UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2006

OR

Commission File No. 000-50886

NTL INCORPORATED

(Exact name of registrant as specified in its charter)

NTL INVESTMENT HOLDINGS 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 o

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

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

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

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

The number of shares outstanding of the registrant’s common stock as of November 6, 2006 was 326,218,427.

The Additional Registrant meets the conditions set forth in General Information H(1)(a) and (b) of Form 10-Q and is filing this form with the reduced disclosure format. See Note Concerning NTLIH.

NTL INCORPORATED
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
INDEX

 

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

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

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

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

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

·       the ability to manage and maintain key customer relationships;

·       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;

·       the ability to control customer churn;

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

·       the effect of technological changes on our businesses;

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

·       possible losses in revenues due to systems failures;

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

·       the reliance on single-source suppliers for some equipment and software;

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

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

These and other factors are discussed in more detail under Item 1A. “Risk Factors” and elsewhere in our Form 10-K filed with the SEC on February 28, 2006 and the Form 10-K of NTL Holdings Inc., our wholly-owned subsidiary, filed with the SEC on March 1, 2006. 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 NTLIH

This quarterly report on Form 10-Q (excepting financial statements responsive to Part I, Item 1) covers both NTL Incorporated and NTL Investment Holdings Limited (“NTLIH’’), an English company with an address at NTL House, Bartley Wood Business Park, Hook, Hampshire, RG27 9UP, United Kingdom, a wholly-owned subsidiary of NTL Cable PLC and a wholly-owned indirect subsidiary of NTL Incorporated.  NTLIH is not an accelerated filer. NTLIH is one of the guarantors of NTL Cable PLC’s 9.75% Senior Notes due 2014 (sterling denominated), 8.75% Senior Notes due 2014 (euro denominated),

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8.75% Senior Notes due 2014 (U.S. dollar denominated), and 9.125% Senior Notes due 2016 (U.S. dollar denominated). NTLIH’s guarantee of those notes is not deemed to be unconditional.

NTLIH carries on the same business as NTL Incorporated, and is the principal borrower under NTL Incorporated’s Senior Credit Facility. In this quarterly report, unless the context otherwise requires, the terms “NTL,” “the “Company,“ “we,” “us,” “our” and similar terms refer to the consolidated business of NTL Incorporated, including NTLIH and its subsidiaries. Unless otherwise indicated, the discussion contained in this report applies to NTLIH as well as NTL Incorporated.

Note Concerning Effect of Merger with Telewest

On March 3, 2006, NTL Holdings Inc. (formerly known as NTL Incorporated) merged with a subsidiary of NTL Incorporated (formerly known as Telewest Global, Inc.). Because this transaction is accounted for as a reverse acquisition, the financial statements included in this Form 10-Q for the period through March 3, 2006 are those of the corporation now known as NTL Holdings Inc. For the period since March 3, 2006 these financial statements reflect the reverse acquisition of Telewest Global, Inc. (“Telewest”). See note 1 to the financial statements.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NTL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (in millions)

Note:                      The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date.

See accompanying notes.

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NTL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in millions, except per share data)

 

See accompanying notes.

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NTL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)

 

See accompanying notes.

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NTL INCORPORATED

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 footnotes 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 nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for NTL Holdings Inc. for the year ended December 31, 2005.

On March 3, 2006, NTL Holdings Inc. (“NTL Holdings”), formerly known as NTL Incorporated, merged with a subsidiary of NTL Incorporated (formerly known as Telewest Global, Inc., or “Telewest”). The merger has been accounted for as a reverse acquisition in which NTL Holdings is treated as the accounting acquirer, primarily because NTL Holdings shareholders owned approximately 75% of the common stock upon completion of the merger. Following the merger, Telewest changed its name to NTL Incorporated. As a result, the historical financial statements of NTL Holdings became the historical financial statements of NTL Incorporated as of the completion of the merger. Therefore, the results for the three and nine months ended September 30, 2005 reflect the operations and cash flows of NTL Holdings only and the balance sheet at December 31, 2005 reflects the financial position of NTL Holdings only. The results of operations and cash flows for Telewest, the acquired company for accounting purposes, are included in the consolidated financial statements from March 3, 2006, the date on which the merger was completed.

