaries.

(5)             Virgin Mobile Holdings (UK) Limited was acquired by us pursuant to a U.K. Scheme of Arrangement on July 4, 2006.

6




PART I

Item 1. Business

Overview

Virgin Media Inc. is a leading U.K. entertainment and communications business providing the first “quad-play” offering of television, broadband, fixed line telephone and mobile telephone services in the United Kingdom. We are the U.K.’s most popular residential broadband and pay-as-you-go mobile provider and the second largest provider in the U.K. of pay television and fixed line telephone services.

Virgin Media Television, or Virgin Media TV, and ntl:Telewest Business also operate under the Virgin Media umbrella. Virgin Media TV provides a broad range of programming through its eleven wholly-owned channels, such as LivingTV and Bravo; through UKTV, its joint ventures with BBC Worldwide; and through the portfolio of retail television channels operated by sit-up tv. ntl:Telewest Business provides a complete portfolio of voice, data and internet solutions to leading businesses, public sector organizations and service providers in the U.K.

We presently manage our business through three reportable segments:

·       Cable (83.5% of our 2006 revenue): our cable segment includes the distribution of television programming over our cable network and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations, both on our cable network and to a lesser extent off our network;

·       Mobile (8.1% of our 2006 revenue): our mobile segment includes the provision of mobile telephone services under the name Virgin Mobile to consumers over cellular networks owned by T-Mobile; and

·       Content (8.4% of our 2006 revenue): our content segment includes the operations of our U.K. television channels, such as LivingTV and Bravo, and sit-up’s portfolio of retail television channels. Although not included in our content segment revenue, our content team also oversees the UKTV television channels through our joint ventures with BBC Worldwide.

For financial and other information on our segments, refer to note 20 to Virgin Media’s consolidated financial statements included elsewhere in this annual report.

On February 6, 2007, we changed our name from NTL Incorporated to Virgin Media Inc. as part of our exciting rebrand to Virgin Media. Virgin is one of the most recognized consumer brands in the world and gives us a prominent profile in a crowded communications marketplace. The strong heritage and reputation of the Virgin brand is a powerful competitive advantage, and our distinctive approach to advertising, packaging and marketing will differentiate us from our competitors.

We operate in an increasingly diverse and challenging entertainment and communications marketplace. To meet this challenge, during 2006 we took several transformative steps, including:

·       Combining NTL’s cable business with the cable business of Telewest by acquiring Telewest in a reverse acquisition in March of 2006:

       the merger combined the two largest U.K. cable operators, with the resulting company becoming the U.K.’s largest provider of residential broadband and triple-play services of television, broadband and fixed line telephone;

       the total acquisition price was £3.5 billion, including £2.3 billion in cash, common stock valued at £1.1 billion and stock options and transaction costs; and

7




       the transaction was structured as a reverse acquisition whereby Telewest Global, Inc. acquired NTL Incorporated, and then subsequently changed its name to NTL Incorporated (and in 2007, we changed the name of NTL Incorporated to Virgin Media Inc.);

·       Adding a mobile phone offering to our services by acquiring Virgin Mobile Holdings (UK) plc, or Virgin Mobile, in July of 2006:

       Virgin Mobile is the U.K.’s leading mobile virtual network operator with approximately 4.5 million mobile phone customers;

       the transaction permitted “quad-play” bundling, adding mobile phone to our triple-play bundling of television, broadband and fixed line telephone services;

       Virgin Mobile has award winning customer service; and

       the total purchase price was £952.2 million, including common stock valued at £518.8 million, cash of £418.2 million and transaction costs.

·       Licensing the name “Virgin Media” from Virgin Enterprises Limited pursuant to a trademark license agreement, subject to a royalty, which:

       allowed our 2007 rebranding of the corporate parent to Virgin Media Inc. and a rebranding of our consumer and a large part of our content businesses;

       permits national branding with an exciting new logo, and facilitates national advertising campaigns; and

       reinvigorates our company culture.

We are incorporated in the State of Delaware, United States. Our principal executive offices are located at 909 Third Avenue, Suite 2863, New York, New York 10022, United States, and our telephone number is (212) 906-8440. Our U.K. headquarters are located outside of London, England in Hook, Hampshire, United Kingdom. Our website is www.virginmedia.com and the investor relations section of our website can be accessed under the heading “About Virgin Media—Investors Information” where we make available free of charge annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this annual report.

Our Business

Cable Segment

In our Cable segment, we provide our services to residential consumers and business customers.

Consumer

We provide television, internet (broadband and dial-up) and fixed line telephone services under the Virgin Media brand to residential customers in the U.K. Our services are distributed principally via our wholly-owned, cabled local access communications network and are available to an addressable market of approximately 12.5 million homes. The network covers parts of many major metropolitan areas in England, Wales, Scotland and Northern Ireland. In addition, we provide broadband and telephone services to residential customers outside of our network via access to other telecommunications networks, which we refer to as “off-net”.

8




Our wholly-owned, local access communications network provides us with several competitive advantages in our addressable markets:

·       it provides real two-way interactivity with residential customers who are connected to the network;

·       it enables us to provide true “triple-play” bundled services of television, broadband, and fixed line telephone services to residential customers in our franchise areas without relying on another service provider or network; and

·       our twin cable, consisting of both coaxial and twisted copper pair elements, provides us with the flexibility to deliver broadband and high-speed services over either coaxial network or copper. Currently we provide our services over coaxial cable, which allows us to provide a superior broadband experience to our customers. Our principal competitors rely solely on the inferior copper pair technology over which broadband speeds can significantly diminish with distance from the local exchange.

In contrast:

·       direct to home satellite service providers do not have the capacity to offer two-way interactivity except by adding a phone line from another service provider or other cable facility; and

·       telephony service providers today have only a limited capacity to provide video over existing digital subscriber lines, or DSL, technology without significant capital investment in their network.

Multi-Service Bundles

Virgin Media was the first U.K. provider of a residential “triple-play” offering of television, broadband and fixed line telephone services. Our packaging and pricing are designed to encourage residential customers to purchase multiple services from us and we frequently offer discounts to customers taking two or more products from our portfolio. As of December 31, 2006, more than 75% of our residential on-net customers received multiple services from us and approximately 41% of our on-net customers were “triple-play’’.

With our acquisition of Virgin Mobile in July 2006, Virgin Media is now able to offer the U.K.’s first “quad-play” of television, broadband, fixed line telephone and mobile telephone services to residential customers. We have already introduced our first “quad-play” bundles into the market, and expect to drive both mobile and cable penetration through the two customer bases by applying our past experience of cross selling products. See “Mobile Segment” below.

As part of our rebrand, we renamed our product offerings and bundles so they are easy to understand. For each of our products, we have a range of packages and tariffs for customers to choose from and have labeled them as Medium (M), Large (L) and Extra Large (XL). For example, we currently offer a 2Mb broadband service as Medium, a 4Mb service as Large and a 10Mb service as Extra Large.

Cable Television

We offer a wide range of digital, or DTV, and analog, or ATV, television services. As of December 31, 2006, we provided cable television services to approximately 3.3 million residential customers, of which approximately 3.0 million received our DTV service and approximately 0.3 million received our ATV service.

Our DTV service includes access to over 130 channels, advanced interactive features, and a range of premium and pay-per-view services. Our ATV service packages offer up to 60 channels, including premium services. In addition to offering the basic and premium pay TV channels, we also offer one of the most comprehensive Video on Demand, or VoD, services in the U.K. to our DTV customers called Virgin

9




Media “On Demand”. Our VoD service includes a large range of premium movies, music videos and TV programs and series on demand. Sport and special pay-per-view events are also provided via our live event service. See “Video on Demand” below.

Our network technology enables us to deliver a significant range of digital interactive services over an ‘always on’ broadband connection from a customer’s home to the network. Examples of interactive services provided include games, television email and access to news, entertainment and information services from an on-screen menu. Interactive services also include enhanced television functionality utilizing the “red button” applications from the BBC and other commercial broadcasters. “Red button” functionality in the U.K. permits television viewers to press a red button on their remote control handset to receive additional interactive services including multiple broadcasts. For example, in a Wimbledon or U.S. Open tennis broadcast, a customer can press the red button and choose which match to watch.

Video on Demand

In 2006, we completed the roll out of our unique cable-only VoD service to our DTV serviced areas. As of December 31, 2006, over 3.0 million existing customers were able to receive the VoD service.

Virgin Media “On Demand” is a significant enhancement to the existing DTV service, offering viewers’ choice over and above scheduled programming without any requirement for new equipment, installation or additional subscription. The VoD service provides access to thousands of hours of additional entertainment for all our DTV customers. It appears within the existing electronic programming guide, and can be accessed and viewed at any time via the remote control. The service offers DVD-style features including freeze frame, fast-forward and rewind. These features provide a customer with full control over the content and timing of their television viewing.

There are three primary types of content available within Virgin Media On Demand, a portion of which is refreshed on a daily basis. A selection of content is available to watch for free to all DTV customers irrespective of package size. This is primarily focused within our ‘catch-up’ TV service which offers a selection of more than 70 hours of top broadcast TV shows from the previous seven days for no additional charge. Additionally, all DTV customers have access to pay-per-transaction content including over 1,000 pay per track music videos and 600 current and library movies provided by ‘FilmFlex’. New movies within this library are available on VoD up to nine months before they appear on scheduled TV movie channels. Pay-per-transaction programs are available for 24 hours after purchase and can be watched as many times as a customer wishes during that period for only one single charge. Finally, DTV customers that subscribe to our Size XL Virgin TV package have additional access to a subscription VoD, or SVoD, package which includes premium TV shows and music videos, all included within the price of their monthly subscription.

We have recently launched an innovative new kind of television channel called “Virgin Central”, which combines the simplicity of a traditional channel with the choice and control of next generation TV-on-demand technology. The channel hosts a continuously refreshing showcase of blockbuster entertainment around the clock. By pressing one button and using a simple on-screen guide, viewers have instant access to different episodes of the show they select. They can then stop, rewind and pause - just like using a DVD player. Virgin Central includes free access to hit shows like The OC, Nip/Tuck, Little Britain, Criminal Minds, Grey’s Anatomy, Spooks and West Wing. The content is updated regularly and, unlike a traditional TV channel, subscribers do not need to wait for scheduled start times.

Digital Video Recorders and High Definition Television

We also offer one of the most advanced fully-supported digital video recorders, or DVRs, for a premium monthly rental option. The Virgin Media DVR box, which is called the “V+ Box”,  is available to our entire DTV customer base. The V+ Box has 160 Gigabytes of storage space (up to 80 hours of

10




broadcast TV), is high definition, or HD, enabled and has three tuners, allowing viewers to record two programs while watching a third. V+ Box customers that also have an HD compatible television can access our HD on demand content. Digital video recorders are also known as personal video recorders, or PVRs, in the United Kingdom.

Broadband Internet

We deliver high-speed broadband and dial-up internet access to customers within reach of our access network by direct connection to our network under the brand name “Virgin Broadband”. We offer broadband services at a selection of download speeds: 2Mb for Size M customers, 4Mb for Size L customers and 10Mb for Size XL customers, which we expect to increase to 20Mb in June 2007. All services offer unlimited usage and PC security software. Premium broadband services (which are free for Size L and XL customers) include advanced security features such as anti-spyware and premium broadband content. Leveraging the technical capability of our network, we are also in the process of trialing a 50Mb broadband service, which will more than double the fastest speed available from our DSL competitors. As of December 31, 2006, we provided broadband service to approximately 3.1 million customers on our cable network.

In February 2007, we won the Best Consumer ISP award at the Internet Service Provider Association Awards (ISPAs) for providing the most outstanding services for consumers.

Through our wholly-owned internet service provider, or ISP, which formerly operated separately under the Virgin.net brand, we provide broadband and dial-up internet services to residential customers who live inside or outside our service areas. Various price and feature packages are available including broadband ranging from 512Kb to 8Mb, and metered and unmetered dial-up. As of December 31, 2006, we had approximately 479,000 residential customers including approximately 261,000 broadband customers.

In 2007, we plan to aggressively roll-out our off-net strategy to leverage the Virgin Media brand nationally by extending it into non-cable areas. We intend to select a wholesale local loop unbundling provider, which will enable us to launch new “quad-play” or other bundled product propositions outside of our cable network by the end of 2007 with only modest capital investment. In addition, we plan to launch a Virgin Media branded multi-channel digital terrestrial television, or DTT, service that we will bundle with our off-net telephone, broadband and mobile products. We intend to begin offering an internet protocol television, or IPTV, service, including pay broadcast channels and VoD, to customers outside of our cable areas in 2008.

Fixed Line Telephone

We provide local, national and international telephone services to our residential customers who are within reach of our access network by direct connection to our network under the brand name “Virgin Phone”. We enhance our basic telephone service by offering additional services, such as call waiting, call barring (which prevents unauthorized outgoing calls), call diversion (call forwarding), three-way calling, advanced voicemail, caller line identification and fully itemized monthly billing. We also provide national and international directory enquiry services.

In addition to a core line rental fee, we offer Size M, L and XL variants of Virgin Phone as alternatives to straight usage-based billing. These packages include “Talk Plans” that enable customers to make unlimited local and national calls for a fixed monthly fee in addition to the standard line rental. As of December 31, 2006, we provided telephone services to approximately 4.1 million residential customers.

We also provide phone service via BT’s local access network to customers outside of our network. As of December 31, 2006, we provided off-net telephone services to approximately 38,000 customers.

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Sales and Marketing

We use a variety of sales channels to sell our services to residential customers, including telesales, online and retail channels. Telesales has been and will continue to be the single largest channel for Consumer product sales. We expect, however, growth in the proportion of sales coming from online and retail channels.

Prior to the acquisition of Virgin Mobile, the Consumer business retail reach was limited to concessions and third party retail channels. In 2007, Virgin Media will leverage Virgin Mobile’s retail experience to launch a series of Virgin Media-branded stores. Virgin Mobile concessions within over 100 Virgin Megastores in the U.K. will also be rebranded Virgin Media and will offer a retail point of sale for Virgin TV, Virgin Broadband and Virgin Phone services alongside Virgin Mobile.

These sales channels are supported by direct marketing initiatives and national and regional television and press advertising. We use our residential customer database to identify the profiles of our customers so that we can design offers to match the needs of our customers. As Virgin Media, we will increase the proportion of our marketing budget spent on marketing as we have the scale and reach as a combined company to justify larger television and radio campaigns. Our offers will encourage customers to purchase new services and upgrade their existing services.

Customer Service

We handle approximately 38 million customer service calls per year, and we service those calls through a combination of in-house call centers and outsource partners. Our in-house call centers are located in the U.K. in Bellshill (Scotland), Manchester, Sheffield and Dudley (England), where we employ approximately 2,300 call center staff.  The call centers have been “virtualized” to allow incoming calls to be routed to any of the four locations, allowing us to optimize call management.

Our outsource call center partners are paid on a pence per minute basis, and are tied directly to agreed service level targets being achieved. Through our outsource partners, we have four more call centers which are also virtualized to optimize call management. Two centers are located in the U.K. in Liverpool and Swansea, and two are located in India in Delhi and Pune.

Business

ntl:Telewest Business focuses on delivering the communications requirements of U.K. public and private sector organizations, as well as those of other service providers. With the extended network reach enabled by the merger of NTL and Telewest, a wide portfolio of voice and data products can now be delivered across the U.K.

While the Consumer division rebrands as Virgin Media, ntl:Telewest Business will continue to use the ntl:Telewest Business brand. Over the past 15 years, we have built significant brand equity through our strong relationships and sector-specific expertise.

Sales Channels

Our Business division sales channels are organized to address three distinct markets - business markets, the public sector and service providers (formerly referred to as wholesale).

·       Business Markets:   This sales channel focuses on the requirements of the U.K. private sector, from small businesses to large, national corporations. While growth has been predominantly delivered by managed services and wide area networks, significant revenues are still derived from traditional voice solutions. The business markets sales channel is segmented by size, with small and medium businesses supported by centrally located teams and larger organizations having regionally located

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account and service managers. Our proximity to businesses is a key differentiator in the U.K. market and the benefits of this strategy are reflected in the long-term relationships held with many of our customers.

·       Public Sector:   This sales channel is divided into vertical segments, including local and central government, education, health and emergency services. This meets the requirement for sector-specific expertise where an understanding of the drivers and procurement processes of publicly funded organizations is needed to enable the efficient deployment of communications solutions. Our deep network coverage benefits regionally-oriented public sector organizations, such as health authorities, who require the deployment of managed voice and data solutions within a local or metropolitan area.

·       Service Provider:   This sales channel is also divided into vertical segments, including fixed and mobile network operators and ISPs, to reflect the different network requirements of service providers. This channel provides predominantly data connectivity to other network operators. Strong market demand by local loop unbundlers and the deployment of 3G mobile networks has enabled the service provider sales channel to leverage our extensive network asset to deliver strong underlying growth. In addition to these network services, a small number of significant contracts drive financial performance, with revenue peaks occurring during construction phases and lower ongoing rentals, reflecting the maintenance of this infrastructure.

Products and Services

ntl:Telewest Business offers a wide portfolio of voice and data services, from analog telephony to managed data networks and applications. Our product strategy is focused on delivering managed solutions, such as inbound call management and internet protocol virtual private networks, or IP VPN, which experienced strong growth in 2006.

·       Outbound and Inbound Voice:   We offer a complete suite of voice products ranging from analog and digital services to converged IP telephony solutions. Strong regional presence and expertise has driven market share in products such as Centrex, where local government and private sector organizations benefit from a managed platform that delivers a uniform suite of features across multiple sites. Developments like IP Multimedia, which offers functionality such as desktop-to-desktop video conferencing, represent the next generation of voice services in a converging IP world.

·       Converged Solutions:   By using a single network to transport voice, data and video, organizations can benefit from cost synergies, flexibility and control. Our converged solutions portfolio enables this with products such as IP VPN. Our network ownership allows the integration of various access technologies, including DSL, synchronous digital hierarchy, or SDH, and Ethernet, while multi protocol label switching, or MPLS, ensures the priority of services during transmission.

·       Ethernet:   We are recognized as a U.K. market leader in Ethernet solutions and were the first European service provider to be accredited by the Metro Ethernet Forum (MEF), for ‘carrier’ service standards. This required the demonstration of rapid service creation, scalability and, based on inherent resilience in the platform, robust service level agreements. A range of products from local area network extensions to managed wide area Ethernet networks are available, providing high-bandwidth and flexible solutions.

·       Applications and Services:   As an overlay to network products, we also offer applications and services, which drive additional value from customer’s communications infrastructure. Examples such as IP CCTV roll-out in the public sector also deliver socioeconomic benefits within communities.

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Customer Service

The goal of ntl:Telewest Business is to become the natural choice provider within our core markets by delivering the best customer experience. This is reflected in the organizational structure, where 75% of employees are dedicated to the provision of in-life support of customers and their communications services. In 2006, the Communications Managers Association (CMA), recognized ntl:Telewest Business in this area, reporting that, amongst its members, the division led the market in providing a high-quality customer experience.

