Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 8, 2013)
  • 10-Q (May 3, 2013)
  • 10-Q (Oct 31, 2012)
  • 10-Q (Jul 30, 2012)
  • 10-Q (May 8, 2012)
  • 10-Q (Nov 4, 2011)

 
8-K

 
Other

Virgin Media 10-Q 2008

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý

 

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

For the quarterly period ended June 30, 2008

OR

o

 

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

Commission File No. 000-50886

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

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED
(Additional Registrant)

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 offices)

 

10022
(Zip code)

(212) 906-8440
(Registrant's telephone number, including area code)

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

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

Large accelerated filers ý    Accelerated filer o    Non-accelerated filer o    Smaller reporting company o

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

        As of August 4, 2008, there were 328,107,207 shares of the registrant's common stock, par value $0.01 per share, issued and outstanding, excluding 855,834 unvested shares of restricted stock held in escrow.

        The Additional Registrant meets the conditions set forth in General Information H(1)(a) and (b) of Form 10-Q and is therefore filing this report with the reduced disclosure format. See "Note Concerning Virgin Media Investment Holdings Limited" in this Form 10-Q.


Table of Contents

VIRGIN MEDIA INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2008
INDEX

 
  Page

PART I. FINANCIAL INFORMATION

  5

Item 1. Financial Statements

  5

Virgin Media Inc.

   
 

Condensed Consolidated Balance Sheets—June 30, 2008 and December 31, 2007

  5
 

Condensed Consolidated Statements of Operations—Three and Six Months ended June 30, 2008 and 2007

  6
 

Condensed Consolidated Statements of Cash Flows—Six Months ended June 30, 2008 and 2007

  7
 

Notes to Condensed Consolidated Financial Statements

  8

Virgin Media Investment Holdings Limited

   
 

Condensed Consolidated Balance Sheets—June 30, 2008 and December 31, 2007

  24
 

Condensed Consolidated Statements of Operations—Three and Six Months ended June 30, 2008 and 2007

  25
 

Condensed Consolidated Statements of Cash Flows—Six Months ended June 30, 2008 and 2007

  26
 

Notes to Condensed Consolidated Financial Statements

  27

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

  36

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  56

Item 4. Controls and Procedures

  58

PART II. OTHER INFORMATION

  59

Item 1. Legal Proceedings

  59

Item 1A. Risk Factors

  59

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

  59

Item 3. Defaults Upon Senior Securities

  59

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

  59

Item 5. Other Information

  60

Item 6. Exhibits

  60

SIGNATURES

  62

2


Table of Contents

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

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

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

    the ability to manage customer churn;

    the continued right 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 ability to control unauthorized access to our network;

    the effect of technological changes on our businesses;

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

    the ability to achieve our business plans;

    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 cash flow will be sufficient to cover our fixed charges.

        These and other factors are discussed in more detail under "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission, or SEC, on February 29, 2008, as amended, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, as filed with the SEC on May 8, 2008. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements.

        In this quarterly 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 Holdings (UK) Ltd, or 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 the company now known as Virgin Media Holdings Inc. (which was formerly known as NTL Incorporated before the merger); and

3


Table of Contents

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

Note Concerning Virgin Media Investments Holdings Limited

        This quarterly report on Form 10-Q (excepting separate financial statements responsive to Part I, Item 1) covers both Virgin Media and Virgin Media Investment Holdings Limited, or VMIH, a company incorporated in England and Wales with its address at 160 Great Portland Street, London W1W 5QA, United Kingdom, which is a wholly owned subsidiary of Virgin Media Finance PLC and a wholly owned indirect subsidiary of Virgin Media. 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, and is the principal borrower under Virgin Media's senior credit facility. In this quarterly 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 quarterly report have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The reporting currency of our consolidated financial statements is U.K. pounds sterling.

4


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)(except par value)

 
  June 30, 2008   December 31, 2007  
 
  (Unaudited)
  (See Note)
 

Assets

             

Current assets

             
 

Cash and cash equivalents

  £ 426.8   £ 321.4  
 

Restricted cash

    6.0     6.1  
 

Accounts receivable—trade, less allowances for doubtful accounts of £20.0 (2008) and £19.5 (2007)

    437.1     455.6  
 

Inventory

    94.8     75.4  
 

Prepaid expenses and other current assets

    185.4     94.8  
           
   

Total current assets

    1,150.1     953.3  

Fixed assets, net

    5,491.6     5,655.6  

Goodwill and other indefinite-lived intangible assets

    2,116.7     2,488.2  

Intangible assets, net

    657.4     816.7  

Equity investments

    373.0     368.7  

Other assets, net of accumulated amortization of £55.9 (2008) and £45.0 (2007)

    176.9     183.6  
           

Total assets

  £ 9,965.7   £ 10,466.1  
           

Liabilities and shareholders' equity

             

Current liabilities

             
 

Accounts payable

  £ 382.8   £ 372.9  
 

Accrued expenses and other current liabilities

    510.9     406.2  
 

VAT and employee taxes payable

    71.6     86.1  
 

Restructuring liabilities

    57.7     89.6  
 

Interest payable

    137.3     172.5  
 

Deferred revenue

    268.0     250.3  
 

Current portion of long term debt

    33.3     29.1  
           
   

Total current liabilities

    1,461.6     1,406.7  

Long term debt, net of current portion

    5,990.2     5,929.4  

Deferred revenue and other long term liabilities

    160.9     238.5  

Deferred income taxes

    83.3     81.0  
           

Total liabilities

    7,696.0     7,655.6  
           

Commitments and contingent liabilities

             

Minority interest

   
0.2
   
 

Shareholders' equity

             
 

Common stock—$.01 par value; authorized 1,000.0 (2008 and 2007) shares; issued 329.0 (2008) and 328.9 (2007) and outstanding 328.1 (2008) and 327.5 (2007) shares

    1.8     1.8  
 

Additional paid-in capital

    4,343.7     4,335.9  
 

Accumulated other comprehensive income

    164.7     148.6  
 

Accumulated deficit

    (2,240.7 )   (1,675.8 )
           
   

Total shareholders' equity

    2,269.5     2,810.5  
           

Total liabilities and shareholders' equity

  £ 9,965.7   £ 10,466.1  
           

Note:    The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

See accompanying notes.

5


Table of Contents


VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Revenue

  £ 990.5   £ 995.0   £ 1,992.3   £ 2,016.9  

Costs and expenses

                         
 

Operating costs (exclusive of depreciation shown separately below)

    434.9     435.1     895.3     884.4  
 

Selling, general and administrative expenses

    222.7     244.6     439.9     511.5  
 

Other (income) charges

    (1.7 )   3.1     2.9     14.7  
 

Depreciation

    230.2     231.6     461.7     463.7  
 

Amortization

    71.3     77.6     164.0     154.9  
 

Goodwill impairment

    366.2         366.2      
                   

    1,323.6     992.0     2,330.0     2,029.2  
                   

Operating (loss) income

    (333.1 )   3.0     (337.7 )   (12.3 )

Other income (expense)

                         
 

Interest income and other, net

    7.6     7.8     13.9     14.8  
 

Interest expense

    (121.6 )   (128.1 )   (245.0 )   (246.6 )
 

Share of income from equity investments

    3.9     5.3     9.0     12.5  
 

Foreign currency gains (losses)

    3.4     2.3     (25.0 )   5.6  
 

Loss on extinguishment of debt

    (5.6 )   (1.1 )   (5.6 )   (1.1 )
 

(Losses) gains on derivative instruments

    (2.3 )   (1.0 )   31.1     (1.5 )
                   

Loss before income taxes and minority interest

    (447.7 )   (111.8 )   (559.3 )   (228.6 )

Income tax benefit (expense)

    0.6     (7.2 )   7.9     (10.7 )

Minority interest

    (0.1 )       (0.2 )    
                   

Net loss

  £ (447.2 ) £ (119.0 ) £ (551.6 ) £ (239.3 )
                   

Basic and diluted net loss per share

  £ (1.36 ) £ (0.37 ) £ (1.68 ) £ (0.74 )
                   

Dividends per share (in U.S. dollars)

  $ 0.04   $ 0.03   $ 0.08   $ 0.05  
                   

Average number of shares outstanding

    328.1     325.5     328.0     324.8  
                   

See accompanying notes.