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

Note 2—Significant Accounting Policies

Revenue Recognition

We recognise revenue only when it is realized or realizable and earned. We recognise revenue when all of the following are present:

·       persuasive evidence of an arrangement exists between us and our customers;

·       delivery has occurred or the services have been rendered;

·       the price for the service is fixed or determinable; and

·       collectibility is reasonably assured.

Telephone, cable television and internet revenues are recognised as the services are provided to customers.

Installation revenues are recognised in accordance with the provisions of FASB Statement No. 51, Financial Reporting by Cable Television Companies, in relation to connection and activation fees for cable television, as well as telephone and internet services, on the basis that we market and maintain a unified fiber network through which we provide all of these services. Installation revenues are recognised at the time the installation has been completed to the extent that those fees are less than direct selling costs. Installation fees in excess of direct selling costs are deferred and amortized over the expected life of the customer’s connection.

Rental revenue in respect of line rentals and rental of equipment provided to customers is recognised on a straight-line basis over the term of the rental agreement.

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)

Mobile handset and other equipment revenue is recognised when the goods have been delivered and title has passed.

Mobile service revenues include airtime, data, roaming and long-distance revenues and are invoiced and recorded as part of a periodic billing cycle. Service revenues are recognised as the services are provided. At the end of each period, adjustments are recorded to defer revenue relating to services billed in advance and to accrue for earned but unbilled services.

Contract and non-contract post-pay customers are billed in arrears based on usage and revenue is recognised when the service is rendered and collectibility is reasonably assured. Revenue from non-contract pre-pay customers is recorded as deferred revenue prior to commencement of services and is recognised as the services are rendered or usage expires.

Bundled services revenue are recognised in accordance with the provisions of EITF No 00-21, Accounting for revenue arrangements with multiple deliverables, to assess whether the components of the bundled services should be recognised separately.

For bundled packages that have separately identifiable components, the total consideration is allocated to the different components based on their relative fair values. Where the fair value of a delivered component cannot be determined reliably but the fair value of the undelivered component can be, the fair value of the undelivered component is deducted from the total consideration and the net amount is allocated to the delivered components based on the “residual value” method.

Subscriber Acquisition Costs

Costs incurred in respect to the acquisition of customers of our Mobile segment, including payments to distributors and the cost of handset promotions, are expensed as incurred.

Note 3—Acquisitions and Disposals

Acquisition of Virgin Mobile

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

The total purchase price of approximately £952.2 million included cash of approximately £418.2 million, common stock valued at £518.8 million and estimated direct transaction costs of £15.2 million. The average market price per share of common stock utilized in determining the value of new common stock issued of £15.07 ($26.59) is based on an average of the closing prices of NTL common stock divided by the Telewest acquisition conversion ratio of 2.5 times for a range of trading days (January 12, January 13, January 17, January 18, January 19) around the announcement date of the proposed acquisition (January 16, 2006).

We financed the cash portion of the offer and transactional expenses through £475 million of additional borrowings under our senior credit facility and cash on hand.

On May 24, 2006, we received approval by a majority of the shareholders of Virgin Mobile, other than those associated with affiliates of the Virgin Group, to enter into a trademark license agreement with Virgin Enterprises Limited under which we are entitled to use certain Virgin trademarks within the United Kingdom and Ireland. The agreement was entered into on the same date and is an exclusive license covering a number of aspects of our consumer business, including the provision of communications services (such as internet, television, fixed line telephony, and upon the acquisition of Virgin Mobile, mobile telephony), the acquisition and branding of sports, movie and other premium television content, and the branding and sale of certain communications equipment related to our consumer businesses, such

