| • FORM 10-Q • CERTIFICATION OF CHIEF EXECUTIVE OFFICER • CERTIFICATION OF CHIEF FINANCIAL OFFICER • CERTIFICATION OF CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
For the quarterly period ended March 31, 2012 Or
Commission File No. 000-50886
VIRGIN MEDIA INC. (Exact name of registrant as specified in its charter)
VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED (Additional Registrant) VIRGIN MEDIA INVESTMENTS LIMITED (Additional Registrant)
(212) 906-8440 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of May 2, 2012, there were 277,766,072 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding. The Additional Registrants meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this report with the reduced disclosure format. See “Note Concerning Virgin Media Investment Holdings Limited and Virgin Media Investments Limited” in this Form 10-Q.
Table of ContentsVIRGIN MEDIA INC. FORM 10-Q QUARTER ENDED March 31, 2012
In this quarterly report on Form 10-Q, unless we have indicated otherwise, or the context otherwise requires, references to “Virgin Media,” “the Company,” “we,” “us,” “our” and similar terms refer to the consolidated business of Virgin Media Inc. and its subsidiaries (including Virgin Media Investment Holdings Limited, or VMIH, Virgin Media Investments Limited, or VMIL, and their respective subsidiaries).
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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,” “think,” “strategy,” and similar expressions identify these forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by these forward-looking statements. These factors, among others, include the following:
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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, 2011, or the 2011 Annual Report, as filed with the U.S. Securities and Exchange Commission, or SEC, on February 21, 2012. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements. Note Concerning Virgin Media Investment Holdings Limited and Virgin Media Investments Limited VMIH is a company incorporated in England and Wales, with its registered office at Media House, Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UP, England. VMIH is a wholly-owned subsidiary of Virgin Media Finance PLC, or Virgin Media Finance, and a wholly-owned indirect subsidiary of Virgin Media. VMIH is not an accelerated filer. VMIH is one of the guarantors of the unsecured senior notes issued by Virgin Media Finance. VMIH’s guarantees of these notes are not deemed to be unconditional. Separate condensed financial statements for VMIH have been included in this quarterly report on Form 10-Q pursuant to the rules and regulations of the SEC. VMIH is also one of the guarantors of the senior secured notes issued by Virgin Media Secured Finance PLC, or Virgin Media Secured Finance. VMIH carries on the same business as Virgin Media, and is the principal borrower under Virgin Media’s senior credit facility. VMIL was formed on December 18, 2009, as a wholly-owned subsidiary of VMIH. On December 30, 2009, VMIL acceded as a senior subordinated guarantor of the unsecured senior notes issued by Virgin Media Finance, on the same terms as VMIH. As VMIL’s guarantees are not deemed to be unconditional, separate condensed financial statements for VMIL have been included in this quarterly report on Form 10-Q pursuant to the rules and regulations of the SEC. VMIL is also one of the guarantors of the senior secured notes issued by Virgin Media Secured Finance. Unless otherwise indicated, the discussion contained in this report applies to VMIH and VMIL as well as Virgin Media. Financial Information and Currency of Financial Statements All of the financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The reporting currency of our consolidated financial statements is U.K. pounds sterling.
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Table of ContentsCONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except par value)
See accompanying notes.
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Table of ContentsVIRGIN MEDIA INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (in millions, except per share data)
See accompanying notes.