Mobile Segment

On July 4, 2006, we acquired Virgin Mobile Holdings (UK) plc, or Virgin Mobile, the U.K.’s leading mobile virtual network operator with approximately 4.5 million customers as of December 31, 2006. As a mobile virtual network operator, Virgin Mobile provides mobile telephone services to its customers over cellular networks owned by third parties. Currently, Virgin Mobile’s main network partner is T-Mobile, and Virgin Mobile has entered into a minimum 10 year, non-exclusive network supply agreement with T-Mobile that was signed in January 2004. Virgin Mobile also uses networks owned by other partners to provide other services. The majority of Virgin Mobile’s customers are prepay customers, who top up their accounts prior to using the services and are not contracted to remain with Virgin Mobile for any period of time. Contract customers represent the fastest growing customer segment and enter into contracts with Virgin Mobile ranging from 12 to 18 months in duration. Virgin Mobile’s customer base reflects a broad age demographic.

Virgin Mobile’s successful business philosophy is centered around five key strengths: a strong brand; a capital-light business model; a differentiated approach to the market; award-winning customer service; and a strong management team.

Virgin Mobile offers a broad range of mobile communications products and services, such as mobile voice and non-voice services (including SMS, picture messaging and entertainment services, such as games, news and music services) delivered over 2G, 2.5G and 3G platforms. In addition, Virgin Mobile has recently launched a mobile TV service, which allows its customers to watch broadcast TV as it happens (including BBC1, ITV1 and Channel 4) on its proprietary TV handsets. This service utilizes the U.K.’s Digital One DAB broadcast network through an agreement with BT Movio, a division of BT. Virgin Mobile offers handsets and/or SIM cards through approximately 5,000 sales outlets in the U.K., including approximately 1,100 specialist shops, concessions located in Virgin Megastores and Virgin Mobile stores, as well as through a wide range of general retailers, its website and its customer care centers. We plan to expand the distribution network by opening further retail stores over the next few years. The concessions and retail outlets act as both a sales and service channel and provide Virgin Mobile with direct access to its customers. Prepaid airtime is sold in all of these channels in addition to others.

Virgin Mobile aims to provide superior customer service, and has won the Best Customer Service Award from Mobile Choice magazine for the past six years running, as well as many other industry customer service awards. Virgin Mobile’s three existing customer call centers are located in Trowbridge and Middlesbrough in England, and in Johannesburg, South Africa. Customers can contact the call centers 24 hours per day, 7 days per week. A fourth center, in Glasgow, Scotland, was launched on a trial basis in January 2007.

Content Segment

Through our wholly-owned subsidiaries, Virgin Media Television Limited, or Virgin Media TV, and sit-up Limited, or sit-up, we provide basic (i.e., non-premium) television channels and related services to the U.K. multi-channel broadcasting market (including to our Cable segment) and a wide variety of consumer products by means of sit-up’s auction-based shopping channels.

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Virgin Media TV has eleven genre-based entertainment channels, including LivingTV, LivingTV2, Bravo, Ftn, Trouble and Challenge TV, and including four “multiplexed” channels which have identical content of another channel but broadcast one hour later. Virgin Media TV also owns a 50% interest in the companies that comprise the UKTV Group, a series of joint ventures with BBC Worldwide. Together, Virgin Media TV and the UKTV Group are the largest supplier of basic channels to the U.K. pay television market. UKTV currently has ten pay channels, including UKTV Gold and UKTV History, and five associated multiplexed channels.

Depending upon the distribution agreement with the platform operator and the package chosen by the customer, our wholly-owned and UKTV channels are available on our own analog and digital platforms and BSkyB’s digital platform. These channels generate revenue by the sale of airtime and sponsorship to advertisers and advertising agencies by Virgin Media TV’s advertising sales department, IDS (Interactive Digital Sales Limited). Some channels also generate distribution revenue based on either the number of customers subscribing to programming packages carried by the relevant platform operators or a fixed monthly fee. Virgin Media TV and UKTV are also represented on Freeview, a U.K. free-to-air digital television service, with UKTV History, UKTV Bright Ideas and Ftn available to Freeview viewers as well as subscribers to all multi-channel platforms, UKTV History, UKTV Bright Ideas and Ftn are separate channels with distinct offerings that operate within one of the twenty-four hour general entertainment slots available on Freeview.

sit-up provides a wide variety of consumer products through three interactive auction-based television channels: price-drop tv, bid tv and speed auction tv. These channels are available on our own digital platforms, BSkyB’s digital platform and Freeview, as well as on the internet.

Our Network

Our business is underpinned by significant investment in our cable network infrastructure. This consists of a national core backbone network and a high capacity two-way local broadband network in the U.K. The entire cable network was designed for large scale, high-speed telecommunications traffic from its inception. Our core network infrastructure transports our voice, internet, data and digital television platforms, whilst our access networks deliver these services directly to our customers.

Our broadband communications network in the U.K. currently passes approximately 12.5 million homes in our regional franchise areas. Our cables also pass a significant number of businesses in these areas. Our service areas include parts of many of the major metropolitan areas in the U.K., including Belfast, Birmingham, Bradford, Brighton, Bristol, Cambridge, Cardiff, Coventry, Derby, Dundee, Edinburgh, Exeter, Glasgow, Leeds, Leicester, Liverpool, London, Manchester, Newcastle, Nottingham, Oxford, Perth, Plymouth, Portsmouth, Reading, Sheffield, Southampton, Swansea and Teesside.

The core network has a fiber backbone that is approximately 23,000 kilometers long. This includes over 15,500 kilometers which are owned and operated by us and approximately 7,500 kilometers which are leased fiber from other network owners. Over 157 switches direct telephone traffic around the core and local networks. In addition, we have more than 600 hub sites, points of presence, repeater nodes or other types of network sites, and facilities at over 150 radio sites.

Our local access networks deliver internet, fixed line telephone and digital and analog television services to our customers’ homes and businesses. Our access network is comprised of two networks together. First, to provide television services and high-speed broadband internet access, our local fiber network is connected to a customer’s premises via high capacity, two-way, coaxial cables. We are currently conducting a residential trial of a 50Mb broadband service on this network. Second, we use Time Division Multiplex (TDM) technology over the fiber network to provide fixed line telephone services. This is then connected to a customer’s premises via a relatively short length twisted copper-pair. Additionally, the copper-pair cables are capable of hosting DSL services. Shorter lengths of copper (usually less than 500

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meters) provide a structural advantage over traditional all copper local distribution networks (which are typically up to 5,000 meters) in delivering very high-speed data services (for example 20Mbps ADSL2+ services).

Because of the extensive use of fiber in our access networks, we are also able to provide high speed ethernet services directly to business customers and provide nationwide area networking to these customers via our core networks.

We have a variety of alternative methods to connect our national telecommunications network over the “last mile” to the premises of those customers that are located outside of our cabled areas. We:

·       obtain permits to construct telecommunications networks and build-out our network to reach our customers. Although this is often the most costly means of reaching a customer, the expense can be justified in the case of larger customers, or where a significant level of traffic is obtained from a customer; and

·       lease circuits and DSL connections on the local networks of other service providers to connect to our customers’ premises. Although this may reduce the operating margin on a particular account, it requires significantly less capital expenditure than a direct connection and can often be put into place relatively quickly, and can be replaced with a direct connection at a later date if traffic volumes justify doing so.

Nationally, approximately 94% of the homes passed by our cable network can receive all of our broadband, digital television and fixed line telephone services. We cannot however currently provide all three of the main services on some older parts of the network. In 2006, we continued a cable network upgrade program targeting more than half a million homes in the London area, where there was an older, less robust cable network. Approximately 239,000 of the London homes were upgraded during 2006, compared to 230,000 in 2005. These homes can now be offered broadband, interactive digital television and fixed line telephone services. Approximately 80,000 further homes will also be able to receive these services when the upgrade program completes in the middle of 2007.

Our mobile telephone services are provided over cellular networks owned by third parties. Our main mobile network provider is T-Mobile. We also use networks owned by other partners to provide some ancillary services. T-Mobile currently operates 2G, 2.5G and 3G networks in the U.K.

Information Technology

We outsource and internally manage the operation and support of our information technology systems. These systems include billing, enterprise resource planning, business intelligence, corporate network, payroll, data center and desktop infrastructure. Although we outsource a portion of our information technology systems to various suppliers, we retain control of the information technology activities that are fundamental to our competitive advantage and key to the development of our intellectual property.

We are in the process of integrating our key information technology systems and are focused on improving the operational efficiency of our systems. The first legacy billing system migration of 1.6 million customers was completed successfully in December 2006. Work will progress to bring merger integration activities to completion through the course of 2007, with key milestones being the second and third legacy billing system conversions presently scheduled for the second half of 2007, the completion of the enterprise resource planning integration across all finance and human resource functions in April 2007 and the final stage of the corporate network integration in March 2007.

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Competition

Cable Segment

Consumer

We believe that we have a competitive advantage in the U.K. residential market because we offer a wide range of integrated communications services, including high-speed broadband internet, fixed line and mobile telephone and television services. We offer most of our products on a stand alone basis or as part of bundled packages designed to encourage customers to subscribe to multiple services. We offer internet and telephone services nationally and currently offer television services in our service areas only. Competition in each of these services individually is significant and some of the other service providers have substantially greater resources than us.

In 2006, competition in all of our Consumer product areas increased substantially, primarily as our competitors looked to expand their own product offerings into bundled propositions. Key developments amongst our primary competitors included:

·       BT Group plc.   BT Retail launched its BT Fusion and BT Vision products in 2006, adding mobile and television bundles. BT Fusion offers a dual-mode mobile/WiFi handset that allows a user to make Voice over Internet Protocol, or VoIP-based calls via WiFi in the home on a handset which can also make traditional mobile calls outside the home. BT Vision offers a Freeview plus an IP-based pay television service, although the service has limited content.

·       British Sky Broadcasting Group plc.   BSkyB, a long-time competitor in the pay television market, launched a broadband and fixed line telephone service in 2006, with television and broadband bundles. In late 2005, BSkyB acquired Easynet, an internet service provider.

·       Carphone Warehouse Group plc.   Carphone Warehouse resells mobile phone services (including Virgin Mobile) via its own retail distribution channels and offers fixed line telephone and broadband services under its TalkTalk brand. In 2006, Carphone Warehouse acquired the AOL UK ISP business, which is being merged with its existing TalkTalk business.

·       Tiscali S.p.A.   Tiscali offers fixed line telephone and broadband services and, in 2006, Tiscali acquired Video Networks Limited (HomeChoice), which provides IP-based television, fixed line telephone and broadband in the London area.

·       Orange.   Orange offers a triple play of mobile phone, fixed line phone and broadband services. The fixed line telephone and broadband services were previously marketed under the brand name Wanadoo, which was rebranded to Orange in 2006.

·       Pipex Communications plc.   Pipex acquired several smaller retail broadband and telephone ISPs in 2006, including Bulldog from Cable & Wireless, Toucan and Homecall.

·       Vodafone and O2.   Both announced plans to launch their own fixed line broadband and phone services in 2007. In 2006, O2 purchased Be, a broadband provider in the U.K.

Cable Television

We compete primarily with BSkyB in providing pay DTV to residential customers in the U.K. BSkyB is the only U.K. pay-satellite television platform in the U.K. and has high market share of the U.K. pay television market. BSkyB owns the U.K. rights to various sports and movie programming content which it has used to create some of the most popular premium pay TV channels in the U.K. BSkyB is therefore both our principal competitor in the pay television market, and an important supplier of television content to us. The Office of Fair Trading, a U.K. regulatory agency which we refer to as the OFT, has previously determined that BSkyB is dominant in the wholesale supply of channels carrying certain premium sports content and premium movies. Subject to a continuing finding of dominance, European and U.K.

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competition law prevent BSkyB from abusing its market position in relation to the supply of these channels to us. Even so we believe that the current terms for this content are not reasonable and should be improved. We currently trade on BSkyB’s rate card terms and pricing for their premium movie and sports channels. These terms can be changed on 30 days’ notice. Additionally, BSkyB has refused to supply us certain enhancements to these services, such as High Definition TV content and “red button” functionality.

Residential customers may also receive digital terrestrial television, or DTT. Digital signals are delivered to customer homes through a conventional television aerial and a separately purchased set-top box or an integrated digital television set. The free-to-air DTT service in the U.K. is branded Freeview. This service is provided by a consortium of operators, including the BBC, and offers customers a limited range of television channels, which include the traditional analog channels. Customers do not pay a monthly subscription fee for basic Freeview service but must acquire a Freeview enabled set-top box or a television with a digital tuner. Presently, Freeview does not offer several of the most popular pay television channels, such as UKTV Gold, LivingTV and MTV. BSkyB has also announced its intention to remove its free channels (Sky News, Sky Sports News and Sky Three) from Freeview and substitute pay channels.

Top Up TV offers a pay television service offering approximately nineteen pay television channels for a fixed fee to subscribers who otherwise receive Freeview and have purchased Top Up TV software.

Currently a limited number of residential customers can receive DTV over BT’s ADSL lines. Video Networks Limited (bought by Tiscali in 2006), under the brand name HomeChoice, supplies this service, including video on demand, to customers in parts of the London metropolitan area, and Kingston Interactive Television supplies this service to customers in one region in England.

There are a number of new and emerging technologies which can be used to provide video services that are likely to compete with our DTV and video on demand services. These include DSL services and third generation, or 3G, mobile telephony. Most notably, BT has recently launched BT Vision, a combined DTT television service and a video on demand service over a DSL broadband connection. BSkyB has also launched a video on demand service over a DSL broadband connection, and bundles that service with its other offerings. Some other new competitors are using DSL technology to offer comparable bundling.

Pay television and pay-per-view services offered by us compete to varying degrees with other communications and entertainment media, including home video, video games and DVDs.

Telecommunications is a constantly evolving industry and we expect that there will continue to be many advances in communications technology and in content. These advances, together with changes in consumer behavior, and in the regulatory and competitive environments, mean that it will be difficult to predict how our operations and businesses will be affected in the future.

The U.K. government has stated that it will terminate ATV transmission by 2012. Consumers wishing to receive television services will have to convert to DTV, currently available via digital satellite, DTT, DSL or cable. However, when ATV transmission is terminated, the terrestrial DTV signal and network may be strengthened. This will enable terrestrial DTV to be made available to additional customers’ homes that cannot currently receive a signal. It may also provide additional capacity to allow the Freeview channel line up to be expanded to include new channels.

There is also a growing demand and supply of full-length video content via broadband connections to the personal computer, which can be a substitute for traditional television viewing. Content owners, online aggregators, television channel owners, etc. are increasingly using broadband as a new digital distribution channel direct to consumers (primarily via downloading). Current business models tend to be on a pay-per-transaction basis. This does represent a potential disintermediation threat to pay television platforms, though the actual demand and willingness to pay for broadband distributed content is unlikely to represent sufficient revenues and benefit to content owners to displace pay television as a preferred distribution channel for the near future.

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Broadband Internet

We provide broadband and dial-up internet services to customers within reach of our access network, by direct connection to our network. We also provide broadband and dial-up internet services to customers not within reach of our access network by providing a connection to our network via BT’s local access network. Our internet services compete with BT, which provides broadband and dial-up internet access services over its own network both as a retail brand and as a wholesale service.

An increasing number of companies are deploying their own network access equipment in BT exchanges via a process known as local loop unbundling, or LLU. LLU allows an ISP to reduce the recurring operating costs incurred through BT Wholesale by reducing the proportion of traffic that must travel directly over BT’s network. LLU deployment requires a substantial capital investment to implement, and requires a large customer base to deliver a return on investment. Carphone Warehouse (TalkTalk) , Orange, Tiscali and BSkyB are all deploying LLU to some degree.

BT and third party service providers use DSL technologies which, like our network, permit internet access to be provided at substantially greater speeds than conventional dial-up access.

In addition to the increasing competition and pricing pressure in the broadband market arising as LLU players look to gain the customer scale to make a return on their investment, there is the longer term threat of new access technology. 3G mobile technology, other wireless technologies such as Wi-Fi and Wi-Max and broadband power line (which utilizes existing electricity networks to deliver high-speed broadband internet services) may subject us to increased competition over time in the provision of broadband services.

Fixed Line Telephone

We provide fixed line telephone services to customers who are within reach of our network by direct connection to our network and, like our internet services, to customers off our network via BT’s local access network. We compete primarily with BT in providing telephone services to residential customers in the U.K. BT occupies an established market position. We also compete with other telecommunications companies that provide indirect access telephone services, including Carphone Warehouse under the brand name TalkTalk, Pipex, Tesco and BSkyB.

We also compete with mobile telephone networks that may threaten the competitive position of our networks by providing a substitute to fixed line telephone services. Mobile telephone services also contribute to the downward price pressure in fixed line telephone services. Through our acquisition of Virgin Mobile in July 2006, we now provide mobile telephony services to approximately 4.5 million customers.

There is also competition from companies offering VoIP services using the customer’s existing broadband connection. These include services offered by independent providers, such as Vonage and Skype, as well as those affiliated with established competitors such as BT and Orange. These services generally offer free calls “on net,” i.e. between users of the same service, but charge for calls made to normal phone numbers either on a flat monthly rate for unlimited calls (typically restricted to geographic calls) or on a pence per minute rate.

Business

The U.K. business telecommunications market is very competitive and comprised of traditional network operators such as BT, virtual network operators such as Vanco plc, or Vanco, and systems integrators such as Affiniti, a trading name of Kingston Communications (Hull) Plc. While BT represents the main competitive threat nationally due to its network reach and product portfolio, other providers compete within product and geographic segments. Thus plc, Affiniti and COLT Telecom Group plc, for

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example, have network advantages within certain regions, while Vanco benefits from the flexibility of being a virtual network operator in particular product markets.

Within retail markets, traditional competitors are in a phase of consolidation and, as a result of the additional scale this affords, organizations such as Cable & Wireless plc, or C&W, and Thus plc have begun to target larger multi-national corporations. We continue to focus on small, medium and large nationally-oriented businesses where leveraging the network asset can provide an economic advantage. In the future, further competition from mobile operators is expected, as they explore strategies to enter the fixed line market with convergence propositions.

In the service provider market, BT and C&W continue to offer strong competition with network reach in the former and aggressive pricing on key city-to-city routes in the latter.

Competition in the U.K. market continues to be based on value for money, the key components of which are quality, reliability and price. Customers, particularly larger organizations and integrators who utilize the network to enable applications and solutions, accept higher price points in exchange for consistent delivery and performance against service level agreements.

Mobile Segment

Virgin Mobile faces direct competition from mobile network operators and other mobile virtual network operators. Its key competitors are the other major mobile communication providers in the U.K., including O2, Vodafone, Orange, T-Mobile and 3. In addition, a number of smaller players have emerged including BT Mobile, Carphone Warehouse and Tesco Mobile.

In the broader telephony market, Virgin Mobile competes indirectly with many fixed line telephone operators and resellers, and internet telephony providers in the U.K., including BT. See “Competition—Cable Segment” for more information on these competitors.

Content Segment

Virgin Media TV supplies basic television programming to the U.K. multi-channel television market and generates revenues largely on advertising and subscription revenues from that television programming.