6


Table of Contents


VIRGIN MEDIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

 
  Six months ended
June 30,
 
 
  2008   2007  

Operating activities

             

Net loss

  £ (551.6 ) £ (239.3 )

Adjustments to reconcile net loss to net cash provided by operating activities

             
 

Depreciation and amortization

    625.7     618.6  
 

Goodwill impairment

    366.2      
 

Non-cash interest

    (29.8 )   (65.4 )
 

Non-cash compensation

    7.2     14.3  
 

Income from equity accounted investments, net of dividends received

    (5.0 )   (9.2 )
 

Income taxes

    (6.1 )   12.7  
 

Amortization of original issue discount and deferred financing costs

    10.9     11.6  
 

Unrealized foreign currency losses (gains)

    21.7     (1.2 )
 

Loss on extinguishment of debt

    5.6     1.1  
 

(Gains) losses on derivative instruments

    (24.1 )   1.5  
 

Other

    (0.5 )    

Changes in operating assets and liabilities

    (41.4 )   (123.6 )
           
   

Net cash provided by operating activities

    378.8     221.1  
           

Investing activities

             
 

Purchase of fixed and intangible assets

    (233.3 )   (286.2 )
 

Principal repayments on loans to equity investments

    0.6     6.2  
 

Acquisitions, net of cash acquired

        (1.0 )
 

Other

    1.6     2.1  
           
   

Net cash used in investing activities

    (231.1 )   (278.9 )
           

Financing activities

             
 

New borrowings, net of financing fees

    494.0     874.5  
 

Proceeds from employee stock option exercises

    0.6     4.0  
 

Principal payments on long term debt and capital leases

    (523.7 )   (951.4 )
 

Dividends paid

    (13.3 )   (8.3 )
           
   

Net cash used in financing activities

    (42.4 )   (81.2 )
           

Effect of exchange rate changes on cash and cash equivalents

    0.1     (2.4 )

Increase (decrease) in cash and cash equivalents

   
105.4
   
(141.4

)

Cash and cash equivalents, beginning of period

    321.4     418.5  
           

Cash and cash equivalents, end of period

  £ 426.8   £ 277.1  
           

Supplemental disclosure of cash flow information

             

Cash paid during the period for interest exclusive of amounts capitalized

  £ 263.5   £ 295.0  

See accompanying notes.

7


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on February 29, 2008, as amended.

        Certain prior year balances have been reclassified to conform to the current period presentation.

Note 2—Goodwill and Intangible Assets

        During the six months ended June 30, 2008, assets not subject to amortization were adjusted for the following (in millions):

 
  Trade Names   Reorganization Value   Goodwill  

Balance, December 31, 2007

  £ 16.5   £ 146.1   £ 2,325.6  
 

Deferred tax balances

        (5.3 )    
 

Goodwill impairment

            (366.2 )
               

Balance, June 30, 2008

  £ 16.5   £ 140.8   £ 1,959.4  
               

        During the six months ended June 30, 2008, reorganization value in excess of amounts allocable to identifiable assets was reduced by £5.3 million due to the use of deferred tax assets that existed as at January 10, 2003 that were previously offset by a valuation allowance.

        As at June 30, 2008, we performed our annual impairment review of the goodwill recognized in the Virgin Media TV and sit-up reporting units, included in our Content segment, and the Virgin Mobile reporting unit. The fair value of these reporting units were determined through the use of a combination of both the market and income valuation approaches to calculate fair value. We concluded that the fair value of the Virgin Media TV and sit-up reporting units exceeded their carrying value, while the Virgin Mobile reporting unit fair value was less than its carrying value.

        The market approach valuations in respect of the Mobile reporting unit have declined from the prior year primarily as a result of declining market multiples of comparable companies. The income approach valuations in respect of the Mobile reporting unit declined as a result of a combination of an increased discount rate, a reduced terminal value multiple and reduced long term cash flow estimates. As a result, we extended our review to include the valuation of the Virgin Mobile reporting unit's individual assets and liabilities and have recognized a preliminary goodwill impairment charge of £366.2 million. We intend to complete our impairment review during the third quarter and any further adjustments to the carrying value of goodwill, if required, will be recognized in our third quarter results.

8


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 3—Long Term Debt

        Long term debt consists of (in millions):

 
  June 30,
2008
  December 31,
2007
 

8.75% U.S. Dollar senior notes due 2014

  £ 213.5   £ 214.2  

9.75% Sterling senior notes due 2014

    375.0     375.0  

8.75% Euro senior notes due 2014

    178.0     165.6  

9.125% U.S. Dollar senior notes due 2016

    276.3     277.2  

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

    502.4      

Senior credit facility

    4,324.1     4,804.8  

Capital leases

    149.8     116.9  

Other

    4.4     4.8  
           

    6,023.5     5,958.5  

Less: current portion

    (33.3 )   (29.1 )
           

  £ 5,990.2   £ 5,929.4  
           

        The effective interest rate on the senior credit facility was 7.4% and 7.8% as at June 30, 2008 and December 31, 2007, respectively.

Convertible Senior Notes

        On April 16, 2008, Virgin Media Inc. issued U.S. dollar denominated 6.5% convertible senior notes due 2016 with a principal amount outstanding of $1.0 billion and used the proceeds and cash on hand to repay £504.0 million of our obligations under our senior credit facility that were originally scheduled to be paid in 2009, 2010 and 2012. The convertible senior notes are unsecured senior obligations of Virgin Media Inc. and, consequently, are subordinated to our obligations under the senior credit facility and rank equally with Virgin Media Inc.'s guarantees of our senior notes. The convertible senior notes bear interest at an annual rate of 6.5% payable semi-annually on May 15 and November 15 of each year, beginning November 15, 2008. The convertible senior notes mature on November 15, 2016 and may not be redeemed by us prior to their maturity date. Upon conversion, we may elect to settle in cash, shares of common stock or a combination of cash and shares of our common stock.

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

9


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 3—Long Term Debt (Continued)


fundamental change (as defined in the indenture governing the convertible senior notes), such as a change in control, merger, consolidation, dissolution or delisting.

        The initial conversion rate is equal to 52.0291 shares of Virgin Media Inc.'s common stock per $1,000 of convertible senior notes, which represents an initial conversion price of approximately $19.22 per share of common stock. The conversion rate is subject to adjustment for stock splits, stock dividends or distributions, the issuance of certain rights or warrants, certain cash dividends or distributions or stock repurchases where the price exceeds market values. In the event of specified fundamental changes relating to Virgin Media Inc., referred to as "make whole" fundamental changes, the conversion rate will be increased as provided by a formula set forth in the indenture governing the convertible senior notes.

        Holders may also require us to repurchase the convertible senior notes for cash in the event of a fundamental change for a purchase price equal to 100% of the principal amount, plus accrued but unpaid interest to the purchase date.

        In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion, or FSP APB 14-1. FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer's nonconvertible debt borrowing rate. As a result, the liability component would be recorded at a discount reflecting its below market coupon interest rate, and the liability component would subsequently be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected in the results of operations. This change in methodology will affect the calculations of net income and earnings per share, but will not increase the Company's cash interest payments. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required and early adoption is prohibited. Our convertible senior notes are within the scope of FSP APB 14-1. We are currently evaluating the impact of the adoption of FSP APB 14-1 on our consolidated financial statements.