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Table of ContentsVIRGIN MEDIA INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in millions)
See accompanying notes.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1—Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and notes thereto included in Virgin Media Inc.’s annual report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on February 21, 2012, or the 2011 Annual Report. Note 2—Recent Accounting Guidance We adopted new guidance regarding the presentation of comprehensive income on January 1, 2012 and have presented total comprehensive income in the condensed consolidated statements of comprehensive income for the current and prior periods. We adopted new guidance regarding fair value measurement disclosure requirements on January 1, 2012 and applied it on a prospective basis. This guidance did not have a material impact on our financial statements. Note 3—Long Term Debt On March 13, 2012, our wholly owned subsidiary, Virgin Media Finance PLC issued $500 million aggregate principal amount of 5.25% senior notes due 2022 at par. The proceeds of $495.5 million, net of fees, were received on March 13, 2012. Interest is payable on February 15 and August 15 each year, beginning on August 15, 2012. The senior notes due 2022 rank pari passu with Virgin Media Finance PLC’s outstanding senior notes due 2016 and 2019. On March 28, 2012, we used the net proceeds from these new senior notes, and cash on our balance sheet, to redeem $500 million of the principal amount of the $1,350 million 9.50% senior notes due 2016. We recognized a loss on extinguishment of debt of £58.6 million as a result of this redemption, which represented the difference between the consideration paid to redeem $500 million of the 9.50% senior notes due 2016 and the carrying value of those notes, and the write-off of associated deferred finance costs. If the trading price of our common stock exceeds 120% of the conversion price of the convertible senior notes for 20 out of the last 30 trading days of a calendar quarter, holders of the convertible notes may elect to convert their convertible notes during the following quarter. This condition was achieved in the three months ended March 31, 2012. If conversions of this nature occur, we may deliver cash, common stock, or a combination of both, at our election, to settle our obligations. We have classified this debt as long-term debt in the condensed consolidated balance sheet as of March 31, 2012 because we determined, in accordance with the Derivatives and Hedging Topic of the FASB ASC, that we have the ability to settle the obligations in equity in all circumstances, except in the case of a fundamental change (as defined in the indenture governing the convertible senior notes).
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 3—Long Term Debt (continued)
Long term debt repayments, excluding capital leases, as of March 31, 2012, were due as follows (in millions):
On October 27, 2010, we entered into capped call option transactions, or conversion hedges, with certain counterparties relating to our $1.0 billion 6.50% convertible senior notes due 2016. The conversion hedges are intended to offset a portion of the dilutive effects that could potentially be associated with conversion of the convertible senior notes at maturity and provide us with the option to receive the number of shares of our common stock (or in certain circumstances, cash) with a value equal to the excess of (a) the value owed by us (up to the cap price of $35.00 per share) to convertible senior note investors pursuant to the terms of the notes on conversion of up to 90% of the notes over (b) the aggregate face amount of such converted notes upon maturity of the convertible senior notes. The conversion hedges also provide various mechanisms for settlement in our common stock and/or cash in certain circumstances, based primarily on the settlement method elected for the notes. These conversion hedges have an initial strike price of $19.22 per share of our stock, which is the conversion price provided under the terms of our convertible senior notes, and a cap price of $35.00 per share of our stock. We paid £205.4 million in respect of the conversion hedges. The cost of these transactions was not deductible for U.S. federal income tax purposes, and the proceeds, if any, received upon exercise of the options will not be taxable for U.S. federal income tax purposes. The conversion hedges do not qualify for equity classification under U.S. GAAP as there are potential circumstances in which cash settlement may be required at the discretion of the counterparties. As such, the fair value of the conversion hedges, which was estimated to be £178.6 million as of March 31, 2012, has been included as a non-current derivative financial asset in the condensed consolidated balance sheets. Refer to note 4 for additional discussion of the fair value measurement of the conversion hedges. Note 4—Fair Value Measurements Fair value is defined 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. The types of inputs used to measure fair value are classified into the following hierarchy:
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.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 4—Fair Value Measurements (continued)
The tables below present our assets and liabilities measured at fair value as at March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy into which they fall (in millions):