Virgin Media TV’s television programming competes with other broadcasters and may lose audience share, as a result of which its advertising revenues may decrease. Market and economic factors apart from individual channel performance may also adversely influence subscription and advertising revenues or carriage of the channels. Virgin Media TV’s primary customer other than Virgin Media itself is BSkyB, which has used its dominance in the pay TV market to reduce substantially carriage subscription payments made to Virgin Media.

Virgin Media TV competes for program rights with broadcasters transmitting similar channels to those owned by Virgin Media TV and those in which it has an interest by virtue of the companies comprising the UKTV Group, Virgin Media TV’s joint ventures with BBC Worldwide. As a result of this competition for a limited number of well-known program rights, the price of these program rights are increasing and could increase further, thereby limiting Virgin Media TV’s ability to purchase that programming for transmission on its channels and those of UKTV, or adversely affecting the profitability of its channels.

ITV1 and Channel 4 have historically held dominant positions in generating advertising revenue due to their share of audience viewing. This generally attracts a price premium (i.e. advertising revenue share higher than audience share) from advertisers who are willing to pay more to launch advertising campaigns that quickly reach a large viewing audience. However, growing audience share at a faster rate than market

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audience, as has occurred over the last several years, can provide the continuation of Virgin Media TV and UKTV leverage in growing its market share of advertising revenue.

sit-up sells a wide range of products, including electronics, jewellery, clothing and home furnishings through its innovative retail shopping channels. Consequently, it competes with a large variety of retailers in the U.K. market. In common with other retailers, the business experiences a seasonal peak in the fourth quarter of the year and is impacted by general consumer confidence and purchasing trends.

sit-up also competes with other shopping and auction-based channels. Because the majority of its sales are initiated from television broadcasts, sit-up also competes with other television channels for audiences. The future performance of the business may be affected by any changes in television viewing habits.

Government Regulation

Regulation in the European Union (EU)

The European Parliament and Commission regulate our principal business activities through Directives and various other regulatory instruments.

In particular, in February 2002, the European Commission adopted a package of new Directives which, together, set out a new framework for the regulation of electronic communications networks and services throughout the EU. This new framework consisted of four Directives, namely:

·       Directive 2002/21 on a common regulatory framework for electronic communications networks and services (the Framework Directive);

·       Directive 2002/20 on the authorization of electronic communications networks and services (the Authorization Directive);

·       Directive 2002/19 on access to and interconnection of electronic communications networks and associated facilities (the Access and Interconnection Directive); and

·       Directive 2002/22 on universal service and users rights relating to electronic communications networks and services (the Universal Service Directive).

This package of Directives was supplemented, subsequently, by the Communications and Privacy Directive which dealt, among other things, with data protection issues in relation to the provision of electronic communications services.

The U.K. Government incorporated these Directives into its national laws under the Communications Act 2003, which came into effect on July 25, 2003, and the Communications Privacy Regulations, which came into effect on December 11, 2003.

During 2006, the European Commission commenced a review of these Directives (the Regulatory Framework Review) to assess their continuing suitability and efficacy and whether any amendments are necessary. This review will continue in 2007, with any new or amended legislative proposals being tabled in draft form during the first half of 2007.

In addition, the European Parliament and Commission are currently carrying out a review of the Television Without Frontiers Directive, now renamed the Audio Visual Media Services (AVMS) Directive. This Directive, which was originally adopted in 1989, has been a cornerstone of EU audiovisual media policy. It requires the Member States of the EU, among other things, to set certain minimum standards for broadcasting and controls on the amount and content of advertising. The Directive also requires Member States to take active measures to ensure that broadcasters under their jurisdiction support the European film and TV production industry. This requirement is achieved, in large part,

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through the imposition of a European content quota under which broadcasters must reserve a majority of their transmission time for European works.

In December 2005, the European Commission published proposed amendments to the Directive which are designed to update the Directive in the light of technological and market developments. The main proposal is that on-demand services, which the European Commission refer to as “non-linear services”, should be brought within the scope of the Directive and should be made subject to some of its requirements. In particular, there is a proposal that on-demand service providers such as ourselves should be required, where practicable and by appropriate means, to promote production of and access to European works. The Commission cites content quotas and investment levies as examples of how this might be achieved.

The proposed amendments to the Directive had their First Reading in the European Parliament during 2006 and debate on the proposals is still continuing. The Second Reading of the proposals in the European Parliament is currently expected in mid-2007. The likely outcome is that, in some respects, our on-demand services will become more heavily regulated and that we may have to demonstrate that, within our on-demand services, we are taking active steps to promote and support European film and TV production.

In July 2006, the European Commission issued a proposal for regulation of international mobile roaming within the EU. The proposal included regulation that would impose a price cap on wholesale and retail roaming rates within the EU. Other requirements such as greater transparency of retail roaming rates were also included in the proposal.

The proposed wholesale rate cap would likely result in a reduction in the wholesale cost per minute incurred by Virgin Mobile when its customers roam in the EU. The proposed retail rate cap would likely reduce the price per minute that Virgin Mobile charges its customers when they roam in the EU.

The date that any regulation may be introduced is not known. The net impact on Virgin Mobile would be dependent on the final details of the regulation and any resulting change in calling patterns whilst roaming, although the regulation could have a negative impact on profits.

Regulation in the U.K.

We are subject to regulation under the Communications Act 2003, the Broadcasting Acts 1990 and 1996 and other U.K. statutes and subordinate legislation.

The Communications Act 2003 established a new regulatory authority, the Office of Communications (Ofcom), as the single regulatory authority for the entire communications sector. Ofcom replaced a number of regulatory authorities such as the Office of Telecommunications (Oftel) and the Independent Television Commission (ITC).

Under the Communications Act 2003, communications providers, such as ourselves, are no longer required to hold individual licenses in order to provide electronic communications networks and services, although certain licenses are required (see below under Cable TV regulation and Mobile Telecoms Regulation) in order to own or operate mobile networks, TV channels or to provide certain facilities such as electronic program guides on the cable TV platform. Even so, all communications providers are subject to a set of basic conditions imposed by Ofcom, which are known as the General Conditions of Entitlement. Any breach of these conditions could lead to the imposition of fines by Ofcom and, ultimately, to the suspension or revocation of a company’s right to provide electronic communications networks and services.

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The General Conditions of Entitlement and SMP conditions

Full details of the General Conditions of Entitlement are available on Ofcom’s website (www.ofcom.org.uk). Some of the requirements under the General Conditions of Entitlement include:

·       a requirement to negotiate interconnection arrangements with other network providers

·       a requirement to ensure that any end-user can access the emergency services

·       a requirement to offer outbound number portability to customers wishing to switch to another network provider and to support inbound number portability where we acquire a customer from another network provider

·       a requirement to ensure that any end-user can access a directory enquiry service

·       a requirement to publish up-to-date price and tariff information

·       a requirement to provide itemized billing on request from each customer.

In addition to the General Conditions of Entitlement, Ofcom imposes further conditions on providers of electronic communications networks or services who have significant market power (SMP) in identified markets. In regulatory terms, SMP equates to the competition law concept of dominance. The new EU regulatory framework, adopted in 2002, required Ofcom to carry out a number of initial market reviews to establish which providers held SMP in these markets, and should therefore be subject to further conditions, and to keep these markets and any other relevant markets identified by Ofcom under regular review. This has resulted in British Telecommunications plc (BT) being found to have SMP in a substantial number of markets. As a result, BT has been made subject to further regulatory requirements in both wholesale and retail markets.

During 2007, Ofcom will be carrying out further reviews in a number of these markets to re-assess the competitive conditions applying in these markets and whether their earlier assessments of companies having SMP remain valid.

Under one of the earlier reviews, all fixed operators, including ourselves, have been found to possess SMP in relation to the termination of calls on their own networks. This has resulted in the imposition of a requirement on all fixed operators to provide access to their networks on fair and reasonable terms for terminating calls, with additional requirements being imposed on BT and Kingston Communications. We have not been found to possess SMP in any of the other voice, data or internet markets in which we operate.

All U.K. mobile network operators (MNOs) have been found to possess SMP in relation to the termination of calls on their own networks. Accordingly in June 2004 Ofcom imposed Specific Conditions on each of the MNOs in respect of their 2G networks requiring, among other things, a reduction in the average charges for termination of voice calls on their networks levied on fixed line operators or other MNOs. These price controls are currently in place until the end of March 2007. Ofcom currently proposes that further average price reductions should be achieved by all MNOs in respect of voice call termination on their 2G and 3G networks over the period from the end of March 2007 to the end of March 2011. Ofcom intends to publish its final statement in respect of such proposals in early 2007. As Virgin Mobile is not an MNO such proposals do not apply directly to us. However, under the terms of the network supply agreement we have with our network provider, T-Mobile, they will continue to operate to decrease the inbound interconnect revenue we receive from T-Mobile in respect of calls made to our customers. Ofcom is currently reviewing the wholesale SMS termination market. This follows the European Commission’s proposed amendment to its Recommendation to include SMS in the voice call termination market. Ofcom believes the review will take 12 to 18 months and will involve at least one consultation.

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The Strategic Review of Telecommunications

Following the passing of the Communications Act 2003, Ofcom announced that one of its first tasks would be to carry out a strategic review of telecommunications in the U.K. (TSR).

The TSR commenced in April 2004 with the observation from Ofcom that, despite almost twenty years of telecommunications liberalization in the U.K., BT remained dominant in almost all telecommunications markets. Ofcom’s preliminary assessment was that although the true infrastructure competition offered by the cable industry was highly desirable and had resulted in substantial consumer benefits, it did not represent a sufficient competitive constraint on BT. Similarly, the intensity of competition to BT based on access by third party service providers to the BT network via wholesale products, was insufficient. Ofcom felt, therefore, that it should seek to increase competitive intensity by improving third party access to the BT network.

Having reached this conclusion, Ofcom has developed a concept known as “equivalence”. Broadly, this concept has been defined as enabling BT’s competitors to gain access to BT’s network infrastructure on exactly the same (i.e. equivalent) terms as BT itself enjoys.

At the conclusion of the TSR, BT offered and Ofcom accepted a number of undertakings to put the concept of equivalence into practice in its dealings with competitors. This has been achieved primarily through the creation of a new division within BT called “Openreach” which manages and sells network services to competitors and the rest of BT on the same terms and conditions (including prices) and in accordance with the same processes.

The outcome of the TSR is expected to create further commercial opportunities for new entrants in markets across the communications sector and therefore to meet Ofcom’s objective of increasing competitive intensity.

The efficacy of the undertakings will be formally reviewed by Ofcom during 2007.

Universal Service

The concept of universal service is designed to ensure that basic fixed-line telecommunications services are available at an affordable price to all citizens across the EU. The scope of universal service obligations is defined by the Universal Service Directive (see above under Regulation in the European Union) and is transposed into U.K. regulation by the Universal Service Order. This Order has been implemented by Ofcom which has imposed a number of specific universal service requirements on BT and Kingston Communications, both of which have been designated by Ofcom as universal service providers.

The European Commission has been considering the future scope of universal service obligations as part of the Regulatory Framework Review (see above under Regulation in the European Union) and is expected to publish a Green Paper on this subject early in 2007. This paper is likely to consider, among other things, whether universal service should extend to the provision of broadband internet connectivity and whether there is scope in the future for making use of mobile technologies in the provision of some aspects of universal service. We would be impacted by any future decision to require us to provide or to contribute to the funding of universal service in the U.K.

Electronic Communications Code

Under the Telecommunications Act 1984, which was largely replaced by the Communications Act 2003, licensed public telecommunications operators were eligible for enhanced legal powers under the electronic communications code annexed to the Telecommunications Act 1984, or Code Powers. Code Powers are of particular benefit to those who construct and maintain networks because they give enhanced

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legal rights of access to private land, exemption from some requirements of general planning law and the right to install equipment in the public highway.

The Communications Act 2003 retained the broad structure of Code Powers. Any operator which possessed Code Powers under the previous licensing regime automatically retained those powers under the Communications Act regime. Any operator wishing to obtain new Code Powers must now apply to Ofcom. Our subsidiaries that provide electronic communications networks and services have Code Powers.

Although Code Powers give operators the right to install equipment in public highways, each operator is required to certify to Ofcom each year that it has sufficient and acceptable financial security in place to cover the costs which could be incurred by local councils or road authorities if they were required to remove equipment or restore the public roads following the insolvency of that operator. This security is commonly described as “funds for liabilities.” Ofcom has indicated that it will generally require an operator to provide board level certification of third party security for this purpose.

Cable TV Regulation

Although we are no longer required to hold individual licenses to provide electronic communications networks and services, we are still required to hold individual licenses under the Broadcasting Acts 1990 and 1996 for any television channels which we own or operate and for the provision of certain other services (e.g. electronic program guides) on our cable TV platform.

We therefore hold a number of Television Licensable Content Service Licenses (TLCS licenses) under the Broadcasting Act 1990 for the provision of promotional channels and for the provision of our electronic program guide.

TLCS licenses are granted and administered by Ofcom. The licenses require that each licensed service complies with a number of Ofcom codes, including the Broadcasting Code, and with all directions issued by Ofcom. Breach of any of the terms of a TLCS license may result in the imposition of fines on the license holder and, ultimately, to the license being revoked.

Holders of TLCS licenses are required to pay an annual fee to Ofcom. The fees are related to the revenue earning capacity of each television service and are based on a percentage, set by Ofcom, of revenues from advertising, sponsorship, subscriptions and interactive services, with special rules applying to shopping channels.

In October 2006, Ofcom commenced a review of the various ways and the terms on which operators of digital TV platforms in the U.K. (including ourselves) allow access to their platforms for third party TV channel and content providers. This review will continue throughout 2007. It is not possible at this stage to predict the outcome of this review and whether access to digital TV platforms in general or to specific platforms in particular, including our cable TV platform, will become more heavily regulated as a result.

Mobile Telecoms Regulation

The use of radio frequency spectrum is regulated by the Wireless Telegraphy Act 2006 (WTA) and the Communications Act 2003. Ofcom has responsibility for allocating, licensing and regulating the use of spectrum. As Virgin Mobile is not an MNO we are not directly regulated by the WTA but our network provider, T-Mobile, does (and is required to) have WTA licenses in respect of the operation of their network.

A new legal and policy framework is being implemented across the U.K. and other member states to fulfill the European Commission’s objective to effect coordination and harmonization with regard to the availability and efficient use of radio spectrum. The European Commission has proposed that specific spectrum bands should be subject to tradability throughout the EU and that this would be supported by

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limiting or removing regulatory restrictions on use. The introduction of trading and liberalization is mainly regulated at national level.

U.K. Competition Law

The Competition Act 1998, which came into force in March 2000, introduced a prohibition on the abuse of a dominant market position and a prohibition on anti-competitive agreements, modeled on Articles 81 and 82 of the Treaty of Rome. The Act also introduced third party rights, stronger investigative and enforcement powers and the ability for the competition authorities to issue interim measures. The new enforcement powers include the ability to impose fines of up to 10% of worldwide turnover. The Competition Act is enforced by the Office of Fair Trading (OFT) and gives concurrent investigative and enforcement powers in matters concerning communications to Ofcom.

The U.K.’s competition law framework was further strengthened by the competition provisions of the Enterprise Act 2002, which came into force in June 2003. Under these provisions, among other things, decisions on mergers are now made by the independent competition authorities, using competition based tests, rather than by the U.K. Government.

Under other provisions of the Enterprise Act, individuals who cause, encourage, participate in or, in some cases, even those who have knowledge of, the making of agreements between competitors which are designed to fix prices, share markets, limit supply or production or rig bids in the U.K., can be prosecuted and punished with unlimited fines and imprisonment for up to five years. The courts may also order the disqualification for up to fifteen years of directors whose companies have committed a breach of U.K. or EU competition law.

WEEE Directive

On December 12, 2006, the U.K. government adopted the Waste Electrical and Electronic Equipment Directive (the WEEE Directive) previously adopted by the European Union relating to certain obligations associated with historical waste (as defined by the WEEE Directive). The WEEE Directive is effective January 2, 2007 and imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of such equipment. The main provisions relate to separate collection, disposal and recycling; standards for its treatment at authorized facilities; and collection, recycling and recovery targets.  It requires distributors to allow consumers to return their waste equipment free of charge, which would include the set-top boxes and cable modems that we provide to our customers.

Seasonality

Some revenue streams are subject to seasonal factors. For example, telephone usage revenue by customers and businesses tends to be slightly lower during summer holiday months. Our customer churn rates include persons who disconnect their service because of moves, resulting in a seasonal increase in our churn rates during the summer months when higher levels of U.K. house moves occur and students leave their accommodations between school years. In addition, our Content segment includes Virgin Media TV, which has a seasonally higher programming spend in the fourth quarter, and  sit-up’s home shopping channels, which earn potentially higher revenues in the fourth quarter, reflecting the Christmas holiday period, which is common in the retail industry. In our Mobile segment, fourth quarter customer acquisition and retention costs generally increase due to the important Christmas period and Mobile ARPU generally decreases in the first quarter of each year due to the lower number of days in February and lower usage post the Christmas period.

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Research and Development

Our research and development activities involve the analysis of technological developments affecting our cable television, telephone and telecommunications business, the evaluation of existing services and sales and marketing techniques and the development of new services and techniques.

Patents, Trademarks, Copyrights and Licenses

We do not have any material patents or copyrights nor do we believe that patents play a material role in our business. We own and have the right to use registered trademarks, which in some cases are, and in others may be, of material importance to our business, including the exclusive right to use the “Virgin” name and logo in connection with our corporate activities and in connection with the activities of our consumer and a large part of our content businesses under license from Virgin Enterprises Limited. This license with Virgin Enterprises Limited is for a 30-year term and exclusive to us within the U.K. and Ireland. The license entitles us to use the “Virgin’’ name for the TV, broadband internet, telephone and mobile phone services we provide to our residential customers, as well as the acquisition and branding of sports, movies and other premium television content and the sale of certain communications equipment, such as set top boxes and cable modems. For our content operations, we have agreed in principle to extend the license to entitle us to use the “Virgin Media Television’’ name for the creation, distribution and management of our wholly-owned television channels, and to provide certain complimentary services to our residential customers. The agreement (and the proposed extension) provides for an annual royalty of 0.25% of certain consumer and content revenues, subject to a minimum annual royalty of £8.7 million. As part of the agreement, we have the right to adopt, and have adopted, a company name for our parent, Virgin Media Inc., which together with the name “Virgin Media”, we retain worldwide exclusivity.

Employees

As of December 31, 2006, we had 17,034 employees, of whom 15,669 were permanent, and 1,365 were temporary or contract. Approximately 1,900 Service Operations, Network Operations, Design & Civils and Business Field Operations employees are covered by two collective bargaining agreements with the Communication Workers Union, or CWU, and the Broadcasting, Entertainment, Cinematograph and Theatre Union, or BECTU. Both of these agreements are terminable by either the Union or us with three months’ written notice. Except for these two arrangements, no other employees are covered by collective bargaining agreements. We believe that our relationship with the CWU, BECTU and our employees is generally good.

Item 1A.   Risk Factors

Our business, financial condition or results of operations could be materially adversely affected by any of the risks and uncertainties described below. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business.

Risks Relating to Our Business and Industry

We are subject to significant competition and we expect that competition will intensify.

