Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 978K
2: EX-31.1 Certification of President and Chief Executive HTML 12K
Officer
3: EX-31.2 Certification of Senior Vice President and HTML 12K
Co-Chief Financial Officer
4: EX-31.3 Certification of Senior Vice President and HTML 12K
Co-Chief Financial Officer
5: EX-32 Section 1350 Certification HTML 12K
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 and (2) has been subject to such filing
requirements for the past
90 days. Yes þ 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.
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the Registrant is a shell company
as defined in
Rule 12b-2 of the
Exchange
Act. Yes o No þ
The number of outstanding shares of Liberty Global, Inc.’s
common stock as of August 1, 2006 was:
Series A common stock, $.01 par value. Authorized
500,000,000 shares; issued 217,115,820 and
232,334,708 shares at June 30, 2006 and
December 31, 2005, respectively
2.2
2.3
Series B common stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding 7,293,199 and
7,323,570 shares at June 30, 2006 and
December 31, 2005, respectively
0.1
0.1
Series C common stock, $.01 par value. Authorized
500,000,000 shares; issued 217,960,663 and
239,820,997 shares at June 30, 2006 and
December 31, 2005, respectively
2.2
2.4
Additional paid-in capital
9,131.3
9,992.2
Accumulated deficit
(1,434.2
)
(1,732.5
)
Accumulated other comprehensive earnings (loss), net of taxes
63.1
(262.9
)
Deferred compensation (note 3)
—
(15.6
)
Treasury stock, at cost
(37.2
)
(169.6
)
Total stockholders’ equity
7,727.5
7,816.4
Total liabilities and stockholders’ equity
$
24,137.1
$
23,378.5
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Operating (other than depreciation) (including stock-based
compensation of $1.1 million, $3.7 million,
$2.1 million and $4.6 million, respectively)
(notes 3 and 9)
680.8
464.4
1,309.0
889.9
Selling, general and administrative (SG&A) (including
stock-based compensation of $18.2 million,
$39.2 million, $33.2 million and $56.9 million,
respectively) (notes 3 and 9)
357.1
293.5
695.4
539.8
Depreciation and amortization
454.6
289.8
880.4
557.8
Impairment, restructuring and other operating charges (credits)
0.1
(3.4
)
6.2
0.8
1,492.6
1,044.3
2,891.0
1,988.3
Operating income
93.5
39.7
184.0
137.7
Other income (expense):
Interest expense
(156.1
)
(77.8
)
(300.2
)
(153.5
)
Interest and dividend income
20.3
22.2
36.0
42.0
Share of results of affiliates, net
(1.0
)
4.5
0.4
(16.8
)
Realized and unrealized gains (losses) on financial and
derivative instruments, net (note 5)
(92.7
)
69.3
21.1
155.2
Foreign currency transaction gains (losses), net
43.6
(136.5
)
82.2
(201.2
)
Losses on extinguishment of debt (note 7)
(26.7
)
(0.7
)
(35.6
)
(12.6
)
Gains (losses) on disposition of non-operating assets, net
(note 4)
2.3
(44.0
)
47.6
25.5
Other income (expense), net
(6.1
)
0.2
(6.2
)
0.9
(216.4
)
(162.8
)
(154.7
)
(160.5
)
Earnings (loss) before income taxes, minority interests and
discontinued operations
(122.9
)
(123.1
)
29.3
(22.8
)
Income tax benefit (expense)
(28.6
)
55.4
(98.9
)
(8.0
)
Minority interests in earnings of subsidiaries, net
(32.8
)
(41.6
)
(60.3
)
(56.0
)
Loss from continuing operations
(184.3
)
(109.3
)
(129.9
)
(86.8
)
Discontinued operations (note 4):
Earnings (loss) from operations, including tax expense of nil,
$0.7 million, $0.2 million and $1.3 million,
respectively
23.6
(4.7
)
14.3
(10.7
)
Gain from disposal of discontinued operations
184.9
—
408.0
—
208.5
(4.7
)
422.3
(10.7
)
Net earnings (loss)
$
24.2
$
(114.0
)
$
292.4
$
(97.5
)
Basic and diluted earnings (loss) per common share (note 2):
Continuing operations
$
(0.40
)
$
(0.30
)
$
(0.28
)
$
(0.24
)
Discontinued operations
0.45
(0.01
)
0.91
(0.03
)
$
0.05
$
(0.31
)
$
0.63
$
(0.27
)
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Liberty Global, Inc. (LGI) was formed on January 13,2005, for the purpose of effecting the combination of Liberty
Media International, Inc. (LMI) and UnitedGlobalCom, Inc.
(UGC). LMI is the predecessor to LGI and was formed on
March 16, 2004, in contemplation of the spin off of certain
international cable television and programming subsidiaries and
assets of Liberty Media Corporation (Liberty Media), including a
majority interest in UGC, an international broadband
communications provider. On June 7, 2004, Liberty Media
distributed to its stockholders, on a pro rata basis, all of the
outstanding shares of LMI’s common stock, and LMI became an
independent, publicly traded company. In the following text, the
terms “we,”“our,”“our company,”
and “us” may refer, as the context requires, to LGI
and its predecessors and subsidiaries.
On June 15, 2005, we completed certain mergers whereby LGI
acquired all of the capital stock of UGC that LMI did not
already own and LMI and UGC each became wholly owned
subsidiaries of LGI (the LGI Combination). As LMI is the
predecessor to LGI, the historical financial statements of LMI
and its predecessor became the historical financial statements
of LGI upon consummation of the LGI Combination. Unless the
context otherwise indicates, we present pre-LGI Combination
references to shares of LMI common stock or UGC common stock in
terms of the number of shares of LGI common stock issued in
exchange for such LMI or UGC shares in the LGI Combination.
LGI is an international broadband communications provider of
video, voice and Internet access services, with consolidated
broadband operations at June 30, 2006 in 17 countries
(excluding France) outside of the continental United States,
primarily in Europe, Japan and Chile. Through our indirect
wholly owned subsidiaries UPC Holding B.V. (UPC Holding) and
Liberty Global Switzerland, Inc. (LG Switzerland),
(collectively, the UPC Broadband Division), we provide video,
voice and Internet access services in 11 European countries
(excluding France). LG Switzerland holds our 100% ownership
interest in Cablecom Holdings AG (Cablecom), a broadband
communications operator in Switzerland. Through our indirect
controlling ownership interest in Jupiter Telecommunications
Co., Ltd. (J:COM), we provide video, voice and Internet access
services in Japan. Through our indirect 80%-owned subsidiary VTR
GlobalCom, S.A. (VTR), we provide video, voice and Internet
access services in Chile. We also have (i) consolidated
direct-to-home
(DTH) satellite operations in Australia,
(ii) consolidated broadband communications operations in
Puerto Rico, Brazil and Peru, (iii) non-controlling
interests in broadband communications companies in Europe and
Japan, (iv) consolidated interests in certain programming
businesses in Europe and Argentina, and (v) non-controlling
interests in certain programming businesses in Europe, Japan,
Australia and the Americas. Our consolidated programming
interests in Europe are primarily held through chellomedia B.V.
(chellomedia), which also provides telecommunications and
interactive digital services and owns or manages investments in
various businesses in Europe. Certain of chellomedia’s
subsidiaries and affiliates provide programming and other
services to our UPC Broadband Division.
On December 19, 2005 we reached an agreement to sell 100%
of our Norwegian cable operator, UPC Norge AS (UPC Norway), and
completed the sale on January 19, 2006. On April 4,2006, we reached an agreement to sell 100% of our Swedish cable
operator, NBS Nordic Broadband Services AB (publ) (UPC Sweden),
and completed the sale on June 19, 2006. On June 6,2006, we reached an agreement to sell 100% of our French cable
operator, UPC France SA (UPC France) and completed the sale on
July 19, 2006. On June 9, 2006, we sold 100% of our
Norwegian common local exchange carrier (CLEC), Priority Telecom
Norway A.S., (PT Norway). We have presented UPC Norway, UPC
Sweden, UPC France and PT Norway as discontinued operations in
our condensed consolidated financial statements. See note 4.
Our unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) and with the
instructions to
Form 10-Q and
Article 10 of
Regulation S-X for
interim financial information. Accordingly, these statements do
not include all of the information required by GAAP or
Securities and Exchange Commission rules and regulations for
complete financial statements. In the opinion of management,
these statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the
results for the interim periods presented. The results of
operations for any interim period are not necessarily indicative
of results for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction
with our consolidated financial statements and notes thereto
included in our 2005 Annual Report on
Form 10-K.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Estimates and
assumptions are used in accounting for, among other things, the
valuation of acquisition-related assets and liabilities,
allowances for uncollectible accounts, deferred income taxes and
related valuation allowances, loss contingencies, fair values of
financial and derivative instruments, fair values of long-lived
assets and any related impairments, capitalization of internal
costs associated with construction and installation activities,
useful lives of long-lived assets, actuarial liabilities
associated with certain benefit plans and stock compensation.
Actual results could differ from those estimates.
We do not control the decision making process or business
management practices of our equity affiliates. Accordingly, we
rely on management of these entities to provide us with accurate
financial information prepared in accordance with GAAP. We are
not aware, however, of any errors in or possible misstatements
of the financial information provided by these entities that
would have a material effect on our unaudited condensed
consolidated financial statements.
Unless otherwise indicated, convenience translations into United
States (U.S.) dollars are calculated as of June 30, 2006.
Certain prior period amounts have been reclassified to conform
to the current year presentation.
(2)
Earnings per Common Share (EPS)
Basic EPS is computed by dividing net earnings by the weighted
average number of common shares outstanding for the period.
Diluted EPS presents the dilutive effect, if any, on a per share
basis of potential common shares (e.g., options, convertible
securities and other contingently issuable shares) as if they
had been exercised or converted at the beginning of the periods
presented. The details of the weighted average shares used in
our basic and diluted EPS calculations are set forth below for
the indicated periods:
In December 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123(R) (revised 2004),
Share-Based Payment (SFAS 123(R)). SFAS 123(R)
is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and supersedes
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25), and its
related implementation guidance. SFAS 123(R) generally
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their grant-date fair values.
SFAS 123(R) also requires the fair value of outstanding
options vesting after the date of initial adoption to be
recognized as a charge to operations over the remaining vesting
period.
SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation expense to be reported as a
financing cash flow, rather than as an operating cash flow as
prescribed by the prior accounting rules. This requirement
reduces net operating cash flows and increases net financing
cash flows in periods after adoption. Total cash flow remains
unchanged from what would have been reported under prior
accounting rules.
On January 1, 2006, we adopted the provisions of
SFAS 123(R) using the modified prospective adoption method.
As a result of the adoption of SFAS 123(R), we began
(i) using the fair value method to recognize share-based
compensation, (ii) estimating forfeitures for purposes of
recognizing the remaining fair value of all unvested awards, and
(iii) using the straight-line method to recognize
stock-based compensation expense for our outstanding stock
awards granted after January 1, 2006. SFAS 123(R) also
requires recognition of the equity component of deferred
compensation as additional paid-in capital. As a result, we have
reclassified the January 1, 2006 deferred compensation
balance of $15.6 million to additional paid-in capital in
our condensed consolidated statement of stockholders’
equity.
Prior to the adoption of SFAS 123(R), we accounted for
stock-based compensation awards to our employees using the
intrinsic value method and we recorded forfeitures as incurred.
Generally, under the intrinsic value method,
(i) compensation expense for fixed-plan stock options was
recognized only if the estimated fair value of the underlying
stock exceeded the exercise price on the measurement date, in
which case, compensation was recognized based on the percentage
of options that were vested until the options were exercised,
expired or were cancelled, and (ii) compensation expense
for variable-plan options was recognized based upon the
percentage of the options that were vested and the difference
between the quoted market price or estimated fair value of the
underlying common stock and the exercise price of the options at
the balance sheet date, until the options were exercised,
expired or were cancelled. We recorded stock-based compensation
expense for our variable-plan options and SARs using the
accelerated expense attribution method. We recorded compensation
expense for restricted stock awards based on the quoted market
price of our stock at the date of grant and the vesting period.
Most of the outstanding LGI and J:COM stock options at
December 31, 2005 were accounted for as variable-plan
awards.
We account for stock-based compensation awards to non-employees
and employees of non-consolidated affiliated companies using the
fair value method. Under this method, the fair value of the
stock based award is determined using the Black-Scholes
option-pricing model and remeasured each period until a
commitment date is reached, which is generally the vesting date.
Only J:COM has such non-employee awards. At June 30, 2006,
J:COM calculated the fair value of its non-employee stock-based
awards using the Black-Scholes option-pricing model with the
following assumptions: no dividends, volatility of 40%, a
risk-free rate of 1.5% and an expected life of five years.
Results for fiscal 2005 have not been restated. The following
table illustrates the pro forma effect on earnings from
continuing operations and earnings from continuing operations
per share as if we had applied the fair value method to our
outstanding stock-based awards that we have accounted for under
the intrinsic value method. As the accounting for restricted
stock and SARs was the same under APB No. 25 and
SFAS 123, the pro forma adjustments included in the
following table do not include amounts related to our
calculation of compensation expense related to restricted stock,
SARs or to options granted in tandem with SARs:
Add stock-based compensation charges as determined under the
intrinsic value method, net of taxes
15.9
18.0
Deduct stock compensation charges as determined under the fair
value method, net of taxes
(4.4
)
(21.7
)
Pro forma loss from continuing operations
$
(97.8
)
$
(90.5
)
Basic and diluted loss from continuing operations per share:
As reported
$
(0.30
)
$
(0.24
)
Pro forma
$
(0.27
)
$
(0.25
)
The LGI Incentive Plan
The Liberty Global, Inc. Incentive Plan, as amended and restated
(the LGI Incentive Plan) is administered by the compensation
committee of our board of directors. The compensation committee
of our board has full power and authority to grant eligible
persons the awards described below and to determine the terms
and conditions under which any awards are made. The incentive
plan is designed to provide additional remuneration to certain
employees and independent contractors for exceptional service
and to encourage their investment in our company. The
compensation committee may grant non-qualified stock options,
stock appreciation rights (SARs), restricted shares, stock
units, cash awards, performance awards or any combination of the
foregoing under the incentive plan (collectively, awards).
The maximum number of shares of LGI common stock with respect to
which awards may be issued under the incentive plan is
50 million, subject to anti-dilution and other adjustment
provisions of the LGI Incentive Plan, of which no more than
25 million shares may consist of LGI Series B common
stock. With limited exceptions, no person may be granted in any
calendar year awards covering more than 4 million shares of
our common stock, of which no more than 2 million shares
may consist of LGI Series B common stock. In addition, no
person may receive payment for cash awards during any calendar
year in excess of $10 million. Shares of our common stock
issuable pursuant to awards made under the incentive plan are
made available from either authorized but unissued shares or
shares that have been issued but reacquired by our company.
Options and SARs under the LGI Incentive Plan issued prior to
the LGI Combination generally vest at the rate of 20% per
year on each anniversary of the grant date and expire
10 years after the grant date. Options and SARs under the
LGI Incentive Plan issued after the LGI Combination generally
(i) vest 12.5% on the six
month anniversary of the grant date and then vest at a rate of
6.25% each quarter thereafter, and (ii) expire 7 years
after the grant date. The LGI Incentive Plan had
32,028,817 shares available for grant as of June 30,2006. These shares may be awarded in any series of stock, except
that no more than 23,372,168 shares may be awarded in LGI
Series B common stock.
The LGI Directors Incentive Plan
The Liberty Global, Inc. Non-employee Director Incentive Plan,
as amended and restated (the LGI Directors Incentive Plan) is
designed to provide a method whereby non-employee directors may
be awarded additional remuneration for the services they render
on our board and committees of our board, and to encourage their
investment in capital stock of our company. The LGI Directors
Incentive Plan is administered by our full board of directors.
Our board has the full power and authority to grant eligible
non-employee directors the awards described below and to
determine the terms and conditions under which any awards are
made, and may delegate certain administrative duties to our
employees.
Our board may grant non-qualified stock options, stock
appreciation rights, restricted shares, stock units or any
combination of the foregoing under the director plan
(collectively, awards). Only non-employee members of our board
of directors are eligible to receive awards under the LGI
Directors Incentive Plan. The maximum number of shares of our
common stock with respect to which awards may be issued under
the director plan is 10 million, subject to anti-dilution
and other adjustment provisions of the LGI Directors Incentive
Plan, of which no more than 5 million shares may consist of
LGI Series B common stock. Shares of our common stock
issuable pursuant to awards made under the LGI Directors
Incentive Plan will be made available from either authorized but
unissued shares or shares that have been issued but reacquired
by our company. Options issued prior to the LGI Combination
under the LGI Directors Incentive Plan vest on the first
anniversary of the grant date and expire 10 years after the
grant date. Options issued after the LGI Combination under the
LGI Directors Incentive Plan will vest as to one-third of the
option shares on the date of the first annual meeting of
stockholders following the grant date and as to an additional
one-third of the option shares on the date of each annual
meeting of stockholders thereafter provided the director
continues to serve as director on such date. The LGI
Non-Employee Director Plan had 9,699,740 shares available
for grant as of June 30, 2006. These shares may be awarded
in any series of stock, except that no more than 5 million
shares may be awarded in LGI Series B common stock.
The Transitional Plan
As a result of the spin off and related adjustments to Liberty
Media’s outstanding stock incentive awards, options to
acquire shares of LGI Series A, B and C common stock were
issued to LMI’s directors and employees, Liberty
Media’s directors and certain of its employees pursuant to
the LMI Transitional Stock Adjustment Plan (the Transitional
Plan). Such options have remaining terms and vesting provisions
equivalent to those of the respective Liberty Media stock
incentive awards that were adjusted. No new grants will be made
under the Transitional Plan.
UGC Equity Incentive Plan, UGC Director Plans and UGC
Employee Plan
Options, restricted stock and SARs were granted to employees and
directors of UGC prior to the LGI Combination under these plans.
No new grants will be made under these plans.
Total compensation cost related to nonvested awards not yet
recognized
$ 91.3
$ 2.4
Weighted average period remaining for expense recognition
3.2 years
0.6 years
(a)
Includes the LGI Incentive Plan, the LGI Directors Incentive
Plan, the Transitional Plan, the UGC Equity Incentive Plan, the
UGC Director Plan and the UGC Employee Plan, as discussed below.