Note 4—Employee Benefit Plans

        The components of net periodic pension cost in the three and six months ended June 30, 2008 and 2007 were as follows (in millions):

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Service costs

  £ 0.5   £ 0.6   £ 0.9   £ 1.2  

Interest costs

    4.5     4.2     9.1     8.4  

Expected return on plan assets

    (5.3 )   (4.8 )   (10.7 )   (9.6 )
                   

Net periodic benefit costs

  £ (0.3 ) £   £ (0.7 ) £  
                   

10


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 5—Other (Income) Charges Including Restructuring Charges

        The following tables summarize our historical restructuring accruals and the restructuring accruals resulting from the acquisitions made by us during 2006 (in millions):

 
  Historical
Restructuring
Accruals
  Acquisition Restructuring
Accruals
  Total  
Three months ended June 30, 2008
  Lease
Exit Costs
  Involuntary
Employee
Termination
and Related Costs
  Lease
Exit Costs
   

Balance, March 31, 2008

  £ 19.7   £ 4.7   £ 40.1   £ 64.5  

Charged to expense

    0.5         0.9     1.4  

Revisions

    (1.6 )   (1.4 )   (0.1 )   (3.1 )

Utilized

    (1.8 )   (1.5 )   (1.8 )   (5.1 )
                   

Balance, June 30, 2008

  £ 16.8   £ 1.8   £ 39.1   £ 57.7  
                   

 

 
  Historical
Restructuring
Accruals
  Acquisition Restructuring
Accruals
  Total  
Six months ended June 30, 2008
  Lease
Exit Costs
  Involuntary
Employee
Termination
and Related Costs
  Lease
Exit Costs
   

Balance, December 31, 2007

  £ 35.9   £ 12.6   £ 41.1   £ 89.6  

Charged to expense

    1.4         1.7     3.1  

Revisions

    (2.0 )   (0.2 )   2.0     (0.2 )

Utilized

    (18.5 )   (10.6 )   (5.7 )   (34.8 )
                   

Balance, June 30, 2008

  £ 16.8   £ 1.8   £ 39.1   £ 57.7  
                   

        Other income of £1.7 million and other charges of £3.1 million for the three months ended June 30, 2008 and 2007, respectively, and other charges of £2.9 million and £14.7 million for the six months ended June 30, 2008 and 2007, respectively, relate mainly to lease exit and employee termination costs as a result of our acquisition-related restructuring programs.

11


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 6—Stockholders' Equity and Share Based Compensation

        During the year ended December 31, 2007 and the six months ended June 30, 2008, we paid the following dividends:

Board Declaration Date
  Per Share
Dividend
  Record Date   Payment Date   Total
Amount
 
 
   
   
   
  (in millions)
 

Year ended December 31, 2007:

                         

February 27, 2007

  $ 0.02     March 12, 2007     March 20, 2007   £ 3.3  

May 16, 2007

    0.03     June 12, 2007     June 20, 2007     5.0  

August 15, 2007

    0.04     September 12, 2007     September 20, 2007     6.5  

November 27, 2007

    0.04     December 12, 2007     December 20, 2007     6.4  

Six months ended June 30, 2008:

                         

February 6, 2008

  $ 0.04     March 12, 2008     March 20, 2008   £ 6.6  

May 21, 2008

    0.04     June 12, 2008     June 20, 2008     6.7  

        Future payments of regular quarterly dividends by us are at the discretion of our Board of Directors and will be subject to our future needs and uses of cash, which could include investments in operations, the repayment of debt, and share repurchase programs.

        Basic and diluted net loss per share is computed by dividing the net loss for the three and six months ended June 30, 2008 and 2007 by the weighted average number of shares outstanding during the respective periods. Options, warrants, shares issuable under our convertible senior notes and shares of restricted stock held in escrow at June 30, 2008 and 2007, respectively, are excluded from the calculation of diluted loss per share, since these securities are anti-dilutive.

        The average number of shares outstanding for the three and six months ended June 30, 2008 and 2007 is computed as follows (in millions):

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Number of shares outstanding at start of period

    328.0     324.6     327.5     323.9  

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

    0.1     0.9     0.5     0.9  
                   

Average number of shares outstanding

    328.1     325.5     328.0     324.8  
                   

        Total share based compensation expense included in selling, general and administrative expenses in the statement of operations was £5.1 million and £7.1 million for the three months ended June 30, 2008 and 2007, respectively, and £7.2 million and £14.3 million for the six months ended June 30, 2008 and 2007, respectively.

12


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 7—Comprehensive Loss

        Comprehensive loss comprises (in millions):

 
  Three months ended June 30,   Six months ended June 30,  
 
  2008   2007   2008   2007  

Net loss for period

  £ (447.2 ) £ (119.0 ) £ (551.6 ) £ (239.3 )

Currency translation adjustments

    0.1         0.1     (0.4 )

Net unrealized gains on derivatives, net of tax

    11.7     9.5     27.6     34.0  

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

    (2.0 )   15.6     (11.6 )   14.5  
                   

Comprehensive loss

  £ (437.4 ) £ (93.9 ) £ (535.5 ) £ (191.2 )
                   

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

 
  June 30,
2008
  December 31,
2007
 

Foreign currency translation

    £131.5     £131.4  

Pension liability adjustments

    (0.2 )   (0.2 )

Net unrealized gains on derivatives

    33.4     17.4  
           

    £164.7     £148.6  
           

Note 8—Income Taxes

        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. At each interim period, management uses the best information available to develop these estimates and assumptions, which are used to compute the forecast effective tax rate for the full year which is applied in computing the income tax expense or benefit for the interim period. In accordance with U.S. 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 changed and will change as new events occur, as more experience is acquired, as additional information is obtained and our tax environment changes. To the extent that the estimate changes during a subsequent quarter, the effect of the change on prior quarters as well as on the current quarter is included in income tax expense for the current quarter.

        For the three and six months ended June 30, 2008, income tax benefit was £0.6 million and £7.9 million, respectively, as compared with income tax expense of £7.2 million and £10.7 million, respectively, for the same periods in 2007. The income tax benefit for the three months ended June 30, 2008 was comprised of current federal tax expense of £0.2 million, deferred federal tax expense of £4.2 million, a U.K. current tax benefit of £1.2 million and a U.K. deferred tax benefit of £3.8 million.

13


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 8—Income Taxes (Continued)


The income tax benefit for the six months ended June 30, 2008 was comprised of current federal tax expense of £0.4 million, deferred federal tax expense of £7.5 million, a U.K. current tax benefit of £2.5 million and a U.K. deferred tax benefit of £13.3 million. The U.K. current tax benefit related to amounts receivable in respect of the sale of U.K. tax losses to an equity-method investee. The U.K. deferred tax benefit related to the decrease in our deferred tax asset valuation allowance due to changes in our assessment of the future realization of certain deferred tax assets. Such changes resulted from the recording of certain deferred tax liabilities related to amounts recognized in the statement of other comprehensive income during the quarter that are expected to reverse in future periods and will allow us to offset such amounts against certain deferred tax assets. The income tax expense for the three months ended June 30, 2007 was comprised of current federal taxes of £0.4 million, a U.S. state and local tax benefit of £nil, deferred federal tax expense of £8.6 million and a U.K. tax benefit of £1.8 million. The income tax expense for the six months ended June 30, 2007 was comprised of current federal taxes of £0.7 million, a U.S. state and local tax benefit of £0.6 million, deferred federal tax expense of £13.7 million and a U.K. tax benefit of £3.1 million. The U.K. tax benefit related to amounts receivable in respect of the sale of U.K. tax losses to an equity-method investee.

        We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the statement of operations.

Note 9—Fair Value Measurements

        In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or FAS 157. FAS 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. FAS 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. FAS 157 is effective for certain financial instruments included in financial statements issued for fiscal years beginning after November 15, 2007 and for all other non-financial instruments for fiscal years beginning after November 15, 2008. The provisions of FAS 157 relating to certain financial instruments were required to be adopted by us in the first quarter of 2008 effective January 1, 2008. The adoption of this standard did not have a material impact on our consolidated financial statements.

        FAS 157, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

   

Level 1

  Unadjusted quoted prices in active markets for identical assets or liabilities
   

Level 2

 

Unadjusted quoted prices in active markets for similar assets or liabilities, or

   

 

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

   

 

Inputs other than quoted prices that are observable for the asset or liability

   

Level 3

 

Unobservable inputs for the asset or liability

14


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 9—Fair Value Measurements (Continued)

        We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We have determined that all of our financial assets and liabilities that are stated at fair value fall in level 2 in the fair value hierarchy described above.

        The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2008 and December 31, 2007 (in millions):

 
  June 30,
2008
  December 31,
2007
 

Included within other current assets:

             

Foreign currency forward rate contracts

  £ 25.9   £  

Interest rate swaps

    25.1     4.1  

Cross-currency interest rate swaps

    21.8      
           

  £ 72.8   £ 4.1  
           

Included within other assets:

             

Foreign currency forward rate contracts

  £   £ 18.3  

Interest rate swaps

        11.2  

Cross-currency interest rate swaps

    57.8     30.6  
           

  £ 57.8   £ 60.1  
           

Included within other current liabilities:

             

Foreign currency forward rate contracts

  £ 76.1   £  

Cross-currency interest rate swaps

    7.5      
           

  £ 83.6   £  
           

Included within deferred revenue and other long term liabilities:

             

Foreign currency forward rate contracts

        67.9  

Cross-currency interest rate swaps

    40.7     54.4  
           

  £ 40.7   £ 122.3  
           

        As a result of our financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest and foreign currency exchange rate fluctuations through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes and we do not use leveraged derivative financial instruments. The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2 in the fair value hierarchy.