The level of competition is intense in each of the markets in which we compete, and we expect competition to increase. In particular, our fixed and mobile telephone, broadband and cable television businesses compete with British Telecommunications Plc, or BT, in telephone and broadband services; Vodafone, O2, Orange and others in mobile telephone services; and British Sky Broadcasting Group Plc, or BSkyB, in multi channel television, telephone and broadband services, each of whom has significant operational scale, resources and national distribution capacity. We also compete with numerous internet service providers and indirect telephone access operators that offer telephone, broadband and dial-up internet services over BT’s network. We will face increasing competition from mobile telephone network providers and new market entrants, including those providing VoIP and IPTV. The increase in

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competition will be compounded by technological changes and business consolidation, which may permit more competitors to offer the “triple-play” of digital television, fixed line telephone and broadband services, or “quad-play” bundles including mobile telephone services.

In the digital television market, we compete primarily with BSkyB in providing digital pay television services. Competition increased as a result of the launch of Freeview in October 2002, which provides approximately 43 digital terrestrial TV channels on a free-to-air basis to consumers who have purchased a Freeview digital set-top box, digital or digital TV recorder television. In March 2004, Top Up TV launched a pay-television service offering approximately 120 programs from 19 channels for a fixed fee to subscribers who otherwise receive Freeview and have purchased a Top Up TV set-top box. This year, BT Vision launched a PC download service of video on demand home entertainment content over a broadband connection. BSkyB and others offer a similar service.

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Our broadband service faces increased competition from BT, Pipex, Orange, Tiscali and others, as well as new providers such as BSkyB and Carphone Warehouse (TalkTalk). Competitors may use new alternative access technology such as advanced, faster asymmetric digital subscriber lines, or ADSL+2, to deliver higher speeds. Local loop unbundling may decrease costs for new entrants and existing BT wholesale customers, leading to increased pricing competition.

Our fixed line telephony business competes with fixed line operators such as BT, telephone local loop unbundlers such as Carphone Warehouse (TalkTalk) and BSkyB, and several mobile telephone operators such as Vodafone, O2, Orange and T-Mobile.

Our business services also face a wide range of competitors, including BT, Cable & Wireless Communications plc, COLT Telecom Group plc and Thus plc, and a number of regional service providers. The nature of this competition varies depending on geography, service offerings and the size of the marketable area.

In the mobile telephony market, we face direct competition from mobile network operators such as O2, Vodafone, Orange, T-Mobile and 3, and other mobile virtual network operators, such as Carphone Warehouse, Tesco Mobile and BT Mobile, in addition to fixed line telephone operators and internet telephony providers. Many of our competitors are part of large multinational groups, have substantial advertising and marketing budgets, have greater retail presence and may benefit from greater economies of scale than we do. As a mobile virtual network operator, our per unit economies may differ substantially from our competitors with their own networks, which may impact our ability to compete.

In order to compete, we may have to reduce the prices we charge for our services or increase the value of our services without being able to recoup associated costs. Reduced prices or increased costs would have a negative impact on our margins and profitability. In addition, if we are unable to compete successfully, even following price reductions or value enhancements, we may not be able to attract new customers, or retain existing customers.

Failure to control customer churn may adversely affect our financial performance.

The successful implementation of our business plan depends upon controlling customer churn. Customer churn is a measure of customers who stop using our services. Customer churn could increase as a result of:

·       billing errors and/or general reduction in the quality of our customer service as a result of the integration of billing systems and customer databases;

·       customers moving to areas where we cannot offer our digital television, or DTV, services;

·       interruptions to the delivery of services to customers over our network and poor fault management;

·       stricter customer credit policies as a result of the alignment of the historical policies of NTL and Telewest;

·       the availability of competing services, such as the digital satellite services offered by BSkyB, the free-to-air digital television services offered by Freeview and the telephone, broadband and dial-up internet services offered by BT, BSkyB, Carphone Warehouse (TalkTalk) , Orange, Tiscali, Pipex and other third parties, some of which may, from time to time, be less expensive or technologically superior to those offered by us or offer content that we do not offer; and

·       the potential loss of customers due to their required migration from our analog television, or ATV, services to our more expensive DTV services when we stop transmitting our ATV signal.

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenue.

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The sectors in which we compete are subject to rapid and significant changes in technology, and the effect of technological changes on our businesses cannot be predicted.

The internet, television, fixed line telephone and mobile telephone services sectors are characterized by rapid and significant changes in technology. The effect of future technological changes on our business cannot be predicted. It is possible that products or other technological breakthroughs, such as VoIP (over fixed and mobile technologies), mobile instant messaging, wireless fidelity, or WiFi, WiMax (i.e., the extension of local WiFi networks across greater distances) or internet protocol television, may result in our core offerings becoming less competitive and render our existing products and services obsolete. We may not be able to develop new products and services at the same rate as competitors or keep up with trends in the technology market as well as our competitors.

The cost of implementing emerging and future technologies could be significant, and our ability to fund that implementation may depend on our ability to obtain additional financing.

We are licensed to use the Virgin name and logo but do not own it.

In February 2007, we rebranded certain areas of our business as Virgin Media and renamed our corporate parent Virgin Media Inc. under a 30 year license agreement with Virgin Enterprises Limited to use the Virgin name and logo. The use of the Virgin Media name and brand carries various risks, including the following:

·       we will be substantially reliant on the general goodwill of consumers towards the Virgin brand. Consequently, adverse publicity in relation to the Virgin Group or its principals, particularly Sir Richard Branson, who is closely associated with the brand, or in relation to another Virgin name licensee, could have a material adverse effect on our business;

·       the license agreement has a 30-year term, and we are obligated to pay a termination payment if the license is terminated early under certain circumstances; and

·       we are required to meet certain performance obligations under the license agreement, and a failure to meet those obligations could lead to a termination of the license.

If we lose the right to use the Virgin brand, we would need to rebrand those areas of our business that have been rebranded, which could result in increased expenditures and increased customer churn.

If we do not maintain and upgrade our networks in a cost-effective and timely manner, we could lose customers.

Maintaining an uninterrupted and high-quality service over our network infrastructure is critical to our ability to attract and retain customers. Providing a competitive service level will depend in part on our ability to maintain and upgrade our networks in a cost-effective and timely manner. The maintenance and upgrade of our networks will depend upon, among other things, our ability to:

·       modify network infrastructure for new products and services;

·       install and maintain cable and equipment; and

·       finance maintenance and upgrades.

Financial covenants in our senior credit facility effectively limit our level of capital expenditures by stipulating minimum levels of net cash generation. If this affects our ability to replace network assets at the end of their useful lives or if there is any reduction in our ability to perform necessary maintenance on network assets, our networks may have an increased failure rate, which is likely to lead to increased customer churn.

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A failure in our critical systems could significantly disrupt our operations, which could reduce our customer base and result in lost revenues.

Our business is dependent on many sophisticated critical systems that support all of the various aspects of our cable network operations. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, malicious human acts, theft, natural disasters, fire, power loss, war or other catastrophes or any other threat to business continuity. Moreover, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. We do not currently have a formal company-wide disaster recovery plan. Unanticipated problems affecting our systems could cause failures in our information technology systems, including systems that are critical for timely and accurate customer billing, or our customer service centers or interrupt the transmission of signals over our cable network. Sustained or repeated system failures that interrupt our ability to provide service to our customers, prevent us from billing and collecting revenue due to us, or otherwise meet our business obligations in a timely manner, would adversely affect our reputation and result in a loss of customers and net revenue. Improvements to our revenue collection processes may not be successful or may not yield enhanced revenue collection. Inefficient collection could result in an increase in bad debt.

Our inability to obtain popular programming, or to obtain it at a reasonable cost, could potentially materially adversely affect the number of customers or reduce margins.

For the provision of television programs and channels distributed via our cable network, we enter into agreements with program providers, such as public and commercial broadcasters, or providers of pay or on demand television. We have historically obtained a significant amount of our premium programming and some of our basic programming and pay-per-view sporting events from BSkyB, one of our main competitors in the television services business. BSkyB is a leading supplier of programming to pay television platforms in the U.K. and is the exclusive supplier of some programming, including its Sky Sports channels and Sky Movie channels, which are the most popular premium subscription film channels available in the U.K. We buy BSkyB wholesale premium content on the basis of BSkyB’s rate card terms and pricing, which can be changed on 30 days’ notice, and not under a contract. Our agreement with BSkyB to purchase its basic channels expired on February 28, 2007. As of the date of this annual report, no new agreement has been reached between the parties. We may not be able to reach an agreement for BSkyB’s basic channels on reasonable terms, or at all.

In addition to providing programming to us, BSkyB competes with us by offering its programming directly to its digital satellite customers. As a result of BSkyB’s ownership of this content, it is able to charge us a price for its content that is challenging for us to compete with and still maintain a profit margin on the sale of that premium programming. BSkyB also offers content (such as high definition and, interactive content) exclusively to its digital satellite customers and not to us.

In addition to BSkyB, our significant programming suppliers include the BBC, ITV plc, Channel 4, Viacom Inc., HBO, Discovery Communications Inc. and Turner, a division of Time Warner Inc. Our dependence on these suppliers for television programming could have a material adverse effect on our ability to provide attractive programming at a reasonable cost. In addition, the loss of programs could negatively affect the quality and variety of the programming delivered to our customers, which could have a material adverse effect on our business and results of operations and increase customer churn.

Revenue from our content segment is highly dependent on subscriber fees and the television advertising market.

Our content segment owns pay channels through Virgin Media TV and our joint ventures with the BBC. Our content segment derives revenue from subscriber fees and advertising revenue. BSkyB, our main competitor, is our largest customer for our programming and has recently used its dominant position in pay television to reduce substantially the fees it pays for our channels. As we are dependent upon carriage

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of our programming in order to attract advertising revenue, BSkyB has considerable power to renegotiate the fees that we charge for our programs. In addition, the TV advertising market has faced steady declines over the last few years. Our failure to generate sufficient subscriber fees or advertising revenue will cause our content segment revenue and cash flow to decline.

We depend on equipment and service suppliers that may discontinue their products or seek to charge us prices that are not competitive, either of which may adversely affect our business and profitability.

We have important relationships with several suppliers of hardware, software and services that we use to operate our network and systems and outsource various customer services. In many cases, we have made substantial investments in the equipment or software of a particular supplier, making it difficult for us in the short-term to change supply and maintenance relationships in the event that our initial supplier refuses to offer us favorable prices or ceases to produce equipment or provide the support that our network and systems require. If equipment or service suppliers were to discontinue their products or seek to charge us prices that are not competitive, our business and profitability could be materially adversely affected.

Furthermore, we rely upon outside contractors to install our equipment in customers’ homes. Delays caused by these contractors, or quality issues concerning these contractors, could cause our customers to become dissatisfied and could produce additional churn or discourage potential new customers.

The integration of our billing systems may have an adverse effect on our customer service, customer acquisitions, customer churn rate and operating costs.

As a result of our growth through acquisitions, we inherited numerous billing and customer service systems. We are in the process of migrating all of our consumer cable and business customers to one central billing system. If we are not successful with this process, we might not be able to achieve the expected cost savings associated with the new system. It is possible that billing errors and other customer service disruptions could occur during further integration processes, potentially resulting in increased customer churn or adverse effects on customer service, customer acquisitions, collections, and the costs of maintaining our billing systems going forward.

Regulation of the markets in which we provide our services has been changing rapidly; unpredictable changes in U.K. and EU regulations affecting the conduct of our business, including price regulations, may have an adverse impact on our ability to set prices, enter new markets or control our costs.

Our principal business activities have historically been regulated and supervised by various governmental bodies in the U.K. and by the regulatory initiatives of the European Commission. Regulatory changes have recently occurred, and may in the future occur, at the U.K. or EU level with respect to licensing requirements, price regulation, environmental regulation, accounting practices, interconnection arrangements, mobile termination rates, roaming regulation, number portability, carrier pre-selection, the ability to provide digital services, ownership of media companies, programming, local loop unbundling, data protection, the provision of open access by U.K. cable operators to other telecommunications operators, the adoption of uniform digital technology standards or the bundling of services. Regulatory changes relating to our activities and those of our competitors, such as changes relating to third party access to cable networks, the costs of interconnection with other networks or the prices of competing products and services, could adversely affect our ability to set prices, enter new markets or control costs.

We are subject to tax in more than one tax jurisdiction and our structure poses various tax risks.

We are subject to taxation in the U.S. and the U.K. Our effective tax rate and tax liability will be affected by a number of factors in addition to our operating results, including the amount of taxable

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income in particular jurisdictions, the tax rates in those jurisdictions, tax treaties between jurisdictions, the manner in which and extent to which we transfer funds to and repatriate funds from our subsidiaries, accounting standards and changes in accounting standards, and future changes in the law. Because we operate in more than one tax jurisdiction and may therefore incur losses in one jurisdiction that cannot be offset against income earned in a different jurisdiction, we may pay income taxes in one jurisdiction for a particular period even though on an overall basis we incur a net loss for that period.

We have a U.S. holding company structure in which substantially all of our operations are in U.K. subsidiaries that are owned by one or more members of a U.S. holding company group. As a result, although we do not expect to have current U.K. tax liabilities on our operating earnings for at least the medium term, our operations may give rise to U.S. tax on “Subpart F” income generated by our U.K. subsidiaries, or on repatriations of cash from our U.K. operating subsidiaries to the U.S. holding company group. While we believe that we have substantial U.S. tax basis in some of our U.K. subsidiaries which may be available to avoid or reduce U.S. tax on repatriation of an equivalent amount of cash from our U.K. subsidiaries, there can be no assurance that the Internal Revenue Service, or IRS, will not seek to challenge the amount of that tax basis or that we will be able to utilize such basis under applicable tax law. As a result, although in accordance with applicable law we will seek to minimize our U.S. tax liability as well as our overall worldwide tax liability, there can be no assurance that we will not incur U.S. tax liabilities with respect to repatriation of cash from our U.K. subsidiaries to the United States. The amount of the tax liability, if any, would depend upon a multitude of factors, including the amount of cash actually repatriated.

There is no assurance that new products we may introduce will achieve full functionality or market acceptance.

Our long-range plan includes IPTV and we cannot guarantee that this new product, or any other new products that we may develop in the future, will perform as expected when first introduced in the market. Should these new products and services fail to perform as expected or should they fail to gain market acceptance, our results of operations may be negatively impacted.

Virgin Mobile relies on T-Mobile’s network to carry its communications traffic.

Virgin Mobile relies on its long-term agreement with T-Mobile for voice, non-voice and other telecommunications services we provide our mobile customers, as well as for certain ancillary services such as pre-pay account management. If the agreement with T-Mobile is terminated, or if T-Mobile fails to deploy and maintain its network, or if T-Mobile fails to provide the services as required under our agreement with them, or if this were required and we are unable to find a replacement network operator on a timely and commercial basis, if at all, we could be prevented from carrying on our mobile business or, if we found a replacement operator, we might be unable to carry on our mobile business only on less favorable terms or provide less desirable services. Additionally any migration of all or some of our customer base to a new operator would be in part dependent on T-Mobile and could entail potential technical or commercial risk. T-Mobile is also a customer of our business division. Any disagreements between T-Mobile and Virgin Mobile may affect our other relationships with T-Mobile.

We rely on third parties to distribute our Virgin Mobile products and procure customers for our services.

Our ability to distribute Virgin Mobile products and services depends, to a large extent, on securing and maintaining a number of third party distributors who sell our branded handsets and service packs, including Carphone Warehouse and prepay vouchers. These distributors also procure customers for our competitors and, in come cases, themselves as well. In particular, Carphone Warehouse also sells its own broadband and telephone services. They may also receive incentives to encourage potential customers to subscribe to our competitors’ services rather than our own. They may at their discretion decide to cease to distribute our products and services.

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Pursuant to an agreement with Virgin Retail Limited, we are entitled to occupy a dedicated space in which to advertise and promote our products and services in specified Virgin Megastores, including future store openings. We have no control over the number of stores that may be opened or closed in the future. In addition, any of our distribution partners may from time to time close retail locations or otherwise reduce the scale of their businesses. If any of our distribution partners were to close some or all of their operations, or we fail to maintain these key distribution relationships, our revenue may decline.

In addition, we plan on opening our own retail outlets in the next few years to increase the sales of our products and services. Our stores may not perform successfully.

We depend on the ability to attract and retain key personnel without whom we may not be able to manage our business lines effectively.

We operate in a number of rapidly changing technologically advanced markets that will continue to challenge our senior management. There is significant competition in attracting and retaining qualified personnel in the telecommunications industry, especially individuals with experience in the cable sector. We believe that the unique combination of skills and experience possessed by our senior management would be difficult to replace, and that the loss of our key personnel could have a material adverse effect on us, including the impairment of our ability to execute our business plan. Our future success is likely to depend in large part on our continued ability to attract and retain highly skilled and qualified personnel.

Certain of our significant stockholders could have an influence over our business and affairs.

Certain persons or entities are our significant stockholders. Based on SEC filings to date, the Virgin Group beneficially owns 10.5% of our issued and outstanding common stock; in addition, Franklin Mutual Advisers, LLC beneficially owns 9.2%, Ameriprise Financial Inc. beneficially owns 8.9%, and Mr. William R. Huff beneficially owns 5.7%, of our issued and outstanding common stock. Each of these significant stockholders could have an influence over the business and affairs of the company.

On April 3, 2006, we entered into a license agreement with Virgin Enterprises Limited which provides for us to use the Virgin name and logo in our consumer and content businesses. In connection with this agreement, Virgin Enterprises Limited had the right to propose a candidate to our Nominating Subcommittee to fill a single new seat on our board. Virgin Enterprises Limited nominated Mr. Gordon McCallum, Group Strategy Director of Virgin Enterprises Limited, and he was appointed to our board on September 11, 2006. As a result of Mr. McCallum’s relationship with Virgin Enterprises Limited, if conflicts between the interests of Virgin Enterprises Limited and the interests of our other stockholders should arise, this director may not be disinterested.

Mr. Huff is a director of Virgin Media Inc. and is the president of the managing member of W.R. Huff Asset Management Co., L.L.C. As a result of his relationship with W.R. Huff Asset Management Co., L.L.C., if conflicts between the interests of W.R. Huff Asset Management Co., L.L.C. and the interests of our other stockholders should arise, this director may not be disinterested.

Disruptions in Virgin Media TV’s or sit-up’s satellite transmissions could materially adversely affect their respective operations.

Virgin Media TV and sit-up currently broadcast their digital programming content with leased satellite transponders, the operations of which are beyond the control of Virgin Media TV and sit-up. Disruption to one of these satellites would result in disruption to Virgin Media TV’s or sit-up’s programming and, depending upon the nature of that disruption, could result in a loss of revenues, a loss of customers and/or adverse publicity. In addition the satellite transponders may fail before the expiration of Virgin Media TV’s and sit-up’s contractual right to utilize them, which may result in additional costs as alternative arrangements are made for satellite transmission.

34




Unauthorized access to our networks could result in a loss of revenue.

We rely on the integrity of our networks to ensure that our services are provided only to identifiable paying customers. The development of new technology facilitating unauthorized access to our network could result in a loss of revenue, and any failure to respond to security breaches could raise concerns under our agreements with content providers. We continue to work on minimizing unauthorized access to our networks.