In addition to the amount reflected in the table, we have
$13.6 million of compensation costs yet to be recognized
related to restricted shares of LGI and Zonemedia (see
note 4) common stock held by employees of Zonemedia.
Stock-based compensation expense associated with these shares,
which will be recognized over the next 3.5 years,
aggregated $2.1 million during the six months ended
June 30, 2006. In addition, we have compensation costs yet
to be recognized related to SARs on VTR’s common stock
granted to employees of VTR in April 2006 (see below) of
$6.0 million based on the fair value of these
liability-based awards at June 30, 2006. Stock-based
compensation expense associated with the VTR SARs, which will be
recognized over the next 3.5 years, aggregated
$1.3 million during the three months ended June 30,2006.
(b)
Includes the J:COM Plan, as discussed below.
We calculated the expected life of options and SARs granted by
LGI during 2006 and 2005 using the “simplified method”
set forth in Staff Accounting Bulletin No. 107. The
expected volatility for LGI options and SARs granted in 2006 and
2005 was based on the historical volatilities of LGI, UGC and
certain other public companies with characteristics similar to
LGI for a historical period equal to the expected average life
of the LGI awards.
Although we generally expect to issue new shares of LGI common
stock when LGI options or SARs are exercised, we may also elect
to issue shares from treasury to the extent available. Although
we repurchase shares of LGI common stock from time to time, the
parameters of our share purchase and redemption activities are
not established solely with reference to the dilutive impact of
shares issued upon the exercise of stock options and SARs.
Summaries of stock option, SARs and restricted stock activity
under the LGI Incentive Plan, the LGI Directors Incentive Plan,
the Transitional Plan, the UGC Equity Incentive Plan, the UGC
Director Plan, the UGC Employee Plan and restricted shares held
by employees of Zonemedia during the six months ended
June 30, 2006 are as follows:
J:COM maintains subscription-rights option and stock purchase
warrant plans for certain directors and employees of J:COM and
its consolidated subsidiaries and managed affiliates, and
certain non-employees. Non-management employees vest two years
from the date of grant, unless their individual grant agreements
provide otherwise. Management employees and non-employees vest
in four equal installments from date of grant, unless their
individual grant agreements provide otherwise. These options
generally expire 10 years from date of grant, currently
ranging from August 23, 2010 to August 23, 2012. As of
June 30, 2006, J:COM has granted the maximum number of
options under existing authorized plans.
At June 30, 2006 and December 31, 2005, our
majority-owned subsidiary, Austar United Communications Limited
(Austar), had 50,000 options outstanding to purchase ordinary
shares at an exercise price of $4.70. Options granted under
Austar’s stock option plan generally vest over four years
and expire ten years from the date of grant. All options
outstanding at June 30, 2006 and December 31, 2005
were fully vested and exercisable and expire in 2009. No
additional options are expected to be issued pursuant to this
plan.
Prior to our acquisition of a controlling interest in Austar on
December 14, 2005, Austar had implemented compensatory
plans that provided for the purchase of Austar Class A and
Class B shares by senior management at various prices and
the conversion of the purchased shares into Austar ordinary
shares, subject to vesting schedules. At December 31, 2005,
Austar senior management held Class A and Class B
shares that had not been converted into ordinary shares
aggregating 20,840,817 and 54,025,795, respectively. As of
June 30, 2006, none of the 54,025,795 Class B shares
have been converted into ordinary shares, as they have not
vested. During the six months ended June 30, 2006, all of
the remaining 20,840,817 Class A shares were converted into
ordinary shares.
Liberty Jupiter, Inc. Stock Plan
Four individuals, including one of our executive officers, an
officer of one of our subsidiaries and one of LMI’s former
directors (who ceased being a director effective with the LGI
Combination) own an 18.75% common stock interest in Liberty
Jupiter, Inc. (Liberty Jupiter), which owned an approximate 4.3%
indirect interest in J:COM. Prior to the adoption of
SFAS 123(R), we recorded stock compensation pursuant to
this plan based on changes in the market price of J:COM common
stock. As a result of our January 1, 2006 adoption of
SFAS 123(R), we no longer account for this arrangement as a
compensatory plan and have reclassified the liability as of
January 1, 2006 to minority interests in consolidated
subsidiaries in our condensed consolidated balance sheet. See
note 10.
VTR Phantom SARs Plan
In April 2006, VTR’s board of directors adopted a phantom
SARs plan with respect to 1,000,000 shares of VTR’s
common stock (the VTR Plan). SARs granted under the VTR Plan
vest in equal semi-annual
installments over a four-year period and expire no later than
July 1, 2010. Upon exercise, the SARs are payable in cash
or, for such time as VTR is publicly traded, cash or shares of
VTR or any combination thereof, in each case at the election of
the committee that administers the VTR Plan (the VTR Committee).
On April 12, 2006, the VTR Committee granted a total of
945,000 SARs, each with a base price of Chilean Peso
(CLP) 10,440 and a vesting commencement date of
January 1, 2006. We use the liability method to account for
the VTR phantom SARs. VTR recorded $1.3 million of
compensation expense with respect to the VTR Plan during the
three months ended June 30, 2006.
A summary of the VTR Plan activity during the three months ended
June 30, 2006 is as follows:
The fair value of these awards at June 30, 2006 was
calculated using an expected volatility of 25.4%, an expected
life of 3.75 years, and a risk-free return of 6.05%. In
addition, we were required to estimate the fair value of VTR
common stock at June 30, 2006. As the outstanding SARs
under this plan currently must be settled in cash, we are
treating these SARs as liability-based awards. Accordingly, the
fair value of these awards will be remeasured each reporting
period, and compensation expense will be adjusted to reflect the
updated fair value.
ULA Phantom Plan
Prior to May, 2006, certain of our directors, executive officers
and officers, and one of our consultants, held phantom options
based on shares of United Latin America, Inc. (ULA), one of our
wholly owned subsidiaries that owns our broadband operations in
Brazil and Peru. ULA also owned an 80% interest in VTR through
May 6, 2006, when the VTR interest was transferred to
another LGI subsidiary in exchange for an intercompany note in
connection with an internal corporate restructuring. The ULA
phantom options were granted pursuant to the UIH Latin America,
Inc. Stock Option Plan (ULA Phantom Plan). Upon the transfer of
the VTR interest in May, all outstanding ULA phantom options
terminated. We currently intend to reconstitute the ULA Phantom
Plan as a new deferred compensation plan (New ULA Plan) pursuant
to which grantees will receive options with substantially
similar values, expiration dates and other terms and conditions
as the ULA phantom options cancelled in May. For purposes of the
New ULA Plan, (i) the issuer (New ULA) will be deemed to be
the owner of the current assets owned by ULA as well as the 80%
interest in VTR, in each case for so long as those assets
continue to be owned by LGI or one of its subsidiaries, and
(ii) the value of the intercompany note received by ULA in
May 2006 will be disregarded, and (iii) the existing ULA
intercompany indebtedness will be deemed to be an obligation of
New ULA. The ULA Phantom Plan expired in June 2003 and no new
grants of options may be made thereunder.
Prior to May, 2006, phantom options were outstanding under the
ULA Phantom Plan with respect to 574,843 shares of ULA
common stock. These outstanding ULA phantom options had exercise
prices ranging from $8.81 to $19.23 and expired on various dates
from 2009 through 2011. All of the phantom options with respect
to ULA common stock that were outstanding prior to May 2006 were
fully vested and upon exercise could be paid, at our
company’s sole election, in cash, shares of LGI common
stock, or, if publicly traded, shares of ULA. The ULA phantom
options had no intrinsic and minimal fair value at
April 30, 2006, prior to their cancellation. The aggregate
options outstanding at April 30, 2006 represented a 2.8%
fully diluted equity interest in ULA. We own all of the
outstanding common stock and hold 100% of the outstanding debt
of ULA.
SFAS No. 155
On February 16, 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, an Amendment of FASB Statements
No. 133 and 140 (SFAS 155). Among other matters,
SFAS 155 allows financial instruments that have embedded
derivatives that otherwise would require bifurcation from the
host to be accounted for as a whole, if the holder irrevocably
elects to account for the whole instrument on a fair value
basis. If elected, subsequent changes in the fair value of the
instrument are recognized in earnings. SFAS 155 is
effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins
after September 15, 2006. Earlier adoption is permitted as
of the beginning of an entity’s fiscal year, provided the
entity has not yet issued financial statements, including
financial statements for any interim period for that fiscal
year. Effective January 1, 2006, we adopted SFAS 155
and elected to account for the UGC Convertible Notes (see
note 7) on a fair value basis. In accordance with the
provisions of SFAS 155, we have accounted for the
$9.3 million cumulative impact of this change, before
deducting applicable deferred income taxes of $3.4 million,
as a $5.9 million net adjustment to our January 1,2006 accumulated deficit. This adjustment represents the
difference between the total carrying value of the individual
components of the UGC Convertible Notes under our former method
of accounting and the fair value of the UGC Convertible Notes as
of January 1, 2006. Pursuant to the provisions of
SFAS 155, we have not restated our results for periods
prior to January 1, 2006 to reflect this accounting change.
FIN No. 48
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes.
FIN 48 provides guidance on the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We have not completed our evaluation of
the impact that this standard will have on our consolidated
financial statements.
(4)
Acquisitions and Dispositions
Consolidation of Super Media/ J:COM
On December 28, 2004, our 45.45% ownership interest in
J:COM, and a 19.78% interest in J:COM owned by Sumitomo
Corporation (Sumitomo) were combined in LGI/ Sumisho Super Media
LLC (Super Media). Super Media’s investment in J:COM was
recorded at the respective historical cost bases of our
company and Sumitomo on the date that our respective J:COM
interests were combined in Super Media. As a result of these
transactions, we held a 69.68% noncontrolling interest in Super
Media, and Super Media held a 65.23% controlling interest in
J:COM at December 31, 2004.
As a result of a February 2005 change in the governance of Super
Media, we obtained control over the financial and operating
policies of Super Media and began accounting for Super Media and
J:COM as consolidated subsidiaries effective January 1,2005. As we paid no monetary consideration to Sumitomo in
connection with this change in corporate governance, we have
recorded the consolidation of Super Media/ J:COM at historical
cost. Super Media will be dissolved in February 2010 unless we
and Sumitomo mutually agree to extend the term.
On March 23, 2005, J:COM received net proceeds of
¥82,043 million ($774.3 million at the
transaction date) in connection with an initial public offering
(IPO) of its common shares, and on April 20, 2005,
J:COM received additional net proceeds of
¥8,445 million ($79.1 million at the transaction
date) in connection with the sale of additional common shares
upon the April 15, 2005 exercise of the underwriters’
over-allotment option.
At June 30, 2006, Super Media owned 3,987,238 or 62.64% of
the issued and outstanding shares of J:COM, and LGI’s
ownership interest in Super Media was 58.66%.
Acquisitions
During 2005 we completed the following significant acquisitions,
which are collectively referred to herein as the Significant
2005 Acquisitions:
(ii) The October 24, 2005 acquisition by LG
Switzerland of the issued share capital of Cablecom, the parent
company of a Swiss broadband communications company;
(iii) The October 14, 2005 acquisition of Astral
Telecom SA (Astral), a broadband communications operator in
Romania;
(iv) The May 9, 2005 consolidation and
December 12, 2005 acquisition of NTL Communications
(Ireland) Limited, NTL Irish Networks Limited and certain
related assets (together NTL Ireland);
(v) The December 14, 2005 acquisition of a controlling
interest in Austar; and
(vi) VTR’s April 13, 2005 acquisition of a
controlling interest in Metrópolis-Intercom S.A.
(Metrópolis), a Chilean broadband communications company.
Prior to the combination, LMI owned a 50% interest in
Metrópolis, with the remaining 50% interest owned by
Cristalerías de Chile S.A. (CCC).
A summary of the purchase prices and the effective acquisition
and consolidation dates for financial reporting purposes of the
Significant 2005 Acquisitions is presented in the following
table (dollar amounts in millions):
As a result of the LGI Combination, our interest in UGC
increased from 53.4% to 100%.
(b)
On December 14, 2005, we completed a transaction that
increased our ownership of Austar from a 36.7% non-controlling
ownership interest to a 55.2% controlling interest. At
June 30, 2006, we owned 670,018,242 shares or 53.18%
of Austar’s outstanding ordinary shares.
The following unaudited pro forma condensed consolidated
operating results for the six months ended June 30, 2005
give effect to the Significant 2005 Acquisitions as if they had
been completed as of January 1, 2005. These pro forma
amounts are not necessarily indicative of the operating results
that would have occurred if these transactions had occurred on
such dates. The pro forma adjustments are based upon currently
available information and upon certain assumptions that we
believe are reasonable (amounts in millions, except per share
amounts).
During 2005 and 2006 we completed the following acquisitions,
which, when considered individually, would not have had a
material impact on our results of operations if such
acquisitions had occurred on January 1, 2005:
(i) The March 2, 2006 acquisition of INODE
Telekommunikationsdienstleistungs GmbH (INODE), an unbundled
Digital Subscriber Line (DSL)-provider in Austria, for cash
consideration before direct acquisition costs of approximately
€93 million
($111 million at the transaction date);
(ii) The November 2005 purchase by Plator Holdings B.V.
(Plator Holdings), an indirect subsidiary of chellomedia, of
interests that it did not already own in certain businesses that
provide thematic television channels in Spain and Portugal (IPS);
(iii) The September 2005 purchase by J:COM of J:COM
Setamachi Co. Ltd. (J:COM Setamachi), a broadband communications
provider in Japan;
(iv) The April 2005 acquisition of the remaining 19.9%
minority interest in UPC France;
(v) The February 2005, purchase of the shares in Telemach
d.o.o. (Telemach), a broadband communications provider in
Slovenia;
(vi) The February 2005 purchase by J:COM of a controlling
interest in J:COM Chofu Cable, Inc. (J:COM Chofu Cable), a
broadband communications provider in Japan;
(vii) The January 2005 purchase by chellomedia of the
Class A shares of Zonemedia Group Limited, formerly Zone
Vision Networks Limited (Zonemedia), a programming company
focused on the ownership, management and distribution of pay
television channels; and
(viii) Other less significant transactions.
In accordance with the purchase method of accounting, the
purchase price of each acquisition was allocated to the acquired
identifiable tangible and intangible assets and liabilities
based upon their respective fair values, and the excess of the
purchase price over the fair value of such net identifiable
assets was allocated to goodwill. The purchase accounting for
each of the Cablecom, Austar, Astral and INODE acquisitions, as
reflected in our condensed consolidated financial statements, is
preliminary and subject to adjustment based upon our final
assessment of the fair values of the identifiable tangible and
intangible assets and liabilities of each acquired entity. As
the open items in the valuation processes generally relate to
property and equipment and intangible assets, we would expect
that the primary effects of any potential adjustments to the
preliminary purchase price allocation would be changes to the
values assigned to these asset categories and to the related
depreciation and amortization expense. In addition, our final
assessment of the purchase price allocation could lead to
adjustments to the amount of acquired deferred tax assets or
assumed deferred tax liabilities.
Dispositions
UPC Norway — On December 19, 2005 we
reached an agreement to sell 100% of UPC Norway to an unrelated
third party. On January 19, 2006 we sold UPC Norway for
cash proceeds of approximately
€444.8 million
($536.7 million at the transaction date). On
January 24, 2006,
€175 million
($214 million at the transaction date) of the proceeds from
the sale of UPC Norway were applied toward the prepayment of
borrowings under Facility I of the UPC Broadband Holding Bank
Facility (see note 7). The amounts repaid may be reborrowed
subject to covenant compliance. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), we have
presented UPC Norway as a discontinued operation in our
condensed consolidated financial statements effective
December 31, 2005. UPC Norway’s net results for the
2006 period through the date of sale were not significant. In
connection with the January 19, 2006 disposal of UPC
Norway, we recognized a net gain of $223.1 million that
includes realized cumulative foreign currency translation losses
of $1.7 million. No income taxes were required to be
provided on this gain. This net gain is reflected in
discontinued operations in our condensed consolidated statement
of operations.
UPC Sweden — On April 4, 2006 we reached
an agreement to sell 100% of UPC Sweden to a consortium of
unrelated third parties. On June 19, 2006 we sold UPC
Sweden for cash proceeds of Swedish Krona
(SEK) 2,984 million ($403.9 million at the
transaction date) and the assumption by the buyer of capital
lease obligations with an aggregate balance of approximately
SEK251 million ($34.0 million at the transaction
date). We were required to use
€150 million
($188.6 million at the transaction date) of the UPC Sweden
sales proceeds to prepay Facility I under the UPC Broadband
Holding Bank Facility. The amounts repaid may be reborrowed
subject to covenant compliance. Effective March 31, 2006,
we began accounting for UPC Sweden as a discontinued operation
in our historical condensed consolidated financial statements in
accordance with SFAS 144. In connection with the
June 19, 2006 disposal of UPC Sweden, we recognized a net
gain of $155.2 million that includes realized cumulative
foreign currency translation gains of $4.4 million. No
income taxes were required to be provided on this gain. This net
gain is reflected in discontinued operations in our condensed
consolidated statement of operations.
UPC France — On July 19, 2006, we sold our
100% interest in UPC France to a consortium of unrelated third
parties for cash proceeds of
€1,253.2 million
($1,578.4 million at the transaction date). Effective
June 1, 2006, we began accounting for UPC France as a
discontinued operation in our condensed consolidated financial
statements in accordance with SFAS 144. Pursuant to the
terms of the UPC Broadband Holding Bank Facility, we are
required to use
€290.0 million
($365.3 at the transaction date) of the cash proceeds from the
UPC France sale to prepay a portion of the amounts outstanding
under the UPC Broadband Holding Bank Facility. As permitted by
the UPC Broadband Holding Bank Facility, we have placed cash
proceeds equal to the
€290.0 million
required prepayment in a restricted account that is reserved for
the prepayment of amounts outstanding under the UPC Broadband
Holding Bank Facility.
PT Norway — On June 9, 2006, our
subsidiary, Priority Telecom NV, disposed of its 100% interest
in PT Norway. In connection with the June 9, 2006 disposal
of UPC Norway, we recognized a net gain of $29.7 million
that includes realized cumulative foreign currency translation
losses of $0.4 million.