15


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 10—Recent Accounting Pronouncements

        In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, or FAS 159. FAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. We did not elect to utilize the fair value option permitted by FAS 159 for any of our assets or liabilities as at December 31, 2007.

        In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or FAS 160. FAS 160 establishes requirements for ownership interests in subsidiaries held by parties other than ourselves (sometimes called "minority interests") to be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent's equity. All changes in the parent's ownership interests are required to be accounted for consistently as equity transactions and any non-controlling equity investments in unconsolidated subsidiaries must be measured initially at fair value. FAS 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008; however, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. We are currently assessing the impact of FAS 160 on our consolidated financial position and results of operations.

Note 11—Industry Segments

        Our reportable segments, Cable, Content and Mobile, are based on our method of internal reporting. Our primary segment is our Cable segment, which consists of the distribution of television programming to consumers and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations on our cable network and, to a lesser extent, off our cable network. We operate our Content segment through our wholly owned subsidiaries Virgin Media Television Limited, or Virgin Media TV, and sit-up Limited, or sit-up, which supply television programming to the U.K. pay-television broadcasting market including our televised shopping unit sit-up tv, which markets and retails a wide variety of consumer products using an auction-based format. We operate our Mobile segment through our wholly owned subsidiary Virgin Mobile Holdings (UK) Ltd., which consists of our mobile telephony business. Our segments operate entirely in the U.K. and no one customer represents more than 5% of our overall revenue.

        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 FAS 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 certain 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. The business segments disclosed in the consolidated financial statements are based on this organizational structure and information reviewed by our management to evaluate the business segment results.

16


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 11—Industry Segments (Continued)

        Segment information for the three and six month periods ended June 30, 2008 and 2007 was as follows (in millions):

 
  Three months ended June 30, 2008  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 767.1   £ 79.5   £ 143.9   £   £ 990.5  

Inter segment revenue

    0.8     6.5         (7.3 )    

Operating costs

    (292.3 )   (66.1 )   (83.0 )   6.5     (434.9 )

Selling, general and administrative expenses

    (177.3 )   (20.8 )   (25.4 )   0.8     (222.7 )
                       

Segment OCF

    298.3     (0.9 )   35.5         332.9  

Depreciation, amortization and other charges

    (269.6 )   (4.6 )   (25.6 )       (299.8 )

Goodwill impairment

            (366.2 )       (366.2 )
                       

Operating income (loss)

  £ 28.7   £ (5.5 ) £ (356.3 ) £   £ (333.1 )
                       

 

 
  Three months ended June 30, 2007  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 775.1   £ 73.6   £ 146.3   £   £ 995.0  

Inter segment revenue

    1.0     6.1         (7.1 )    

Operating costs

    (297.0 )   (60.1 )   (84.2 )   6.2     (435.1 )

Selling, general and administrative expenses

    (196.6 )   (19.5 )   (29.4 )   0.9     (244.6 )
                       

Segment OCF

    282.5     0.1     32.7         315.3  

Depreciation, amortization and other charges

    (286.0 )   (4.3 )   (22.0 )       (312.3 )
                       

Operating (loss) income

  £ (3.5 ) £ (4.2 ) £ 10.7   £   £ 3.0  
                       

 

17


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 11—Industry Segments (Continued)

 
  Six months ended June 30, 2008  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 1,546.0   £ 162.9   £ 283.4   £   £ 1,992.3  

Inter segment revenue

    1.5     12.8         (14.3 )    

Operating costs

    (601.3 )   (131.2 )   (175.6 )   12.8     (895.3 )

Selling, general and administrative expenses

    (346.0 )   (40.3 )   (55.1 )   1.5     (439.9 )
                       

Segment OCF

    600.2     4.2     52.7         657.1  

Depreciation, amortization and other charges

    (568.4 )   (9.1 )   (51.1 )       (628.6 )

Goodwill impairment

            (366.2 )       (366.2 )
                       

Operating income (loss)

  £ 31.8   £ (4.9 ) £ (364.6 ) £   £ (337.7 )
                       

 

 
  Six months ended June 30, 2007  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 1,575.4   £ 154.2   £ 287.3   £   £ 2,016.9  

Inter segment revenue

    1.9     12.0         (13.9 )    

Operating costs

    (608.7 )   (120.2 )   (167.6 )   12.1     (884.4 )

Selling, general and administrative expenses

    (419.3 )   (33.7 )   (60.3 )   1.8     (511.5 )
                       

Segment OCF

    549.3     12.3     59.4         621.0  

Depreciation, amortization and other charges

    (581.5 )   (8.4 )   (43.4 )       (633.3 )
                       

Operating (loss) income

  £ (32.2 ) £ 3.9   £ 16.0   £   £ (12.3 )
                       

Note 12—Condensed Consolidated Financial Information

        On April 13, 2004, our wholly owned subsidiary, Virgin Media Finance PLC, or Virgin Media Finance, issued £375 million aggregate principal amount of 9.75% senior notes due 2014, $425 million aggregate principal amount of 8.75% senior notes due 2014, €225 million aggregate principal amount of 8.75% senior notes due 2014 and $100 million aggregate principal amount of floating rate notes due 2012, together referred to as the Senior Notes due 2014. On July 15, 2005, the $100 million aggregate principal amount of floating rate notes was redeemed. On July 25, 2006, Virgin Media Finance issued $550 million aggregate principal amount of 9.125% senior notes due 2016, and together with the Senior Notes due 2014, these are referred to as the Senior Notes. Virgin Media Inc. and certain of its subsidiaries, namely Virgin Media Group LLC, Virgin Media Holdings Inc., Virgin Media (UK) Group, Inc. and Virgin Media Communications Limited, have guaranteed the Senior Notes on a senior basis. Virgin Media Investment Holdings Limited, or VMIH, has guaranteed the Senior Notes on a senior subordinated basis.

18


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Condensed Consolidated Financial Information (Continued)

        We present the following condensed consolidated financial information as of June 30, 2008 and December 31, 2007 and for the three and six months ended June 30, 2008 and 2007 as required by Article 3-10(d) of Regulation S-X.

 
  June 30, 2008  
Balance sheets
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Cash and cash equivalents

  £ 0.9   £   £ 4.2   £   £ 421.7   £   £ 426.8  

Restricted cash

                    6.0         6.0  

Other current assets

    1.2             4.4     711.7         717.3  
                               
 

Total current assets

    2.1         4.2     4.4     1,139.4         1,150.1  

Fixed assets, net

                    5,491.6         5,491.6  

Intangible assets, net

            (18.2 )       2,792.3         2,774.1  

Investments in, and loans to, parent and subsidiary companies

    2,770.1     508.2     (110.6 )   4,444.3     (6,601.2 )   (637.8 )   373.0  

Other assets, net

    9.7             180.7     (13.5 )       176.9  
                               
 

Total assets

  £ 2,781.9   £ 508.2   £ (124.6 ) £ 4,629.4   £ 2,808.6   £ (637.8 ) £ 9,965.7  
                               

Current liabilities

  £ 10.0   £ 38.4   £ 27.6   £ 61.8   £ 1,479.8   £ (156.0 ) £ 1,461.6  

Long term debt

    502.4     1,042.8         2,066.8     2,378.2         5,990.2  

Other long term liabilities

            0.3     107.5     136.4         244.2  

Minority interest

                    0.2         0.2  

Shareholders' equity

    2,269.5     (573.0 )   (152.5 )   2,393.3     (1,186.0 )   (481.8 )   2,269.5  
                               
 

Total liabilities and shareholders' equity

  £ 2,781.9   £ 508.2   £ (124.6 ) £ 4,629.4   £ 2,808.6   £ (637.8 ) £ 9,965.7  
                               

 

 
  December 31, 2007  
Balance sheets
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Cash and cash equivalents

  £ 1.3   £   £ 10.0   £ 0.7   £ 309.4   £   £ 321.4  

Restricted cash

                    6.1         6.1  

Other current assets

            0.4     9.6     615.8         625.8  
                               
 

Total current assets

    1.3         10.4     10.3     931.3         953.3  

Fixed assets, net

                    5,655.6         5,655.6  

Intangible assets, net

            (13.1 )       3,318.0         3,304.9  

Investments in, and loans to, parent and subsidiary companies

    2,808.8     1,018.0     379.5     5,281.1     (6,526.6 )   (2,592.1 )   368.7  

Other assets, net

                129.0     54.6         183.6  
                               
 