In estimating the fair value of our financial assets and liabilities, we used the following methods and assumptions: Derivative financial instruments: As a result of our financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest and foreign currency exchange rate fluctuations through the use of derivative financial instruments such as, foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps. These contracts are valued using internal models based on observable inputs, counterparty valuations, or market transactions in either the listed or over-the-counter markets, adjusted for non-performance risk. As such, these derivative instruments are classified within level 2 in the fair value hierarchy. The fair values of our derivative financial instruments are disclosed in note 5.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 4—Fair Value Measurements (continued)
Valuation of conversion hedges: Because the conversion hedges do not qualify for equity classification, the fair values have been included as a non-current derivative financial asset in the condensed consolidated balance sheets. The conversion hedges may only be exercised by us upon maturity of the convertible senior notes. As of March 31, 2012, the fair value of these instruments was estimated to be £178.6 million using the Black-Scholes Merton valuation technique. The fair values of the conversion hedges are primarily impacted by our stock price on the measurement date and the expected volatility of our stock price, but are also impacted by the remaining duration of the options, the strike price ($19.22 per share) of the instrument, the cap price ($35.00 per share) of the instrument, the dividend yield on our stock, exchange rates, and counterparty non-performance risk. The table below presents the estimated impact on the March 31, 2012 fair value of a hypothetical 20% increase and decrease in our stock price, holding all other inputs constant (in millions):
We have determined that the overall valuation of the conversion hedges falls within level 3 of the fair value hierarchy as the assumption for the expected volatility of our stock price over the term of the options is based on an unobservable input and is deemed to be significant to the determination of fair value. Other impacts are not significant or are observable. We utilized expected volatility assumptions of 26% and 34% in the valuation of each component of the conversion hedges as of March 31, 2012. An increase in this input in isolation would generally result in a higher value of the conversion hedges while a decrease in this input would result in a lower value of the conversion hedges. Non-performance risk is based on quoted credit default swaps for counterparties to the contracts. The inclusion of counterparty non-performance risk resulted in a decrease to the fair values of the conversion hedges of £19.6 million and £16.5 million as of March 31, 2012 and 2011, respectively. The following table presents a reconciliation of the beginning and ending balances of the conversion hedges (in millions):
Future changes in fair values of the conversion hedges will be reported as gains (losses) on derivative instruments in the condensed consolidated statements of comprehensive income.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 4—Fair Value Measurements (continued)
Long term debt: The carrying value of our senior credit facility approximates its fair value. The fair values of our senior notes, convertible senior notes and senior secured notes in the following table are based on the market prices in active markets which incorporate non-performance risk. As such, these measurements are classified within level 1 in the fair value hierarchy. The carrying values of the $500 million 5.25% and £650 million 5.50% senior secured notes due 2021 include adjustments of £34.2 million and £72.0 million at March 31, 2012, and £45.7 million and £77.9 million at December 31, 2011, respectively, as a result of our application of fair value hedge accounting to these instruments. The carrying amounts and fair values of our long term debt are as follows (in millions):
Note 5—Derivative Financial Instruments and Hedging Activities Strategies and Objectives for Holding Derivative Instruments Our operations are materially impacted by changes in interest rates and foreign currency exchange rates. In an effort to manage these risks, we periodically enter into various derivative instruments including interest rate swaps, cross-currency interest rate swaps and foreign exchange forward rate contracts. We recognize all derivative instruments as either assets or liabilities at fair value on our consolidated balance sheets and certain changes in the fair value of derivative instruments in our condensed consolidated statements of comprehensive income. We have entered into cross-currency interest rate swaps and foreign currency forward rate contracts to manage interest rate and foreign exchange rate currency exposures with respect to our U.S. dollar ($) and euro (€) denominated debt obligations. Additionally, we have entered into interest rate swaps to manage interest rate exposures resulting from variable and fixed rates of interest we pay on our U.K. pound sterling (£) denominated debt obligations. We have also entered into U.S. dollar and South African rand forward rate contracts to manage our foreign exchange rate currency exposures related to certain committed and forecasted purchases.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