UPC Norway and UPC Sweden were included in our Other Western
Europe reportable segment, UPC France was presented as a
separate reportable segment, and PT Norway was included in our
corporate and other category.
The major assets and liabilities of (i) UPC France at
June 30, 2006 and (ii) UPC Norway at December 31,2005, which are classified as discontinued operations in our
condensed consolidated balance sheets, are as follows:
The operating results of UPC Norway, UPC Sweden, UPC France and
PT Norway that are classified as discontinued operations in our
condensed consolidated statements of operations are summarized
in the following table:
Earnings (loss) before income taxes and minority interests
$
23.6
$
(6.6
)
$
14.5
$
(21.5
)
Net earnings (loss) from discontinued operations
$
23.6
$
(4.7
)
$
14.3
$
(10.7
)
As noted above, we were required to use proceeds from the UPC
Norway, UPC Sweden and UPC France dispositions to prepay amounts
outstanding under the UPC Broadband Holding Bank Facility.
Interest expense related to such required debt repayments of
$8.1 million and $8.9 million for the three months
ended June 30, 2006 and 2005, respectively, and
$17.9 million and $24.2 million for the six months
ended June 30, 2006 and 2005, respectively, is included in
discontinued operations in the accompanying condensed
consolidated statements of operations.
Sky Mexico
On February 16, 2006, we received $88.0 million in
cash upon the sale of our cost investment in a
direct-to-home
satellite provider that operates in Mexico (Sky Mexico). We
recognized a $45.3 million pre-tax gain in connection with
this transaction.
Through our subsidiaries, we have entered into various
derivative instruments to manage interest rate and foreign
currency exposure. With the exception of J:COM’s interest
rate swaps, which are accounted for as cash flow hedges, we do
not apply hedge accounting to our derivative instruments.
Accordingly, changes in the fair values of all other derivative
instruments are recorded in realized and unrealized gains
(losses) on financial and derivative instruments in our
condensed consolidated statements of operations. The following
table provides details of the fair value of our derivative
instrument assets (liabilities), net:
Excludes embedded derivative components of the UGC Convertible
Notes at December 31, 2005 and the prepaid forward sale of
News Corp. Class A common stock at June 30, 2006 and
December 31, 2005, as all amounts related to these items
are included in long-term debt and capital lease obligations in
our condensed consolidated balance sheet. As discussed in
note 3, we changed our method of accounting for the UGC
Convertible Notes effective January 1, 2006.
Realized and unrealized gains (losses) on financial and
derivative instruments are comprised of the following amounts:
Includes gains and losses associated with the embedded
derivative component of the UGC Convertible Notes during the
2005 period and the forward sale of the News Corp. Class A
common stock during the 2006 and 2005 periods. As discussed in
note 3, we changed our method of accounting for the UGC
Convertible Notes effective January 1, 2006.
(b)
Represents the change in the fair value of the UGC Convertible
Notes during the 2006 periods that is not attributable to
changes in foreign currency exchange rates. See notes 3 and
7.
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s
U.S. dollar-denominated LIBOR (London Interbank Offered
Rate)-indexed floating rate debt to Euro-denominated EURIBOR
(the Euro Interbank Offered Rate)-indexed floating rate debt.
(b)
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s
U.S. dollar-denominated LIBOR-indexed floating rate debt to
Euro-denominated fixed rate debt.
(c)
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s Euro-denominated
fixed-rate debt to Czech Koruna (CZK)-denominated fixed rate
debt for the indicated period.
(d)
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s Euro-denominated
fixed-rate debt to Slovakian Koruna (SKK)-denominated fixed rate
debt for the indicated period.
(e)
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s Euro-denominated
fixed-rate debt to Hungarian Forint (HUF)-denominated fixed rate
debt for the indicated period.
(f)
Swap contract effectively converts the underlying principal
amount of UPC Broadband Holding’s Euro-denominated
fixed-rate debt to Polish Zloty (PLN)-denominated fixed rate
debt for the indicated period.
(g)
Swap contract effectively converts the underlying principal
amount of Cablecom GmbH’s Euro-denominated fixed-rate debt
to Swiss Franc (CHF)-denominated fixed-rate debt.
(h)
Swap contract effectively converts the underlying principal
amount of Cablecom Luxembourg’s Euro-denominated
EURIBOR-indexed floating rate debt to CHF-denominated
LIBOR-indexed floating rate debt for the indicated period.
(i)
Swap contract effectively converts the indicated notional amount
from a dollar-denominated floating rate instrument to
CLP-denominated fixed rate instrument for the indicated period.
We entered into the swap contract in anticipation of the
completion of VTR’s debt refinancing, which is described in
note 7. Upon the completion of the debt refinancing, the
swap contract will effectively convert the underlying principal
amount of VTR’s new dollar-denominated LIBOR-indexed
floating rate debt to CLP-denominated fixed rate debt for the
indicated period.
Each contract effectively fixes the EURIBOR on the underlying
principal amount of UPC Broadband Holding’s
Euro-denominated debt.
(b)
At June 30, 2006, this contract effectively fixed the
EURIBOR rate on the underlying principal amount of LG
Switzerland’s Euro-denominated debt. The notional amount of
this contract increases ratably through January 2007 to a
maximum amount of
€597.8 million
($764.3 million) and remains at that level through the
maturity date of the contract.
(c)
Each contract effectively fixes the CHF LIBOR on the underlying
principal amount of Cablecom Luxembourg’s CHF-denominated
debt.
(d)
Each contract effectively fixes the Australian dollar (AUD) BBSY
(the Australian Bank Bill Swap Rate) on the underlying principal
amount of Austar’s AUD-denominated debt.
(e)
Each contract effectively fixes the LIBOR on the underlying
principal amount of the U.S. dollar-denominated debt of our
Puerto Rico subsidiary.
(f)
We entered into the swap contract in anticipation of the
completion of VTR’s debt refinancing, which is described in
note 7. Upon the completion of the debt refinancing, the
swap contract will effectively fix the
180-day CLP-denominated
Tasa Activa Bancaria (TAB) on the underlying principal
amount of VTR’s CLP-denominated debt.
(g)
These swap agreements effectively fix the TIBOR (Tokyo Interbank
Offered Rate) component of the interest rates on borrowings
pursuant to J:COM’s Credit Facility (see note 7), and
the Japanese yen LIBOR component of the interest rates on new
loans obtained by J:COM in connection with the 2006 refinancing
of the Tranche B Term Loan of the J:COM Credit Facility.
J:COM accounts for these derivative instruments as cash flow
hedging instruments. Accordingly, the effective component of the
change in the fair value of these instruments is reflected in
other comprehensive earnings (loss), net.
(h)
Swap contract fixes EURIBOR on the underlying principal amount
of Plator Holding’s Euro-denominated debt for the indicated
period.
Interest Rate Caps:
Each contract caps the EURIBOR rate on the underlying principal
amount of UPC Broadband Holding’s Euro-denominated debt, as
detailed below:
Several of our subsidiaries have outstanding foreign currency
forward contracts. Changes in the fair value of these contracts
are recorded in realized and unrealized gains (losses) on
financial and derivative instruments in our condensed
consolidated statements of operations. The following table
summarizes our outstanding foreign currency forward contracts at
June 30, 2006:
Currency
Currency
purchased forward
sold forward
Maturity dates
amounts in millions
J:COM
¥
2,391.8
$
20.9
July 2006 — January 2007
VTR
CLP17,936.9
$
33.9
July 2006 — June 2007
VTR
$
14.5
CLP8,025.8
August 2006
LG Switzerland
CHF 925.1
€
606.4
April 2007
Austar
AUD 49.3
$
36.3
July 2006 — December 2007
(6)
Long-Lived Assets
Property and equipment, net
The details of property and equipment and the related
accumulated depreciation are set forth below:
Represents the weighted average interest rate in effect at
June 30, 2006 for all borrowings outstanding pursuant to
each debt instrument including the applicable margin. The
interest rates presented do not include the impact of our
interest rate exchange agreements. See note 5.
(b)
Unused borrowing capacity represents the maximum availability
under the applicable facility at June 30, 2006 without
regard to covenant compliance calculations. At June 30,2006, the full amount of unused borrowing capacity was available
to be borrowed under each of the respective facilities except as
indicated below. At June 30, 2006, the availability of the
unused borrowing capacity of the UPC Broadband
Holding Bank Facility (see below) was limited by covenant
compliance calculations. Based on the June 30, 2006
covenant compliance calculations, the aggregate amount that will
be available for borrowing when the June 30, 2006 bank
reporting requirements have been completed for the UPC Broadband
Holding Bank Facility is
€310 million
($396.3 million).
(c)
Includes unamortized debt discount or premium, if applicable.
UPC Broadband Holding Bank Facility
On July 3, 2006, UPC Broadband Holding entered into an
Additional Facility Accession Agreement with a selected
syndicate of relationship banks. The Additional Facility
Accession Agreement adds a new
€830 million
multicurrency repayable and redrawable term loan facility
(Facility L) to UPC Broadband Holding’s Senior Secured
Credit Facility Agreement dated January 16, 2004 (as
previously amended and restated through May 10, 2006, the
UPC Broadband Holding Bank Facility). Borrowings under Facility
L will bear interest at the applicable reference rate plus
225 basis points and will mature in full in July 2012.
Facility L replaces the Euro 500 million multicurrency
revolving credit facility (Facility A) which was due to mature
in June 2008. Facility A was the last remaining facility under
UPC Broadband Holding’s Senior Secured Credit Facility
Agreement dated October 26, 2000 (as previously amended and
restated through May 10, 2006, the 2000 Credit Agreement).
As a condition to the effectiveness of the Additional Facility
Accession Agreement, the 2000 Credit Agreement is being
cancelled.
On May 10, 2006 (the Effective Date) the UPC Broadband
Holding Bank Facility was amended and the Facility F, G and H
term loans thereof were refinanced with a portion of the
borrowings under new Facility J and K term loans of the amended
UPC Broadband Holding Bank Facility. The amounts borrowed under
Facilities J and K aggregated
€1.8 billion
($2.3 billion) and $1.775 billion, with each
denomination split evenly between Facilities J and K. Borrowings
denominated in Euros under Facility J and K bear interest at an
initial margin of 2.25% above EURIBOR. Borrowings denominated in
U.S. dollars under Facilities J and K bear interest at an
initial margin of 2.00% above LIBOR. Both facilities are to be
repaid in one installment with the outstanding borrowings under
Facilities J and K due and payable on March 31, 2013 and
December 31, 2013, respectively. As a result of this
refinancing, UPC Broadband Holding reduced its cost of borrowing
and extended its debt maturities such that no term loans under
the amended UPC Broadband Holding Bank Facility mature prior to
2013. The U.S. dollar facilities include call protection
for 12 months from signing such that any amounts
voluntarily prepaid during that period will have to include an
additional 1% on the aggregate amount repaid.
The amended UPC Broadband Holding Bank Facility permits
additional facilities and the remaining availability under
existing revolving credit Facilities I and L to be drawn in the
currencies of the jurisdictions of members of the borrower group
(in addition to Euros and U.S. dollars).
The amended UPC Broadband Holding Bank Facility also introduces
a mandatory prepayment requirement of 4 times the Annualized
EBITDA, as defined in the amended UPC Broadband Holding Bank
Facility, of disposed assets. The prepayment amount may be
allocated to one or more of the facilities at the
borrower’s discretion and then applied to the loans under
the relevant facility on a pro-rata basis. A prepayment may be
waived by the majority lenders subject to the requirement to
maintain pro-forma covenant compliance. If the mandatory
prepayment amount is less than
€100 million,
then no prepayment is required (subject to pro-forma covenant
compliance).
The basket for permitted disposals of assets has been increased
from an aggregate of 5% of assets, revenues or EBITDA of the
borrower group to allow for disposals of assets, the Annualized
EBITDA of which does not exceed the Remaining Percentage of the
Annualized EBITDA of the borrower group, with each
capitalized term having the meaning set forth in the amended UPC
Broadband Holding Bank Facility. The Remaining Percentage is
(i) the greater of (A) 17.5% and (B) the
percentage of Annualized EBITDA of the borrower group
represented by the Annualized EBITDA of UPC France Holding B.V.
and its subsidiaries; (ii) less the aggregate percentage
value of all previous disposals made after the Effective Date;
(iii) plus the aggregate amount of certain reinvestments
made after the Effective Date. The amended UPC Broadband Holding
Bank Facility introduces a recrediting mechanism, in relation to
the permitted disposals basket, based on the proportion of net
sales proceeds that are (i) used to prepay facilities and
(ii) reinvested in the borrower group.
The amended UPC Broadband Holding Bank Facility also permits the
payment by members of the borrower group of dividends,
distributions and other payments where the Senior Leverage Ratio
of the borrower group, as defined in the amended UPC Broadband
Holding Bank Facility, is 4 to 1 or less prior to and after
making the payment and provided that no default is outstanding
or will result from the relevant payment being made.
During the second quarter of 2006, we recognized a loss on
extinguishment of debt of $21.1 million related to the
write-off of deferred financing costs and creditor fees incurred
in connection with the May 2006 refinancing of the UPC Broadband
Holding Bank Facility.
J:COM Credit Facility and Other J:COM debt
In December 2005 J:COM entered into a credit facility agreement
with a syndicate of banks (the J:COM Credit Facility). The J:COM
Credit Facility originally consisted of three facilities: a
¥30 billion ($262.1 million) five-year revolving
credit loan (the Revolving Loan); an ¥85 billion
($742.5 million) five-year amortizing term loan (the
Tranche A Term Loan); and a ¥40 billion
($349.4 million) seven-year amortizing term loan (the
Tranche B Term Loan). Borrowings may be made under the
J:COM Credit Facility on a senior, unsecured basis. On
December 21, 2005 J:COM borrowed ¥85 billion of
the Tranche A Term Loan and ¥40 billion of the
Tranche B Term Loan to repay its then-existing credit
facility. As discussed below, J:COM has refinanced the
Tranche B Term Loan. Amounts repaid under the
Tranche A and B Term Loans may not be reborrowed.
During April and May of 2006, J:COM refinanced
¥38 billion ($323 million at the transaction
date) and ¥2 billion ($18 million at the
transaction date), respectively, of the Tranche B Term Loan
with ¥20 billion of new fixed-interest rate loans and
¥20 billion of new variable-interest rate loans. At
June 30, 2006, the fixed-interest rate loans had a weighted
average interest rate of 2.08%, while the new variable-interest
rate loans had a weighted average interest rate of Japanese yen
LIBOR plus 0.30%, (0.47% as of June 30, 2006 including
margin). The new loans, which contain covenants similar to those
of the J:COM Credit Facility, mature in 2013 and are each to be
repaid in one installment on their respective maturity dates. We
have included the new loans in other J:COM debt in the summary
debt table that appears at the beginning of this footnote. J:COM
has entered into interest rate swaps that effectively convert
the new variable-interest rate loans into fixed-interest rate
loans. See note 5.
UGC Convertible Notes
Through December 31, 2005, we accounted for the UGC
Convertible Notes as compound financial instruments that
contained a foreign currency debt component and an equity
component that was indexed to LGI Series A common stock,
LGI Series C common stock and to currency exchange rates
(Euro to U.S. dollar). Effective January 1, 2006, we
began accounting for the UGC Convertible Notes at fair value.
See note 3.
On December 5, 2005, Cablecom Luxembourg and Cablecom GmbH
entered into a secured facilities agreement (the Cablecom
Luxembourg Bank Facility) with certain banks and financial
institutions as lenders. On January 20, 2006, Cablecom
Luxembourg used the remaining available proceeds under the
Cablecom Luxembourg Bank Facility term loans of
(i) CHF350 million ($273 million at the
transaction date) from the Facility A term loan,
(ii) CHF356 million ($277 million at the
transaction date) from the Facility B term loan, and
(iii) €229 million
($277 million at the transaction date) from the Facility B
term loan, to fund the redemption (the Redemption) of all of
Cablecom Luxembourg’s senior secured floating rate notes
(the Cablecom Luxembourg Floating Rate Notes) that were not
tendered in the change in control offer that Cablecom Luxembourg
was required to effect in connection with the Cablecom
Acquisition. The redemption price paid was 102% of the
respective principal amounts of the Cablecom Floating Rate
Notes, plus accrued and unpaid interest through the Redemption
date. We recognized a $7.6 million loss on the
extinguishment of the Cablecom Luxembourg Floating Rate Notes
during the three months ended March 31, 2006. This loss
represents the difference between the redemption and carrying
amounts of the Cablecom Luxembourg Floating Rate Notes at the
date of the Redemption.
The Cablecom Luxembourg Bank Facility provides the structure for
a CHF 150 million ($122.5 million) revolving credit
facility to be available to replace an existing CHF
150 million ($122.5 million) revolving credit facility
of Cablecom GmbH (the Cablecom GmbH Revolving Facility). To
date, the Cablecom GmbH Revolving Facility remains in place and
there are no commitments to fund the revolving credit facility
of the Cablecom Luxembourg Bank Facility.
Borrowing Secured by ABC Family Preferred Stock
We own a 99.9% beneficial interest in Liberty Family Preferred,
LLC (LFP LLC), an entity that owns 345,000 shares of the 9%
Series A preferred stock of ABC Family Worldwide, Inc. (ABC
Family) with an aggregate liquidation value of
$345.0 million. The issuer is required to redeem the ABC
Family preferred stock at its liquidation value on
August 1, 2027, and has the option to redeem the ABC Family
preferred stock at its liquidation value at any time after
August 1, 2007. We have the right to require the issuer to
redeem the ABC Family preferred stock at its liquidation value
during the 30 day periods commencing upon August 2 of the
years 2017 and 2022. The carrying value of the ABC Family
preferred stock was $355.8 million and $365.1 million
at June 30, 2006 and December 31, 2005, respectively,
and is included in other investments in our condensed
consolidated balance sheets.
On March 23, 2006, LFP LLC entered into a Loan and Pledge
Agreement with Deutsche Bank AG, which allowed LFP LLC to borrow
up to $345.0 million. On March 29, 2006, LFP LLC
borrowed the full available amount and received net proceeds of
$338.9 million ($345.0 million less prepaid interest
of $6.1 million). The net proceeds received by LFP LLC were
then loaned to LGI. The borrowing bears interest at three-month
LIBOR plus 2.1% and matures on August 1, 2007. LFP LLC has
pledged all 345,000 shares of the ABC Family preferred
stock as security for the borrowing. The borrowing is
non-recourse to LFP LLC and LGI, except for the collateral and
except for LGI’s conditional limited guarantee of any and
all amounts due under the Loan and Pledge Agreement. We believe
that the likelihood of having to honor this guarantee is remote.