Total assets

  £ 2,810.1   £ 1,018.0   £ 376.8   £ 5,420.4   £ 3,432.9   £ (2,592.1 ) £ 10,466.1  
                               

Current liabilities

  £ (0.4 ) £ 29.9   £ 6.4   £ 119.6   £ 1,354.5   £ (103.3 ) £ 1,406.7  

Long term debt

        1,032.0         2,262.4     2,635.0         5,929.4  

Other long term liabilities

            0.3     116.7     202.5         319.5  

Shareholders' equity

    2,810.5     (43.9 )   370.1     2,921.7     (759.1 )   (2,488.8 )   2,810.5  
                               
 

Total liabilities and shareholders' equity

  £ 2,810.1   £ 1,018.0   £ 376.8   £ 5,420.4   £ 3,432.9   £ (2,592.1 ) £ 10,466.1  
                               

19


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Condensed Consolidated Financial Information (Continued)

 
  Three months ended June 30, 2008  
Statements of operations
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Revenue

  £   £   £   £   £ 990.5   £   £ 990.5  

Operating costs

                    (434.9 )       (434.9 )

Selling, general and administrative expenses

    (11.6 )       5.2         (216.3 )       (222.7 )

Other income

                    1.7         1.7  

Depreciation and amortization

                    (301.5 )       (301.5 )

Goodwill impairment

                    (366.2 )       (366.2 )
                               

Operating (loss) income

    (11.6 )       5.2         (326.7 )       (333.1 )

Interest income and other, net

    6.9     30.7     26.8     17.3     (7.3 )   (66.8 )   7.6  

Interest expense

    (7.5 )   (31.0 )   (20.4 )   (84.1 )   (45.4 )   66.8     (121.6 )

Share of income from equity investments

                    3.9         3.9  

Foreign currency (losses) gains

    (0.1 )       (0.1 )   6.1     (2.5 )       3.4  

Loss on extinguishment of debt

                (4.4 )   (1.2 )       (5.6 )

(Loss) gain on derivative instruments

                28.1     (30.4 )       (2.3 )

Income tax benefit (expense)

    (0.1 )       (3.2 )   13.3     (9.4 )       0.6  

Minority interest

                    (0.1 )       (0.1 )
                               

(Loss) income before equity in net (loss) income from subsidiaries

    (12.4 )   (0.3 )   8.3     (23.7 )   (419.1 )       (447.2 )

Equity in net loss of subsidiaries

    (434.8 )   (444.2 )   (443.3 )   (420.5 )       1,742.8      
                               

Net loss

  £ (447.2 ) £ (444.5 ) £ (435.0 ) £ (444.2 ) £ (419.1 ) £ 1,742.8   £ (447.2 )
                               

 

 
  Six months ended June 30, 2008  
Statements of operations
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Revenue

  £   £   £   £   £ 1,992.3   £   £ 1,992.3  

Operating costs

                    (895.3 )       (895.3 )

Selling, general and administrative expenses

    (12.2 )               (427.7 )       (439.9 )

Other charges

                    (2.9 )       (2.9 )

Depreciation and amortization

                    (625.7 )       (625.7 )

Goodwill impairment

                    (366.2 )       (366.2 )
                               

Operating (loss)

    (12.2 )               (325.5 )       (337.7 )

Interest income and other, net

    6.9     56.2     39.9     34.2     (16.0 )   (107.3 )   13.9  

Interest expense

    (7.9 )   (56.5 )   (27.0 )   (166.7 )   (94.2 )   107.3     (245.0 )

Share of income from equity investments

                    9.0         9.0  

Foreign currency (losses) gains

    (0.1 )   (0.4 )   (0.1 )   (22.4 )   (2.0 )       (25.0 )

Loss on extinguishment of debt

                (4.4 )   (1.2 )       (5.6 )

Gain on derivative instruments

                28.1     3.0         31.1  

Income tax benefit (expense)

    (0.1 )       (5.5 )   13.3     0.2         7.9  

Minority interest

                    (0.2 )       (0.2 )
                               

(Loss) income before equity in net (loss) income from subsidiaries

    (13.4 )   (0.7 )   7.3     (117.9 )   (426.9 )       (551.6 )

Equity in net loss of subsidiaries

    (538.2 )   (544.4 )   (545.8 )   (426.5 )       2,054.9      
                               

Net loss

  £ (551.6 ) £ (545.1 ) £ (538.5 ) £ (544.4 ) £ (426.9 ) £ 2,054.9   £ (551.6 )
                               

20


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Condensed Consolidated Financial Information (Continued)

 
  Three months ended June 30, 2007  
Statements of operations
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Revenue

  £   £   £   £   £ 995.0   £   £ 995.0  

Operating costs

                    (435.1 )       (435.1 )

Selling, general and administrative expenses

    (0.1 )       (2.9 )       (241.6 )       (244.6 )

Other charges

                    (3.1 )       (3.1 )

Depreciation and amortization

    0.1                 (309.3 )       (309.2 )
                               

Operating income (loss)

            (2.9 )       5.9         3.0  

Interest income and other, net

    0.1     25.1     12.5     24.3     (17.8 )   (36.4 )   7.8  

Interest expense

        (24.8 )   (6.5 )   (97.5 )   (35.7 )   36.4     (128.1 )

Share of income from equity investments

                    5.3         5.3  

Loss on extinguishment of debt

                (0.5 )   (0.6 )       (1.1 )

Foreign currency gains (losses)

        0.1     0.3     (4.4 )   6.3         2.3  

Losses on derivative instruments

                    (1.0 )       (1.0 )

Income tax (expense) benefit

    (0.1 )   0.1     (4.7 )       (2.5 )       (7.2 )
                               

(Loss) income before equity in net loss from subsidiaries

        0.5     (1.3 )   (78.1 )   (40.1 )       (119.0 )

Equity in net loss of subsidiaries

    (119.0 )   (115.0 )   (117.7 )   (37.0 )       388.7      
                               

Net loss

  £ (119.0 ) £ (114.5 ) £ (119.0 ) £ (115.1 ) £ (40.1 ) £ 388.7   £ (119.0 )
                               

 

 
  Six months ended June 30, 2007  
Statements of operations
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Revenue

  £   £   £   £   £ 2,016.9   £   £ 2,016.9  

Operating costs

                    (884.4 )       (884.4 )

Selling, general and administrative expenses

    (2.0 )       (8.1 )   (0.3 )   (501.1 )       (511.5 )

Other charges

    (0.3 )               (14.4 )       (14.7 )

Depreciation and amortization

                    (618.6 )       (618.6 )
                               

Operating loss

    (2.3 )       (8.1 )   (0.3 )   (1.6 )       (12.3 )

Interest income and other, net

    0.3     50.4     23.9     41.5     (28.2 )   (73.1 )   14.8  

Interest expense

        (49.9 )   (12.9 )   (184.5 )   (72.4 )   73.1     (246.6 )

Share of income from equity investments

                    12.5         12.5  

Loss on extinguishment of debt

                (0.5 )   (0.6 )       (1.1 )

Foreign currency gains (losses)

        0.1     0.4     (4.5 )   9.6         5.6  

Losses on derivative instruments

                    (1.5 )       (1.5 )

Minority interest income

                             

Income tax expense

    (0.2 )       (7.3 )       (3.2 )       (10.7 )
                               

(Loss) income before equity in net loss from subsidiaries

    (2.2 )   0.6     (4.0 )   (148.3 )   (85.4 )       (239.3 )

Equity in net loss of subsidiaries

    (237.1 )   (230.9 )   (233.1 )   (82.7 )       783.8      
                               

Net loss

  £ (239.3 ) £ (230.3 ) £ (237.1 ) £ (231.0 ) £ (85.4 ) £ 783.8   £ (239.3 )
                               

21


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Condensed Consolidated Financial Information (Continued)

 
  Six months ended June 30, 2008  
Statements of cash flows
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Net cash provided by (used in) operating activities

  £ (2.3 ) £   £ (8.4 ) £ (30.8 ) £ 420.3   £   £ 378.8  

Investing activities:

                                           

Purchase of fixed and intangible assets

                    (233.3 )       (233.3 )