We do not insure the underground portion of our cable network and various pavement-based electronics associated with our cable network.

We obtain insurance of the type and in the amounts that we believe are customary for similar companies. Consistent with this practice, we do not insure the underground portion of our cable network or various pavement-based electronics associated with our cable network. Almost all our cable network is constructed underground. As a result, any catastrophe that affects our underground cable network or our pavement-based electronics could prevent us from providing services to our customers and result in substantial uninsured losses.

Risks Relating to Our Recent Acquisitions

We may be unable to successfully integrate operations and realize the full anticipated synergies of our recent acquisitions, which may harm the value of our securities.

Our merger with Telewest and acquisition of Virgin Mobile involve the integration of companies that have previously operated independently. The difficulties of combining operations include:

·       the necessity of coordinating geographically separated organizations and facilities, including call centers;

·       combining product offerings and coordinating the branding and pricing of these offerings;

·       rationalizing each company’s internal systems and processes, including billing systems, which are different from each other; and

·       integrating personnel from different company cultures.

The process of integrating operations could cause an interruption of, or loss of, momentum in the activities of one or more of our businesses and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and acquisition and the integration of the companies’ operations could result in the disruption of our ongoing businesses or inconsistencies in the standards, controls, product offerings, level of customer service, procedures and policies of the companies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

While we have already achieved many synergies from our recent acquisitions, we expect to continue to realize synergies by creating efficiencies in operations, capital expenditures and other areas. If we are not able to successfully sustain these savings, the anticipated benefits of the merger and acquisition may not be realized fully, or may take longer to realize than expected. Although we have quantified an amount of synergies that we expect to realize, this amount is an estimate and has not been prepared in accordance with GAAP. This estimate is a forward-looking statement and is based on assumptions that may not ultimately prove to be accurate.

35




We have incurred and will continue to incur significant costs in connection with the merger and acquisition.

We have incurred a number of costs associated with completing the merger with Telewest and acquisition of Virgin Mobile, combining the operations of the three companies and achieving desired synergies. These costs have been and will be substantial. We are in the process of executing integration plans to deliver the planned synergies. Additional unanticipated costs may be incurred in the integration of the businesses. Although we expect that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of our businesses, will offset the incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

We could suffer losses due to asset impairment charges for goodwill and long-lived intangible assets.

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which we refer to in this annual report as “SFAS 142,” goodwill and indefinite-lived intangible assets are subject to annual review for impairment (or more frequently should indications of impairment arise). Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On December 31, 2006, we had goodwill and intangible assets of £3,637.0 million. A downward revision in the fair value of a reporting unit or intangible assets could result in an impairment and a non-cash charge would be required. Any significant shortfall, now or in the future, could lead to a downward revision in the fair value of such assets. Any such charge could have a material effect on our reported net earnings.

Risks Relating to Our Financial Indebtedness and Structure

We may not be able to fund our debt service obligations through operating cash flow in the future.

It is possible that we may not achieve or sustain sufficient cash flow in the future for the payment of interest or principal on our indebtedness when due. If our operating cash flow is not sufficient to meet our debt payment obligations, we may be forced to raise cash or reduce expenses by doing one or more of the following:

·       increasing, to the extent permitted, the amount of borrowings under new credit facilities;

·       restructuring or refinancing our indebtedness prior to maturity, and/or on unfavorable terms;

·       selling or disposing of some of our assets, possibly on unfavorable terms; or

·       foregoing business opportunities, including the introduction of new products and services, acquisitions and joint ventures.

We cannot be sure that any of, or a combination of, the above actions would be sufficient to fund our debt service obligations.

Our current leverage is substantial, which may have an adverse effect on our available cash flow, our ability to obtain additional financing if necessary in the future, our flexibility in reacting to competitive and technological changes and our operations.

We had consolidated total long-term debt of £6,159.1 million as of December 31, 2006. This high degree of leverage could have important consequences, including the following:

·       a substantial portion of the cash flow from operations will have to be dedicated to the payment of interest and principal on existing indebtedness, thereby reducing the funds available for other purposes;

·       the ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions or general corporate purposes may be impaired;

36




·       our flexibility in reacting to competitive technological and other changes may be limited;

·       the substantial degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or adverse developments in our business; and

·       we may be exposed to risks inherent in interest rate and foreign exchange rate fluctuations.

We have incurred losses in the past and may not be profitable in the future.

We had losses from continuing operations for 2006 of £570.9 million and for 2005 of £420.5 million (both on a pro forma basis). We cannot be certain that we will achieve or sustain profitability in the future. Failure to achieve profitability could diminish our ability to sustain operations, meet financial covenants, obtain additional required funds and make required payments on present or future indebtedness.

The restrictive covenants under our debt agreements may limit our ability to operate our business.

The agreements that govern our indebtedness contain restrictive covenants that limit the discretion of our management over various business matters. For example, these covenants restrict our ability to:

·       incur or guarantee additional indebtedness;

·       pay dividends or make other distributions, or redeem or repurchase equity interests or subordinated obligations;

·       make investments;

·       sell assets, including the capital stock of subsidiaries;

·       enter into sale and leaseback transactions and certain vendor financing arrangements;

·       create liens;

·       enter into agreements that restrict some of our subsidiaries’ ability to pay dividends, transfer assets or make intercompany loans;

·       merge or consolidate or transfer all or substantially all of our assets; and

·       enter into transactions with affiliates.

These restrictions could materially adversely affect our ability to finance future operations or capital needs or to engage in other business activities that may be in our best interests. We may also incur other indebtedness in the future that may contain financial or other covenants more restrictive than those that will be applicable under our current indebtedness.

We are a holding company dependent upon cash flow from subsidiaries to meet our obligations.

We and a number of our subsidiaries are holding companies with no independent operations or significant assets other than investments in our subsidiaries. Each of these holding companies depends upon the receipt of sufficient funds from its subsidiaries to meet its obligations.

The terms of our senior credit facility and other debt securities limit the payment of dividends, loan repayments and other distributions to or from these companies under many circumstances. Various agreements governing the debt that may be issued by our subsidiaries from time to time may restrict and, in some cases, may also prohibit the ability of these subsidiaries to move cash within their restricted group. Applicable tax laws may also subject such payments to further taxation.

Applicable law may also limit the amounts that some of our subsidiaries will be permitted to pay as dividends or distributions on their equity interests, or even prevent such payments.

37




The inability to transfer cash among entities within their respective consolidated groups may mean that even though they may have sufficient resources to meet their obligations, they may not be permitted to make the necessary transfers from one entity in their restricted group to another entity in their restricted group in order to make payments to the entity owing the obligations.

We are subject to currency and interest rate risks.

We are subject to currency exchange rate risks because substantially all of our revenues and operating expenses are paid in U.K. pounds sterling, but we pay interest and principal obligations with respect to a portion of our indebtedness in U.S. dollars and euros. To the extent that the pound declines in value against the U.S. dollar and the euro, the effective cost of servicing our U.S. dollar and euro-denominated debt will be higher. Changes in the exchange rate result in foreign currency gains or losses.

We are also subject to interest rate risks. Before taking into account the impact of current hedging arrangements, as of December 31, 2006, we would have had interest determined on a variable basis on £5,025 million, or 82%, of our long term debt. An increase in interest rates of 1% would increase unhedged gross interest expense by £50.3 million per year.

To manage these foreign exchange and interest rate risks, we have entered into a number of derivative instruments, including interest rate swaps, cross-currency swaps and foreign currency forward rate contracts. We are required by our lenders under our senior credit facility to fix the interest rate (whether through coupon or through derivatives) on not less than two thirds of the total debt represented by our senior credit facility and high yield notes, for a period of not less than three years from March 3, 2006. Accordingly, after giving effect to these hedges, an increase in interest rates of 1% would increase our gross interest expense by £18.2 million per year.

We may not have sufficient financial resources to repay our debt upon a change of control.

We may, under some circumstances involving a change of control, be obligated to repay our outstanding indebtedness. The company or any possible acquiror may not have available financial resources necessary to repay that indebtedness in those circumstances.

If we or any possible acquiror cannot repay our outstanding indebtedness in the event of a change of control of the company (if such repayment is required), the failure to do so would constitute an event of default under the agreements under which that indebtedness was incurred and could result in a cross default under other indebtedness that does not have similar provisions.

Risks Relating to Our Common Stock

The market price of our common stock is subject to volatility, as well as to trends in the telecommunications industry in general, which will continue.

The current market price of our common stock may not be indicative of prices that will prevail in the trading markets in the future. Stock prices in the telecommunications sector have historically been highly volatile, and the market price of our common stock could be subject to wide fluctuations in response to numerous factors, many of which will be beyond our control. These factors include actual or anticipated variations in our operational results and cash flow, our earnings releases and our competitors’ earnings releases, announcements of technological innovations, changes in financial estimates by securities analysts, trading volume, rumors of private equity interest in our company, market conditions in the industry and the general state of the securities markets and the market for telecommunications stocks, changes in capital markets that affect the perceived availability of capital to communications companies, governmental legislation or regulation, currency and exchange rate fluctuations, as well as general

38




economic and market conditions, like recessions. Trends in this industry are likely to have a corresponding impact on the price of our common stock.

We may in the future seek to raise funds through equity offerings, which could have a dilutive effect on our common stock.

In the future, we may determine to raise capital through offerings of our common stock, securities convertible into our common stock, or rights to acquire these securities or our common stock. In any case, the result would ultimately be dilutive to our common stock by increasing the number of shares outstanding. We cannot predict the effect this dilution may have on the price of our common stock.

We have not historically paid cash dividends on our common stock, we may not be able to continue to pay dividends, and the failure to do so could adversely affect our stock price.

Until recently, we had not paid any cash dividends on our common stock. The terms of our existing indebtedness limit our ability to pay dividends from cash generated from operations. We may be unable to continue to pay cash dividends on our common stock.

Sales of stock by stockholders in the company may decrease the price of the common stock.

Based on SEC filings to date, the Virgin Group beneficially owns 10.5% of our issued and outstanding common stock; in addition, Franklin Mutual Advisers, LLC beneficially owns 9.2%, Ameriprise Financial Inc. beneficially owns 8.9%, and Mr. William R. Huff beneficially owns 5.7%, of our issued and outstanding common stock.

Some of these stockholders also have rights, subject to various conditions, to require the company to file one or more registration statements covering their shares, or to include their shares in registration statements that the company may file for itself or on behalf of other stockholders.

Subsequent sales by any of these stockholders of a substantial amount of the company’s common stock may significantly reduce the market price of the common stock of the company. Moreover, the perception that these stockholders might sell significant amounts of such common stock could depress the trading price of the company’s common stock for a considerable period. Sales of the company’s common stock, and the possibility of these sales, could make it more difficult for the company to sell equity, or equity related securities, in the future at a time, and price, that it considers appropriate.

Provisions of our debt agreements, our stockholder rights plan, our certificate of incorporation, Delaware law and our contracts could prevent or delay a change of control of us.

We may, under some circumstances involving a change of control, be obligated to repurchase substantially all of our outstanding senior notes and repay our outstanding indebtedness under our senior credit facility and other indebtedness. We or any possible acquiror may not have available financial resources necessary to repurchase those notes or repay that indebtedness in those circumstances.

If we or any possible acquiror cannot repurchase those senior notes or repay our indebtedness under our credit facilities and other indebtedness in the event of a change of control of us, the failure to do so would constitute an event of default under the agreements under which that indebtedness was incurred and could result in a cross-default under other indebtedness that does not have similar provisions. The threat of this could have the effect of delaying or preventing transactions involving a change of control of us, including transactions in which our stockholders would receive a substantial premium for their shares over then current market prices, or otherwise which they may deem to be in their best interests.

Our stockholder rights plan, some provisions of our certificate of incorporation and our ability to issue additional shares of common stock or preferred stock to third parties without stockholder approval may

39




have the effect, alone or in combination with each other, of preventing or making more difficult transactions involving a change of control of us. We are subject to the Delaware business combinations law that, subject to limited exceptions, prohibit some Delaware corporations from engaging in some business combinations or other transactions with any stockholder who owns 15% or more of the corporation’s outstanding voting stock for three years following the date that the stockholder acquired that interest. The terms of certain of our existing agreements relating to changes of control may also have the effect of delaying or preventing transactions involving a change of control of us.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

In the U.K., we own, lease or occupy under license 134 business units and regional offices including our U.K. corporate head offices in Hook, Hampshire. We also maintain an office, which is our principal executive office, under lease in New York City. Twenty two of our corporate real estate sites are unoccupied, representing 16% of our properties or 14% of available accommodation. We continue to explore every opportunity to dispose of these surplus buildings.

In addition, we own or lease facilities at approximately 900 switching centers/head-ends, operational hub-sites, and other types of network sites like points of presence, radio sites and repeater nodes. We also own or lease warehouses and other non-operational properties, as well as operating various cable television, telephone and telecommunications equipment housed in street-cabinet enclosures situated on public and private sites. Currently four of our technical sites are unoccupied, representing a rental expense of approximately 0.9% of our technical sites rents. We are seeking to renegotiate the leases for these properties or dispose of them.

Item 3. Legal Proceedings

We are involved in various other disputes and litigation arising in the ordinary course of our business. None of these matters is expected to have a material adverse effect on our financial position, results of operation or cash flow.

In 2004, Owl Creek Asset Management L.P. and JMB Capital Partners, L.P. filed a complaint in the Supreme Court of the State of New York seeking to hold our subsidiary, Virgin Media Holdings Inc. (formerly NTL Holdings Inc.), and PTV Inc. (NTL Holdings Inc’s. pre-bankruptcy holding company) liable for alleged damages attributable to their trading in NTL common stock on a “when issued” basis prior to the completion of NTL’s plan of bankruptcy in January 2003. A similar claim was brought by Maxcor Financial Inc. in 2005. We settled these matters in February 2007. We paid $182,500 in the settlement to the plaintiffs.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters that were submitted to a vote of our stockholders during the quarter ended December 31, 2006.

40




PART II

Item 5. Market for the Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)           Market Information

Our shares are traded on the Nasdaq National Market under the symbol “VMED” (formerly traded as “NTLI”). The following table sets forth the reported high low price per share of our common stock on the Nasdaq National Market for the periods indicated.

 

 

Price per Share

 

 

 

High

 

Low

 

2005

 

 

 

 

 

First Quarter(1)

 

$

29.25

 

$

25.24

 

Second Quarter(1)

 

$

27.71

 

$

25.14

 

Third Quarter(1)

 

$

27.98

 

$

25.14

 

Fourth Quarter(1)

 

$

27.78

 

$

22.21

 

2006

 

 

 

 

 

First Quarter to March 3, 2006(1)

 

$

27.76

 

$

25.27

 

First Quarter from March 6, 2006

 

$

29.15

 

$

27.00

 

Second Quarter

 

$

29.69

 

$

22.91

 

Third Quarter

 

$

26.90

 

$

21.02

 

Fourth Quarter

 

$

27.50

 

$

23.68

 

2007

 

 

 

 

 

First Quarter (through February 26, 2007)

 

$

28.22

 

$

24.14

 


(1)          Restated for the merger with Telewest. On the merger of NTL and Telewest on March 3, 2006, each shareholder of NTL (now known as Virgin Media Holdings Inc.) received 2.5 shares of stock and shareholders of Telewest received $16.25 in cash and retained 0.287 shares of the company now known as Virgin Media Inc. for each share that Telewest held previously.

Holders

As of February 26, 2007, our transfer agent informed us that there were 468 record holders of our common stock, although there is a much larger number of beneficial owners.

Dividends

On May 18, 2006, August 28, 2006 and November 28, 2006, our board of directors approved and declared the payment of regular quarterly cash dividends of $0.01, $0.02 and $0.02 per share on June 20, 2006, September 20, 2006 and December 20, 2006, to stockholders of record as of June 12, 2006, September 12, 2006, and December 12, 2006, totaling £1.6 million, £3.5 million and £3.4 million, respectively. Future payments of regular quarterly dividends by us are at the discretion of the board of directors and will be subject to our future needs and uses of free cash flow, which could include investments in operations, the repayment of debt, and share repurchase programs. In addition, the terms of our and our subsidiaries’ existing and future indebtedness and the laws of jurisdictions under which those subsidiaries are organized limit the payment of dividends, loan repayments and other distributions to us under many circumstances.

Stock Performance Graph

The following graph compares the cumulative total return on our common stock with the cumulative total return on Standard & Poor’s 500 Stock Index and a Peer Group Index. Because no published index of

41




comparable companies currently reports values on a dividends reinvested basis, we have created a Peer Group Index for purposes of this graph in accordance with the requirements of the SEC. The Peer Group Index is made up of companies that engage in cable television operations and related businesses as a significant element of their overall business, although not all of the companies included in the Peer Group Index participate in all of the lines of business in which we are engaged and some of the companies included in the Peer Group Index also engage in lines of business in which we do not participate. In addition, the market capitalizations of many of the companies included in the Peer Group Index are different from ours.

Furthermore, all of the companies included in the Peer Group Index are U.S. based, whereas our operations are exclusively based in the U.K. and the Republic of Ireland and our U.S. dollar performance is significantly influenced by exchange rate changes. The common stocks of the following companies have been included in the Peer Group Index: Comcast Corporation, Cablevision Systems Corporation, Charter Communications, Inc. and Mediacom Communications Corp.

GRAPHIC

The graph assumes that $100 was invested on January 13, 2003 and all dividends are reinvested. The graph covers only the period from January 13, 2003 to December 31, 2006 because NTL’s common stock was registered under Section 12 of the Exchange Act and started trading on that date.

Total Returns

 

 

January 13,
2003

 

December 31,
2003

 

December 31,
2004

 

December 31,
2005

 

December 31,
2006

 

Virgin Media(1)

 

 

100

 

 

 

352.01

 

 

 

368.21

 

 

 

343.58

 

 

 

319.08

 

 

S&P 500

 

 

100

 

 

 

122.07

 

 

 

135.35

 

 

 

142.00

 

 

 

164.43

 

 

Peer Group

 

 

100

 

 

 

118.97

 

 

 

119.99

 

 

 

94.64

 

 

 

156.52

 

 


(1)          Share prices from January 13, 2003 through March 3, 2006 reflect the historic prices of the common stock of NTL Incorporated prior to its merger with and into a subsidiary of Telewest Global, Inc., in a transaction that was accounted for as a reverse acquisition. The new holding company, Telewest Global, Inc., changed its name to NTL Incorporated on March 3, 2006. From March 6, 2006, share prices reflect the market price for that company, which was renamed Virgin Media Inc. on February 6, 2007.

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(b)   Not applicable.