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)

as set top boxes and cable modems. The agreement provides for a royalty of 0.25% per annum of our revenue from the relevant businesses, subject to a minimum annual royalty of £8.5 million (the royalty would have been approximately £9 million based on combined historical NTL and Telewest 2005 revenues including revenue from Virgin Mobile and our subsidiary Virgin.net). The agreement replaces the existing license agreement under which our subsidiary Virgin.net was entitled to use the Virgin brand in relation to its internet business. The agreement has a term of 30 years. It can be terminated after 10 years on one year’s notice, and it is subject to earlier termination by us in certain other circumstances, including (subject to specified payments) upon a change of control. The agreement also entitles us to use a corporate name that includes the Virgin name. We expect to commence the proposed re-branding of our consumer operations early in 2007 and the re-branding is expected to include a change in name of the corporate parent.

The total purchase price of approximately £952.2 million has been allocated as follows (in millions) (unaudited):

		Acquisition Date
Cash and cash equivalents, including restricted cash			£	10.0
Accounts receivable			45.4
Prepaid expenses and other current assets			24.6
Fixed assets			18.5
Inventory			9.1
Amortizable intangible assets:
Customer lists			280.0
Contractual relationships			6.0
Intangible assets with indefinite lives:
Goodwill			918.2
Other assets, net			1.4
Accounts payable			(47.2		)
Long-term debt, including current portion			(200.0		)
Other current liabilities			(111.2		)
Other long-term liabilities			(2.6		)
Total purchase price			£	952.2

 

The allocation of the purchase price to assets acquired and liabilities assumed is preliminary, pending finalization of valuations performed by third party experts, finalization of management’s integration plan pertaining to the acquired business, completion of analysis of deferred tax balances and completion of a review of certain other historical matters.

Amortizable intangible assets

Of the total purchase price, approximately £286.0 million has been allocated to amortizable intangible assets including customer lists and contractual relationships. Customer lists represent existing contracts that relate primarily to underlying customer relationships pertaining to the services provided by Virgin Mobile. The fair value of these assets was determined utilizing the income approach. We expect to amortize the fair value of these assets on a straight-line basis over weighted average estimated useful lives of four years.

Contractual relationships represent the fair value of certain contracts with distributors of our products and services.  The fair value of these contracts was determined utilizing the income approach. We expect to amortize the fair value of these assets on a straight-line basis over the remaining life of the contracts of approximately three years.

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)

Reverse Acquisition of Telewest

On March 3, 2006, NTL Holdings merged with a subsidiary of NTL Incorporated and the merger has been accounted for as a reverse acquisition of Telewest using the purchase method. This merger created the UK’s largest provider of residential broadband and the UK’s leading provider of triple play services. In connection with this transaction, Telewest changed its name to NTL Incorporated.

The total purchase price of approximately £3.5 billion includes cash of approximately £2.3 billion, common stock valued at £1.1 billion, stock options with a fair value of £29.8 million and estimated direct transaction costs of £25.1 million. The average market price per share of common stock utilized in determining the value of the new common stock issued of £13.00 ($22.90) is based on an average of the closing prices of Telewest common stock for a range of trading days (September 29, September 30, October 3, October 4 and October 5, 2005) around the announcement date of the proposed merger (October 3, 2005). The cash payment of £2.3 billion was based on the redemption value of $16.25 (£9.30) per share of Telewest redeemable common stock issued in exchange for Telewest common stock in the transaction and 246.0 million shares of Telewest redeemable common stock so issued.

The outstanding options to purchase shares of NTL Holdings common stock were exchanged for options to purchase shares of NTL Incorporated new common stock with the same terms and conditions.

The outstanding options to purchase shares of Telewest common stock were converted into options to purchase shares of NTL Incorporated new common stock at an option price calculated in accordance with the formula in the merger agreement. In accordance with the terms of Telewest’s equity-based plans, a significant proportion of Telewest’s outstanding options that were granted prior to March 3, 2006 vested upon completion of the merger. All vested and unvested options of Telewest have been recorded at their fair value by using the Black-Scholes option pricing model.