Principal repayments (drawdowns) on loans to equity investments

    (492.8 )       0.9     262.2     230.3         0.6  

Other

                    1.6         1.6  
                               

Net cash (used in) provided by investing activities

    (492.8 )       0.9     262.2     (1.4 )       (231.1 )
                               

Financing activities:

                                           

New borrowings, net of financing fees

    494.0                         494.0  

Proceeds from employee stock options

    0.6                         0.6  

Principal payments on long term debt and capital leases

                (217.1 )   (306.6 )       (523.7 )

Intercompany funding movements

    13.3         1.7     (15.0 )            

Dividends paid

    (13.3 )                       (13.3 )
                               

Net cash (used in) provided by in financing activities

    494.6         1.7     (232.1 )   (306.6 )       (42.4 )
                               

Effect of exchange rate changes

    0.1                         0.1  

Increase (decrease) in cash and cash equivalents

    (0.4 )       (5.8 )   (0.7 )   112.3         105.4  

Cash and cash equivalents at beginning of period

    1.3         10.0     0.7     309.4         321.4  
                               

Cash and cash equivalents at end of period

  £ 0.9   £   £ 4.2   £   £ 421.7   £   £ 426.8  
                               

22


Table of Contents

VIRGIN MEDIA INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Condensed Consolidated Financial Information (Continued)

 
  Six months ended June 30, 2007  
Statements of cash flows
  Company   Virgin
Media
Finance
  Other
guarantors
  VMIH   All other
subsidiaries
  Adjustments   Total  
 
  (in millions)
 

Net cash provided by (used in) operating activities

  £ (0.5 ) £   £ (3.2 ) £ (28.9 ) £ 253.7   £   £ 221.1  

Investing activities:

                                           

Purchase of fixed and intangible assets

                    (286.2 )       (286.2 )

Acquisitions, net of cash acquired

                (1.0 )           (1.0 )

Principal repayments (drawdowns) on loans to equity investments

    4.6         (4.6 )   (375.1 )   381.3         6.2  

Other

                    2.1         2.1  
                               

Net cash (used in) provided by investing activities

    4.6         (4.6 )   (376.1 )   97.2         (278.9 )
                               

Financing activities:

                                           

New borrowings, net of financing fees

                576.8     297.7         874.5  

Principal payments on long term debt and capital leases

                (161.9 )   (789.5 )       (951.4 )

Proceeds from employee stock options

    4.0                         4.0  

Dividends paid

    (8.3 )                       (8.3 )
                               

Net cash (used in) provided by financing activities

    (4.3 )           414.9     (491.8 )       (81.2 )
                               

Effect of exchange rate changes

            (2.4 )               (2.4 )

(Decrease) increase in cash and cash equivalents

    (0.2 )       (10.2 )   9.9     (140.9 )       (141.4 )

Cash and cash equivalents at beginning of period

    2.4         31.5     0.2     384.4         418.5  
                               

Cash and cash equivalents at end of period

  £ 2.2   £   £ 21.3   £ 10.1   £ 243.5   £   £ 277.1  
                               

23


Table of Contents


VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

 
  June 30,
2008
  December 31,
2007
 
 
  (Unaudited)
  (See Note)
 

Assets

             

Current assets

             
 

Cash and cash equivalents

  £ 421.7   £ 310.0  
 

Restricted cash

    5.2     5.4  
 

Accounts receivable—trade, less allowances for doubtful accounts of £17.6 (2008) and £17.1 (2007)

    427.5     451.0  
 

Inventory

    94.8     75.4  
 

Prepaid expenses and other current assets

    184.1     94.4  
           
   

Total current assets

    1,133.3     936.2  

Fixed assets, net

    5,362.1     5,510.3  

Goodwill and other indefinite-lived intangible assets

    2,129.1     2,495.3  

Intangible assets, net

    657.3     814.3  

Equity investments

    373.0     368.7  

Other assets, net of accumulated amortization of £55.7 (2008) and £45.0 (2007)

    167.2     183.6  

Due from group companies

    720.0     637.4  
           

Total assets

  £ 10,542.0   £ 10,945.8  
           

Liabilities and shareholders' equity

             

Current liabilities

             
 

Accounts payable

  £ 382.7   £ 372.9  
 

Accrued expenses and other current liabilities

    498.9     407.4  
 

VAT and employee taxes payable

    66.4     81.2  
 

Restructuring liabilities

    57.3     84.8  
 

Interest payable

    106.0     148.2  
 

Interest payable to group companies

    93.5     77.6  
 

Deferred revenue

    259.2     240.3  
 

Current portion of long term debt

    33.3     29.1  
           
   

Total current liabilities

    1,497.3     1,441.5  

Long term debt, net of current portion

    4,445.0     4,897.4  

Long term debt, due to group companies

    1,964.1     1,367.1  

Deferred revenue and other long term liabilities

    158.6     237.1  

Deferred income taxes

    83.5     81.0  
           

Total liabilities

    8,148.5     8,024.1  
           

Commitments and contingent liabilities

             

Minority interest

    0.2      

Shareholders' equity

             
 

Share capital—£0.001 par value; authorized 1,000,000 ordinary shares (2008 and 2007); issued and outstanding 224,552 ordinary shares (2008 and 2007)

         
 

Additional paid-in capital

    4,371.3     4,371.3  
 

Accumulated other comprehensive income

    33.2     17.2  
 

Accumulated deficit

    (2,011.2 )   (1,466.8 )
           
   

Total shareholders' equity

    2,393.3     2,921.7  
           

Total liabilities and shareholders' equity

  £ 10,542.0   £ 10,945.8  
           

Note:    The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

See accompanying notes.

24


Table of Contents


VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions)

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Revenue

  £ 963.0   £ 965.1   £ 1,937.4   £ 1,956.5  

Costs and expenses

                         
 

Operating costs (exclusive of depreciation shown separately below)

    421.7     421.6     869.3     860.0  
 

Selling, general and administrative expenses

    210.0     232.1     414.8     482.3  
 

Other (income) charges

    (1.7 )   2.7     2.8     13.3  
 

Depreciation

    225.1     226.1     451.0     452.8  
 

Amortization

    70.9     75.7     161.7     151.1  
 

Goodwill impairment

    366.2         366.2      
                   

    1,292.2     958.2     2,265.8     1,959.5  
                   

Operating (loss) income

    (329.2 )   6.9     (328.4 )   (3.0 )

Other income (expense)

                         
 

Interest income and other, net

    7.6     6.8     13.8     13.4  
 

Interest income from group companies

    1.8     1.1     3.7     3.0  
 

Interest expense

    (90.4 )   (102.8 )   (189.8 )   (199.5 )
 

Interest expense to group companies

    (37.4 )   (29.7 )   (67.1 )   (56.7 )
 

Share of income from equity investments

    3.9     5.3     9.0     12.5  
 

Foreign currency gains (losses)

    3.6     1.9     (24.4 )   5.1  
 

Loss on extinguishment of debt

    (5.6 )   (1.1 )   (5.6 )   (1.1 )
 

(Losses) gains on derivative instruments

    (2.3 )   (1.0 )   31.1     (1.5 )
                   

Loss before income taxes and minority interest

    (448.0 )   (112.6 )   (557.7 )   (227.8 )

Income tax benefit (expense)

    3.9     (2.5 )   13.5     (3.2 )

Minority interest

    (0.1 )       (0.2 )    
                   

Net loss

  £ (444.2 ) £ (115.1 ) £ (544.4 ) £ (231.0 )
                   

See accompanying notes.