(c)           Purchases of Equity Securities by the Issuer

Period

 

 

 

(a)
Total Number of
Shares (or Units)
Purchased

 

(b)
Average Price
Paid per Share
(or Unit)

 

(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs

 

(d)
Maximum Number
(or Approximate
Dollar Value of
Shares (or Units)
That May Yet Be
Purchased Under the
Plans or Programs

 

May 17, 2006

 

 

6,027

(1)

 

 

$

27.51

 

 

 

 

 

 

$

 

 

Total

 

 

6,027

 

 

 

$

27.51

 

 

 

 

 

 

$

 

 


(1)          In connection with the merger with Telewest, the U.K. tax rules caused a deemed tax liability to be created for holders of restricted stock who were subject to U.K. tax. Prior to May 17, 2006, Robert C. Gale, our Vice President-Controller, held 32,275 shares of our common stock and restricted stock units, including 17,250 shares of restricted stock vesting in three equal instalments of 5,750 shares on each of May 6, 2006, May 6, 2007 and May 6, 2008. As a result of the merger, Mr. Gale incurred a tax liability with respect to his shares of restricted stock. To satisfy this tax liability, which we paid in cash, we withheld 2,009 shares of common stock from each 5,750 share tranche. The average price paid per share shown in column (b) is our mid-market share price on May 17, 2006, the date of this transaction. Accordingly, 3,741 shares of common stock were delivered in satisfaction of the shares of restricted stock that vested on May 6, 2006, and 3,741 shares of common stock remain subject to restrictions that will lapse (subject to Mr. Gale’s continued employment) on each of May 6, 2007, and May 6, 2008.

Item 6. Selected Financial Data

The selected consolidated financial information presented below should be read in conjunction with the consolidated financial statements and notes thereto and the information contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this annual report. Historical results are not necessarily indicative of future results.

On July 4, 2006, we acquired 100% of the outstanding shares and options of Virgin Mobile Holdings (UK) plc, or Virgin Mobile, through a U.K. Scheme of Arrangement. Virgin Mobile is the largest mobile virtual network operator in the United Kingdom, with approximately 4.5 million customers.

On March 3, 2006, NTL merged with a subsidiary of Telewest, which changed its name to NTL Incorporated. Because this transaction is accounted for as a reverse acquisition, the financial statements included in this Form 10-K for the period through March 3, 2006 are those of NTL, which is now known as Virgin Media Holdings Inc. For the period since March 3, 2006 these financial statements reflect the reverse acquisition of Telewest. See note 1 to the consolidated financial statements of Virgin Media Inc.

On May 9, 2005, we sold our operations in the Republic of Ireland. We have restated the historical consolidated financial information to account for the Ireland operations as a discontinued operation. The assets and liabilities of the Ireland operations have been reclassified as assets held-for-sale and liabilities of discontinued operations, respectively, and the results of operations of the Ireland operations have been removed from our results of continuing operations for all periods presented.

Following the disposal of our operations in the Republic of Ireland, all of our revenue from continuing operations and substantially all of our assets are denominated in U.K. pounds sterling. Consequently, we now report our results in pounds sterling. Financial information for all periods presented has been restated accordingly.

We entered into an agreement for the sale of our Broadcast Operations on December 1, 2004 and closed the sale on January 31, 2005. As of December 31, 2004, we accounted for the Broadcast operations

43




as a discontinued operation. Therefore, the results of operations of the Broadcast operations have been excluded from the components of loss from continuing operations and the assets and liabilities of the Broadcast operations have been reported as assets held-for-sale and liabilities of discontinued operations, respectively, for all periods presented.

We operated our business as a debtor-in possession subject to the jurisdiction of the Bankruptcy Court beginning on May 8, 2002, the date that we, NTL Europe and certain of our and NTL Europe’s subsidiaries filed the Plan under Chapter 11 of the U.S. Bankruptcy Code, until January 10, 2003. Accordingly, we have prepared our consolidated financial statements in accordance with SOP 90-7.

Upon emergence from Chapter 11 reorganization and in accordance with the Plan, all of our outstanding public notes were canceled other than the notes issued by Diamond Holdings Limited and NTL (Triangle) LLC, and we acquired all of the outstanding public notes of Diamond Cable Communications Limited. In connection with our emergence from Chapter 11 reorganization, some of our subsidiaries and we issued $558.2 million aggregate principal amount at maturity of 19% senior secured notes due 2010, or Exit Notes, on January 10, 2003. Initial purchasers of our Exit Notes also purchased 500,000 shares of our common stock on that date. The gross proceeds from the sale of the Exit Notes and such shares totaled $500.0 million, or £310.7 million.

We adopted fresh-start reporting upon our emergence from Chapter 11 reorganization in accordance with SOP 90-7. For financial reporting purposes, the effects of the completion of the Plan as well as adjustments for fresh-start reporting have been recorded as of January 1, 2003. Pursuant to fresh-start reporting, a new entity was deemed to have been created for financial reporting purposes. The carrying values of our assets were adjusted to their reorganization values, which are equivalent to their estimated fair values at January 1, 2003. The carrying values of our liabilities were adjusted to their present values at January 1, 2003. The term “Predecessor Company” refers to our subsidiaries and us for periods prior to and including December 31, 2002. The term “Reorganized Company” refers to our subsidiaries and us for periods subsequent to January 1, 2003. The effects of the completion of the Plan as well as adjustments for fresh-start reporting recorded as of January 1, 2003 are Predecessor Company transactions. All other results of operations on January 1, 2003 are Reorganized Company transactions.

On November 17, 2003, we completed a rights offering, pursuant to which 35,853,465 shares of our common stock were issued. In connection with the rights offering, we received gross proceeds of $1,434 million, or £846.0 million. From the net proceeds of $1,367 million, or £806.5 million, we repaid in full all obligations under our Exit Notes and, together with cash on hand, our working capital facility. In addition, we used part of the net proceeds as inter-company funding to one of our subsidiaries and the balance for general corporate purposes.

We have a number of stock-based employee compensation plans. Effective January 1, 2003, we adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, or FAS 123. We selected the prospective method of adoption permitted by FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, or FAS 148. Accordingly, the recognition provisions will be applied to all employee awards granted, modified or settled after January 1, 2003. In the year ended December 31, 2006, we recognized £36.7 million of stock-based compensation and in the year ended December 31, 2005, we recognized £9.8 million of stock-based compensation.

Pursuant to SOP 90-7, beginning on May 8, 2002 we ceased accruing interest expense on some of our pre-petition obligations. Our reported interest expense in 2002 excludes £429.4 million of contractual interest for the period from May 8, 2002 to December 31, 2002. Also in 2002, recapitalization expenses were £101.8 million. Recapitalization expenses include all transactions incurred as a result of our Chapter 11 reorganization. Recapitalization expenses include £24.1 million for employee retention related to substantially all of our U.K. employees and £77.7 million for financial advisory, legal, accounting and consulting costs.

44




In addition, in 2002 we recorded asset impairment charges of £277.0 million consisting of non-cash charges to write down some fixed assets of £37.3 million, and goodwill of £239.7 million. We also recorded restructuring charges of £57.9 million and non-cash charges of £189.3 million primarily for allowances for the cancellation of receivables from NTL Europe in accordance with the Plan. Amortization expense in 2002 decreased from amounts in prior periods owing to the adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, or FAS 142, on January 1, 2002, which ended the amortization of goodwill and other indefinite lived intangible assets.

 

 

Year ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

 

 

2002

 

 

 

Reorganized
Company

 

Reorganized
Company

 

Reorganized
Company

 

Reorganized
Company

 

 

 

Predecessor
Company(2)

 

 

 

(in millions, except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

£

3,602.2

 

 

 

£

 1,947.6

 

 

 

£

 2,000.3

 

 

 

£

 1,887.4

 

 

 

 

 

£

 1,854.5

 

 

Operating income (loss)

 

 

9.8

 

 

 

(19.7

)

 

 

(52.5

)

 

 

(194.4

)

 

 

 

 

(955.2

)

 

Loss from continuing operations

 

 

(509.2

)

 

 

(241.7

)

 

 

(509.4

)

 

 

(606.7

)

 

 

 

 

(1,611.6

)

 

Basic and diluted loss from continuing operations per share (pro forma for 2002)(1)

 

 

£

(1.74

)

 

 

£

 (1.13

)

 

 

£

 (2.34

)

 

 

£

 (3.84

)

 

 

 

 

£

 (10.83

)

 

Average number of shares outstanding (pro forma for 2002)(1)

 

 

292.9

 

 

 

213.8

 

 

 

218.0

 

 

 

158.0

 

 

 

 

 

148.8

 

 


(1)          Pro forma basic and diluted loss from continuing operations per share for 2002 is computed assuming the following shares were outstanding for these years: 125.0 million shares issued in connection with the Plan, 1.3 million shares issued in connection with the issuance of the Exit Notes due 2010 and 22.5 million shares as an adjustment to give effect to the impact of the rights offering.

(2)          On January 1, 2003, we adopted fresh-start reporting in accordance with SOP 90-7. As a result, on January 1, 2003, we recognized £3,655.8 million for both operating income and income from continuing operations.

 

 

As of December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

 

 

2002

 

 

 

Reorganized
Company

 

Reorganized
Company

 

Reorganized
Company

 

Reorganized
Company

 

 

 

Predecessor
Company

 

 

 

(in millions)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and marketable securities

 

 

£

418.5

 

 

 

£

 832.1

 

 

 

£

  136.8

 

 

 

£

 446.1

 

 

 

 

 

£

 315.1

 

 

Working capital

 

 

(604.4

)

 

 

529.9

 

 

 

(286.8

)

 

 

(48.1

)

 

 

 

 

(4,224.4

)

 

Fixed assets

 

 

6,026.3

 

 

 

3,294.9

 

 

 

3,531.6

 

 

 

3,857.2

 

 

 

 

 

6,487.1

 

 

Total assets

 

 

11,243.5

 

 

 

4,988.5

 

 

 

5,493.3

 

 

 

6,262.1

 

 

 

 

 

8,102.8

 

 

Long term debt(1)

 

 

6,159.1

 

 

 

2,280.0

 

 

 

3,013.5

 

 

 

3,211.9

 

 

 

 

 

9,795.9

 

 

Shareholders’ equity (deficit)

 

 

3,230.1

 

 

 

1,955.0

 

 

 

1,574.5

 

 

 

2,068.6

 

 

 

 

 

(3,218.9

)

 

Dividends declared per common share

 

 

£

0.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)          As of December 31, 2002, long term debt of £3,698.2 million was classified as current and £6,097.7 million was classified as liabilities subject to compromise.

45




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Virgin Media Inc. is a leading U.K. entertainment and communications business providing the first “quad-play” offering of television, broadband, fixed line telephone and mobile telephone services in the United Kingdom. We are the U.K.’s most popular residential broadband and pay-as-you-go mobile provider and the second largest provider in the U.K. of pay television and fixed line telephone services.

Virgin Media Television, or Virgin Media TV, and ntl:Telewest Business also operate under the Virgin Media umbrella. Virgin Media TV provides a broad range of programming through its eleven wholly-owned channels, such as LivingTV and Bravo; through UKTV, its joint ventures with BBC Worldwide; and through the portfolio of retail television channels operated by sit-up tv. ntl:Telewest Business provides a complete portfolio of voice, data and internet solutions to leading businesses, public sector organizations and service providers in the U.K.

We presently manage our business through three reportable segments:

·       Cable: our cable segment includes the distribution of television programming over our cable network and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations, both on our cable network and to a lesser extent off our network;

·       Mobile: our mobile segment includes the provision of mobile telephone services under the name Virgin Mobile to consumers over cellular networks owned by T-Mobile; and

·       Content: our content segment includes the operations of our U.K. television channels, such as LivingTV and Bravo and sit-up’s portfolio of retail television channels. Although not included in our content segment revenue, our content team also oversees our interest in the UKTV television channels, through our joint ventures with BBC Worldwide.

For further discussion of our business please refer to Item 1.

Revenue

Our revenue by segment for the years ended December 31, 2006, 2005 and 2004 was as follows (in millions):

 

 

Year ended December 31,

 

 

 

2006

 

2005

 

2004

 

Cable Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

£

2,393.3

 

66.4

%

£

1,520.0

 

78.0

%

£

1,507.3

 

75.4

%

Business

 

614.0

 

17.1

 

427.6

 

22.0

 

493.0

 

24.6

 

 

 

3,007.3

 

83.5

 

1,947.6

 

100.0

 

2,000.3

 

100.0

 

Mobile Segment

 

292.1

 

8.1

 

 

 

 

 

Content Segment

 

302.8

 

8.4

 

 

 

 

 

 

 

£

3,602.2

 

100.0

%

£

1,947.6

 

100.0

%

£

2,000.3

 

100.0

%

 

The principal sources of revenue within each segment are:

Cable

·       consumer—monthly fees and usage charges for telephone service, cable television service and internet access; and

·       business—monthly fees and usage charges for inbound and outbound voice, data and internet services and charges for transmission, fiber and voice services provided to other telecommunications service providers over our national network.

46




Mobile

·       mobile services—monthly fees and usage charges for airtime, data, roaming and long-distance calls; and

·       mobile handset and other equipment—charges for the supply of equipment.

Content

·       advertising—on television airing of advertising from advertisers or advertising agencies;

·       programming services—on transmission of television programs based on the numbers of customers subscribing to programming packages; and

·       transactional and interactive—on delivery of services.

Expenses

The principal components of our operating costs and selling, general and administrative expenses within each segment include:

Cable

·       interconnection costs paid to carriers related to telephone services;

·       television programming costs;

·       costs of maintaining our cable network infrastructure;

·       payroll and other employee-related costs;

·       marketing and selling costs;

·       facility related costs, such as rent, utilities and rates; and

·       allowances for doubtful accounts.

Mobile

·       interconnection costs paid to other carriers related to mobile telephony services;

·       purchase costs of mobile handsets and other equipment;

·       subscriber acquisition costs;

·       marketing and selling costs;

·       payroll and other employee-related cost;

·       repairs and maintenance costs;

·       facility related costs, such as rent, utilities and rates; and

·       allowances for doubtful accounts.

Content

·       television production programming costs;

·       amortization of television and movie program costs;

·       costs of purchasing consumer goods for re-sale;

·       leased satellite transponder costs;

47




·       payroll and other employee-related costs;

·       marketing and selling costs;

·       repairs and maintenance costs;

·       facility related costs, such as rent, utilities and rates; and

·       allowances for doubtful accounts.

Acquisitions and Disposals

Acquisition of Virgin Mobile

On July 4, 2006, we acquired 100% of the outstanding shares and options of Virgin Mobile through a U.K. Scheme of Arrangement for a purchase price totaling £952.2 million, including cash of £418.2 million, common stock valued at £518.8 million and estimated direct transaction costs of £15.2 million.

Reverse Acquisition of Telewest

On March 3, 2006, NTL merged with a subsidiary of Telewest and the merger has been accounted for as a reverse acquisition of Telewest using the purchase method. In connection with this transaction, Telewest changed its name to NTL Incorporated, and has since changed its name to Virgin Media Inc. The total purchase price was £3.5 billion, including cash of £2.3 billion, common stock valued at £1.1 billion, stock options with a fair value of £29.8 million and estimated direct transaction costs of £25.1 million.

Sale of Broadcast and Ireland Operations

On January 31, 2005, we sold our Broadcast operations, a provider of commercial television and radio transmission services, to a consortium led by Macquarie Communications Infrastructure Group. The cash proceeds from the sale were £1.3 billion. Our Broadcast operations provided site leasing, broadcast transmission, satellite, media, public safety communications and other network services, utilizing broadcast transmission infrastructure, wireless communications and other facilities.

On May 9, 2005, we sold our telecommunications operations in the Republic of Ireland to MS Irish Cable Holdings B.V., an affiliate of Morgan Stanley for an aggregate purchase price of 333.4 million, or £225.5 million.

As a result of the sale of our Broadcast and Ireland operations, we have accounted for the Broadcast and Ireland operations as discontinued operations. Financial information for all prior periods presented in this report is restated accordingly. The results of operations for the Broadcast and Ireland operations have been excluded from the components of loss from continuing operations and shown in a separate caption, titled income from discontinued operations.

Factors Affecting Our Business

Cable Segment

Our Cable segment residential customers account for the majority of our total revenue. The number of residential customers, the number and types of services that each customer uses and the prices we charge for these services drive our revenue. Our profit is driven by the relative margins on the types of services we provide to these customers and by the number of services that we provide to them. For example, broadband internet is more profitable than our television services and, on average, our “triple-play” customers are more profitable than “double-play” or “single-play” customers. Our packaging of services and our pricing are designed to encourage our customers to use multiple services such as television, telephone and broadband at a lower price than each stand-alone product on a combined basis. Factors particularly affecting our profitability include customer churn, average revenue per user (ARPU),

48




competition, the success of our integration efforts, capital expenditures, currency movements and seasonality.

Customer Churn.   Customer churn is a measure of the number of customers who stop using our services. An increase in our customer churn can lead to increased costs and reduced revenue. We continue to focus on improving our customer service and enhancing and expanding our service offerings to existing customers in an effort to manage our customer churn rate. Our ability to reduce our customer churn rate beyond a base level is limited by factors like customers moving outside our network service area, in particular during the summer season. Managing our customer churn rate is a significant component of our business plan. Our customer churn rate may increase if our customer service is seen as unsatisfactory, if we are unable to deliver our services over our network without interruption, or if we fail to match offerings by our competitors.

Cable ARPU.   Average Revenue Per User, or ARPU, is a measure we use to evaluate how effectively we are realizing potential revenue from customers. We believe that our “triple-play” cable offering of television, broadband and fixed line telephone services is attractive to our existing customer base and allows us to increase our Cable ARPU by facilitating the sale of multiple services to each customer. Cable ARPU excludes any recognition of revenue from our Mobile segment. With the acquisition of Virgin Mobile we are now able to offer “quad-play” of television, broadband, mobile and fixed line telephone services, which we believe will enhance our competitiveness and growth opportunities.

Competition.   Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant competition in the market for our consumer services, including broadband and telephone services offered by British Telecom (“BT”) and resellers or local loop unbundlers, alternative internet access services like DSL, satellite television services offered by British Sky Broadcasting Group plc (“BSkyB”), digital terrestrial television offered through Freeview, internet protocol television offered by Tiscali S.p.A. (“Tiscali”) and BT, and mobile telephone services offered by other mobile telephone operators. Our business services also face a range of competitors, including BT and Cable & Wireless. Certain competitors, such as BT and BSkyB, are dominant in markets in which we compete and may use their dominance in those markets to offer bundled services that include two or more of our product offerings. If competitive forces prevent us from charging the prices for these services that we plan to charge, or if our competition is able to attract our customers or potential customers we are targeting, our results of operations will be adversely affected.

Integration.   We are presently integrating our legacy NTL and Telewest cable businesses. This involves the incurrence of substantial operating and capital expenditures and, in some cases, involves the outsourcing of key functions in an effort to achieve synergies through the integration of the two businesses. For example, we are consolidating our billing platforms over the next twelve months. While these integration efforts are presently on track, any issues that may arise in connection with our integration could have a material negative effect on our financial performance.

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

Currency Movements.   We encounter currency exchange rate risks because substantially all of our revenue and operating costs are earned and paid primarily in U.K. pounds sterling, but we pay interest and principal obligations with respect to a portion of our existing indebtedness in U.S. dollars and euros. We have implemented a hedging program to seek to mitigate the risk from these exposures. The objective of this program is to reduce the volatility of our cash flows and earnings caused by changes in underlying rates.