VTR Refinancing
On June 27, 2006, VTR received commitments from certain
lenders to make loans to VTR pursuant to new senior secured
credit facilities. The commitments contemplate that the new
senior secured credit facilities
would include a CLP110.7 billion ($200.0 million) term
facility, a $475 million term facility and a CLP
13.8 billion ($25.0 million) revolving facility, and
that borrowings under the new senior secured facilities would
bear interest at variable rates and mature between 2012 through
2014. Subject to the completion of definitive documentation and
other customary matters, this financing is expected to close in
the third quarter of 2006. At closing, it is anticipated that
the $475 million term loan will be drawn and that the
proceeds will be used to (i) repay the existing VTR Bank
Facility (CLP175.502 billion or $325.8 million
principal amount outstanding at June 30, 2006),
(ii) repay an intercompany loan payable to one of our
subsidiaries ($50.2 million principal amount outstanding at
June 30, 2006), (iii) pay financing fees and other
transaction costs, and (iv) fund capital expenditures and
other general corporate uses.
Austar Refinancing
On August 3, 2006, Austar entered into a new senior secured
debt bank facility with a selected syndicate of local and
international banks. The new facility will allow Austar to
borrow up to AUD600.0 million ($445.3 million).
Borrowings under the new facility mature between 2011 and 2013
and bear interest at margins ranging from 0.90% to 1.7% over the
AUD BBSY (7.54% at August 3, 2006 including margin). Austar
will use borrowings under the new facility (i) to repay all
amounts outstanding under its existing bank facility of
AUD190.0 million ($141.0 million), (ii) to fund,
subject to the receipt of an Australian Tax Office ruling, a
AUD201.6 million ($149.6 million) capital distribution
to Austar’s shareholders on or about August 31, 2006,
including AUD107.2 million ($79.6 million) to be
distributed to our company, and (iii) for other general
corporate purposes. In connection with the new senior debt bank
facility, Austar entered into interest rate swaps that
effectively convert the current drawings on the facility into a
fixed rate loan.
Refinancing of Puerto Rico Subsidiary’s Bank
Debt
On March 1, 2006, our Puerto Rico subsidiary refinanced its
existing bank facility with a portion of the proceeds from a
$150 million term loan under an amended and restated senior
secured bank credit facility. The new bank credit facility also
provides for a $10 million revolving loan. Borrowings under
the new facility mature in 2012 and bear interest at a margin of
2.25% over LIBOR. In connection with this refinancing, our
Puerto Rico subsidiary entered into interest rate swaps that
effectively convert the full principal amount of the
$150 million term loan into a fixed rate loan.
(8)
Stockholders’ Equity
On June 20, 2005, we announced the authorization of a stock
repurchase program. Under this program, we effected purchases
through the first quarter of 2006 that resulted in our
acquisition of $200 million in LGI Series A common
stock and LGI Series C common stock. In addition, on
March 8, 2006, our Board of Directors approved a new stock
repurchase program under which we may acquire an additional
$250 million in LGI Series A common stock and LGI
Series C common stock. This stock repurchase program may be
effected through open market transactions or privately
negotiated transactions, which may include derivative
transactions. The timing of the repurchase of shares pursuant to
this program will depend on a variety of factors, including
market conditions. This program may be suspended or discontinued
at any time.
In January 2006, we paid $10.7 million to enter into a call
option contract pursuant to which we contemporaneously
(i) sold call options on 500,000 shares of LGI
Series A common stock at an exercise price of $21.80 and
(ii) purchased call options on an equivalent number of
shares of LGI Series A common stock with an exercise price
of zero. In connection with the February 2006 expiration of this
agreement, we exercised our call options and acquired
500,000 shares of LGI Series A common stock.
In April 2006, we repurchased 5,000,000 shares of LGI
Series C common stock from a financial institution pursuant
to a collared accelerated stock repurchase transaction for an
initial price (subject to adjustment) of $100.7 million. In
May 2006, the contract was settled with a payment to LGI, the
amount of which was not significant.
In May 2006, our board of directors authorized two cash
self-tender offers to purchase up to 10,000,000 shares of
LGI Series A common stock and up to 10,288,066 shares
of LGI Series C common stock at a purchase price of $25.00
and $24.30 per share, respectively, or up to an aggregate
for both tender offers of $500.0 million. The self tender
offers commenced on May 18, 2006 and expired on
June 15, 2006. As each tender offer was oversubscribed, the
number of shares of LGI Series A common stock and the
number of shares of LGI Series C common stock that we
purchased from each tendering stockholder was pro-rated
approximately 9.2% for the LGI Series A common stock tender
offer and approximately 7.9% for the LGI Series C common
stock tender offer. On or about June 21, 2006, LGI, through
its depository agent, purchased 10,000,000 shares of LGI
Series A common stock and 10,288,066 shares of LGI
Series C common stock for an aggregate price of
$500.0 million and returned all other shares tendered but
not accepted for purchase. Shares purchased pursuant to the
tender offers did not reduce our previously announced stock
repurchase program.
Including the foregoing transactions, we repurchased during the
six months ended June 30, 2006 a total of
12,698,558 shares and 19,994,748 shares of LGI
Series A common stock and LGI Series C common stock,
respectively, for aggregate cash consideration of
$755.7 million. At June 30, 2006, we were authorized
under the March 8, 2006 stock repurchase plan to acquire an
additional $117.6 million of LGI Series A common and
LGI Series C common stock.
Capital lease additions — related parties of J:COM(g)
$
27.9
$
40.4
$
52.7
$
69.9
(a)
J:COM provides programming, construction, management and
distribution services to its managed affiliates. In addition,
J:COM sells construction materials to such affiliates, provides
distribution services to other LGI affiliates and receives
distribution fees from Jupiter TV Co., Ltd. (Jupiter TV), a 50%
joint venture owned by our company and Sumitomo.
(b)
Amounts consist primarily of management, advisory and
programming license fees, call center charges and fees for
uplink services charged to our equity method affiliates.
(c)
J:COM (i) purchases certain cable television programming
from Jupiter TV and other affiliates, (ii) incurs rental
expense for the use of certain vehicles and equipment under
operating leases with two Sumitomo subsidiaries and an affiliate
of Sumitomo, and (iii) paid monthly fees to an equity
method affiliate during the 2005 periods for Internet
provisioning services based on an agreed-upon percentage of
subscription revenue collected by J:COM.
(d)
Amounts consist primarily of programming costs and interconnect
fees charged by equity method affiliates.
(e)
J:COM has management service agreements with Sumitomo under
which officers and management level employees are seconded from
Sumitomo to J:COM, whose services are charged as service fees to
J:COM based on their payroll costs. Amounts also include rental
expense paid to the Sumitomo entities, as described in
(c) above.
Amounts consist of net related party interest expense, primarily
related to assets leased from the aforementioned Sumitomo
entities.
(g)
J:COM leases, in the form of capital leases, customer premise
equipment, various office equipment and vehicles from the
aforementioned Sumitomo entities. At June 30, 2006, capital
lease obligations of J:COM aggregating ¥35,642 million
($311.3 million) were owed to these Sumitomo entities.
(10)
Commitments and Contingencies
Commitments
In the normal course of business, we have entered into
agreements that commit our company to make cash payments in
future periods with respect to non-cancelable leases,
programming contracts, satellite carriage commitments, purchases
of customer premise equipment, construction activities, network
maintenance, and upgrade and other commitments arising from our
agreements with local franchise authorities. We expect that in
the normal course of business, operating leases that expire
generally will be renewed or replaced by similar leases.
Contingent Obligations
Our equity method investment in Mediatti is owned by our
consolidated subsidiary, Liberty Japan MC, LLC (Liberty Japan
MC). Another shareholder of Mediatti, Olympus Capital Holdings
Asia I, L.P. and its affiliates who own Mediatti shares
(Olympus), has a put right that is first exercisable during July
2008 to require Liberty Japan MC to purchase all of its Mediatti
shares at fair value. If Olympus exercises such right, the two
minority shareholders who are party to the shareholders
agreement may also require Liberty Japan MC to purchase their
Mediatti shares at fair value. If Olympus does not exercise such
right, Liberty Japan MC has a call right that is first
exercisable during July 2009 to require Olympus and the minority
shareholders to sell their Mediatti shares to Liberty Japan MC
at the then fair value. If both the Olympus put right and the
Liberty Japan MC call right expire without being exercised
during the first exercise period, either may thereafter exercise
its put or call right, as applicable, until October 2010. Upon
Olympus’ exercise of its put right, or our exercise of our
call right, we have the option to use cash, or subject to
certain conditions being met, marketable securities, including
LGI common stock, to acquire Olympus’ interest in Mediatti.
Belgian Cable Holdings (BCH), an indirect wholly owned
subsidiary of chellomedia, and Callahan Partners Europe (CPE),
an unrelated third party, each own 78.4% and 21.6%,
respectively, of the common equity interest in Belgian Cable
Investors, LLC (Belgian Cable Investors). Belgian Cable
Investors and another subsidiary of chellomedia collectively own
a 19.89% economic interest in Telenet Group Holdings N.V., a
broadband communications operator in Belgium. CPE has the right
to require BCH to purchase all of CPE’s interest in Belgian
Cable Investors for the then appraised fair value of such
interest during the first 30 days of every six-month period
beginning in December 2007. BCH has the corresponding right to
require CPE to sell all of its interest in Belgian Cable
Investors to BCH for appraised fair value during the first
30 days of every six-month period following December 2009.
At June 30, 2006, the accreted value of our preferred
interest in Belgian Cable Investors was $201.0 million.
Upon CPE’s exercise of its put right, we have the option to
use cash, or subject to certain conditions being met, marketable
securities, including LGI common stock, to acquire CPE’s
interest in Belgium Cable Investors.
Zone Vision’s Class B1 shareholders have the
right, subject to vesting, to put 60% and 100% of their
Class B1 shares to chellomedia on January 7, 2008
and January 7, 2010, respectively. chellomedia has a
corresponding call right. The put and call rights are to be
settled in cash.
In connection with the April 13, 2005 combination of VTR
and Metrópolis, CCC acquired an option to require UGC to
purchase CCC’s equity interest in VTR at fair value,
subject to a $140 million floor price. This option is
exercisable by CCC beginning on April 13, 2006 and expires
on April 13, 2015. Upon the exercise of this put right by
CCC, we have the option to use cash or shares of LGI common
stock to acquire CCC’s interest in VTR. We have reflected
the $7.0 million fair value of this put obligation at
June 30, 2006 in other current liabilities in our condensed
consolidated balance sheet.
As described in note 3, four individuals own an 18.75%
common stock interest in Liberty Jupiter, which owned an
approximate 4.3% indirect interest in J:COM at June 30,2006. Under the amended and restated shareholders agreement, the
individuals can require us to purchase all of their Liberty
Jupiter common stock interest, and we can require them to sell
us all or part of their Liberty Jupiter common stock interest,
in exchange for LGI common stock with an aggregate market value
equal to the fair market value of the Liberty Jupiter shares so
exchanged, as determined by agreement of the parties or
independent appraisal.
Guarantees and Other Credit Enhancements
At June 30, 2006, J:COM guaranteed
¥10,375 million ($90.6 million) of debt of
certain of its non-consolidated affiliates. The debt maturities
range from 2007 to 2018.
In the ordinary course of business, we have provided
indemnifications to (i) purchasers of certain of our
assets, (ii) our lenders, (iii) our vendors and
(iv) other parties. In addition, we have provided
performance and/or financial guarantees to local municipalities,
our customers and vendors. Historically, these arrangements have
not resulted in our company making any material payments and we
do not believe that they will result in material payments in the
future.
Legal Proceedings and Other Contingencies
Cignal — On April 26, 2002, Liberty Global
Europe N.V., previously known as United Pan Europe
Communications, N.V. (Liberty Global Europe) and the
indirect parent of UPC Holding, received a notice that certain
former shareholders of Cignal Global Communications (Cignal)
filed a lawsuit against Liberty Global Europe in the District
Court of Amsterdam, The Netherlands, claiming $200 million
on the basis that Liberty Global Europe failed to honor certain
option rights that were granted to those shareholders in
connection with the acquisition of Cignal by Priority Telecom.
Liberty Global Europe believes that it has complied in full with
its obligations to these shareholders through the successful
completion of the IPO of Priority Telecom on September 27,2001. Accordingly, Liberty Global Europe believes that the
Cignal shareholders’ claims are without merit and intends
to defend this suit vigorously. On May 4, 2005, the court
rendered its decision, dismissing all claims of the former
Cignal shareholders. On August 2, 2005, an appeal against
the district court decision was filed. Subsequently, when the
grounds of appeal were filed in November 2005, only damages
suffered by nine individual plaintiffs, rather than all former
Cignal shareholders, continued to be claimed. Based on the share
ownership information provided by the plaintiffs, the damage
claims remaining subject to the litigation are approximately
$28 million in the aggregate before statutory interest.
On June 13, 2006, Liberty Global Europe, Priority Telecom,
Euronext NV and Euronext Amsterdam NV were each served with a
summons for a new action purportedly on behalf of all former
Cignal shareholders. The new action claims, among other things,
that the listing of Priority Telecom on Euronext Amsterdam in
September 2001 did not meet the requirements of the applicable
listing rules and, accordingly, the IPO was not valid and did
not satisfy Liberty Global Europe’s obligations to the
Cignal shareholders. Damages of $200 million, plus
statutory interest are claimed in this new action. The nine
individual plaintiffs
involved in the appeal proceedings referred to above,
conditionally claim compensation from Liberty Global Europe in
this new action in the event that the court of appeals
determines their claims inadmissible in the appeal proceedings.
We cannot estimate the amount of loss, if any, that we will
incur upon the ultimate resolution of this matter. However, we
do not anticipate that the outcome of this case will result in a
material adverse effect on our financial position or results of
operations.
Class Action Lawsuits Relating to the LGI
Combination — Since January 18, 2005,
twenty-one lawsuits have been filed in the Delaware Court of
Chancery and one lawsuit in the Denver District Court, State of
Colorado, all purportedly on behalf of UGC’s public
stockholders, regarding the announcement on January 18,2005 of the execution by UGC and LMI of the agreement and plan
of merger for the combination of the two companies under LGI.
The defendants named in these actions include UGC, former
directors of UGC and LMI. The allegations in each of the
complaints, which are substantially similar, assert that the
defendants have breached their fiduciary duties of loyalty,
care, good faith and candor and that various defendants have
engaged in self-dealing and unjust enrichment, approved an
unfair price, and impeded or discouraged other offers for UGC or
its assets in bad faith and for improper motives. The complaints
seek various remedies, including damages for the public holders
of UGC’s stock and an award of attorney’s fees to
plaintiffs’ counsel. On February 11, 2005, the
Delaware Court of Chancery consolidated all 21 Delaware lawsuits
into a single action. Also, on April 20, 2005, the Denver
District Court, State of Colorado, issued an order granting a
joint stipulation for stay of the action filed in this court
pending the final resolution of the consolidated action in
Delaware. On May 5, 2005, the plaintiffs in the Delaware
action filed a consolidated amended complaint containing
allegations substantially similar to those found in and naming
the same defendants named in the original complaints. The
defendants filed their answers to the consolidated amended
complaint on September 30, 2005. The parties are proceeding
with pre-trial discovery activity. The defendants believe that a
fair process was followed and a fair price was paid to the
public stockholders of UGC in connection with the LGI
Combination and intend to vigorously defend this action. We
cannot estimate the amount of loss, if any, that we will incur
upon the ultimate resolution of this matter. However, we do not
anticipate that the outcome of this case will result in a
material adverse effect on our financial position or results of
operations.
The Netherlands Rate Increases — On
September 28, 2005, the Dutch competition authority, NMA,
informed UPC Nederland B.V. (UPC NL), our Dutch subsidiary, that
it had closed its investigation with respect to the price
increases for UPC NL’s analog video services in 2003-2005.
The NMA concluded that the price increases were not excessive
and therefore UPC NL did not abuse what NMA views as UPC
NL’s dominant position in the analog video services market.
KPN, the incumbent telecommunications operator in The
Netherlands, submitted an appeal of the NMA decision. The NMA
rejected the appeal of KPN by declaring the appeal inadmissible
on April 7, 2006. On May 3, 2006, we were informed
that KPN had filed an appeal against the NMA decision with the
administrative District Court (of Rotterdam). UPC NL will
intervene as a third party. On November 15, 2006 a court
hearing will be held.
Historically, in many parts of The Netherlands, UPC NL is a
party to contracts with local municipalities that seek to
control aspects of its Dutch business including, in some cases,
pricing and package composition. Most of these contracts have
been eliminated by agreement, although some contracts are still
in force and under negotiation. In some cases there is
litigation ongoing with certain municipalities resisting UPC
NL’s attempts to move away from the contracts.
The Netherlands Regulatory Developments — As
part of the process of implementing certain directives
promulgated by the European Union in 2003, the Dutch national
regulatory authority (OPTA) has been analyzing eighteen
markets predefined in the directives to determine if any
operator or service provider has
“significant market power” within the meaning of the
EU directives. In relation to video services OPTA has analyzed
market 18 (wholesale market for video services) and an
additional nineteenth market relating to the retail delivery of
radio and television packages (retail market). On March 17,2006 OPTA announced its decisions on both markets. The decisions
are in line with the draft decisions that were approved by the
Commission of European Communities (EC Commission) in November
and December 2005. OPTA’s findings are that UPC NL has
significant market power in the distribution of both
free-to-air and pay
television programming on a wholesale and retail level. The OPTA
decision in relation to market 18 (wholesale market for video
services) includes the obligation to provide access to content
providers and packagers that seek to distribute content over UPC
NL’s network using their own conditional access platforms.
This access must be offered on a non-discriminatory and
transparent basis at cost oriented prices regulated by OPTA.