The total purchase price of approximately £3.5 billion has been allocated as follows (in millions) (unaudited):

		Acquisition Date
Cash and cash equivalents, including restricted cash			£	303.2
Accounts receivable			156.5
Prepaid expenses and other current assets			47.8
Fixed assets			2,957.2
Programming inventory			24.3
Investments in and loans to affiliates			380.6
Amortizable intangible assets:
Customer lists			760.8
Trade names			10.7
Licenses			37.0
Intangible assets with indefinite lives:
Goodwill			1,354.9
Trade names			17.9
Accounts payable			(144.8		)
Long-term debt, including current portion			(1,873.6		)
Other current liabilities			(457.2		)
Other long-term liabilities			(39.3		)
Deferred income taxes			(77.0		)
Total purchase price			£	3,459.0

 

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)

The allocation of the purchase price to assets acquired and liabilities assumed is preliminary, pending finalization of valuations performed by third party experts, finalization of management’s integration plan pertaining to the acquired business and completion of a review of certain other historical matters. During the quarter, we revised the preliminary allocation to reflect amendments to the fair value of certain amounts, principally deferred tax balances. The total impact of these adjustments resulted in a decrease in goodwill of £65.1 million.

Amortizable intangible assets

Of the total purchase price, approximately £808.5 million has been allocated to amortizable intangible assets including customer lists, trade names and licenses. Customer lists represent existing contracts that relate primarily to underlying customer relationships pertaining to the services provided by Telewest. The fair value of these assets was determined utilizing the income approach. We expect to amortize the fair value of these assets on a straight-line basis over weighted average estimated useful lives of between five and eight years.

Trade names represent the Telewest and Blueyonder brand names and the names of the Content segment’s TV channels. The fair value of these assets was determined utilizing a relief from royalty method. We expect to amortize the fair value of these assets on a straight-line basis over weighted average estimated useful lives of between 1 and 9 years.

Licenses represent contracts to broadcast television content over a digital broadcasting system in the United Kingdom. The fair value of these contracts was determined utilizing the income approach. We expect to amortize the fair value of these assets on a straight-line basis over a weighted average estimated useful life of approximately 4 years.

Pro forma results

The following pro forma financial information presents the combined results of operations of NTL, Telewest and Virgin Mobile as if the acquisitions had occurred as of the beginning of the periods presented (in millions, except per share data). The pro forma results for the nine month period ended September 30, 2006 include the results of Telewest from March 3, 2006 (the acquisition date) and the results of Virgin Mobile from July 4, 2006 (the acquisition date). The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of NTL that would have been reported had the acquisitions been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of NTL.

		Three months ended September 30,										Nine months ended September 30,
		2006 Pro forma					2005 Pro forma					2006 Pro forma					2005 Pro forma
Revenue			£	1,031.3				£	1,023.3				£	3,080.6				£	2,961.8
Operating (loss) income			(9.0		)			10.1					(5.5		)			61.4
Loss from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle			(103.7		)			(123.2		)			(483.4		)			(374.9		)
Loss from continuing operations			(103.5		)			(116.1		)			(481.6		)			(399.8		)
Discontinued operations:
Income from discontinued operations			8.1					1.4					8.1					662.7
Net (loss) income			£	(95.4	)			£	(114.9	)			£	(473.5	)			£	262.9
Loss from continuing operations per share			£	(0.32	)			£	(0.36	)			£	(1.49	)			£	(1.23	)
Net (loss) income per share			£	(0.29	)			£	(0.35	)			£	(1.46	)			£	0.81

 

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)

 

The pro forma financial information above includes the following material, non-recurring charges: write-offs of historical deferred finance charges of £32.9 million in the nine months ended September 30, 2006 and £59.8 million in the nine months ended September 30, 2005; acquisition-related charges of £16.3 million in the nine months ended September 30, 2006; other charges including restructuring charges, of £51.9 million in the nine months ended September 30, 2006 and £2.4 million in the nine months ended September 30, 2005.