Whenever it is practical to do so, we designate a derivative contract as either a cash flow or fair value hedge for accounting purposes. These relationships are referred to as “Accounting Hedges” below. When a derivative contract is not designated as an Accounting Hedge, the derivative is treated as an economic hedge with mark-to-market movements and realized gains or losses recognized through gains (losses) on derivative instruments in the condensed consolidated statements of comprehensive income. These derivatives are referred to as “Economic Hedges” below. We do not enter into derivatives for speculative or trading purposes. The conversion hedges are intended to offset a portion of the dilutive effects that could potentially be associated with conversion of the convertible senior notes at maturity and provide us with the option to receive the number of shares of our common stock (or in certain circumstances cash) with a value equal to the excess of (a) the value owed by us (up to the cap price of $35.00 per share) to convertible senior note investors pursuant to the terms of the notes on conversion of up to 90% of the notes over (b) the aggregate face amount of such converted notes upon maturity of the convertible senior notes. We believe that those relationships designated as Accounting Hedges will be highly effective throughout their term in offsetting changes in cash flow or fair value attributable to the hedged risk. If we determine it is probable that forecasted transactions to which a hedge contract relates will not occur, we discontinue hedge accounting prospectively and immediately reclassify any amounts accumulated in other comprehensive income to income. We perform, at least quarterly, both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including assessing the possibility of counterparty default. If we determine that a hedging relationship is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the derivative in gains (losses) on derivative instruments in the condensed consolidated statements of comprehensive income. As a result of our effectiveness assessment at March 31, 2012, we believe our derivative contracts that are designated and qualify for hedge accounting will continue to be highly effective in offsetting changes in cash flow or fair value attributable to the hedged risk. The foreign currency forward rate contracts, interest rate swaps and cross-currency interest rate swaps are valued using internal models based on observable inputs, counterparty valuations, or market transactions in either the listed or over-the-counter markets, adjusted for non-performance risk. Non-performance is based on quoted credit default swap spreads for counterparties to the contracts and swaps. These derivative instruments are classified within level 2 in the fair value hierarchy, because we consider all of the significant inputs are observable. Derivative instruments which are subject to master netting arrangements are not offset and we have not provided, nor do we require, cash collateral with any counterparty. Refer to note 4 for a discussion of the conversion hedges.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
The fair values of our derivative instruments recorded on our condensed consolidated balance sheets were as follows (in millions):
Cross-Currency Interest Rate Swaps—Hedging the Interest Payments of Senior Notes and Senior Secured Notes During the three months ended March 31, 2012, we terminated the cross-currency interest rate swaps on the $500 million 9.50% senior notes due 2016 that were redeemed in the quarter. We also entered into new cross-currency interest rate swaps to mitigate the foreign exchange rate risk associated with the $500 million 5.25% senior notes due 2022. As of March 31, 2012, we had outstanding cross-currency interest rate swaps to mitigate the interest and foreign exchange rate risks relating to the pound sterling value of interest and principal payments on the U.S. dollar and euro denominated senior notes and senior secured notes.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
The terms of our outstanding cross-currency interest rate swaps at March 31, 2012 were as follows:
All of our cross-currency interest rate swaps include exchanges of the notional amounts at the start and end of the contract except for the contract maturing in November 2016 hedging the $1,000 million convertible senior notes due 2016.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
Interest Rate Swaps—Hedging of Interest Rate Sensitive Obligations As of March 31, 2012, we had outstanding interest rate swap agreements to manage the exposure to variability in future cash flows on the interest payments associated with our senior credit facility, which accrue at variable rates based on LIBOR. We have also entered into interest rate swap agreements to manage our exposure to changes in the fair value of certain debt obligations due to interest rate fluctuations. The interest rate swaps allow us to receive or pay interest based on three or six month LIBOR in exchange for payments or receipts of interest at fixed rates. The terms of our outstanding interest rate swap contracts at March 31, 2012 were as follows:
Foreign Currency Forward Rate Contracts—Hedging Committed and Forecasted Transactions As of March 31, 2012, we had outstanding foreign currency forward rate contracts to purchase U.S. dollars and South African rand to hedge committed and forecasted purchases. The terms of our outstanding foreign currency forward rate contracts at March 31, 2012 were as follows:
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