49




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

Mobile Segment

Competition.   Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant competition in our markets from mobile operators, including O2, Vodafone, Orange, T-Mobile and 3, and from other mobile virtual network operators, including Tesco Mobile, BT Mobile and Carphone Warehouse. Many of our competitors are part of large multinational groups, have substantial advertising and marketing budgets, and have a significant retail presence. If competitive forces prevent us from charging the prices for these services that we plan to charge, or if our competition is able to attract our customers or potential customers we are targeting, our results of operations will be adversely affected.

Seasonality.   Some revenue streams and cost drivers are subject to seasonal factors. For example, in the fourth quarter of each year our customer acquisition and retention costs typically increase due to the Christmas period. Our ARPU generally decreases in the first quarter of each year due to the fewer number of days in February and lower usage after the Christmas period.

Distribution.   We rely upon third parties to distribute our mobile products and services. If any of these distribution partners were to cease to act as distributors for our products and services, or the commissions or other costs charged by the third parties were to increase, our ability to gain new customers or retain existing customers may be adversely affected.

Content Segment

Competition.   Our television programming competes with other broadcasters for advertising revenues, subscription revenues, and programming rights. sit-up competes with a large variety of retailers in the U.K. market and with other television channels for audiences.

Limited Number of Buyers with Market Power.   Other than our own Cable segment, the primary buyer of our television channels is BSkyB. BSkyB has recently used its market power to reduce, and in some cases, eliminate the fees that it pays us to carry our channels. This is expected to reduce our content segment revenues in 2007 by approximately £30 million.

Access to Content.   Some of the television program content is purchased, mainly from the U.S. Because there is a limited supply of content available and an increasing number of digital channels in the U.K., Virgin Media TV may experience an increase in the cost of programming.

Seasonality.   Our Content segment incurs increased costs in the fourth quarter of each year due to the need to provide enhanced programming over the important Christmas holiday period. Also, sit-up generally records increased revenues and costs in the fourth quarter due to generally higher retail sales in the lead up to the Christmas holiday.

Critical Accounting Policies

Our consolidated financial statements and related financial information are based on the application of accounting principles generally accepted in the U.S., or GAAP. GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported, as well as disclosures about contingencies, risk and financial condition. The following critical accounting policies have the potential to have a more significant impact on our financial statements. An impact could occur because of the significance of the

50




financial statement item to which these policies relate, or because these policies require more judgment and estimation than other matters owing to the uncertainty related to measuring, at a specific point in time, transactions that are continuous in nature.

These policies may need to be revised in the future in the event that changes to our business occur.

Business Combinations

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their fair values. We engage third party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts and customer lists; the trademark’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s assumptions about fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect management’s estimates.

Other estimates associated with the accounting for these acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. In particular, liabilities in relation to tax exposures or liabilities to restructure the pre-acquisition businesses of NTL, Telewest and Virgin Mobile, including the exit of properties and termination of employees, are subject to change as management completes its assessment of pre-merger operations and begins to execute the approved plan for the integration of the three companies.

Impairment of Long-Lived Assets and Indefinite-Lived Assets

Long-lived assets and certain identifiable intangibles (intangible assets that do not have indefinite lives) to be held and used by an entity are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indications of impairment are determined by reviewing undiscounted projected future cash flows. If impairment is indicated, the amount of the impairment is the amount by which the carrying value exceeds the fair value of the assets.

Goodwill arising from business combinations, reorganization value in excess of amounts allocable to identifiable assets and intangible assets with indefinite lives are subject to annual review for impairment (or more frequently should indications of impairment arise). Impairment of goodwill and reorganization value in excess of amounts allocable to identifiable assets is determined using a two-step approach, initially based on a comparison of the reporting unit’s fair value to its carrying value; if the fair value is lower than the carrying value, then the second step compares the asset’s fair value (implied fair value for goodwill and reorganization value in excess of amounts allocable to identifiable assets) with its carrying value to measure the amount of the impairment. Impairment of intangible assets with indefinite lives is determined based on a comparison of fair value to carrying value. Any excess of carrying value over fair value is recognized as an impairment loss. We evaluate our cable reporting unit for impairment on an annual basis as at December 31, while all other reporting units are evaluated as at June 30. In the future, we may incur impairment charges under SFAS No. 142 if market values decline and we do not achieve expected cash flow growth rates.

Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and those

51




estimates include inherent uncertainties, including those relating to the timing and amount of future cash flows and the discount rate used in the calculation. Assumptions used in these cash flows are consistent with our internal forecasts. If actual results differ from the assumptions used in the impairment review, we may incur additional impairment charges in the future.

Income Taxes

Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, income tax rates, and tax planning opportunities available in the jurisdictions in which we operate. From time to time, we engage in transactions in which the tax consequences may be subject to some uncertainty. Examples of such transactions include business acquisitions and disposals, issues related to consideration paid or received in connection with acquisitions, and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations.

At each period end, it is necessary for us to make certain estimates and assumptions to compute the provision for income taxes including, but not limited to the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in the United Kingdom and the extent to which this income (or loss) may also be taxed in the United States, permanent and temporary differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to matters such as business acquisitions and disposals and certain financing transactions including intercompany transactions, amongst others, and we accrue a liability when we believe an assessment may be probable and the amount is estimable. In accordance with generally accepted accounting principles, the impact of revisions to these estimates are recorded as income tax expense or benefit in the period in which they become known. Accordingly, the accounting estimates used to compute the provision for income taxes have and will change as new events occur, as more experience is acquired, as additional information is obtained and our tax environment changes.

Fixed Assets

Labor and overhead costs directly related to the construction and installation of fixed assets, including payroll and related costs of some employees and related rent and other occupancy costs, are capitalized. The payroll and related costs of some employees that are directly related to construction and installation activities are capitalized based on specific time devoted to these activities where identifiable. In cases where the time devoted to these activities is not specifically identifiable, we capitalize costs based upon estimated allocations. Costs associated with initial customer installations are capitalized. The costs of reconnecting the same service to a previously installed premise are charged to expense in the period incurred. Costs for repairs and maintenance are charged to expense as incurred.

We assign fixed assets and intangible assets useful lives that impact the annual depreciation and amortization expense. The assignment of useful lives involves significant judgments and the use of estimates. Our managers use their experience and expertise in applying judgments about appropriate estimates. Changes in technology or changes in intended use of these assets may cause the estimated useful life to change, resulting in higher or lower depreciation charges or asset impairment charges.

Restructuring Costs

As of January 1, 2003, we adopted FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or FAS 146, and recognize a liability for costs associated with restructuring activities

52




when the liability is incurred. The adoption of FAS 146 did not have a significant effect on our results of operations, financial condition or cash flows.

Prior to 2003, we recognized a liability for costs associated with restructuring activities at the time a commitment to restructure was given, in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a restructuring). Liabilities for costs associated with restructuring activities initiated prior to January 1, 2003 continue to be accounted for under EITF 94-3.

In relation to our restructuring activities, we have recorded a liability of £108.1 million as of December 31, 2006 relating to lease exit costs of properties that we have vacated. In calculating the liability, we make a number of estimates and assumptions including the timing of ultimate disposal of the properties, our ability to sublet the properties either in part or as a whole, amounts of sublet rental income achievable including any incentives required to be given to sublessees, and amounts of lease termination costs.

Recent Accounting Pronouncements

In June 2005, the FASB issued FSP FAS 143-1, Accounting for Electronic Equipment Waste Obligations (“FSP 143-1”). The FASB issued the FSP to address the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive adopted by the European Union (EU). FSP 143-1 requires that the commercial user should apply the provisions of FASB Statement No. 143 and the related FASB Interpretation No. 47 to certain obligations associated with historical waste (as defined by the Directive), since this type of obligation is an asset retirement obligation. The FSP is effective for the later of the first reporting period ending after June 8, 2005 or the Directive’s adoption into law by the applicable EU-member country. The Directive was adopted by the U.K. on December 12, 2006, and is effective January 2, 2007. Management have reviewed their obligations under the law and concluded that an obligation exists for certain of our customer premises equipment. As a result we have recognized a retirement obligation of £58.2 million and fixed assets of £24.4 million on the balance sheet and a cumulative effect change in accounting principle of £33.8 million in the statement of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to retained earnings. We adopted FIN 48 effective January 1, 2007. We are continuing to evaluate the impact of adopting FIN 48, but do not anticipate any significant impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and we are required to adopt it in the first quarter of 2008. We are currently evaluating the effect that the adoption of SFAS 157 will have on our consolidated results of operations and financial condition and are not yet in a position to determine its effects.

In September 2006, the SEC issued SAB No.108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides

53




guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of a company’s balance sheet and statement of operations and the related financial statement disclosures. SAB 108 is effective for fiscal years ending after December 15, 2006. The adoption of SAB 108 did not have a material impact on our consolidated financial statements.

Consolidated Results of Operations from Continuing Operations

Years ended December 31, 2006 and 2005

Revenue

For the year ended December 31, 2006, revenue increased by 85.0% to £3,602.2 million from £1,947.6 million for 2005. This increase is primarily due to the reverse acquisition of Telewest and the inclusion of its revenues from March 3, 2006, and to the acquisition of Virgin Mobile and the inclusion of its revenues from July 4, 2006.

Cable ARPU has increased steadily through the year, reflecting our drive to encourage “triple-play” bundling and a focus on better quality customers. Our focus on acquiring new bundled customers and on cross-selling to existing customers is shown by Revenue Generating Units (RGUs) per customer increasing from 1.99 at December 31, 2005 to 2.17 at December 31, 2006 and by the percentage of our customers with “triple-play” growing from 29.3% at December 31, 2005 to 40.6% at December 31, 2006. These increases arise primarily because the number of RGUs per customer and the percentage of customers with “triple-play” were higher in the legacy Telewest business than in NTL.

Expenses

Operating costs.   For the year ended December 31, 2006, operating costs, including network expenses, increased by 94.6% to £1,572.8 million from £808.3 million during the same period in 2005. This increase is primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile. Operating costs as a percentage of revenue increased to 43.7% for the year ended December 31, 2006, from 41.5% for the same period in 2005, in part due to the inclusion of the Telewest content segment subsequent to the reverse acquisition of Telewest and the new Mobile segment subsequent to the acquisition of Virgin Mobile, since these segments have lower margins than our Cable segment.

Selling, general and administrative expenses.   For the year ended December 31, 2006, selling, general and administrative expenses increased by 87.8% to £906.9 million from £483.0 million for the same period in 2005. This increase is primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile. Selling, general and administrative expenses as a percentage of revenue increased slightly to 25.2% for the year ended December 31, 2006, from 24.8% for the same period in 2005, partly due to costs incurred in connection with the integration of NTL and Telewest and increased stock based compensation expense offset by savings from lower employee related costs as a result of involuntary employee terminations in the year ended December 31, 2006.

In January 2007, we began the extensive marketing campaign behind our new Virgin Media rebrand. We expect this to increase our normal marketing and advertising costs by over £25.0 million in 2007.

Other charges

Other charges of £67.0 million in the year ended December 31, 2006 relate primarily to employee termination costs and lease exit costs in connection with our restructuring programs initiated in respect of the reverse acquisition of Telewest.

54




The following table summarizes our historical restructuring provisions (in millions):

Historical Restructuring Provisions

 

 

 

Involuntary
Employee
Termination
and Related
Costs

 

Lease
Exit
Costs

 

Total

 

Balance, January 1, 2006

 

 

£

 

 

£

45.3

 

£

45.3

 

Charged to expense

 

 

 

 

4.0

 

4.0

 

Utilized

 

 

 

 

(5.9

)

(5.9

)

Balance, December 31, 2006

 

 

£

 

 

£

43.4

 

£

43.4

 

 

The following table summarizes our restructuring provisions resulting primarily from the reverse acquisition of Telewest (in millions):

Acquisition Restructuring Provisions

 

 

 

Involuntary
Employee
Termination
and Related
Costs

 

Lease
Exit
Costs

 

Total

 

Balance, January 1, 2006

 

 

£

 

 

£

 

£

 

Provisions resulting from business acquisition recognized under EITF 95-3

 

 

43.2

 

 

45.9

 

89.1

 

Charged to expense

 

 

40.3

 

 

22.7

 

63.0

 

Utilized

 

 

(64.8

)

 

(3.9

)

(68.7

)

Balance, December 31, 2006

 

 

£

18.7

 

 

£

64.7

 

£

83.4

 

 

Depreciation expense

For the year ended December 31, 2006, depreciation expense increased to £799.1 million from £541.7 million for the same period in 2005. This increase is primarily attributable to the reverse acquisition of Telewest and related fair value adjustment to the property and equipment acquired, and to the acquisition of Virgin Mobile. Excluding the impact of the reverse acquisition of Telewest and of the acquisition of Virgin Mobile, depreciation expense has decreased due to the absence of depreciation on some assets that became fully depreciated in 2005.

Amortization expense

For the year ended December 31, 2006, amortization expense increased to £246.6 million from £109.5 million for the same period in 2005. The increase in amortization expense relates to additional intangible assets arising from the reverse acquisition of Telewest and from the acquisition of Virgin Mobile.

Interest income and other

For the year ended December 31, 2006, interest income and other increased to £34.7 million from £29.4 million for the year ended December 31, 2005, primarily as a result of increased interest rates and additional cash balances throughout  the year.

Interest expense

For the year ended December 31, 2006, interest expense increased to £457.4 million from £235.8 million for the same period in 2005, primarily as a result of the additional borrowing as a result of the reverse acquisition of Telewest and the acquisition of Virgin Mobile.

55




We paid cash interest of £327.1 million for the year ended December 31, 2006, and £216.8 million for the year ended December 31, 2005. The increase in cash interest payments resulted from the effects of the new senior credit facility and senior bridge facility in respect of the reverse acquisition of Telewest and the acquisition of Virgin Mobile, and changes in timing of interest payments.

Loss on extinguishment of debt

For the year ended December 31, 2006, loss on extinguishment of debt was £32.8 million, and relates primarily to the write off of deferred financing costs on the senior credit facility that was repaid upon completion of the refinancing of the reverse acquisition of Telewest.

For the year ended December 31, 2005, loss on extinguishment of debt was £2.0 million, and related to the redemption of the $100 million floating rate senior notes due 2012 on July 15, 2005.

Foreign currency transaction gains (losses)

For the year ended December 31, 2006, foreign currency transaction losses were £90.1 million as compared with gains of £5.3 million for 2005. The foreign currency losses in the year ended December 31, 2006 were largely comprised of foreign exchange losses of £70.8 million on U.S. dollar forward purchase contracts that were entered into to hedge the repayment of the U.S. dollar denominated bridge facility. The repayment of $3.1 billion of this facility on June 19, 2006 resulted in an offsetting gain during the period of £120.7 million that has been recorded as a component of equity. The foreign currency transaction gains in the year ended December 31, 2005 include gains of £43.7 million on the forward rate contracts and collars taken out in December 2005 in connection with £1.8 billion of the expected cash purchase price of Telewest offset by losses on the revaluation of foreign currency denominated long term debt and related forward contracts. Our results of operations will continue to be affected by foreign exchange rate fluctuations since £827.7 million of our indebtedness is denominated in U.S. dollars and £487.1 million is denominated in euros.

Gain from derivative instruments

The gain from derivative instruments of £1.3 million in the year ended December 31, 2006, mainly relates to favorable movements in the fair value of sterling interest rate swaps.

Income tax benefit

For the year ended December 31, 2006, income tax benefit was £11.8 million as compared with income tax expense of £18.8 million for the same period in 2005. The 2006 and 2005 (benefit)/expense is composed of (in millions):

 

 

2006

 

2005

 

U.S. state and local income tax

 

£

 

£

(1.3

)

Foreign tax

 

(2.7

)

   —

 

Deferred U.S. income tax

 

(8.6

)

18.7

 

Alternative minimum tax

 

(0.5

)

1.4

 

Total

 

£

(11.8

)

£

18.8

 

 

In 2006, we received refunds of £1.3 million of the U.S. alternative minimum tax and £0.1 million of U.S. state and local tax. We also paid £3.1 million of U.S. federal income tax in respect of pre-acquisition periods of Telewest. In addition, we paid £4.6 million of U.K. tax expense in respect of pre-acquisition periods of Virgin Mobile. In 2005, we paid £2.2 million of the U.S. alternative minimum tax.

56




Loss from continuing operations

For the year ended December 31, 2006, loss from continuing operations was £509.2 million compared with a loss of £241.7 million for the same period in 2005. The increase in loss from continuing operations is primarily attributable to the reverse acquisition of Telewest and the acquisition of Virgin Mobile together with the associated increases in depreciation, amortization, interest expense, foreign exchange losses and loss on extinguishment of debt partially offset by increased income from those acquisitions during the year.

Cumulative effect of changes in accounting principle

In June 2005, the Financial Accounting Standards Board issued FSP FAS 143-1, Accounting for Electronic Waste Obligations (FSP 143-1) addressing the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive adopted by the European Union (EU). FSP 143-1 requires that the commercial user should apply its provisions to certain obligations associated with historical waste (as defined by the Directive), since this type of obligation is an asset retirement obligation. The Directive was adopted by the U.K. on December 12, 2006, and is effective January 2, 2007. Management have reviewed their obligations under the law and have concluded that an obligation exists for certain of our customer premises equipment. As a result we have recognized a retirement obligation of £58.2 million and fixed assets of £24.4 million on the balance sheet and a cumulative effect change in accounting principle of £33.8 million in the consolidated statement of operations.

Loss from continuing operations per share

Basic and diluted loss from continuing operations per common share for the year ended December 31, 2006 was £1.74 compared to £1.13 for the year ended December 31, 2005. Basic and diluted loss from continuing operations per share is computed using a weighted average of 292.9 million shares issued in the year ended December 31, 2006 and a weighted average of 213.8 million shares issued for the same period in 2005. Options and warrants to purchase 37.4 million shares at December 31, 2006 are excluded from the calculation of diluted loss from continuing operations per share, since the inclusion of such options and warrants is anti-dilutive.

Segment Information

A description of the products and services, as well as year-to-date financial data, for each segment can be found below in note 20 to Virgin Media’s consolidated financial statements. The segment results for the year ended December 31, 2006 included in our consolidated financial statements are reported on an actual basis and include the results of Telewest from March 3, 2006 and the results of Virgin Mobile from July 4, 2006.

The results of operations of each of our Cable and Content segments for the years ended December 31, 2006 and 2005 are reported in this section on a pro forma combined basis as if the reverse acquisition of Telewest had occurred at the beginning of the periods presented and combine Telewest’s historical Content and sit-up segments into the combined company’s Content segment. The pro forma data has been calculated on a basis consistent with the pro forma financial information filed with the Securities and Exchange Commission under our Form 8-K/A on May 10, 2006. We believe that a pro forma comparison of these segments is more relevant than a historic comparison as: (a) in respect of our Cable segment, the size of the acquired legacy Telewest cable business would obscure any meaningful discussion of changes in our Cable segment if viewed on a historical basis; and (b) we did not have a Content segment in 2005. Comparative pro forma results of our Mobile segment have not been presented.

57




The reportable segments disclosed in this Form 10-K are based on our management organizational structure as of December 31, 2006. Future changes to this organizational structure may result in changes to the reportable segments disclosed.