Further, the decision requires UPC NL to grant program providers
access to its basic tier offering in certain circumstances in
line with current laws and regulations. UPC NL will have to
reply within 15 days after a request for access. OPTA has
stated that requests for access must be reasonable and has given
some broad guidelines filling in this concept. Examples of
requests that will not be deemed to be reasonable are: requests
by third parties who have an alternative infrastructure;
requests that would hamper the development of innovative
services; or requests that would result in disproportionate use
of available network capacity due to the duplication of already
existing offerings of UPC NL. It is expected that the concept of
reasonableness will develop by the creation of guidelines by
OPTA and/or by the development of case law.
On the same date OPTA also announced its decision on the market
relating to the retail delivery of radio and television packages
(retail market). The decision is limited to one year
(2006) and OPTA will not intervene in UPC NL’s retail
prices as long as UPC NL does not increase its basic analog
subscription fee by more than the CPI increase (which UPC NL did
not do). Furthermore the decision includes two additional
obligations: (i) to continue to offer the analog video
services on a standalone basis without requiring customers to
buy other services and (ii) to publish on the website of
UPC NL which part of the monthly subscription fees relates to
programming costs.
UPC appealed both decisions on April 28, 2006 with the
highest administrative court and substantiated its grounds of
appeal on July 28, 2006. The court hearing will take place
on February 1, 2007.
Teleclub Litigation — Cablecom is involved in a
number of proceedings with Teleclub AG (Teleclub), which has
exclusive rights to a significant portion of the premium and
sports content distributed in Switzerland. Swisscom AG
(Swisscom), the incumbent telecommunications operator, holds an
indirect interest in Teleclub. In proceedings before the
Competition Commission initiated by Teleclub, based on a
preliminary fact finding and legal assessment process, Cablecom
was determined to be dominant in the market for distribution of
television signals via cable television networks in the areas in
which it operates. Interim measures were granted in September
2002 ordering Cablecom, among other things, to transmit the
digital television signals of Teleclub and allow the
installation of Teleclub’s proprietary set-top boxes on the
Cablecom network. In September 2003, the Swiss Federal Court,
while assuming that Cablecom holds a dominant position, reversed
the Competition Commission’s decision on the interim
measures related to installing set-top boxes of Teleclub’s
choosing on the basis that Cablecom’s objection to doing so
may be justified by legitimate business reasons. The Competition
Commission is continuing its investigation of whether
Cablecom’s application of its digital standards or digital
platform to the distribution of Teleclub’s digital
television signals may constitute an abuse of a dominant
position. Given the finding of dominance, which the Competition
Commission confirmed in October 2004 in a legal opinion prepared
for the Swiss Price Regulator, if Cablecom is found to have
abused its dominant position, Teleclub may be granted the relief
requested, Cablecom may be found to have violated the Federal
Act on Cartels and other restrictions of
Competition (the Cartels Act), and Cablecom may be subject to
administrative fines and additional civil litigation.
In October 2002, the Competition Commission also investigated
whether the encryption of the digital channels offered by
Cablecom as part of its basic digital package constitutes an
abuse of a dominant position as such encryption would prevent
reception of these channels through any alternative set-top box.
Until a final determination has been made in the pending
proceedings between Teleclub and Cablecom, the Competition
Commission has suspended its investigation. Should this
proceeding be resumed and have an adverse outcome, Cablecom may
be subject to fines and sanctions under the Cartels Act and may
be required to make its digital service available through
alternate set-top boxes. For the same reason described above,
the Competition Commission has not acted on the request of the
Swiss Price Regulator to intervene against Cablecom to cease
encrypting the digital signal and allow use of third-party
set-top boxes on Cablecom’s network and to prohibit
bundling of set-top box rental and content subscription.
Although an unfavorable outcome from the Teleclub legal
proceedings could result in an adverse effect on Cablecom’s
business, we cannot currently estimate the loss that Cablecom
would incur in the event of an unfavorable outcome. We expect
that these proceedings may continue for several years until a
non-appealable decision has been made. We cannot currently
predict the outcome of these proceedings.
Income Taxes — We operate in numerous countries
around the world and accordingly we are subject to, and pay
annual income taxes under, the various income tax regimes in the
countries in which we operate. The tax rules and regulations in
many countries are highly complex and subject to interpretation.
In the normal course of business, we may be subject to a review
of our income tax filings by various taxing authorities. In
connection with such reviews, disputes could arise with the
taxing authorities over the interpretation or application of
certain income tax rules related to our business in that tax
jurisdiction. Such disputes may result in future tax and
interest assessments by these taxing authorities. We have
recorded an estimated liability in our consolidated tax
provision for any such amount that we do not have a probable
position of sustaining upon review of the taxing authorities. We
adjust our estimates periodically because of ongoing
examinations by and settlements with the various taxing
authorities, as well as changes in tax laws, regulations,
interpretations, and precedent. We believe that adequate
accruals have been made for contingencies related to income
taxes, and have classified these in current and long-term
liabilities based upon our estimate of when the ultimate
resolution of the contingent liability will occur. The ultimate
resolution of the contingent liabilities will take place upon
the earlier of (i) the settlement date with the applicable
taxing authorities or (ii) the date when the tax
authorities are statutorily prohibited from adjusting the
company’s tax computations. Any difference between the
amount accrued and the ultimate settlement amount, if any, will
be released to income or recorded as a reduction of goodwill
depending upon whether the liability was initially recorded in
purchase accounting.
Regulatory Issues — Video distribution,
Internet, telephony and content businesses are regulated in each
of the countries in which we operate. The scope of regulation
varies from country to country, although in some significant
respects regulation in European markets is harmonized under the
regulatory structure of the European Union. Adverse regulatory
developments could subject our businesses to a number of risks.
Regulation could limit growth, revenue and the number and types
of services offered. In addition, regulation may restrict our
operations and subject them to further competitive pressure,
including pricing restrictions, interconnect and other access
obligations, and restrictions or controls on content, including
content provided by third parties. Failure to comply with
current or future regulation could expose our businesses to
various penalties.
In addition to the foregoing items, we have contingent
liabilities related to (i) legal proceedings,
(ii) wage, property and sales tax issues, and
(iii) other matters arising in the ordinary course of
business. Although it is reasonably possible we may incur losses
upon conclusion of such matters, an estimate of any loss or
range of loss cannot be made. In our opinion, it is expected
that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to our condensed
consolidated financial statements.
(11)
Segment Reporting
We own a variety of international subsidiaries and investments
that provide broadband communications services, and to a lesser
extent, video programming services. We identify our reportable
segments as (i) those consolidated subsidiaries that
represent 10% or more of our revenue, operating cash flow (as
defined below), or total assets, and (ii) those equity
method affiliates where our investment or share of operating
cash flow represents 10% or more of our total assets or
operating cash flow, respectively. In certain cases, we may
elect to include an operating segment in our segment disclosure
that does not meet the above-described criteria for a reportable
segment. We evaluate performance and make decisions about
allocating resources to our operating segments based on
financial measures such as revenue and operating cash flow. In
addition, we review non-financial measures such as subscriber
growth and penetration, as appropriate.
Operating cash flow is the primary measure used by our chief
operating decision maker to evaluate segment operating
performance and to decide how to allocate resources to segments.
As we use the term, operating cash flow is defined as revenue
less operating and SG&A expenses (excluding stock-based
compensation, depreciation and amortization, and impairment,
restructuring and other operating charges or credits). We
believe operating cash flow is meaningful because it provides
investors a means to evaluate the operating performance of our
segments and our company on an ongoing basis using criteria that
is used by our internal decision makers. Our internal decision
makers believe operating cash flow is a meaningful measure and
is superior to other available GAAP measures because it
represents a transparent view of our recurring operating
performance and allows management to readily view operating
trends, perform analytical comparisons and benchmarking between
segments in the different countries in which we operate and
identify strategies to improve operating performance. For
example, our internal decision makers believe that the inclusion
of impairment and restructuring charges within operating cash
flow would distort the ability to efficiently assess and view
the core operating trends in our segments. A reconciliation of
total segment operating cash flow to our consolidated earnings
before income taxes, minority interests and discontinued
operations is presented below. Investors should view operating
cash flow as a measure of operating performance that is a
supplement to, and not a substitute for, operating income, net
earnings, cash flow from operating activities and other GAAP
measures of income.
We have identified the following consolidated operating segments
as our reportable segments:
All of the reportable segments set forth above provide broadband
communications services, including video, voice and Internet
access services. At June 30, 2006, our operating segments
in the UPC Broadband Division provided services in 11 European
countries (excluding France). Other Western Europe includes our
operating segments in Ireland and Belgium. Other Central and
Eastern Europe includes our operating segments in Poland, Czech
Republic, Slovak Republic, Romania and Slovenia. Our corporate
and other category includes (i) certain less significant
consolidated operating segments that provide DTH satellite
services in Australia, broadband communications services in
Puerto Rico, Brazil and Peru and video programming and other
services in Europe and Argentina, and (ii) our corporate
segment. Intersegment eliminations primarily represent the
elimination of intercompany transactions between our UPC
Broadband Division and chellomedia. J:COM provides video, voice
and Internet access services in Japan. VTR is an 80%-owned
subsidiary that provides video, voice and Internet access
services in Chile.
During the second quarter of 2006, we changed our reporting such
that we no longer allocate the central and corporate costs of
the UPC Broadband Division to the individual operating segments
within the UPC Broadband Division. Instead, we present these
costs as a separate category within the UPC Broadband Division.
The UPC Broadband Division’s central and corporate costs
include billing, programming, network operations, technology,
marketing, facilities, finance, legal and other administrative
costs. Segment information for all periods presented has been
restated to reflect the above-described change and to present
UPC Norway, UPC Sweden, UPC France and PT Norway as discontinued
operations. Previously, UPC Norway and UPC Sweden were included
in our Other Western Europe reportable segment, UPC France was
presented as a separate reportable segment, and PT Norway was
included in our corporate and other category. We present only
the reportable segments of our continuing operations in the
following tables. See note 4.
Both Cablecom and UPC Broadband Holding have separate financial
reporting requirements in connection with their separate
financing arrangements. For purposes of these separate reporting
requirements, certain of UPC Broadband Holding’s central
and corporate costs are charged to Cablecom. Consistent with how
we present Cablecom’s performance measures to our chief
operating decision maker, the segment information presented for
Cablecom in the following tables does not reflect intersegment
charges made for separate reporting purposes.
Performance Measures of Our Reportable Segments
The amounts presented below represent 100% of each
business’s revenue and operating cash flow. As we control
VTR, Super Media/ J:COM and Austar (which we report in our
corporate and other category), GAAP requires that we consolidate
100% of the revenue and expenses of these entities in our
condensed consolidated statements of operations. The minority
owners’ interests in the operating results of VTR, J:COM
and other less significant majority owned subsidiaries are
reflected in minority interests in earnings of subsidiaries, net
in our condensed consolidated statements of operations. In the
case of Austar, the minority interests’ share of
Austar’s net earnings are currently charged to additional
paid-in capital due to the fact that the minority
interest’s share of Austar’s deficit at the
acquisition date was charged to our additional paid-in capital.
It should be noted that our ability to consolidate J:COM is
dependent on our ability to continue to control Super Media,
which will be dissolved in February 2010 unless we and Sumitomo
mutually agree to extend the term. If Super Media is dissolved
and we do not otherwise control J:COM at the time of any such
dissolution, we will no longer be in a position to consolidate
J:COM. When reviewing and analyzing our operating results, it is
important to keep in mind that other third party entities own
significant interests in
The following table provides a reconciliation of total segment
operating cash flow to earnings before income taxes, minority
interests and discontinued operations:
Central and corporate operations of UPC Broadband Division
2.1
0.8
2.8
1.4
Total Europe (UPC Broadband Division)
793.9
490.0
1,530.8
969.5
chellomedia(a)
89.4
53.9
176.4
110.2
Total Europe
883.3
543.9
1,707.2
1,079.7
Japan (J:COM)
455.9
412.9
893.2
819.0
The Americas:
Chile (VTR)
141.1
109.2
274.0
194.1
Other(b)
35.0
36.1
68.8
69.2
Total — The Americas
176.1
145.3
342.8
263.3
Australia
92.9
—
179.6
—
Intersegment eliminations
(22.1
)
(18.1
)
(47.8
)
(36.0
)
Total consolidated LGI
$
1,586.1
$
1,084.0
$
3,075.0
$
2,126.0
(a)
chellomedia’s geographic segments are located primarily in
the United Kingdom, The Netherlands and other European countries.
(b)
Includes certain less significant operating segments that
provide broadband services in Puerto Rico, Brazil and Peru and
video programming services in Argentina.
On August 9, 2006, we announced that our indirect
subsidiary, Liberty Global Europe, had signed a total return
swap agreement with each of Aldermanbury Investments Limited
(AIL), an affiliate of JP Morgan, and Deutsche Bank AG, London
Branch (Deutsche), to acquire Unite Holdco III B.V. (Unite
Holdco), subject to regulatory approvals. Unite Holdco, an
affiliate of AIL and Deutsche, has entered into a share purchase
agreement to acquire for
€322.5 million
($412.3 million), subject to closing adjustments, all
interests in Karneval Media s.r.o. and Forecable s.r.o.
(together Karneval) from ICZ Holding B.V., subject only to the
approval of the Czech Broadcasting Council. Karneval provides
cable television and broadband Internet services to residential
customers and managed network services to corporate customers in
the Czech Republic.
As stated above, Liberty Global Europe’s acquisition of
Unite Holdco from Unite Holdco’s parent companies, AIL and
Deutsche, is subject to receipt of applicable regulatory
approvals.
Pursuant to the total return swap agreements, if the relevant
regulatory approvals have been obtained prior to May 7,2007, Liberty Global Europe will transfer to each of AIL and
Deutsche an amount equal to AIL’s and Deutsche’s
respective invested capital in Unite Holdco, which initially
will be
€163.75 million
($209.3 million), plus interest at a specified
EURIBOR-based rate plus a margin of 0.7%, in exchange for all of
the outstanding share capital of Unite Holdco and
(indirectly) Karneval. Liberty Global Europe’s
obligations under each of the swap agreements are secured by
cash collateral in the amount of
€163.75 million
($209.3 million) provided by Liberty Global Europe on
August 8, 2006 to each of AIL and Deutsche, to be repaid to
Liberty Global Europe upon settlement of the swap agreement. AIL
and Deutsche have agreed to pay Liberty Global Europe interest
on the amount of the cash collateral at agreed upon rates, which
following Unite Holdco’s acquisition of Karneval will be
the specified EURIBOR-based rate. The aggregate amount of the
cash collateral provided by Liberty Global Europe equals the sum
of the
€322.5 million
purchase price payable by Unite Holdco for Karneval plus
€5 million
($6.4 million) of working capital.
If regulatory approval for Liberty Global Europe’s
acquisition of Unite Holdco (including subsidiaries Karneval) is
not received by May 7, 2007 or, if prior to that date, the
appropriate authorities have expressly and conclusively refused
to grant the necessary approval, AIL and Deutsche may sell their
direct or indirect interest in Unite Holdco and Karneval to any
third party for such consideration and on such terms and
conditions as AIL and Deutsche determine in their sole
discretion. Liberty Global Europe has agreed to indemnify each
of AIL and Deutsche and their affiliates with respect to any
losses, liabilities and taxes incurred in connection with the
acquisition, ownership and subsequent transfer of the Unite
Holdco and Karneval interests.
In connection with the transaction, Liberty Global Europe agreed
to pay each of AIL and Deutsche an arrangement fee of
€1.75 million
($2.24 million), in addition to the interest referred to
above, and to reimburse AIL and Deutsche for their reasonable
costs and expenses associated with the transaction.
As mentioned above Liberty Global Europe has agreed to indemnify
AIL and Deutsche and its affiliates with respect to any losses,
liabilities and taxes incurred in connection with the
transaction. As we are responsible for all losses to be incurred
by AIL and Deutsche in connection with the acquisition,
ownership and ultimate disposition of Unite Holdco, we believe
we will be required to consolidate Unite Holdco and its
subsidiaries, including Karneval, as of the closing date of
Unite Holdco’s acquisition of Karneval. The closing of
Unite Holdco’s acquisition of Karneval is expected to occur
in September or October of 2006.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis is intended to assist in
providing an understanding of our financial condition, changes
in financial condition and results of operations. This
discussion is organized as follows:
•
Forward Looking Statements. This section provides a
description of certain of the factors that could cause actual
results or events to differ materially from anticipated results
or events.
•
Overview. This section provides a general description of
our business and recent events.
•
Material Changes in Results of Operations. This section
provides an analysis of our results of operations for the three
and six months ended June 30, 2006 and 2005.
•
Material Changes in Financial Condition. This section
provides an analysis of our corporate and subsidiary liquidity,
condensed consolidated cash flow statements and our off balance
sheet arrangements.
•
Quantitative and Qualitative Disclosures about Market
Risk. This section provides discussion and analysis of the
foreign currency, interest rate and other market risk that our
company faces.
The capitalized terms used below have been defined in the notes
to our condensed consolidated financial statements. In the
following text, the terms, “we,”“our,”“our company” and “us” may refer, as the
context requires, to LGI and its predecessors and subsidiaries.
Unless otherwise indicated, convenience translations into
U.S. dollars are calculated as of June 30, 2006.
Forward Looking Statements
Certain statements in this Quarterly Report on
Form 10-Q
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. To the extent
that statements in this Quarterly Report are not recitations of
historical fact, such statements constitute forward-looking
statements, which, by definition, involve risks and
uncertainties that could cause actual results to differ
materially from those expressed or implied by such statements.