25


Table of Contents


VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

 
  Six months ended
June 30,
 
 
  2008   2007  

Operating activities

             

Net loss

  £ (544.4 ) £ (231.0 )
           

Adjustments to reconcile net loss to net cash provided by operating activities

             
 

Depreciation and amortization

    612.7     603.9  
 

Goodwill impairment

    366.2      
 

Non-cash interest

    (36.7 )   (63.3 )
 

Non-cash compensation

    5.4     11.4  
 

Income from equity accounted investments, net of dividends received

    (5.0 )   (9.2 )
 

Income taxes

    (11.5 )   5.5  
 

Amortization of original issue discount and deferred financing costs

    10.7     11.6  
 

Unrealized foreign currency losses (gains)

    23.9     0.6  
 

Loss on extinguishment of debt

    5.6     1.1  
 

(Gains) losses on derivative instruments

    (24.1 )   1.5  
 

Other

    (0.5 )   0.1  

Changes in operating assets and liabilities

    (44.0 )   (107.3 )
           
   

Net cash provided by operating activities

    358.3     224.9  
           

Investing activities

             
 

Purchase of fixed and intangible assets

    (231.0 )   (284.5 )
 

Principal repayments on loans to equity investments

    0.6      
 

Investments in, and loans from, parent and subsidiary companies

    505.9     5.3  
 

Acquisitions, net of cash acquired

        (1.0 )
 

Other

    1.6     1.5  
           
   

Net cash provided by (used in) investing activities

    277.1     (278.7 )
           

Financing activities

             
 

New borrowings, net of financing fees

        874.5  
 

Principal payments on long term debt and capital leases

    (523.7 )   (951.4 )
           
   

Net cash used in financing activities

    (523.7 )   (76.9 )
           

Increase (decrease) in cash and cash equivalents

    111.7     (130.7 )

Cash and cash equivalents, beginning of period

    310.0     384.0  
           

Cash and cash equivalents, end of period

  £ 421.7   £ 253.3  
           

26


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Basis of Presentation

        Virgin Media Investment Holdings Limited, or VMIH, is an indirect, wholly owned subsidiary of Virgin Media Inc., or Virgin Media.

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and notes thereto included in Virgin Media's Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on February 29, 2008, as amended.

        Certain prior year balances have been reclassified to conform to the current period presentation.

Note 2—Goodwill and Intangible Assets

        During the six months ended June 30, 2008, assets not subject to amortization were adjusted for the following (in millions):

 
  Trade Names   Reorganization
Value
  Goodwill  

Balance, December 31, 2007

  £ 16.5   £ 153.2   £ 2,325.6  
 

Goodwill impairment

            (366.2 )
               

Balance, June 30, 2008

  £ 16.5   £ 153.2   £ 1,959.4  
               

        As at June 30, 2008, we performed our annual impairment review of the goodwill recognized in the Virgin Media TV and sit-up reporting units, included in our Content segment, and the Virgin Mobile reporting unit. The fair value of these reporting units were determined through the use of a combination of both the market and income valuation approaches to calculate fair value. We concluded that the fair value of the Virgin Media TV and sit-up reporting units exceeded their carrying value, while the Virgin Mobile reporting unit fair value was less than its carrying value.

        The market approach valuations in respect of the Mobile reporting unit have declined from the prior year primarily as a result of declining market multiples of comparable companies. The income approach valuations in respect of the Mobile reporting unit declined as a result of a combination of an increased discount rate, a reduced terminal value multiple and reduced long term cash flow estimates. As a result, we extended our review to include the valuation of the Virgin Mobile reporting unit's individual assets and liabilities and have recognized a preliminary goodwill impairment charge of £366.2 million. We intend to complete our impairment review during the third quarter and any further adjustments to the carrying value of goodwill, if required, will be recognized in our third quarter results.

27


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 3—Long Term Debt

        Long term debt consists of (in millions):

 
  June 30,
2008
  December 31,
2007
 

8.75% U.S. Dollar senior loan notes due 2014 due to Virgin Media Finance PLC

  £ 213.5   £ 214.2  

9.75% Sterling senior loan notes due 2014 due to Virgin Media Finance PLC

    375.0     375.0  

8.75% Euro senior loan notes due 2014 due to Virgin Media Finance PLC

    178.0     165.6  

9.125% U.S. Dollar senior notes due 2016 due to Virgin Media Finance PLC

    276.3     277.2  

Floating rate senior loan notes due 2012 due to Virgin Media Finance PLC

    50.2     50.4  

Senior credit facility

    4,324.1     4,804.8  

Other loan notes due to affiliates

    871.1     284.7  

Capital leases

    149.8     116.9  

Other

    4.4     4.8  
           

    6,442.4     6,293.6  

Less: current portion

    (33.3 )   (29.1 )
           

  £ 6,409.1   £ 6,264.5  
           

        The effective interest rate on the senior credit facility was 7.4% and 7.8% as at June 30, 2008 and December 31, 2007, respectively.

Note 4—Employee Benefit Plans

        The components of net periodic pension cost in the three and six months ended June 30, 2008 and 2007 were as follows (in millions):

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Service costs

  £ 0.5   £ 0.6   £ 0.9   £ 1.2  

Interest costs

    4.5     4.1     9.1     8.3  

Expected return on plan assets

    (5.3 )   (4.7 )   (10.7 )   (9.5 )
                   

Net periodic benefit costs

  £ (0.3 ) £   £ (0.7 ) £  
                   

28


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 5—Other (Income) Charges Including Restructuring Charges

        The following tables summarize our historical restructuring accruals and the restructuring accruals resulting from the acquisitions during 2006 made by Virgin Media (in millions):

 
  Historical
Restructuring
Accruals
  Acquisition Restructuring
Accruals
  Total  
Three months ended June 30, 2008
  Lease
Exit Costs
  Involuntary
Employee
Termination
and Related Costs
  Lease
Exit Costs
   

Balance, March 31, 2008

  £ 19.2   £ 4.6   £ 39.8   £ 63.6  

Charged to expense

    0.5         0.9     1.4  

Revisions

    (1.6 )   (1.4 )   (0.1 )   (3.1 )

Utilized

    (1.5 )   (1.4 )   (1.7 )   (4.6 )
                   

Balance, June 30, 2008

  £ 16.6   £ 1.8   £ 38.9   £ 57.3  
                   

 

 
  Historical
Restructuring
Accruals
  Acquisition Restructuring
Accruals
  Total  
Six months ended June 30, 2008
  Lease
Exit Costs
  Involuntary
Employee
Termination
and Related Costs
  Lease
Exit Costs
   

Balance, December 31, 2007

  £ 34.0   £ 11.9   £ 38.9   £ 84.8  

Charged to expense

    1.4         1.7     3.1  

Revisions

    (2.0 )   (0.2 )   1.9     (0.3 )

Utilized

    (16.8 )   (9.9 )   (3.6 )   (30.3 )
                   

Balance, June 30, 2008

  £ 16.6   £ 1.8   £ 38.9   £ 57.3  
                   

        Other income of £1.7 million and other charges of £2.7 million for the three months ended June 30, 2008 and 2007, respectively, and other charges of £2.8 million and £13.3 million for the six months ended June 30, 2008 and 2007, respectively, relate mainly to lease exit and employee termination costs as a result of our acquisition-related restructuring programs.

Note 6—Share Based Compensation

Stock Option Plans

        We are an indirect, wholly owned subsidiary of Virgin Media. Accordingly, we have no stock-based compensation plans. As at June 30, 2008, certain of our employees participated in the stock-based compensation plans of Virgin Media, as described in Virgin Media's 2007 Annual Report on Form 10-K, filed with the SEC on February 29, 2008, as amended.

29


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 7—Comprehensive Loss

        Comprehensive loss comprises (in millions):

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Net loss for period

  £ (444.2 ) £ (115.1 ) £ (544.4 ) £ (231.0 )

Net unrealized gains on derivatives, net of tax

    11.7     9.5     27.6     34.0  

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

    (2.0 )   10.2     (11.6 )   7.8  
                   

Comprehensive loss

  £ (434.5 ) £ (95.4 ) £ (528.4 ) £ (189.2 )
                   

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

 
  June 30,
2008
  December 31,
2007
 

Pension liability adjustments

  £ (0.2 ) £ (0.2 )

Net unrealized gains on derivatives

    33.4     17.4  
           

  £ 33.2   £ 17.2  
           

Note 8—Income Taxes

        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. At each interim period, management uses the best information available to develop these estimates and assumptions, which are used to compute the forecast effective tax rate for the full year which is applied in computing the income tax expense or benefit for the interim period. In accordance with U.S. 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 changed and will change as new events occur, as more experience is acquired, as additional information is obtained and our tax environment changes. To the extent that the estimate changes during a subsequent quarter, the effect of the change on prior quarters as well as on the current quarter is included in income tax expense for the current quarter.