Segment operating income before depreciation, amortization and other charges, which we refer to as Segment OCF, is management’s measure of segment profit as permitted under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”. Our management, including our chief executive officer who is our chief operating decision maker, considers Segment OCF as an important indicator of the operational strength and performance of our segments. Segment OCF excludes the impact of costs and expenses that do not directly affect our cash flows. Other charges, including restructuring charges, are also excluded from Segment OCF as management believes they are not characteristic of our underlying business operations.

Cable Segment

The summary pro forma combined results of operations of our Cable segment were as follows (in millions):

 

 

Year  ended
December 31,

 

 

 

2006

 

2005

 

Revenue

 

£

3,225.4

 

£

3,205.2

 

Inter segment revenue

 

3.0

 

2.6

 

Segment OCF

 

1,145.2

 

1,191.7

 

Depreciation, amortization and other charges

 

(1,134.9

)

(1,139.6

)

Operating (loss) income

 

£

10.3

 

£

52.1

 

 

 

Revenue

Our pro forma Cable segment revenue by customer type for the years ended December 31, 2006 and 2005 was as follows (in millions):

 

 

Year  ended December 31,

 

 

 

2006

 

2005

 

Increase/
(Decrease)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

£

2,568.6

 

 

£

2,527.4

 

 

1.6

%

 

Business

 

 

656.8

 

 

677.8

 

 

(3.1

)%

 

Total revenue

 

 

£

3,225.4

 

 

£

3,205.2

 

 

0.6

%

 

 

Consumer:   For year ended December 31, 2006, pro forma revenue from residential customers increased by 1.6% to £2,568.6 million from £2,527.4 million for the year ended December 31, 2005. This increase is driven largely by growth in the number of broadband internet subscribers together with television and telephony price rises partially offset by lower telephony usage. Cable ARPU has increased steadily through the year, reflecting our drive to encourage “triple-play” bundling and a focus on better quality customers. Our focus on acquiring new bundled customers and on cross-selling to existing customers is shown by Revenue Generating Units (RGUs) per customer increasing from 2.06 on a pro forma basis at December 31, 2005 to 2.17 at December 31, 2006 and by “triple-play” penetration growing from 32.4% on a pro forma basis at December 31, 2005 to 40.6% at December 31, 2006.

Business:   For the year ended December 31, 2006, pro forma revenue from business customers decreased by 3.1% to £656.8 million from £677.8 million for the year ended December 31, 2005. This

58




decrease is attributable to declines in telephony voice revenue and lower wholesale and other revenues, partially offset by greater data installation and rental revenue.

Cable segment OCF

For the year ended December 31, 2006, pro forma Cable segment OCF decreased by 3.9% to £1,145.2 million from £1,191.7 million for the year ended December 31, 2005. The decrease in OCF is primarily due to increased selling, general and administrative expenses, which included pre-acquisition charges of £20.9 million relating to the reverse acquisition of Telewest, consisting of legal and professional charges of £11.7 million and executive compensation costs and insurance expenses of £9.2 million, together with integration costs incurred since the acquisition.

Summary Cable Statistics

Selected statistics for residential cable customers of Virgin Media, excluding customers off our network and Virgin Mobile customers, for the three months ended December 31, 2006 as well as the four prior quarters, are set forth in the table below.

 

 

For the three months ended

 

 

December 31,
2006

 

September 30,
2006

 

June 30,
2006

 

March 31,
2006

 

December 31,
2005

Opening customers

 

4,891,500

 

4,928,700

 

4,983,800

 

3,089,800

 

 

3,097,300

 

Data cleanse(1)

 

 

 

(36,200

)

 

 

(18,100

)

Adjusted opening customers

 

4,891,500

 

4,928,700

 

4,947,600

 

3,089,800

 

 

3,079,200

 

Increase in customers on acquisition of Telewest

 

 

 

 

1,880,400

 

 

 

Customer additions

 

213,500

 

229,200

 

192,300

 

167,100

 

 

162,800

 

Customer disconnects

 

(250,500

)

(266,500

)

(211,200

)

(153,500

)

 

(142,200

)

Net customer movement

 

(37,000

)

(37,300

)

(18,900

)

13,600

 

 

20,600

 

Reduction in customer count(2)

 

 

 

 

 

 

(10,000

)

Closing customers

 

4,854,500

 

4,891,500

 

4,928,700

 

4,983,800

 

 

3,089,800

 

Churn(3)

 

1.7

%

1.8

%

1.5

%

1.4

%

 

1.6

%

Revenue generating units(4)

 

 

 

 

 

 

 

 

 

 

 

 

Television

 

3,353,900

 

3,315,400

 

3,293,100

 

3,315,900

 

 

1,942,700

 

DTV (included in Television)

 

3,005,900

 

2,922,000

 

2,836,200

 

2,786,500

 

 

1,445,100

 

Telephone

 

4,114,000

 

4,178,300

 

4,233,000

 

4,268,100

 

 

2,573,100

 

Broadband

 

3,058,500

 

2,980,400

 

2,902,300

 

2,821,700

 

 

1,625,200

 

Total Revenue Generating Units

 

10,526,400

 

10,474,100

 

10,428,400

 

10,405,700

 

 

6,141,000

 

RGU/Customers

 

2.17x

 

2.14x

 

2.12x

 

2.09x

 

 

1.99x

 

Internet dial-up and DTV access(5)

 

73,300

 

97,000

 

113,300

 

140,400

 

 

123,700

 

Cable average revenue per user(6)

 

£

42.82

 

£

42.48

 

£

42.21

 

£

40.37

 

 

£

38.96

 

ARPU calculation:

 

 

 

 

 

 

 

 

 

 

 

 

On-net revenues (millions)

 

£

626.7

 

£

625.4

 

£

628.4

 

£

443.3

 

 

£

361.6

 

Average customers(7)

 

4,878,800

 

4,907,400

 

4,962,300

 

3,660,500

 

 

3,093,500

 


(1)          Data cleanse activity in Q2-06 resulted in a decrease of 36,200 customers and 69,000 RGUs, a decrease of approximately 13,500 Telephone, 24,400 Broadband and 31,100 TV RGUs. Data cleanse

59




activity in Q2-06 is a result of more closely aligning customer definitions between NTL and Telewest together with the removal of approximately 20,000 inactive backlog customers in NTL.

                           Data cleanse activity in Q4-05 resulted in a decrease in NTL of 18,100 customers and 43,100 RGUs, a decrease of approximately 17,700 Telephone, 26,600 Broadband and an increase of 1,300 net TV RGUs.

(2)          Review of inactive backlog customers in the three months ended December 31, 2005 resulted in an adjustment to remove an additional 10,000 customers.

(3)          Customer churn is calculated by taking the total disconnects during the month and dividing them by the average number of customers during the month. Average monthly churn during a quarter is the average of the three monthly churn calculations within the quarter.

(4)          Each telephone, television and broadband internet subscriber directly connected to our network counts as one RGU. Accordingly, a subscriber who receives both telephone and television service counts as two RGUs. RGUs may include subscribers receiving some services for free or at a reduced rate in connection with incentive offers.

(5)          Dial-up internet customers exclude metered customers who have not used the service within the last 30 days.

(6)          The monthly cable average revenue per user, or cable ARPU, is calculated on a quarterly basis by dividing total revenue generated from the provision of telephone, television and internet services to customers who are directly connected to our network in that period, exclusive of VAT, by the average number of customers directly connected to our network in that period divided by three. Cable average revenue per user for the three months ended March 31, 2006, previously disclosed as £40.92, has, due to the discovery of a calculation error, been restated to £40.37.

(7)          For the three months ended March 31, 2006, average customers has been calculated by adding the average customers who were directly connected to the NTL network and the pro rata proportion of customers directly connected to the Telewest network for the number of days subsequent to the acquisition of Telewest.

Mobile Segment

Virgin Mobile was acquired on July 4, 2006, and its results of operations have been consolidated from that date. Total Mobile segment revenue for the period since acquisition to December 31, 2006 was £292.1 million, of which £274.3 million was service revenue and £17.8 million was equipment revenue. Equipment revenue is stated net of discounts earned through service usage. Mobile segment OCF was £30.2 million for the period since acquisition.

Net customer additions in the three month ended December 31, 2006 were 11,100 compared to 122,700 in the three months ended September 30, 2006, Customer growth was lower due to increased price competition, and higher advertising spend from our mobile competitors. We continued to grow the number of higher mobile ARPU contract customers.

60




Summary Mobile Statistics

Selected statistics for Virgin Mobile since acquisition are set forth in the table below:

 

 

December 31,
2006

 

September 30,
2006

 

Opening 90 day active customers(1)

 

 

4,511,700

 

 

 

 

 

Increase in customers on acquisition of Virgin Mobile

 

 

 

 

 

4,389,000

 

 

Net customer additions

 

 

11,100

 

 

 

122,700

 

 

Closing 90 day active customers

 

 

4,522,800

 

 

 

4,511,700

 

 

Mobile average revenue per user(2)

 

 

£10.59

 

 

 

£10.28

 

 

ARPU calculation:

 

 

 

 

 

 

 

 

 

Mobile revenue (millions)

 

 

£141.8

 

 

 

£132.5

 

 

Average customers

 

 

4,465,400

 

 

 

4,294,800

 

 


(1)          90 day active customers—Prepay customers are defined as active customers if they have made an outbound event in the preceding 90 days. Contract customers are defined as active customers if they have been provisioned and have not been disconnected.

(2)          Mobile monthly average revenue per user, or Mobile ARPU, is calculated on service revenue for the periods since acquisition, divided by the average 90 day active customers for the period since acquisition, divided by three.

Content Segment

The summary pro forma combined results of operations of our Content segment were as follows (in millions):

 

 

Year ended
December 31,

 

 

 

2006

 

2005

 

Revenue

 

£

362.1

 

£

287.2

 

Inter segment revenue

 

22.7

 

20.6

 

Segment OCF

 

25.7

 

26.7

 

Depreciation, amortization and other charges

 

18.5

 

25.6

 

Operating income (loss)

 

£

7.2

 

£

1.1

 

 

Revenue

For year ended December 31, 2006, pro forma Content segment revenue increased by 26.1% to £362.1 million from £287.2 million for the year ended December 31, 2005. This increase is driven largely by the inclusion in the year ended December 31, 2006 of sit-up. sit-up was acquired by Telewest in May 2005 and contributed revenue of £226.4 million in 2006. Increased revenue from Virgin Media TV of £14.0 million was principally due to an increased share of the TV advertising revenue market as a result of the cumulative effect of the relative strength of the viewing performance of the Virgin Media TV channels, and increased subscription revenue arising from contractual price increases.

Content segment OCF

For the year ended December 31, 2006, pro forma Content segment OCF decreased by 3.7% to £25.7 million from £26.7 million for the year ended December 31, 2005. The decrease in pro forma Content segment OCF is primarily due to lower gross margins being achieved in 2006 compared with 2005, particularly in sit-up trading.

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Virgin Media TV has recently signed a new two year carriage contract with BSkyB for the carriage of its channels which runs from January 1, 2007. As a result subscription revenue is expected to be approximately £30 million lower in 2007 than in 2006. A cost reduction plan is in place to address some of this shortfall, but nevertheless 2007 Content segment OCF is expected to be significantly affected.

Years ended December 31, 2005 and 2004

Revenue

For the year ended December 31, 2005, consolidated revenue decreased by 2.6% to £1,947.6 million from £2,000.3 million for 2004. Our revenue by customer type for the years ended December 31, 2005 and 2004 was as follows (in millions):

 

 

Year ended

December 31,

 

 

 

 

 

2005

 

2004

 

Increase
(decrease)

 

Revenues:

 

 

 

 

 

 

 

 

 

Consumer

 

£

 1,520.0

 

£

 1,507.3

 

 

0.8

%

 

Business

 

427.6

 

493.0

 

 

(13.3

)%

 

Total revenues

 

£

 1,947.6

 

£

 2,000.3

 

 

(2.6

)%

 

 

Consumer:   For the year ended December 31, 2005, revenue from residential customers increased by 0.8% to £1,520.0 million from £1,507.3 million for 2004. This increase was driven largely by growth in the number of broadband internet subscribers as well as the inclusion of additional revenue of £48.5 million from our subsidiary Virgin Net Limited following its acquisition in November 2004. These increases were offset by lower telephony usage revenue as a result of a decline in the volume of minutes generated per customer and competitive pressure on pricing and higher promotional discounts as well as lower TV revenue due to lower ATV subscribers and lower premium channel revenue.

Business:   For the year ended December 31, 2005, revenue from business customers decreased by 13.3% to £427.6 million from £493.0 million during the same period in 2004. This decrease reflected the loss of £44.1 million of wholesale revenue from Virgin Net Limited, which ceased to be a third party business customer as a consequence of its acquisition by us in November 2004, together with the conclusion of two wholesale customer contracts. Lower telephony access and usage revenues were offset by growth in install, data product and project revenue.

Expenses

Operating Costs.   For the year ended December 31, 2005, operating costs, including network expenses, decreased by 2.3% to £808.3 million from £827.7 million during the same period in 2004. Operating costs as a percentage of revenue increased slightly to 41.5% for the year ended December 31, 2005, from 41.4% for the same period in 2004 primarily because of a reduction in telephony interconnect costs driven by lower usage on low margin call types and lower television content costs offset by the impact of more installs in pre-wired homes where the cost to install was expensed and an increase in costs associated with network repair and maintenance.

Selling, general and administrative expenses.   For the year ended December 31, 2005, selling, general and administrative expenses decreased by 3.8% to £483.0 million from £502.2 million for the same period in 2004. Selling, general and administrative expenses as a percentage of revenue decreased to 24.8% for the year ended December 31, 2005, from 25.1% for the same period in 2004. Lower employee costs following the involuntary employee terminations at the end of 2004, maintenance costs savings through

62




negotiated contracts, and reduced levels of set-top box repair and recycling costs were partly offset by higher spend on marketing and communications together with increased allowances for doubtful accounts.

Other charges

Other charges of £24.8 million in the year ended December 31, 2005 mainly related to changes in cash flow estimates with respect to lease exit costs in connection with properties that have been vacated. Other charges of £23.8 million in the year ended December 31, 2004 related to restructuring charges incurred in connection with our call center consolidation program. Of the costs of £23.8 million incurred in connection with our call center consolidation program, £12.4 million related to involuntary employee termination and related costs, £2.4 million related to lease exit costs, and £9.0 million related to other costs of the consolidation program, including recruitment and training of new employees at the new sites.

The following table summaries the restructuring charges incurred and utilized in the year ended December 31, 2005 and 2004 (in millions):

 

 

Involuntary
Employee
Termination
and Related
Costs

 

Lease
Exit
Costs

 

Agreement
Modifications

 

Other

 

Total

 

Balance, December 31, 2003

 

 

£

 

 

£

38.8

 

 

£

0.3

 

 

£

 

£

39.1

 

Released

 

 

 

 

 

 

 

 

 

 

Charged to expense

 

 

12.4

 

 

2.4

 

 

 

 

9.0

 

23.8

 

Utilized

 

 

(10.7

)

 

(12.8

)

 

(0.1

)

 

(9.0

)

(32.6

)

Balance, December 31, 2004

 

 

1.7

 

 

28.4

 

 

0.2

 

 

 

30.3

 

Released

 

 

 

 

 

 

(0.2

)

 

(0.4

)

(0.6

)

Charged to expense

 

 

0.8

 

 

24.2

 

 

 

 

0.4

 

25.4

 

Utilized

 

 

(2.5

)

 

(7.3

)

 

 

 

 

(9.8

)

Balance, December 31, 2005

 

 

£

 

 

£

45.3

 

 

£

 

 

£

 

£

45.3

 

 

Depreciation expense

For the year ended December 31, 2005, depreciation expense decreased to £541.7 million from £594.9 million for the same period in 2004. This reduction in depreciation expense is because of the absence of depreciation on some assets that became fully depreciated in 2004.

Amortization expense

For the year ended December 31, 2005, amortization expense increased to £109.5 million from £104.2 million for the same period in 2004. The increase in amortization expense relates to additional intangible assets arising from the acquisition of Virgin Net Limited during the fourth quarter of 2004.

Interest expense

For the year ended December 31, 2005, interest expense decreased to £235.8 million from £271.0 million for the same period in 2004, primarily as a result of the interest saving offset by the accelerated amortization of deferred financing costs following the repayments totaling £723 million of our senior credit facility on February 4, 2005, June 14, 2005 and July 14, 2005, the redemption of the $100 million floating rate senior notes on July 15, 2005 and the effects of the refinancing transaction in April 2004 that lowered our weighted average interest rate.

We paid interest in cash of £216.8 million for the year ended December 31, 2005, and £298.5 million for the year ended December 31, 2004. The decrease in cash interest payments resulted from debt

63




repayments and the effects of the refinancing transaction in April 2004 that lowered our weighted average interest rate and rescheduled some interest payments.

Loss on extinguishment of debt

For the year ended December 31, 2005, loss on extinguishment of debt was £2.0 million, and relates to the redemption of the $100 million floating rate senior notes due 2012 on July 15, 2005.

For the year ended December 31, 2004, loss on extinguishment of debt was £162.2 million, and relates to the redemption, or repayment, of our indebtedness in the refinancing transaction. The loss comprises the payment of the premium of £6.4 million on the redemption of the Diamond notes and the expensing of the unamortized issue costs of £63.8 million and unamortized discount of £92.0 million on the redemption of the Diamond notes and the Triangle debentures and the repayment of the then-existing senior credit facility.

Foreign currency transaction (losses) gains

For the year ended December 31, 2005, foreign currency transaction gains were £5.3 million as compared with losses of £24.4 million for 2004. The foreign currency transaction gains in the year ended December 31, 2005 included gains of £43.7 million on the forward rate contracts and collars taken out in December 2005 in connection with £1.8 billion of the expected cash purchase price of Telewest offset by losses on the revaluation of foreign currency denominated long term debt and related forward contracts. The losses for the year ended December 31, 2004 were primarily because of the effect of changes in the exchange rate on the U.S. dollar and euro denominated debt and unrealized losses of £35.7 million arising from changes in the fair value of our foreign currency forward contracts. Our results of operations will continue to be affected by foreign exchange rate fluctuations since £477.2 million of our indebtedness is denominated in U.S. dollars and £259.1 million is denominated in euros.

Income tax expense

For the year ended December 31, 2005, income tax expense was £18.8 million as compared with income tax expense of £5.0 million for the same period in 2004. The 2005 and 2004 expense is composed of (in millions):

 

 

2005

 

2004

 

U.S. state and local income tax

 

£

 (1.3

)

£

1.3

 

Deferred U.S. income tax

 

18.7

 

3.6

 

Alternative minimum tax

 

1.4

 

0.1

 

Total

 

£

18.8

 

£

 5.0

 

 

In 2005, we paid £2.2 million of the alternative minimum tax. In 2004, we paid £0.1 million of the alternative minimum tax and £0.1 million of U.S. state and local tax expense for 2004. None of the remaining income tax expense is expected to be payable in the next year.

Minority interest expense

The minority interest expense of £1.0 million for the year ended December 31, 2005 related to the minority interest in the net assets of NTL (South Hertfordshire) Limited (“NTL South Herts”). No minority interest was recorded for the year ended December 31, 2004 since the cumulative losses of NTL South Herts appl