Disposal of Broadcast and Ireland operations

On December 1, 2004, we reached an agreement for the sale of our Broadcast operations. The sale completed on January 31, 2005. The Broadcast operations are accounted for as a discontinued operation and therefore, Broadcast’s results of operations have been removed from our results of continuing operations for the nine months ended September 30, 2005. The results of operations of Broadcast have been excluded from the components of “Loss from continuing operations” and shown under the caption “Income from discontinued operations before income taxes” in the Statements of Operations. Upon the sale, we recorded a gain on disposal of £514.6 million.

On May 9, 2005, we sold our operations in the Republic of Ireland, comprising all of the ordinary shares of ntl Communications (Ireland) Limited and ntl Irish Networks Limited and certain additional assets, to MS Irish Cable Holdings B.V., an affiliate of Morgan Stanley & Co. International Limited, for an aggregate purchase price of €333.4 million, or £225.5 million. The Ireland operations are accounted for as a discontinued operation and therefore, Ireland’s results of operations have been removed from our results of continuing operations for the nine months ended September 30, 2005. The results of operations of Ireland have been excluded from the components of “Loss from continuing operations” and shown under the caption “Income from discontinued operations before income taxes” in the Statements of Operations. Upon the sale, we recorded a gain on disposal of £137.0 million, net of tax of £8.5 million. During the three months ended September 30, 2006, we were able to release certain contingent tax liabilities of £8.1 million relating to the disposal of our former Ireland operations

As a result of the sale of our Broadcast and Ireland operations, we have accounted for the Broadcast and Ireland operations as discontinued operations in 2005. Revenue from the Broadcast operations reported in discontinued operations for the three and nine months ended September 30, 2005 was £nil and £21.4 million, respectively. Pre-tax (loss) income from Broadcast operations, reported as pre-tax (loss) income from discontinued operations, for the three and nine months ended September 30, 2005, was £nil and £3.0 million, respectively. Revenue from the Ireland operations reported in discontinued operations for the three and nine months ended September 30, 2005 was £nil and £25.6 million, respectively. Pre-tax income from Ireland operations, reported as pre-tax income from discontinued operations, for the three and nine months ended September 30, 2005 was £nil and £2.5 million, respectively.

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

Note 4—Goodwill and Intangible Assets

Goodwill and intangible assets consist of (in millions):

		Estimated Useful Life		September 30, 2006					December 31, 2005
		(Unaudited)
Goodwill and intangible assets not subject to amortization:
Goodwill					£	2,273.1				£	—
Reorganization value in excess of amounts allocable to identifiable assets					£	193.0				£	193.0
Trade names					17.9					—
					£	210.9				£	193.0
Intangible assets subject to amortization:
Costs
Contractual relationships		2 – 3 years			£	6.0				£	—
Trade names and licenses		1 – 9 years			50.7					3.2
Customer lists		4 – 8 years			1,601.4					560.6
					£	1,658.1				£	563.8
Accumulated amortization
Contractual relationships					£	0.5				£	—
Trade names and licenses					7.6					0.8
Customer lists					472.0					313.0
					480.1					313.8
					£	1,178.0				£	250.0

 

Estimated aggregate amortization expense for each of the five succeeding fiscal years from December 31, 2005 is as follows: £249.8 million in 2006, £306.2 million in 2007, £235.0 million in 2008, £202.1 million in 2009 and £160.1 million in 2010.

Note 5—Long-Term Debt

Long-term debt consists of (in millions):

		September 30, 2006					December 31, 2005
		(Unaudited)
8.75% US Dollar Senior Notes due 2014			£	227.1				£	247.3
9.75% Sterling Senior Notes due 2014			375.0					375.0
8.75% Euro Senior Notes due 2014			152.5					155.0
9.125% US Dollar Senior Notes due 2016			293.9					—
Senior Credit Facility			5,042.0					1,463.0
Capital leases			110.7					38.2
Other			5.8					1.5
			6,207.0					2,280.0
Less: current portion			(151.5		)			(0.8		)
			£	6,055.5				£	2,279.2

 

The effective interest rate on the senior credit facility was 6.7% and 6.9% as at September 30, 2006 and December 31, 2005, respectively.