In particular, statements under Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 3. Quantitative
and Qualitative Disclosures About Market Risk contain
forward-looking statements, including statements regarding
business, product, acquisition, disposition and finance
strategies, our capital expenditure priorities, anticipated cost
increases and target leverage levels. Where, in any
forward-looking statement, we express an expectation or belief
as to future results or events, such expectation or belief is
expressed in good faith and believed to have a reasonable basis,
but there can be no assurance that the expectation or belief
will result or be achieved or accomplished. In addition to the
risk factors described in our 2005 Annual Report on
Form 10-K, the
following are some but not all of the factors that could cause
actual results or events to differ materially from anticipated
results or events:
•
economic and business conditions and industry trends in the
countries in which we operate;
•
currency exchange risks;
•
consumer disposable income and spending levels, including the
availability and amount of individual consumer debt;
•
changes in television viewing preferences and habits by our
subscribers and potential subscribers;
•
consumer acceptance of existing service offerings, including our
newer digital video, voice and Internet access services;
•
consumer acceptance of new technology, programming alternatives
and broadband services that we may offer such as our digital
migration project in The Netherlands;
•
our ability to manage rapid technological changes and grow our
digital video, voice and Internet access services;
the regulatory and competitive environment of the broadband
communications and programming industries in the countries in
which we, and the entities in which we have interests, operate;
•
competitor responses to our products and services, and the
products and services of the entities in which we have interests;
•
continued consolidation of the foreign broadband distribution
industry;
•
uncertainties inherent in the development and integration of new
business lines and business strategies;
•
spending on foreign television advertising;
•
capital spending for the acquisition and/or development of
telecommunications networks and services;
•
our ability to successfully integrate and recognize anticipated
efficiencies from the businesses we acquire;
•
problems we may discover post-closing with the operations,
internal controls and financial statements of businesses we
acquire;
•
future financial performance, including availability, terms and
deployment of capital;
•
the ability of suppliers and vendors to deliver products,
equipment, software and services;
•
the outcome of any pending or threatened litigation;
•
availability of qualified personnel;
•
changes in, or failure or inability to comply with, government
regulations in the countries in which we operate and adverse
outcomes from regulatory proceedings, including regulatory
initiatives in The Netherlands;
•
our ability to obtain regulatory approval and satisfaction of
other conditions necessary to close announced transactions,
including our proposed acquisition of Karneval;
•
government intervention that opens our broadband distribution
networks to competitors;
•
our ability to successfully negotiate rate increases with local
authorities;
•
changes in the nature of key strategic relationships with
partners and joint venturers;
•
uncertainties associated with our ability to satisfy conditions
imposed by competition and other regulatory authorities in
connection with acquisitions; and
•
events that are outside of our control, such as political unrest
in international markets, terrorist attacks, natural disasters,
pandemics and other similar events.
You should be aware that the video, voice and Internet access
services industries are changing rapidly, and, therefore, the
forward-looking statements of expectations, plans and intent in
this Quarterly Report are subject to a greater degree of risk
than similar statements regarding many other industries.
These forward-looking statements and such risks, uncertainties
and other factors speak only as of the date of this Quarterly
Report, and we expressly disclaim any obligation or undertaking
to disseminate any updates or revisions to any forward-looking
statement contained herein, to reflect any change in our
expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.
Overview
We are an international broadband communications provider of
video, voice and Internet access services with consolidated
broadband operations at June 30, 2006 in 17 countries
(excluding France) outside of the continental United States,
primarily in Europe, Japan and Chile. Through our UPC Broadband
Division, we provide video, voice and Internet access services
in 11 European countries (excluding France). LG Switzer-
land holds our 100% ownership in Cablecom, a broadband
communications operator in Switzerland. Through our indirect
controlling ownership interest in J:COM, we provide video, voice
and Internet access services in Japan. Through our indirect
80%-owned subsidiary
VTR, we provide video, voice and Internet access services in
Chile. We also have (i) consolidated DTH satellite
operations in Australia, (ii) consolidated broadband
communications operations in Puerto Rico, Brazil and Peru,
(iii) non-controlling interests in broadband communications
companies in Europe and Japan, (iv) consolidated interests
in certain programming businesses in Europe and Argentina, and
(v) non-controlling interests in certain programming
businesses in Europe, Japan, Australia and the Americas. Our
consolidated programming interests in Europe are primarily held
through chellomedia, which also provides telecommunication and
interactive digital services and owns or manages investments in
various businesses in Europe. Certain of chellomedia’s
subsidiaries and affiliates provide programming and other
services to our UPC Broadband Division.
As a result of the June 15, 2005 consummation of the LGI
Combination, our ownership interest in UGC, the ultimate parent
of UPC Holding and VTR prior to the LGI Combination,
increased from 53.4% to 100%. However, in connection with
VTR’s April 13, 2005 acquisition of a controlling
interest in Metrópolis, a broadband communications provider
in Chile, UGC’s ownership interest in VTR decreased from
100% to 80%. At June 30, 2006, we owned an indirect 36.74%
interest in J:COM through our 58.66% controlling interest in
Super Media and Super Media’s 62.64% controlling interest
in J:COM. We began consolidating Super Media and J:COM on
January 1, 2005. Prior to that date we used the equity
method to account for our investment in Super Media/J:COM.
In addition to the LGI Combination and the consolidation of
Super Media/J:COM, we have completed a number of acquisitions
during the past 18 months that have expanded our footprint
and the scope of our business. In Europe, we acquired (i) a
controlling interest in Zonemedia, a video programming company
in Europe, on January 7, 2005, (ii) Telemach, a
broadband communications provider in Slovenia, on
February 10, 2005, (iii) Astral, a broadband
communications provider in Romania, on October 14, 2005,
(iv) Cablecom, a broadband communications provider in
Switzerland on October 24, 2005, (v) IPS, an indirect
subsidiary of chellomedia that provides thematic television
channels in Spain and Portugal on November 23, 2005, and
(vi) INODE, an unbundled DSL- provider in Austria, on
March 2, 2006. In another transaction in Europe, our
indirect subsidiary, UPC Ireland B.V.
(UPC Ireland), through its contractual relationship with
Morgan Stanley Dean Witter Equity Funding, Inc.
(MSDW Equity) and its affiliate, MS Irish Cable
Holdings B.V. (MS Irish Cable), began consolidating
NTL Ireland, a broadband communications provider in
Ireland, effective May 9, 2005, and on December 12,2005, UPC Ireland acquired a 100% interest in
NTL Ireland through its acquisition of MS Irish Cable
from MSDW Equity. In the following discussion and analysis of
our results of operations, we collectively refer to the
May 9, 2005 consolidation, and the December 12, 2005
acquisition of NTL Ireland as the “acquisition”
of NTL Ireland, with such acquisition considered to be
effective as of May 1, 2005 for purposes of comparing our
2006 and 2005 operating results. We have also completed a number
of less significant acquisitions in Europe during this period.
In Japan, J:COM acquired an approximate 92% ownership interest
in J:COM Chofu Cable on February 25, 2005 and a 100%
interest in J:COM Setamachi on September 30, 2005. J:COM
Chofu Cable and J:COM Setamachi are broadband communications
providers in Japan. During the fourth quarter of 2005 and the
first six months of 2006, J:COM also acquired controlling
interests in certain less significant entities in Japan. As
noted above, VTR acquired a controlling interest in
Metrópolis on April 13, 2005. In addition, on
December 14, 2005 we completed a transaction that increased
our indirect ownership of Austar from a 36.7% non-controlling
ownership interest to a 55.2% controlling interest. Prior to
this transaction, we accounted for our investment in Austar
using the equity method of accounting.
For additional information concerning our closed acquisitions,
see note 4 to our condensed consolidated financial
statements.
As further discussed in note 4 to our condensed
consolidated financial statements, our condensed consolidated
financial statements have been reclassified to present
UPC Norway, UPC Sweden, UPC France and
PT Norway as discontinued operations. Accordingly, in the
following discussion and analysis, the operating statistics,
results of operations and financial condition that we present
and discuss are those of our continuing operations.
In general, we are seeking to build broadband and video
programming businesses that have strong prospects for future
growth in revenue and operating cash flow (as defined below and
in note 11 to our condensed consolidated financial
statements). Therefore, we seek to acquire entities that have
strong growth potential at prudent prices and sell businesses
that we believe do not meet this profile. In this regard, we
sold UPC Norway in January 2006, UPC Sweden and
PT Norway in June 2006 and UPC France in
July 2006. As discussed further under Material Changes
in Financial Condition — Capitalization below, we
also seek to maintain our debt at levels that provide for
attractive equity returns without assuming undue risk.
Through our subsidiaries and affiliates, we are the largest
broadband communications operator outside the United States in
terms of subscribers. At June 30, 2006, our consolidated
subsidiaries owned and operated networks that passed
approximately 25.3 million homes and served approximately
17.8 million revenue generating units (RGUs), consisting of
approximately 12.2 million video subscribers,
3.2 million broadband Internet subscribers and
2.4 million telephony subscribers.
In general, we are focused on growing our subscriber base and
average total monthly revenue from all sources (including
non-subscription revenue such as installation fees or
advertising revenue) per average RGU (ARPU) by launching
bundled entertainment, information and communications services,
upgrading the quality of our networks where appropriate,
leveraging the reach of our broadband distribution systems to
create new content opportunities and entering into strategic
alliances and acquisitions in order to increase our distribution
presence and maximize operating efficiencies.
Including the effects of acquisitions during 2006, our
continuing operations added a total of 391,100 and 843,100 RGUs
during the three and six months ended June 30, 2006,
respectively. Excluding the effects of acquisitions during 2006,
our continuing operations added total RGUs of 362,900 and
734,900 during the three and six months ended June 30,2006, respectively, which includes post-acquisition RGU
additions. Most of our internal RGU growth is attributable to
the growth of our digital telephony (primarily through Voice
over Internet Protocol or VoIP) and Internet access services, as
significant increases in digital video RGUs were largely offset
by declines in analog video RGUs. We also focus on increasing
the average revenue we receive from each household by increasing
the penetration of new services through product bundling,
upselling or other means.
Our analog video service offerings include basic programming and
expanded basic programming in some markets. We tailor both our
basic channel line-up
and our additional channel offerings to each system according to
culture, demographics, programming preferences and local
regulation. Our digital video service offerings include basic
programming, premium services and pay-per-view programming,
including near
video-on-demand (NVOD)
and video on demand (VOD) in some markets. We offer broadband
Internet access services in all of our markets. Our residential
subscribers can access the Internet via cable modems connected
to their personal computers at faster speeds than that of
conventional dial-up
modems. We determine pricing for each different tier of Internet
access service through analysis of speed, data limits, market
conditions and other factors.
We offer telephony services in seven countries in Europe, and in
Japan, Chile and Puerto Rico, primarily over our broadband
networks. We also have begun offering VoIP telephony services in
The Netherlands, Switzerland, Austria, Hungary, Poland, Romania,
Czech Republic, Japan, Chile and Puerto Rico, and during the
remainder of 2006, we plan to launch VoIP telephony services in
additional broadband markets in Europe.
The video, telephony and Internet access businesses in which we
operate are capital intensive. Significant capital expenditures
are required to add customers to our networks, including
expenditures for equipment and labor costs. As video, telephony
and Internet access technology changes and competition
increases, we may need to increase our capital expenditures to
further upgrade our systems to remain competitive in markets
that might be impacted by the introduction of new technology. No
assurance can be given that any such future upgrades could be
expected to generate a positive return or that we would have
adequate capital available to finance such future upgrades. If
we are unable to, or elect not to, pay for costs associated with
adding new customers, expanding or upgrading our networks or
making our other planned or unplanned capital expenditures, our
growth could be limited and our competitive position could be
harmed.
The comparability of our operating results during the 2006 and
2005 interim periods is affected by our acquisitions of
Cablecom, NTL Ireland, Astral, Austar, IPS, Telemach and
Metrópolis, and J:COM’s acquisition of
J:COM Chofu Cable and J:COM Setamachi during 2005, and our
acquisition of INODE during 2006. As we have consolidated UGC
since January 1, 2004, the primary effect of the
LGI Combination for periods following the June 15,2005 transaction date has been an increase in depreciation and
amortization expense as a result of the application of purchase
accounting. In the following discussion, we quantify the impact
of acquisitions on our results of operations. The acquisition
impact is calculated as the difference between current and prior
year amounts that is attributable to the timing of an
acquisition.
Changes in foreign currency exchange rates have a significant
impact on our operating results as all of our operating
segments, except for Puerto Rico, have functional currencies
other than the U.S. dollar. Our primary exposure is
currently to the Euro and Japanese yen. In this regard, 28.5%
and 28.8% of our U.S. dollar revenue during the three
months ended June 30, 2006, and 28.3% and 29.1% of our
U.S. dollar revenue during the six months ended
June 30, 2006, was derived from subsidiaries whose
functional currency is the Euro and Japanese yen, respectively.
In addition, our operating results are impacted by changes in
the exchange rates for the Swiss franc, the Chilean peso, the
Hungarian forint, the Australian dollar and other local
currencies in Europe.
At June 30, 2006, we owned an 80% interest in VTR, a 53.18%
interest in Austar (which we report in our corporate and other
category for segment reporting purposes) and, through our
interest in Super Media, an indirect 36.74% interest in J:COM.
However, as we control VTR, Austar and Super Media/J:COM, GAAP
requires that we consolidate 100% of the revenue and expenses of
these entities in our condensed consolidated statements of
operations. The minority owners’ interests in the operating
results of VTR, J:COM and other less significant majority owned
subsidiaries are reflected in minority interests in earnings of
subsidiaries, net in our condensed consolidated statements of
operations. In the case of Austar, the minority interests’
share of Austar’s net earnings are currently charged to
additional paid-in capital due to the fact that the minority
interest’s share of Austar’s deficit at the
acquisition date was charged to our additional paid-in capital.
For additional information, see note 4 to our condensed
consolidated financial statements. It should be noted that our
ability to consolidate J:COM is dependent on our ability to
continue to control Super Media, which will be dissolved in
February 2010 unless we and Sumitomo mutually agree to
extend the term. If Super Media is dissolved and we do not
otherwise control J:COM at the time of any such dissolution, we
will no longer be in a position to consolidate J:COM. When
reviewing and analyzing our operating results, it is important
to keep in mind that other third party entities own significant
interests in J:COM, VTR and Austar and that Sumitomo effectively
has the ability to prevent our company from consolidating J:COM
after February 2010.
Discussion and Analysis of our Reportable
Segments
All of the reportable segments set forth below provide broadband
communications services, including video, voice and Internet
access services. At June 30, 2006, our operating segments
in the UPC Broadband Division provided services in 11 European
countries (excluding France). Other Western Europe includes our
operating segments in Ireland and Belgium. Other Central and
Eastern includes our operating segments in Poland, Czech
Republic, Slovak Republic, Romania and Slovenia. VTR provides
video, voice and Internet access services in Chile. J:COM
provides video, voice and Internet access services in Japan. Our
corporate and other category includes (i) certain less
significant operating segments that provide DTH satellite
services in Australia, broadband communications services in
Puerto Rico, Brazil and Peru and video programming and other
services in Europe and Argentina, and (ii) our corporate
segment. Intersegment eliminations primarily represent the
elimination of intercompany transactions between our UPC
Broadband Division and chellomedia.
During the second quarter of 2006, we changed our reporting such
that we no longer allocate the central and corporate costs of
the UPC Broadband Division to individual operating segments
within the UPC Broadband Division. Instead, we present these
costs as a separate category within the UPC Broadband Division.
The UPC Broadband Division’s central and corporate costs
include billing, programming, network
operations, technology, marketing, facilities, finance, legal
and other administrative costs. Segment information for all
periods presented has been restated to reflect the
above-described change and to present UPC Norway, UPC Sweden,
UPC France and PT Norway as discontinued operations. Previously,
UPC Norway and UPC Sweden were included in our Other Western
Europe reportable segment, UPC France was presented as a
separate reportable segment, and PT Norway was included in our
corporate and other category. We present only the reportable
segments of our continuing operations in the following tables.
See note 4.
Both Cablecom and UPC Broadband Holding have separate financial
reporting requirements in connection with their separate
financing arrangements. For purposes of these separate reporting
requirements, certain of UPC Broadband Holding’s central
and corporate costs are charged to Cablecom. Consistent with how
we present Cablecom’s performance measures to our chief
operating decision maker, the segment information presented for
Cablecom in the following tables does not reflect intersegment
charges made for separate reporting purposes.
For additional information concerning our reportable segments,
including a discussion of our performance measures and a
reconciliation of total segment operating cash flow to our
consolidated earnings before income taxes, minority interests
and discontinued operations, see note 11 to our condensed
consolidated financial statements.
The tables presented below in this section provide a separate
analysis of each of the line items that comprise operating cash
flow (revenue, operating expenses and SG&A expenses,
excluding allocable stock-based compensation expense in
accordance with our definition of operating cash flow) as well
as an analysis of operating cash flow by reportable segment for
the three and six months ended June 30, 2006, as compared
to the corresponding prior year period. In each case, the tables
present (i) the amounts reported by each of our reportable
segments for the comparative interim periods, (ii) the
U.S. dollar change and percentage change from period to
period, and (iii) the percentage change from period to
period, after removing foreign currency effects (FX). The
comparisons that exclude FX assume that exchange rates remained
constant during the periods that are included in each table. As
discussed under Quantitative and Qualitative Disclosures
about Market Risk below, we have significant exposure to
movements in foreign currency rates.
As discussed above, acquisitions have significantly affected the
comparability of the results of operations of our reportable
segments. In this regard, the changes in the amounts reported
for our Switzerland segment are entirely attributable to the
acquisition of Cablecom in October 2005. Accordingly, we do not
separately discuss the results of our Switzerland segment below.
For additional information concerning acquisitions, see the
discussion under Overview above and note 4 to our
condensed consolidated financial statements.
The Netherlands. The Netherlands’ revenue increased
$6.7 million or 3.4%, and decreased $1.8 million or
0.5%, during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. Excluding the effects of foreign exchange rate
fluctuations and an acquisition, The Netherlands’ revenue
increased $7.4 million or 3.8%, and $13.8 million or
3.4%, respectively. These increases are attributable to higher
average RGUs, as increases in average telephony and broadband
Internet RGUs were only partially offset by declines in average
video RGUs. The declines in average video RGUs are due largely
to the effects of competition. The positive impact of higher
average RGUs was largely offset by decreases in ARPU, as the
positive impact of a January 2006 rate increase for analog
video services was more than offset by the negative impacts of
(i) decreases in the average rates charged for digital
video services due to price decreases for pre-existing digital
video subscribers to harmonize rates and promotional discounts
implemented in connection with The Netherlands’ program to
migrate analog video subscribers to digital video services (as
discussed in the following paragraph), (ii) decreases in
ARPU from broadband Internet services due to a higher proportion
of customers selecting lower-priced tiers and competitive
factors, and (iii) decreases in ARPU from telephony
services due to competitive factors and lower call volumes. The
decreases in ARPU from digital video services, together with
decreases in the average number of video subscribers, resulted
in slight decreases in revenue from video services during the
respective 2006 periods. As discussed in the following
paragraph, we would expect our video services revenue to be
positively impacted to the extent that new subscribers to our
digital video service are retained beyond the promotional
period. The decreases in telephony and broadband Internet ARPU
were more than offset by increases in the average number of RGUs
as The Netherlands’ revenue from these services increased
during both of the respective 2006 periods.