Cash Flow Hedges For derivative instruments that are designated and qualify as cash flow Accounting Hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. In our consolidated statement of cash flows, we recognize the cash flows resulting from derivative contracts that are treated as Accounting Hedges in the same category where the cash flows from the underlying exposure are recognized. Cash flows from derivative contracts that are not designated as Accounting Hedges are recognized as operating activities in the condensed consolidated statement of cash flows. If we discontinue hedge accounting for an instrument, subsequent cash flows are classified based on the nature of the instrument. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized as gains or losses on derivative instruments in the condensed consolidated statement of comprehensive income in the period in which they occur. During the three months ended March 31, 2012 and 2011, we recognized no gain or loss relating to ineffectiveness on our cash flow hedges. The following table presents the effective amount of gain or (loss) recognized in other comprehensive income (loss) and amounts reclassified to earnings during the three months ended March 31, 2012 (in millions):
Assuming no change in interest rates or foreign exchange rates for the next twelve months, the amount of pre-tax income or losses that would be reclassified from other comprehensive income (loss) to earnings would be income of £0.1 million relating to interest rate swaps, losses of £7.8 million relating to cross-currency interest rate swaps, and income of £0.1 million relating to forward foreign exchange contracts. During the three months ended March 31, 2012, we recognized gains on derivative instruments of £45.5 million relating to derivative instruments that were not designated or qualifying cash flow hedges.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 5—Derivative Financial Instruments and Hedging Activities (continued)
Fair Value Hedges For derivative instruments that are designated and qualify in fair value Accounting Hedge relationships, the gain or loss on the derivative is reported in earnings along with offsetting changes in the value of the hedged debt obligations due to changes in the hedged risks. In our condensed consolidated balance sheet, changes in the value of the hedged debt obligations due to changes in the hedged risks are included as adjustments to the carrying value of the debt. In our condensed consolidated statement of cash flows, we recognize the cash flows resulting from derivative contracts that are treated as Accounting Hedges in the same category where the cash flows from the underlying exposure are recognized. All other cash flows from derivative contracts are recognized as operating activities in the condensed consolidated statement of cash flows. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized as gains or losses on derivative instruments in the condensed consolidated statements of comprehensive income in the period in which they occur. During the three months ended March 31, 2012 and 2011, we recognized ineffectiveness totaling £1.7 million and £1.8 million, respectively. Note 6—Shareholders’ Equity and Share Based Compensation On July 27, 2011, we announced a second phase capital structure optimization program which includes the application of, in aggregate, up to £850 million for purposes of repurchasing our common stock and debt and for effecting associated derivative transactions until December 31, 2012. Our second phase capital structure optimization program consists of the application of up to £625 million in repurchases of our common stock and up to £225 million for transactions relating to our debt and convertible debt, including related derivative transactions. In addition, on October 27, 2011, we announced our intention to expend up to a further £250 million on share repurchases from the proceeds from the sale of our UKTV joint venture companies to a subsidiary of Scripps Network Interactive Inc. Our capital structure optimization programs may be effected through open market, privately negotiated, and/or derivative transactions, and may be implemented through arrangements with one or more brokers. Any shares of common stock acquired in connection with these programs will be held in treasury or cancelled. During the three months ended March 31, 2012, we entered into a capped Accelerated Stock Repurchase (ASR) to purchase $250.0 million (£157.3 million) of our common stock. We received 10.2 million shares of common stock during the quarter at an average purchase price per share of $24.58. The shares of common stock so acquired were held in treasury as of March 31, 2012 and cancelled in April 2012. During the three months ended March 31, 2011, we repurchased 7.2 million shares of common stock in connection with the 2010 capital structure optimization program, at an average purchase price per share of $27.10 ($194.4 million in aggregate), through open market repurchases. The shares of common stock acquired in connection with this program were cancelled. Total share based compensation expense included within selling, general and administrative expenses in the condensed consolidated statements of comprehensive income was £7.6 million and £7.0 million for the three months ended March 31, 2012 and 2011, respectively.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 7—Income Per Common Share Basic net income per common share is computed by dividing the net income for the three months ended March 31, 2012 and 2011 by the weighted average number of shares outstanding during the respective periods. Diluted net income per common share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for options, sharesave options, shares of restricted stock held in escrow and restricted stock units, and the if-converted method for shares potentially issuable under our convertible senior notes. The weighted average number of shares outstanding for the three months ended March 31, 2012 and 2011 is computed as follows (in millions):