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

Senior Notes

All of our outstanding senior notes due 2014 were issued by our subsidiary NTL Cable PLC, on April 13, 2004. On July 25, 2006, NTL Cable PLC issued $550 million U.S. dollar denominated 9.125% senior notes due 2016. The note proceeds were used to repay part of our alternative senior bridge facility.

Senior Credit Facility

On March 3, 2006, we repaid £1,358.1 million in respect of NTL Holdings’ senior credit facility, £1,686.9 million in respect of Telewest’s existing senior credit facilities and £102.0 million in respect of Flextech’s senior credit facility. The NTL and Telewest facilities were repaid in full utilizing borrowings under our new senior credit facility. The Flextech facility was repaid using cash on hand.

Our new senior credit facility comprises a term facility denominated in a combination of pounds sterling, euros and U.S. dollars in an aggregate principal amount of £4.359 billion, $646 million and €498 million and a revolving facility of £100 million. As at September 30, 2006, the sterling equivalent of £5.0 billion of the term facility had been drawn and £12 million of the revolving credit facility had been utilized for bank guarantees and standby letters of credit. The facility bears interest at LIBOR, USLIBOR or EURIBOR plus a current margin ranging from 1.75% to 2.75% and the applicable cost of complying with any reserve requirement. The margins on £3.412 billion of the term loan facilities and on the revolving credit facility ratchet from 1.25% to 2.25% based on leverage ratios. Interest is payable at least semi-annually. Principal repayments in respect of £3.412 billion of the term loan facilities are due semi-annually beginning in September 2007 and ending on March 3, 2011, and the remaining term loan facilities are repayable in full on their maturity dates, which range from September 3, 2012 through March 3, 2013. We are also required to make principal payments when available cashflows exceed certain thresholds.

The facility is secured through a guarantee from NTL Cable PLC. In addition, the bulk of the facility is secured through guarantees and first priority pledges of the shares and assets of substantially all of the operating subsidiaries of NTL Investment Holdings Limited (“NTLIH”) and of receivables arising under any intercompany loans to those subsidiaries. We are subject to financial maintenance tests under the facility, including a test of liquidity, coverage and leverage ratios applied to us and certain of our subsidiaries.

Senior Bridge Facilities

On June 19, 2006, our £1.8 billion bridge facility drawn by one of our subsidiaries, Neptune Bridge Borrower LLC, was repaid in full utilizing drawings on our senior credit facility totaling £1.2 billion and an alternative senior bridge facility of $1,048.8 million. The alternative senior bridge facility was repaid in two stages utilizing the proceeds from our $550 million 9.125% senior notes due 2016 on July 25, 2006, and an additional drawing from our senior credit facility on August 1, 2006.

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NTL INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

Note 6—Derivative Instruments and Hedging Activities

The fair values of our derivative instruments were as follows (in millions):

		September 30,					December 31,
		2006					2005
		(unaudited)
Included within other long-term assets:
Foreign currency forward rate contracts			£	—				£	51.3
Included within other long-term assets:
Interest rate swaps			£	2.9				£	11.9
Foreign currency forward rate contracts			9.3					—
			£	12.2				11.9
Included within other current liabilities:
Foreign currency forward rate contracts			£	—				£	5.0
Interest rate swaps			7.7					—
			£	7.7				£	5.0
Included within deferred revenue and other long-term liabilities:
Foreign currency forward rate contracts			£	46.9				£	16.8
Interest rate swaps			50.8					15.1
			£	97.7				£	31.9

 

Interest Rate Swaps—Hedging of Interest Rate Sensitive Obligations

During the quarter we entered into additional interest rate swaps to fix at least two thirds of the interest payments on our debt obligations.

As of September 30, 2006, we had outstanding interest rate swap agreements to manage the exposure to variability in future cash flows on the interest payments associated with £3.2 billion of our outstanding senior credit facility, which accrues at variable rates based on LIBOR. The interest rate swaps allow us to receive interest based on three and six month LIBOR in exchange for payments of interest at fixed rates between  4.8% and 6.3%. All of the new interest rate swaps became effective during the quarter and mature in April 2009. The net settlement of £16.3 million under these interest rate swaps is included within interest expense for the nine months ended September 30, 2006.