In October 2005, we initiated a program to migrate over
time substantially all of our analog video subscribers to
digital video services in The Netherlands by providing digital
set-top boxes to analog video subscribers at no charge and
discounting the entry-level digital video service for a
six-month period following subscriber acceptance of the digital
set-top box (the digital migration program). To the extent that
digital video subscribers are retained after the promotional
pricing period has elapsed, we will experience an increase in
ARPU derived from video services in The Netherlands. As of
June 30, 2006, the promotional period had elapsed for only
a limited number of digital video subscribers. The Netherlands
has incurred significant operating, marketing and other costs
during the 2006 periods in connection with the digital migration
program. Although a portion of these costs vary with our
subscriber migration efforts, some costs, such as programming,
vary with our digital video subscriber base and others remain
somewhat fixed relative to our digital subscriber base. As we
cannot predict with certainty (i) the percentage of new
digital video subscribers that will be retained after the
promotional period has elapsed, (ii) the percentage of
current analog subscribers that ultimately will be successfully
migrated to the digital video service and (iii) the amount
of fixed and variable costs related to digital video services
that The Netherlands will incur over the life of the digital
migration program and in the following periods, no assurance can
be given as to the impact of this program on The
Netherlands’ future operating results.
On September 28, 2005, the NMA informed UPC NL that it had
closed its investigation with respect to the price increases for
UPC NL’s analog video services in 2003-2005. The NMA
concluded that UPC NL’s price increases were not
excessive and therefore UPC NL did not abuse what NMA views
as UPC NL’s dominant position in the analog video
services market. KPN, the incumbent telecommunications operator
in The Netherlands, submitted an appeal of the NMA decision. The
NMA rejected the appeal of KPN by declaring the appeal
inadmissible on April 7, 2006. On May 3, 2006, we were
informed that KPN had filed an appeal against the NMA decision
with the administrative District Court (of Rotterdam).
UPC NL will intervene as a third party. On
November 15, 2006 a court hearing will be held. For
additional information, see note 10 to our condensed
consolidated financial statements.
In another matter, OPTA, the Dutch national regulatory agency,
had proposed imposing retail price regulation on a cost oriented
basis for UPC NL’s analog cable television offerings
and requiring UPC NL to continue to offer analog video on a
stand alone basis without requiring customers to buy other
services. Following consultation with the European Commission,
OPTA’s proposal was approved on the basis that it would be
limited to a period of one year and that OPTA will only
intervene if price increases exceed the CPI
increase. After 2006, OPTA may again seek approval from the
European Commission to maintain or expand its regulatory powers
in this retail market. UPC NL appealed this and another
OPTA decision on April 28, 2006 with the highest
administrative court and substantiated its grounds of appeal on
July 28, 2006. The court hearing will take place on
February 1, 2007. Adverse outcomes from future regulatory
initiatives by OPTA could have a significant negative impact on
UPC NL’s ability to maintain or increase its revenue
in The Netherlands. For additional information, see note 10
to our condensed consolidated financial statements.
Austria. Austria’s revenue increased
$24.1 million or 29.5%, and $26.0 million or 15.6%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. These increases include increases attributable to the
INODE acquisition of $22.7 million and $30.6 million,
respectively. Excluding the effects of the INODE acquisition and
foreign exchange rate fluctuations, Austria’s revenue
increased $1.8 million or 2.2%, and $4.1 million or
2.5%, respectively. These increases are the result of higher
average RGUs, offset in part by decreases in ARPU. The increases
in average RGUs are primarily attributable to significant
increases in the average number of broadband Internet RGUs that
were only partially offset by slight decreases in the average
number of video and telephony RGUs during the 2006 periods. The
ARPU decreases primarily are attributable to lower ARPUs from
broadband Internet and telephony services as a result of
competitive factors, including (i) an increase in the
proportion of subscribers selecting lower tiered broadband
Internet products, and (ii) lower telephony call volume
resulting from increased customer usage of off-network calling
plans. The negative impacts of these factors on ARPU were
partially offset by the positive effects of a January 2006 rate
increase for analog video services. The decreases in the average
number of telephony RGUs, together with decreases in telephony
ARPU, led to 6.8% and 6.2% decreases in telephony revenue during
the respective 2006 periods.
Other Western Europe. Other Western Europe’s revenue
increased $19.0 million or 33.7%, and $57.4 million or
63.8%, during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The NTL Ireland acquisition accounted for
$14.0 million and $56.4 million, respectively, of
these increases. Excluding the effects of the NTL Ireland
acquisition and foreign exchange rate fluctuations, Other
Western Europe’s revenue increased $5.2 million or
9.2%, and $6.9 million or 7.7%, respectively. The increases
during the 2006 periods are due primarily to increases in ARPU
and, to a somewhat lesser extent, increases in the average
number of broadband Internet and video RGUs. The increases in
ARPU are largely attributable to a January 2006 rate increase
for analog video services in Ireland. During the second quarter
of 2006, our operations in Ireland experienced a slight decline
in video RGUs, due primarily to the effects of competition.
Hungary. Hungary’s revenue increased
$4.9 million or 6.9%, and $7.7 million or 5.4%, during
the three and six months ended June 30, 2006, respectively,
as compared to the corresponding prior year periods. Excluding
the effects of foreign exchange rate fluctuations, such
increases were $9.9 million or 14.0%, and
$22.4 million or 15.6%, respectively. Most of these
increases are attributable to increases in the average number of
broadband Internet, telephony and DTH RGUs and, to a lesser
extent, analog RGUs. The increases in the average DTH and analog
video RGUs occurred despite the fact that, during the second
quarter of 2006, Hungary experienced slight decreases in both
categories, due largely to competitive factors. ARPU remained
relatively constant over the 2006 and 2005 periods as a
January 2006 rate increase for analog video services
largely offset the negative impacts on ARPU of increased
competition for video, broadband Internet and telephony
subscribers. The increases in average telephony RGUs were
primarily driven by VoIP telephony sales. The positive effects
of the increases in average RGUs and ARPU were partially offset
by $3.8 million and $7.3 million decreases in
Hungary’s comparatively low-margin telephony transit
service revenue during the respective 2006 periods. The decrease
in telephony transit service revenue is due to a lower volume of
transit traffic since late 2005, when certain alternative
providers of telecommunications services began directly
interconnecting with traditional telecommunications networks,
bypassing Hungary’s broadband networks.
Other Central and Eastern Europe. Other Central and
Eastern Europe’s revenue increased $54.4 million or
64.2%, and $98.3 million or 58.3%, during the three and six
months ended June 30, 2006, respectively, as compared to
the corresponding prior year periods. The effects of the Astral
and Telemach acquisitions and other less significant
acquisitions accounted for $34.8 million and
$70.7 million, respectively, of such
increases. Excluding the effects of these acquisitions and
foreign exchange rate fluctuations, Other Central and Eastern
Europe’s revenue increased $14.4 million or 17.0%, and
$28.4 million or 16.9%, respectively. Most of the increases
are attributable to growth in average RGUs. Higher ARPU also
contributed to the increases for the 2006 periods, due in part
to rate increases for video services in certain countries during
the first six months of 2006. The growth in RGUs during the 2006
periods is primarily attributable to increases in the average
number of broadband Internet, telephony and video RGUs, with
most of the broadband Internet growth occurring in Poland, the
Czech Republic and Romania, most of the video growth occurring
in the Czech Republic and Romania, and most of the telephony
growth attributable to the expansion of VoIP services in Poland
and Romania. During the second quarter of 2006, our operations
in Poland, the Czech Republic, Romania and the Slovak Republic
all experienced slight declines in video RGUs, due largely to
subscriber reaction to a 2006 rate increase in the case of
Poland, and to the effects of competition in the case of the
Czech Republic, Romania and the Slovak Republic.
Japan (J:COM). J:COM’s revenue increased
$43.0 million or 10.4%, and $74.2 million or 9.1%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The effect of the J:COM Chofu Cable and J:COM Setamachi
acquisitions and other less significant acquisitions together
accounted for approximately $23.6 million and
$53.0 million of such increases during the respective 2006
periods. Excluding the increases associated with these
acquisitions and the effects of foreign exchange rate
fluctuations, J:COM’s revenue increased $49.2 million
or 11.9%, and $102.4 million or 12.5%, respectively. The
increases are primarily attributable to increases in the average
number of telephony, broadband Internet and video RGUs during
the 2006 periods. ARPU remained relatively constant over the
2006 and 2005 periods as the positive effects of increases in
the proportion of subscribers selecting digital video services
over analog video services and the higher-speed broadband
Internet services over the lower-speed alternatives were largely
offset by the negative effects of bundling discounts and lower
telephony ARPU due to decreases in customer call volumes and
minutes used.
Chile (VTR). VTR’s revenue increased
$31.9 million or 29.2%, and $79.9 million or 41.2%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The estimated effects of the Metrópolis
acquisition accounted for approximately $18.5 million of
the six month increase. Excluding the effects of the
Metrópolis acquisition and foreign exchange rate
fluctuations, VTR’s revenue increased $18.6 million or
17.0%, and $36.3 million or 18.7%, respectively. These
increases are due primarily to growth in the average number of
VTR’s broadband Internet, telephony and digital video RGUs.
ARPU remained relatively constant over the 2006 and 2005
periods, as the positive effects of a January 2006 inflation
adjustment to rates for video services and the August 2005
introduction of flat-rate pricing for telephony services were
offset by the negative impact of lower ARPU from broadband
Internet services. The lower ARPU from broadband Internet
services is primarily attributable to an increase in the
proportion of subscribers selecting lower priced broadband
Internet tiers.
General. Operating expenses include programming, network
operations, customer operations, customer care and other direct
costs. Programming costs, which represent a significant portion
of our operating costs, are expected to rise in future periods
as a result of the expansion of service offerings and the
potential for price increases. Any cost increases that we are
not able to pass on to our subscribers through service rate
increases would result in increased pressure on our operating
margins.
UPC Broadband Division. The UPC Broadband Division’s
operating expenses increased $114.8 million or 57.3%, and
$220.8 million or 57.3%, during the three and six months
ended June 30, 2006, respectively, as compared to the
corresponding prior year periods. The aggregate effects of the
Cablecom, NTL Ireland, Astral, INODE, Telemach and other less
significant acquisitions, accounted for $102.4 million and
$211.5 million of such increases during the respective 2006
periods. Excluding the effects of these acquisitions and foreign
exchange rate fluctuations, the UPC Broadband Division’s
operating expenses increased $12.8 million or 6.4%, and
$28.6 million or 7.4%, respectively, primarily due to the
net effect of the following factors:
•
Increases in salaries and other staff related costs of
$4.5 million and $8.1 million during the respective
2006 periods, primarily reflecting increased staffing levels,
including increased use of temporary personnel, particularly in
the customer care and customer operations areas, to sustain the
higher levels of activity resulting from:
•
higher subscriber numbers;
•
the greater volume of calls received by customer care centers in
The Netherlands and elsewhere due to increases in digital video,
broadband Internet and telephony subscribers. On a per
subscriber basis, these services typically generate more calls
than our analog video service;
•
The Netherlands’ digital migration program, which was
launched in October 2005 and is expected to continue throughout
2006;
•
increased customer service standard levels; and
•
annual wage increases.
•
Increases in network related expenses of $4.6 million and
$8.8 million during the respective 2006 periods, primarily
driven by higher costs in The Netherlands and Hungary.
•
Increases in direct programming and copyright costs of
$5.2 million and $4.3 million during the respective
2006 periods, primarily due to increases related to subscriber
growth on the digital and DTH platforms, and to a lesser extent,
increased content, higher intercompany charges from chellomedia
for programming and increases due to consumer price index rate
increases. These increases were partly offset by the favorable
impact of the termination of an unfavorable programming contract
in May 2005.
•
Decreases in interconnect costs of $2.4 million and
$2.3 million during the respective 2006 periods, primarily
due to a decrease in telephony transit volume in Hungary, as
discussed under Revenue of our Reportable
Segments — Hungary, above. The impact of the lower
telephony transit volume in Hungary was largely offset by the
impact of increases in VoIP telephony subscribers, primarily in
The Netherlands, Hungary, Poland and Romania.
•
Increases in outsourced labor and consulting fees of
$2.1 million during the six month period, driven by the use
of third parties primarily in The Netherlands, to manage excess
call center volume, projects to increase service levels, network
improvements and the launch of new products in certain of our
operations, including The Netherlands’ program to migrate
subscribers from analog to digital video services and the UPC
Broadband Division’s initiative to introduce and expand
VoIP telephony services.
•
Increases in bad debt and collection expenses of
$1.9 million during the six month period due largely to
corresponding increases in revenue.
Individually insignificant increases during the 2006 six-month
period in information technology, facility, postage and other
costs associated with the increased scope of the UPC Broadband
Division’s business.
As discussed under Revenue of our Reportable
Segments — The Netherlands above, we have incurred
significant operating costs during the 2006 periods in
connection with The Netherlands’ digital migration program.
Japan (J:COM). J:COM’s operating expenses increased
$20.7 million or 12.2%, and $37.8 million or 11.4%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The effects of the J:COM Chofu Cable and J:COM
Setamachi acquisitions and other less significant acquisitions
accounted for approximately $3.7 million and
$8.2 million of such increases during the respective 2006
periods. Excluding the effects of these acquisitions and the
effects of foreign exchange rate fluctuations, J:COM’s
operating expenses increased $29.4 million or 17.3%, and
$62.9 million or 19.0%, respectively. These increases
primarily are due to (i) increases of $11.1 million
and $21.3 million during the respective 2006 periods in
programming and related costs as a result of growth in the
number of digital video customers, and (ii) increases of
$3.6 million and $6.6 million during the respective
2006 periods in salaries and other employee related costs as a
result of the increased scope of J:COM’s business.
Increases in network operating expenses, maintenance and
technical support costs associated with RGU growth and the
expansion of J:COM’s network, together with the effects of
other individually insignificant items, accounted for the
remaining increases.
Chile (VTR). VTR’s operating expenses increased
$11.9 million or 24.3%, and $33.1 million or 39.9%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The estimated effects of the Metrópolis
acquisition accounted for approximately $10.7 million of
the six month increase. Excluding the effects of the
Metrópolis acquisition and foreign exchange rate
fluctuations, VTR’s operating expenses increased
$7.6 million or 15.5%, and $11.8 million or 14.2%,
respectively. These increases are primarily attributable to
growth in VTR’s subscriber base, as increases in labor and
network related costs accounted for $5.8 million and
$10.7 million, respectively, of the increases. Higher
access charges, due primarily to growth in VTR’s telephony
subscribers, also contributed to the quarter and
year-to-date increases.
General. SG&A expenses include human resources,
information technology, general services, management, finance,
legal and marketing costs and other general expenses.
UPC Broadband Division. The UPC Broadband Division’s
SG&A expenses increased $59.3 million or 55.6%, and
$114.4 million or 56.1%, during the three and six months
ended June 30, 2006, respectively, as compared to the
corresponding prior year periods. The aggregate effects of the
Cablecom, NTL Ireland, Astral, INODE, Telemach and other less
significant acquisitions accounted for $49.4 million and
$100.2 million of such increases during the respective 2006
periods. Excluding the effects of these acquisitions and foreign
exchange rate fluctuations, the UPC Broadband Division’s
SG&A expenses increased $10.2 million or 9.6%, and
$24.2 million or 11.9%, respectively, primarily due to:
•
Increases in sales and marketing expenses and commissions of
$5.1 million and $11.1 million during the three and
six months ended June 30, 2006, respectively, as compared
to the corresponding prior year periods, reflecting the cost of
marketing campaigns designed to promote RGU growth and product
bundling, and to support the growth of VoIP telephony services
and The Netherlands’ digital migration program.
•
Increases in salaries and other staff related costs of
$6.3 million and $12.9 million during the respective
2006 periods, reflecting increased staffing levels in sales and
marketing and information technology functions, as well as
annual wage increases.
•
Individually insignificant increases during the 2006 six-month
period in facility and other costs associated with the increased
scope of the UPC Broadband Division’s business.
The increase in the UPC Broadband Division’s SG&A
expenses were partially offset by decreases in certain SG&A
expenses, primarily decreases in audit and legal expenses of
$2.1 million and $3.4 million during the respective
2006 periods reflecting the conclusion of certain litigation and
lower fees attributable to our internal controls attestation
process.
As discussed under Revenue of our Reportable
Segments — The Netherlands above, we have incurred
significant SG&A costs during the 2006 periods in connection
with The Netherlands’ digital migration program.
Japan (J:COM). J:COM’s SG&A expenses decreased
$8.5 million or 8.9%, and increased $1.8 million or
1.0%, during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The effects of the J:COM Chofu Cable and J:COM
Setamachi acquisitions and other less significant acquisitions
accounted for increases of approximately $10.0 million and
$22.1 million during the respective 2006 periods. Excluding
the effects of these acquisitions and the effects of foreign
exchange rate fluctuations, J:COM’s SG&A expenses
decreased $12.8 million or 13.4%, and $4.6 million or
2.7%, respectively. These decreases are attributable primarily
to lower marketing and advertising costs during the 2006 periods
as costs incurred in connection with a rebranding initiative
undertaken by J:COM during the first half of 2005 were not
repeated during the 2006 periods. The six-month decrease was
partially offset by higher labor and related overhead costs
associated with increases in sales staff during the second
quarter of 2005.
Chile (VTR). VTR’s SG&A expenses increased
$7.1 million or 28.4%, and $18.3 million or 40.5%,
during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year
periods. The estimated effects of the Metrópolis
acquisition accounted for approximately $5.4 million of the
six month increase. Excluding the effects of the Metrópolis
acquisition and foreign exchange rate fluctuations, VTR’s
SG&A expenses increased $2.7 million or 10.7%, and
$7.1 million or 15.8%, respectively. These increases are
primarily attributable to increases in sales commissions,
marketing and advertising costs and professional fees. These
increases were offset in part by lower labor and related costs,
due largely to non-recurring labor costs that were incurred
during the 2005 periods in connection with the Metrópolis
combination. The increases in professional fees reflect amounts
incurred in 2006 in connection with certain litigation matters
and strategic projects.