The following table sets forth the components of basic and diluted income (loss) per common share (in millions):
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 7—Income Per Common Share (continued)
The following table sets forth the number of potential common shares excluded from the calculation of the denominator for diluted income (loss) per common shares (in millions):
In the three months ended March 31, 2012, certain share based awards to employees have been excluded from the calculation of the diluted weighted average number of shares because generally their exercise prices exceeded our average share price during the calculation period. In the three months ended March 31, 2012, certain restricted stock held in escrow and certain restricted stock units have been excluded from the calculation of the diluted weighted average number of shares because these shares are contingently issuable based on the achievement of performance and/or market conditions that have not been achieved as of March 31, 2012. In the three months ended March 31, 2012, the common shares issuable under our convertible notes have been excluded from the calculation of the diluted weighted average number of shares because the effect of their inclusion would be anti-dilutive based on the application of the if-converted method, which assumes that interest charges applicable to the convertible notes, net of the income tax effect, are added to income (loss) for the period and that the common shares issuable upon conversion of the convertible notes are added to the number of weighted average shares outstanding. Stock Option Grants All options outstanding under our stock incentive plans have a ten year term and vest and become fully exercisable within five years of continued employment. We have historically issued new shares upon exercise of the options and expect to continue to do so. For performance-based option grants, the performance objectives are based upon both quantitative and qualitative objectives, including earnings and stock price performance, amongst others. These objectives may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range. Sharesave Option Grants All options granted under the Virgin Media Inc. Sharesave Plan enable eligible employees to purchase shares of our common stock at a discount. Employees are invited to take out savings contracts that last for three years. At the end of the contract, employees use the proceeds of these savings to exercise the options granted under the plan. We intend to issue new shares upon exercise of the options.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 7—Income Per Common Share (continued)
Restricted Stock Grants The shares of restricted stock granted under our stock incentive plans have a term of up to three and a half years and vest based on time or performance, subject to continued employment. For performance-based restricted stock grants, the performance objectives are based upon quantitative and qualitative objectives, including earnings, operational performance and achievement of strategic goals, amongst others, and vest after a one to three year period. These objectives may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range. Restricted Stock Unit and Performance Share Grants The restricted stock units and performance shares granted under our stock incentive plans have a term of up to three and a half years and vest based on performance, subject to continued employment. These targets may be absolute or relative to prior performance or to the performance of other entities, indices or benchmarks and may be expressed in terms of progression within a specific range. Convertible Senior Notes Holders of our U.S. dollar denominated 6.50% convertible senior notes due 2016 may tender their notes for conversion at any time on or after August 15, 2016 through to the second scheduled trading date preceding the maturity date. Prior to August 15, 2016, holders may convert their notes, at their option, only under the following circumstances: (i) in any quarter, if the closing sale price of Virgin Media Inc.’s common stock during at least 20 of the last 30 trading days of the prior quarter was more than 120% of the applicable conversion price per share of common stock on the last day of such prior quarter; (ii) if, for five consecutive trading days, the trading price per $1,000 principal amount of notes was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate; (iii) if a specified corporate event occurs, such as a merger, recapitalization, reclassification, binding share exchange or conveyance of all, or substantially all, of Virgin Media Inc.’s assets; (iv) the declaration by Virgin Media Inc. of the distribution of certain rights, warrants, assets or debt securities to all, or substantially all, holders of Virgin Media Inc.’s common stock; or (v) if Virgin Media Inc. undergoes a fundamental change (as defined in the indenture governing the convertible senior notes), such as a change in control, merger, consolidation, dissolution or delisting. The initial conversion rate is equal to 52.0291 shares of Virgin Media Inc.’s common stock per $1,000 of convertible senior notes, which represents an initial conversion price of approximately $19.22 per share of common stock. The conversion rate is subject to adjustment for stock splits, stock dividends or distributions, the issuance of certain rights or warrants, certain cash dividends or distributions or stock repurchases where the price exceeds market values.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 8—Comprehensive Income (Loss) Comprehensive income (loss) comprises (in millions):