        For the three and six months ended June 30, 2008, income tax benefit was £3.9 and £13.5 million, respectively, as compared with income tax expense of £2.5 million and £3.2 million for the same periods in 2007. The income tax benefit for the three months ended June 30, 2008 was comprised of deferred federal tax expense of £1.1 million, a U.K. current tax benefit of £1.2 million and a U.K. deferred tax benefit of £3.8 million. The income tax benefit for the six months ended June 30, 2008 was comprised of deferred federal tax expense of £2.3 million, a U.K. current tax benefit of £2.5 million and a U.K. deferred tax benefit of £13.3 million. The U.K. current tax benefit related to amounts receivable in

30


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 8—Income Taxes (Continued)


respect of the sale of tax losses to an equity-method investee. The U.K. deferred tax benefit related to the decrease in our deferred tax asset valuation allowance due to changes in our assessment of the future realization of certain deferred tax assets. Such changes resulted from the recording of certain deferred tax liabilities related to amounts recognized in the statement of other comprehensive income that are expected to reverse in future periods and will allow us to offset such amounts against certain deferred tax assets. The income tax expense for the three months ended June 30, 2007 was comprised of deferred federal tax expense of £4.3 million and a U.K. tax benefit of £1.8 million. The income tax expense for the six months ended June 30, 2007 was comprised of deferred federal tax expense of £6.3 million and a U.K. tax benefit of £3.1 million. The U.K. tax benefit relates to amounts receivable in respect of the sale of U.K. tax losses to an equity-method investee.

        We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the statement of operations.

Note 9—Related Party Transactions

Virgin Media Inc. and its consolidated subsidiaries

        We are a wholly owned subsidiary of Virgin Media Inc. We charge Virgin Media Inc. and certain of its group companies for operating costs and selling, general and administrative expenses incurred by us on their behalf. The following information summarizes our significant related party transactions with Virgin Media Inc. and its group companies (in millions):

 
  Three months ended
June 30,
  Six months ended
June 30,
 
 
  2008   2007   2008   2007  

Operating costs

  £ 13.2   £ 13.5   £ 26.0   £ 24.4  

Selling, general and administrative expenses

    12.7     9.5     25.1     19.1  

        The above recharges are recorded in operating costs and selling, general and administrative expenses and offset the respective costs incurred.

Note 10—Fair Value Measurements

        In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or FAS 157. FAS 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. FAS 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. FAS 157 is effective for certain financial instruments included in financial statements issued for fiscal years beginning after November 15, 2007 and for all other non-financial instruments for fiscal years beginning after November 15, 2008. The provisions of FAS 157 relating to certain financial instruments were required to be adopted by us in the first quarter of 2008 effective January 1, 2008. The adoption of this standard did not have a material impact on our consolidated financial statements.

31


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 10—Fair Value Measurements (Continued)

        FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1

  Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2

 

Unadjusted quoted prices in active markets for similar assets or liabilities, or

 

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

 

Inputs other than quoted prices that are observable for the asset or liability

Level 3

 

Unobservable inputs for the asset or liability

        We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We have determined that all of our financial assets and liabilities that are stated at fair value fall in level 2 in the fair value hierarchy described above.

        The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2008 and December 31, 2007 (in millions):

 
  June 30,
2008
  December 31,
2007
 

Included within other current assets:

             

Foreign currency forward rate contracts

  £ 25.9   £  

Interest rate swaps

    25.1     4.1  

Cross-currency interest rate swaps

    21.8      
           

  £ 72.8   £ 4.1  
           

Included within other assets:

             

Foreign currency forward rate contracts

  £   £ 18.3  

Interest rate swaps

        11.2  

Cross-currency interest rate swaps

    57.8     30.6  
           

  £ 57.8   £ 60.1  
           

Included within other current liabilities:

             

Foreign currency forward rate contracts

  £ 76.1   £  

Cross-currency interest rate swaps

    7.5      
           

  £ 83.6   £  
           

Included within deferred revenue and other long term liabilities:

             

Foreign currency forward rate contracts

  £   £ 67.9  

Cross-currency interest rate swaps

    40.7     54.4  
           

  £ 40.7   £ 122.3  
           

32


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 10—Fair Value Measurements (Continued)

        As a result of our financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest and foreign currency exchange rate fluctuations through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes and we do not use leveraged derivative financial instruments. The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2 in the fair value hierarchy.

Note 11—Recent Accounting Pronouncements

        In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, or FAS 159. FAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. We did not elect to utilize the fair value option as permitted by FAS 159 for any of our assets or liabilities as at December 31, 2007.

        In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, or FAS 160. FAS 160 establishes requirements for ownership interests in subsidiaries held by parties other than ourselves (sometimes called "minority interests") be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent's equity. All changes in the parent's ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in unconsolidated subsidiaries must be measured initially at fair value. FAS 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. We are currently assessing the impact of FAS 160 on our consolidated financial position and results of operations.

Note 12—Industry Segments

        Our reportable segments Cable, Content and Mobile are based on our method of internal reporting. Our primary segment is our Cable segment, which consists of the distribution of television programming to consumers and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations on our cable network and, to a lesser extent, off our cable network. We operate our Content segment through our wholly owned subsidiaries Virgin Media TV, and sit-up, which supply television programming to the U.K. pay-television broadcasting market including our televised shopping unit sit-up tv, which markets and retails a wide variety of consumer products using an auction-based format. We operate our Mobile segment through our wholly owned subsidiary Virgin Mobile Holdings (UK) Ltd., which consists of our mobile telephony business. Our segments operate entirely in the U.K. and no one customer represents more than 5% of our overall revenue.

        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 FAS 131, Disclosures about Segments of an Enterprise and Related Information. Our management, including our chief

33


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Industry Segments (Continued)


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 certain 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. The business segments disclosed in the consolidated financial statements are based on this organizational structure and information reviewed by our management to evaluate the business segment results.

        Segment information for the three and six month periods ended June 30, 2008 and 2007 was as follows (in millions):

 
  Three months ended June 30, 2008  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 739.6   £ 79.5   £ 143.9   £   £ 963.0  

Inter segment revenue

    0.8     6.5         (7.3 )    

Operating costs

    (279.1 )   (66.1 )   (83.0 )   6.5     (421.7 )

Selling, general and administrative expenses

    (164.6 )   (20.8 )   (25.4 )   0.8     (210.0 )
                       

Segment OCF

    296.7     (0.9 )   35.5         331.3  

Depreciation, amortization and other charges

    (264.1 )   (4.6 )   (25.6 )       (294.3 )

Goodwill impairment

            (366.2 )       (366.2 )
                       

Operating income (loss)

  £ 32.6   £ (5.5 ) £ (356.3 ) £   £ (329.2 )
                       

 

 
  Three months ended June 30, 2007  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 745.2   £ 73.6   £ 146.3   £   £ 965.1  

Inter segment revenue

    1.0     6.1         (7.1 )    

Operating costs

    (283.5 )   (60.1 )   (84.2 )   6.2     (421.6 )

Selling, general and administrative expenses

    (184.1 )   (19.5 )   (29.4 )   0.9     (232.1 )
                       

Segment OCF

    278.6     0.1     32.7         311.4  

Depreciation, amortization and other charges

    (278.2 )   (4.3 )   (22.0 )       (304.5 )
                       

Operating income (loss)

  £ 0.4   £ (4.2 ) £ 10.7   £   £ 6.9  
                       

 

 
  Six months ended June 30, 2008  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 1,491.1   £ 162.9   £ 283.4   £   £ 1,937.4  

Inter segment revenue

    1.5     12.8         (14.3 )    

Operating costs

    (575.3 )   (131.2 )   (175.6 )   12.8     (869.3 )

Selling, general and administrative expenses

    (320.9 )   (40.3 )   (55.1 )   1.5     (414.8 )
                       

Segment OCF

    596.4     4.2     52.7         653.3  

Depreciation, amortization and other charges

    (555.3 )   (9.1 )   (51.1 )       (615.5 )

Goodwill impairment

            (366.2 )       (366.2 )
                       

Operating income (loss)

  £ 41.1   £ (4.9 ) £ (364.6 ) £   £ (328.4 )
                       

34


Table of Contents

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Note 12—Industry Segments (Continued)

 

 
  Six months ended June 30, 2007  
 
  Cable   Content   Mobile   Elims.   Total  

Revenue

  £ 1,515.0   £ 154.2   £ 287.3   £   £ 1,956.5  

Inter segment revenue

    1.9     12.0         (13.9 )    

Operating costs

    (584.3 )   (120.2 )   (167.6 )   12.1     (860.0 )

Selling, general and administrative expenses

    (390.1 )   (33.7 )   (60.3 )   1.8     (482.3 )
                       

Segment OCF

    542.5     12.3     59.4         614.2  

Depreciation, amortization and other charges

    (565.4 )   (8.4 )   (43.4 )