We have designated all of these new interest rate swaps as cash flow hedges under FAS 133, because they are highly effective hedges against changes in the amount of future cash flows attributable to changes in LIBOR. In the nine months ended September 30, 2006, we recorded £7.3 million of unrealized losses in accumulated other comprehensive income (loss) as a result of the increase in fair market value of these interest rate hedges. Certain interest rate swaps entered into under our previous financing arrangements are not designated as hedges under FAS 133. Changes in the fair value of these contracts are recognised through gains (losses) on derivative instruments in our Statement of Operations.

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

During the quarter we entered into cross-currency swaps to fix the sterling value of interest payments on the U.S. dollar and euro denominated portions of the senior credit facility and the senior notes due 2016.

As of September 30, 2006, we had outstanding cross-currency interest rate swaps with principal amounts of $1,625 million and €725 million. We currently hedge the interest payments on U.S. dollar and euro denominated  senior notes due 2014, as well as interest payments on the U.S. dollar denominated portion of our senior credit facility, as well as the $550 million senior notes due 2016. Under these

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

cross-currency swaps, we receive interest in U.S. dollars at fixed rates of 8.75% and 9.125% and variable rate based on USLIBOR, and in euros at a fixed  rate of 8.75%, in exchange for payments of interest in pound sterling at fixed rates ranging from 8.5% to 9.4%, and variable LIBOR based on the pound sterling equivalent of $1,625 million and €725 million. The net settlement of £2.3 million under these cross-currency interest rate swaps is included within interest expense for the nine months ended September 30, 2006.

We have designated these cross-currency swaps as cash flow hedges under FAS 133 because they hedge the changes in the pound sterling value of the interest payments on our U.S. dollar and euro denominated senior notes due 2014 and 2016 and the U.S. dollar and euro denominated portion of our senior credit facility, that result from changes in the U.S. dollar, euro and pound sterling exchange rates. In the nine months ended September 30, 2006, we recorded £28.4 million of unrealized losses in accumulated other comprehensive income (loss) as a result of the changes in fair market value of these cross-currency interest rate swaps.

Foreign Currency Forward Rate Contracts—Hedging the Principal Obligations of the U.S. Dollar Senior Notes and Senior Credit Facility

As of September 30, 2006, we had outstanding foreign currency forward rate contracts to purchase $425 million, maturing in April 2009. These contracts hedge changes in the pound sterling value of the U.S. dollar and euro denominated principal obligation of the 8.75% senior notes due 2014 caused by changes in the U.S. dollar and pound sterling exchange rates. The principal obligations under the $550 million 9.125% senior notes due 2016, and the $646 million and €498 million principal obligations under the senior credit facility are hedged via the aforementioned cross-currency swaps, and are not separate forward rate contracts.

The foreign currency forward rate contracts have not been designated as hedges under FAS 133. As such, the contracts are carried at fair value on our balance sheet with changes in the fair value recognised immediately in the income statement. The foreign currency forward rate contracts do not subject us to material volatility in our earnings and cash flows because changes in the fair value partially mitigate the gains or losses on the translation of our U.S. dollar and euro denominated debt into pound sterling, in accordance with FASB Statement No. 52, Foreign Currency Translation. Changes in fair value of these contracts are reported within foreign exchanges gains (losses).