The components of accumulated other comprehensive income, net of taxes, were as follows (in millions):
Note 9—Contingent Liabilities We are involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employee and employee benefits which arise in the ordinary course of our business. In accordance with the Contingencies Topic of the FASB ASC, we recognize a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We believe we have adequate provisions for any such matters. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Additionally, when we believe it is at least reasonably possible that a liability has been incurred in excess of any recorded liabilities we provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. While litigation is inherently unpredictable, we believe that we have valid defenses with respect to legal matters pending against us. Our revenue generating activities are subject to Value Added Tax, or VAT. The U.K. tax authorities have challenged our VAT treatment of certain of these activities. As a result, we have estimated contingent losses totaling £28.6 million as of March 31, 2012 that are not accrued for, as we deem them to be reasonably possible, but not probable, of resulting in a liability. We currently expect an initial hearing on these matters to take place in late 2012.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 10—Industry Segments Our reporting segments are based on our method of internal reporting along with the criteria used by our chief executive officer, who is our chief operating decision maker (CODM), to evaluate segment performance, the availability of separate financial information and overall materiality considerations. We have two reporting segments, Consumer and Business, as described below. Our Consumer segment is our primary segment, consisting of the distribution of television programming, broadband and fixed line telephone services to residential customers on our cable network, the provision of broadband and fixed line telephone services to residential customers outside of our cable network, and the provision of mobile telephony and mobile broadband to residential customers. Our Business segment comprises our operations carried out through Virgin Media Business which provides voice, data and internet solutions to businesses, public sector organizations and service providers in the U.K. Segment contribution, which is operating income before network operating costs, corporate costs, depreciation, amortization, goodwill and intangible asset impairments and restructuring and other charges, is management’s measure of segment profit. Segment contribution excludes the impact of certain costs and expenses that are not directly attributable to the reporting segments, such as the costs of operating the network, corporate costs and depreciation and amortization. Restructuring and other charges, and goodwill and intangible asset impairments are excluded from segment contribution as management believes they are not characteristic of our underlying business operations. Assets are reviewed on a consolidated basis and are not allocated to segments for management reporting since the primary asset of the business is the cable network infrastructure, which is shared by our Consumer and Business segments. Segment information for the three month periods ended March 31, 2012 and 2011 was as follows (in millions):
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 10—Industry Segments (continued)
The reconciliation of total segment contribution to consolidated operating income and net income is as follows (in millions):
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 11—Condensed Consolidating Financial Information—Senior Notes
We present the following condensed consolidating financial information as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 as required by Rule 3-10(d) of Regulation S-X. Virgin Media Finance is the issuer of the following 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. Each of Virgin Media Investment Holdings Limited, or VMIH, and Virgin Media Investments Limited, or VMIL, are conditional guarantors and have guaranteed the senior notes on a senior subordinated basis.
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Table of ContentsVIRGIN MEDIA INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)
Note 11—Condensed Consolidating Financial Information—Senior Notes (continued)
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Note 11—Condensed Consolidating Financial Information—Senior Notes (continued)
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Note 12—Condensed Consolidating Financial Information—Senior Secured Notes
We present the following condensed consolidating financial information as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 as required by Rule 3-10(d) of Regulation S-X. Virgin Media Secured Finance PLC is the issuer of the following senior secured notes:
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Note 12—Condensed Consolidating Financial Information—Senior Secured Notes (continued)
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Note 12—Condensed Consolidating Financial Information—Senior Secured Notes (continued)
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