Net changes in the fair value of the foreign currency forward rate contracts recognised in gain (loss) from continuing operations for the three and nine months ended September 30, 2006 and 2005 were as follows (in millions) (unaudited):

		Three months ended September 30,						Nine months ended September 30,
		2006			2005			2006			2005
Net gain (loss) in fair value of foreign currency forward rate contracts		£	3.2		£	(0.6	)	£	(15.4	)	£	11.0

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

Note 7—Employee Benefit Plans

The components of net periodic pension cost in the three and nine months ended September 30, 2006 and 2005 were as follows (in millions) (unaudited):

		Three months ended September 30,						Nine months ended September 30,
		2006			2005			2006			2005
Service costs		£	0.7		£	0.6		£	2.1		£	2.3
Interest costs		3.9			3.6			11.7			10.9
Expected return on plan assets		(4.2		)	(3.9		)	(12.6		)	(11.2		)
Settlements and curtailments		0.3			—			0.9			(0.1		)
Net periodic benefit costs		£	0.7		£	0.3		£	2.1		£	1.9

 

Employer Contributions

We previously disclosed in our financial statements for the year ended December 31, 2005, that we expected to contribute £2.2 million to our pension plans in 2006. For the three and nine months ended September 30, 2006, we contributed £0.5 million and £1.5 million respectively, to our pension plans. We anticipate contributing an additional £0.7 million to fund our pension plans in 2006 for a total of £2.2 million.

Note 8—Other Charges Including Restructuring Charges

Other charges of £30.9 million for the three months ended September 30, 2006, relate to our historical restructuring programs and restructuring programs initiated in respect of the reverse acquisition of Telewest. Liabilities with respect to Telewest property lease exit costs and Telewest involuntary employee termination costs were recognised on the balance sheet of the acquired entity in accordance with EITF 95-3, “Recognition of Liabilities in Connection with Purchase Combinations”. Liabilities with respect to NTL property exit costs and involutary employee termination costs under the restructuring program are recorded in the period the liability is incurred or the plan is communicated to employees. As of September 30, 2006, we have incurred £45.3 million, and we expect to incur a total of approximately £133 million, of costs to fully execute this program.

The following tables summarize our historical restructuring provisions and the restructuring provisions resulting from the reverse acquisition of Telewest at September 30, 2006 (in millions) (unaudited):

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

 

Acquisition Restructuring Provisions				Involuntary Employee Termination and Related Costs					Lease Exit Costs			Total
Balance, December 31, 2005					£	—			£	—		£	—
Provisions resulting from business acquisition recognised under EITF 95-3					34.8				33.2			68.0
Amendments to business acquisition related provision					—				12.7			12.7
Charged to expense					28.3				20.1			48.4
Utilized					(43.1		)		(2.2		)	(45.3		)
Balance, September 30, 2006					£	20.0			£	63.8		£	83.8

 

Note 9—Stockholders’ Equity and Share Based Compensation

In connection with the reverse acquisition of Telewest, each share of NTL Holdings (formerly known as NTL Incorporated) common stock issued and outstanding immediately prior to the effective time of the acquisition was converted into the right to receive 2.5 shares of NTL Incorporated new common stock. On March 3, 2006, we issued 212,931,048 shares of common stock for this purpose. For accounting purposes, the acquisition of NTL Holdings has been treated as a reverse acquisition. Accordingly, the 212,931,048 shares issued to acquire NTL Holdings have been treated as outstanding from January 1, 2004 (as adjusted for historical issuances and repurchases during the period from January 1, 2004 to March 3, 2006). In addition, on March 3, 2006, each share of Telewest’s common stock issued and outstanding immediately prior to the acquisition was converted into 0.2875 shares of NTL Incorporated new common stock (and redeemable stock that was redeemed). These 70,728,375 shares of NTL Incorporated new common stock have been treated as issued on the acquisition date.

In accordance with the preceding paragraph, the outstanding shares as of December 31, 2005 and weighted average shares outstanding for the nine months ended September 30, 2005 were restated as follows (in millions):

For the three and nine months ended September 30, 2005:

		Three months				Nine months
Weighted average shares outstanding as previously reported			85.1				85.6
Share exchange ratio in reverse acquisition			2.5				2.5
Weighted average shares outstanding, as restated			212.8				214.0

 

In connection with the acquisition of Virgin Mobile, we issued 34,418,335 shares of common stock. As at September 30, 2006, we had authorized shares totaling one billion and issued and outstanding shares totaling 326.0 million.

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