Operating cash flow is the primary measure used by our chief
operating decision maker to evaluate segment operating
performance and to decide how to allocate resources to segments.
As we use the term, operating cash flow is defined as revenue
less operating and SG&A expenses (excluding stock-based
compensation, depreciation and amortization, and impairment,
restructuring and other operating charges or credits). We
believe operating cash flow is meaningful because it provides
investors a means to evaluate the operating performance of our
segments and our company on an ongoing basis using criteria that
is used by our internal decision makers. Our internal decision
makers believe operating cash flow is a meaningful measure and
is superior to other available GAAP measures because it
represents a transparent view of our recurring operating
performance and allows management to readily view operating
trends, perform analytical comparisons and benchmarking between
segments in the different countries in which we operate and
identify strategies to improve operating performance. For
example, our internal decision makers believe that the inclusion
of impairment and restructuring charges within operating cash
flow would distort the ability to efficiently assess and view
the core operating trends in our segments. For a reconciliation
of total segment operating cash flow to our consolidated
earnings before income taxes, minority interests and
discontinued operations, see note 11 to our condensed
consolidated financial statements. Investors should view
operating cash flow as a measure of operating performance that
is a supplement to, and not a substitute for, operating income,
net earnings, cash flow from operating activities and other GAAP
measures of income.
Discussion and Analysis of our Historical Operating
Results
General
As noted above, the effects of acquisitions have affected the
comparability of our results of operations during the 2006 and
2005 interim periods. Unless otherwise indicated in the
discussion below, the significant increases in our historical
revenue, expenses and other items during the three and six
months ended June 30, 2006, as compared to the respective
2005 periods, are primarily attributable to the effects of these
acquisitions. For more detailed explanations of the changes in
our revenue, operating expenses and SG&A expenses, see the
Discussion and Analysis of Reportable Segments that
appears above.
Revenue
Our total consolidated revenue increased $502.1 million and
$949.0 million during the three and six months ended
June 30, 2006, respectively, as compared to the
corresponding prior year periods. The effects of acquisitions
accounted for $406.4 million and $840.9 million of
such increases during the respective 2006 periods. Excluding the
effects of these transactions and foreign exchange rate
fluctuations, total consolidated revenue increased
$113.6 million or 10.5%, and $219.5 million or 10.3%,
respectively. As discussed in greater detail under Discussion
and Analysis of Reportable Segments above, most of these
increases are attributable to RGU growth.
Operating expense
Our total consolidated operating expense increased
$216.4 million and $419.1 million during the three and
six months ended June 30, 2006, respectively, as compared
to the corresponding prior year periods. The effects of
acquisitions accounted for $169.9 million and
$358.7 million of such increases during the respective 2006
periods. Excluding the effects of these transactions and foreign
exchange rate fluctuations, total consolidated operating expense
increased $57.7 million or 12.5%, and $109.2 million
or 12.3%, respectively. As discussed in more detail under
Discussion and Analysis of Reportable Segments above,
these increases generally reflect increases in
(i) programming costs, (ii) labor costs,
(iii) interconnect costs, and (iv) less significant
increases in other expense categories. Most of these increases
are a function of increased volumes or levels of activity
associated with the increase in our customer base. Our operating
expenses include stock-based compensation expense. For
additional information, see discussion under SG&A below.
SG&A expense
Our total consolidated SG&A expense increased
$63.6 million and $155.6 million during the three and
six months ended June 30, 2006, respectively, as compared
to the corresponding prior year periods. The effects of
acquisitions accounted for $86.4 million and
$183.3 million of such increases during the respective 2006
periods. Excluding the effects of these acquisitions and foreign
exchange rate fluctuations, total consolidated SG&A expense
remained relatively constant over the 2006 and 2005 three-month
periods, and increased $17.0 million or 3.5% during the
2006 six-month period. As discussed in more detail under
Discussion and Analysis of Reportable Segments above, the
increase during the six-month period generally reflects
increases in (i) labor costs and (ii) marketing and
advertising costs and sales commissions. The increases in our
marketing and advertising costs and sales commissions primarily
are attributable to our efforts to promote RGU growth and launch
new product offerings and initiatives. The increases in our
labor costs primarily are a function of the increased levels of
activity associated with the increase in our customer base. As
further described below, our SG&A expenses include
stock-based compensation expense.
Stock-based compensation expense (included in operating and
SG&A expenses)
Effective January 1, 2006, we adopted SFAS 123(R) and
began using the fair value method to account for the stock
incentive awards of our company and our subsidiaries. Prior to
January 1, 2006, we used the intrinsic value method
prescribed by APB No. 25 to account for stock-based
incentive awards. Our stock-based compensation expense for the
three and six months ended June 30, 2005 has not been
restated to adopt the provisions of SFAS 123(R).
SFAS 123(R) requires all share-based payments to employees,
including
grants of employee stock options, to be recognized in the
financial statements based on their grant-date fair values.
SFAS 123(R) also requires the fair value of outstanding
options vesting after the date of initial adoption to be
recognized as a charge to operations over the remaining vesting
period. We record stock-based compensation that is associated
with LGI common stock, J:COM common stock, and certain other
subsidiary common stock. The stock-based compensation expense
associated with J:COM common stock consists of the amounts
recorded by J:COM with respect to its stock-based compensation
plans, and during the 2005 periods, amounts recorded with
respect to the Liberty Jupiter stock plan pursuant to which four
individuals, including one of our executive officers, an officer
of one of our subsidiaries and one of LMI’s former
directors (who ceased being a director effective with the LGI
Combination) have an indirect interest in J:COM.
A summary of the aggregate stock-based compensation expense that
is included in our SG&A and operating expenses is set forth
below:
Most of the LGI stock incentive awards outstanding during the
three and six months ended June 30, 2005 were accounted for
as variable-plan awards under the intrinsic value method.
Accordingly, fluctuations in our stock-based compensation
expense for the three and six months ended June 30, 2005
were largely a function of changes in the market price of the
underlying common stock.
(b)
The stock-based compensation expense related to J:COM common
stock during the three and six months ended June 30, 2005
includes (i) stock-based compensation recorded by J:COM of
$9.6 million and $18.8 million, respectively,
including amounts recorded due to adjustments to the terms of
J:COM’s outstanding awards that were made in connection
with J:COM’s March 23, 2005 IPO and to increases in
the market price of J:COM common stock following the IPO; and
(ii) stock-based compensation expense recorded with respect
to the Liberty Jupiter stock plan of $2.6 million and
$6.0 million, respectively. Prior to the adoption of
SFAS 123(R), we recorded stock compensation pursuant to the
Liberty Jupiter stock plan based on changes in the market price
of J:COM common stock. As a result of our January 1, 2006
adoption of SFAS 123(R), we no longer account for this
arrangement as a compensatory plan and have reclassified the
liability as of January 1, 2006 to minority interests in
consolidated subsidiaries in our condensed consolidated balance
sheet.
For additional information concerning our stock-based
compensation, see note 3 to our condensed consolidated
financial statements.
Depreciation and amortization
Our total consolidated depreciation and amortization expense
increased $164.8 million and $322.6 million during the
three and six months ended June 30, 2006 respectively, as
compared to the corresponding prior year periods. The effects of
acquisitions accounted for $143.3 million and
$301.5 million of such increases during the respective 2006
periods. Excluding the effect of acquisitions and foreign
exchange rate fluctuations, depreciation and amortization
expense increased $25.7 million or 8.9%, and
$50.4 million or 9.0%, respectively. These increases are
due primarily to increases associated with capital expenditures
related to the
installation of customer premise equipment, the expansion and
upgrade of our networks and other capital initiatives.
Interest expense
Our total consolidated interest expense increased
$78.3 million and $146.7 million during the three and
six months ended June 30, 2006, respectively, as compared
to the corresponding prior year periods. Excluding the effects
of foreign exchange rate fluctuations, interest expense
increased $78.3 million or 100.5%, and $154.3 million or
100.5% during the respective 2006 periods. These increases are
primarily attributable to a $4.3 billion or 70% increase in
our outstanding indebtedness at June 30, 2006, as compared
to June 30, 2005. The increase in debt is primarily
attributable to debt incurred or assumed in connection with the
Cablecom and other acquisitions. The increases in interest
expense are partially offset by $7.0 million and
$13.8 million decreases during the respective 2006 periods,
in the non-cash interest expense recorded on the UGC Convertible
Notes due to the adoption of SFAS 155 on January 1,2006. As a result of this change in accounting, we no longer
record non-cash interest expense with respect to the UGC
Convertible Notes. For additional information, see note 3
to our condensed consolidated financial statements.
Interest and dividend income
Our total consolidated interest and dividend income decreased
$1.9 million and $6.0 million during the three and six
months ended June 30, 2006, respectively, as compared to
the corresponding prior year periods, as the effect of a
decrease in our average consolidated cash and cash equivalent
balances was only partially offset by the impact of an increase
in the average interest rate earned on such balances.
Share of results of affiliates, net
The following table reflects our share of earnings (losses), net
of affiliates including any other-than-temporary declines in
value:
Our share of TyC’s losses during the six months ended
June 30, 2005 includes a $25.4 million impairment
charge to reflect an other-than-temporary decline in the fair
value of our investment in TyC at March 31, 2005. We sold
our investment in TyC during the second quarter of 2005.
Includes a CLP 12.3 billion ($23.3 million at the
average exchange rate for the period) unrealized loss recorded
during the second quarter of 2006 related to certain
cross-currency and interest rate exchange contracts entered into
by VTR in connection with its pending refinancing (see
note 7 to our condensed consolidated financial statements).
Most of this unrealized loss is associated with the market
spreads contained in these contracts due to the large notional
amount of these contracts relative to the standard size of
similar transactions in Chile. The remaining losses on the
cross-currency and interest rate exchange contracts during the
2006 periods are attributable to the net effect of
(i) gains associated with increases in market interest
rates, (ii) losses associated with a decrease in the value
of the Euro relative to the CHF, and (iii) losses
associated with a decrease in the value of the U.S. dollar
relative to the Euro. The gains on the cross-currency and
interest rate exchange agreements during the 2005 periods are
attributable to the net effect of (i) gains associated with
an increase in the value of the U.S. dollar relative to the
Euro and (ii) losses associated with decreases in market
interest rates.
(b)
Includes gains and losses associated with the embedded
derivative component of the UGC Convertible Notes during the
2005 periods and the forward sale of the News Corp. Class A
common stock during the 2006 and 2005 periods. As discussed in
note 3 to our condensed consolidated financial statements,
we changed our method of accounting for the UGC Convertible
Notes effective January 1, 2006.
(c)
Represents the change in the fair value of the UGC Convertible
Notes during the 2006 periods that is not attributable to
changes in foreign currency exchange rates. See note 3 to
our condensed consolidated financial statements. The fair value
of the UGC Convertible Notes is impacted by changes in
(i) the exchange rate for the U.S dollar and the Euro,
(ii) the market price of LGI common stock,
(iii) market interest rates, and (iv) the credit
rating of UGC. Gains and losses due to exchange rate
fluctuations are reported as foreign currency transaction gains
(losses), net, (see below) while changes in the remaining fair
value components are included in realized and unrealized gains
(losses) on financial and derivative instruments, net.
(d)
The gains and losses on call and put options during the 2006
periods are primarily attributable to call options that we hold
with respect to Telenet ordinary shares.
U.S. dollar debt issued by our European subsidiaries
$
92.0
$
(139.4
)
$
138.5
$
(181.2
)
Euro denominated debt issued by UGC (UGC Convertible Notes)
(28.3
)
34.2
(42.6
)
53.1
Cash denominated in a currency other than the entities’
functional currency
—
(23.0
)
5.7
(50.2
)
Intercompany notes denominated in a currency other than the
entities’ functional currency
(14.2
)
(5.7
)
(7.3
)
(17.1
)
Other
(5.9
)
(2.6
)
(12.1
)
(5.8
)
$
43.6
$
(136.5
)
$
82.2
$
(201.2
)
Losses on extinguishment of debt
We recognized losses on extinguishment of debt of
$26.7 million and $35.6 million during the three and
six months ended June 30, 2006, respectively. The loss for
the six months ended June 30, 2006 includes (i) a
$21.1 million write-off of deferred financing costs and
creditor fees in connection with the May 2006 refinancing of the
UPC Broadband Holding Bank Facility, (ii) a
$5.6 million loss recognized by J:COM during the second
quarter of 2006, and (iii) a $7.6 million loss
associated with the first quarter 2006 Redemption of the
Cablecom Luxembourg Floating Rate Notes. The Cablecom Luxembourg
loss represents the difference between the redemption and
carrying amounts of the Cablecom Luxembourg Floating Rate Notes
at the date of the Redemption. For additional information, see
note 7 to our condensed consolidated financial statements.
We recognized losses on extinguishment of debt of
$0.7 million and $12.6 million during the three and
six months ended June 30, 2005, respectively. The loss for
the six months ended June 30, 2005 represents a first
quarter write-off of deferred financing costs in connection with
the March 2005 refinancing of the UPC Broadband Holding Bank
Facility.
Gains (losses) on disposition of non-operating assets, net
We recognized gains on disposition of non-operating assets, net
of $2.3 million and $47.6 million during the three and
six months ended June 30, 2006, respectively. The gain for
the six months ended June 30, 2006 includes a
$45.3 million gain on the February 2006 sale of our cost
investment in Sky Mexico.
We recognized gains (losses) on disposition of non-operating
assets, net of $(44.0 million) and $25.5 million
during the three and six months ended June 30, 2005,
respectively. The loss for the three months ended June 30,2005 includes a $62.7 million loss resulting primarily from
the realization of cumulative foreign currency losses in
connection with the April 2005 disposition of our investment in
TyC, offset by a $17.3 million gain on the June 2005 sale
of our investment in The Wireless Group plc. The gain for the
six months ended June 30, 2005 includes, in addition to the
above, a $40.5 million gain recognized in connection with
the February 2005 sale of our subscription right to purchase
newly-issued Cablevisión S.A. shares in connection with its
debt restructuring and a $28.2 million gain on the January
2005 sale of UGC’s investment in EWT Holding GmbH.
We recognized income tax expense of $98.9 million and
$8.0 million during the six months ended June 30, 2006
and 2005, respectively.
The tax expense amount for six months ended June 30, 2006
differs from the expected tax expense of $10.3 million
(based on the U.S. federal 35% income tax rate) due
primarily to (i) the impact of certain permanent
differences between the financial and tax accounting treatment
of interest and other items associated with intercompany loans,
investments in subsidiaries, and other items that resulted in
nondeductible expenses or tax-exempt income in the tax
jurisdiction, (ii) the realization for financial reporting
purposes of foreign currency gains and losses in certain
jurisdictions not recognized for tax reporting purposes and
(iii) the impact of differences in the statutory and local
tax rates in certain jurisdictions in which we operate.
The tax expense for the six months ended June 30, 2005
differs from the expected tax benefit of $8 million (based
on the U.S. federal 35% income tax rate) due primarily to
(i) the realization of taxable foreign currency gains and
losses in certain jurisdictions not recognized for financial
reporting purposes, (ii) the impact of certain permanent
differences between the financial and tax accounting treatment
of interest and other items associated with cross jurisdictional
intercompany loans and investments and the UGC Convertible
Notes, (iii) the impact of differences in the statutory and
local tax rate in certain jurisdictions in which we operate, and
(iv) a net increase in our valuation allowance established
against currently arising deferred tax assets in certain tax
jurisdictions that is largely offset during the six month period
by the release of valuation allowances in other jurisdictions,
including a tax benefit of $37.9 million recognized during
the six months ended June 30, 2005 associated with the net
release of valuation allowances by J:COM.
Material Changes in Financial Condition
Sources and Uses of Cash
Although our consolidated operating subsidiaries have generated
cash from operating activities and have borrowed funds under
their respective bank facilities, the terms of the instruments
governing the indebtedness of certain of our subsidiaries,
including UPC Broadband Holding and Cablecom Luxembourg,
restrict our ability to access the assets of these subsidiaries.
In addition, our ability to access the liquidity of other
subsidiaries may be limited by tax considerations, foreign
currency exchange rates, the presence of minority interest
owners and other factors.
Cash and cash equivalents
The details of the U.S. dollar equivalent balances of our
consolidated cash and cash equivalents at June 30, 2006 are
set forth in the following table (amounts in millions):
The cash and cash equivalent balances of $877.3 million
held by LGI and its non-operating subsidiaries represented
available liquidity at the corporate level at June 30,2006. Our remaining unrestricted cash and cash equivalents of
$777.6 million at June 30, 2006 were held by our
operating subsidiaries as set forth in the table above. As noted
above, various factors may limit our ability to access the cash
of our consolidated subsidiaries. As described in greater detail
below, our current sources of corporate liquidity include
(i) our cash and cash equivalents, (ii) our ability to
monetize certain investments, and (iii) interest and
dividend income received on our cash and cash equivalents and
investments. From time to time, we may also receive
distributions or loan repayments from our subsidiaries or
affiliates and proceeds upon the disposition of investments and
other assets or upon the exercise of stock options.
The ongoing cash needs of LGI and its non-operating subsidiaries
include corporate general and administrative expenses and
interest payments on the UGC Convertible Notes. From time to
time, LGI and its non-operating subsidiaries may also require
funding in connection with acquisitions, the repurchase of LGI
common stock, or other investment opportunities.
On June 20, 2005, we announced the authorization of a
$200 million stock repurchase program. Under this program,
we effected purchases through the first quarter of 2006 that
resulted in our acquisition of $200 million in LGI
Series A common stock and LGI Series C common stock.
On March 8, 2006, our Board of Directors approved a new
stock repurchase program under which we may acquire an
additional $250 million in LGI Series A common stock
and LGI Series C common stock. This stock repurchase
program may be effected through open market transactions or
privately negotiated transactions, which may include derivative
transactions. The timing of the repurchase of shares pursuant to
this program will depend on a variety of factors, including
market conditions. This program may be suspended or discontinued
at any time.
Including our cash self-tender offer and other repurchase
transactions described in note 8 to our condensed
consolidated financial statements, we repurchased during the six
months ended June 30, 2006 a total of
12,698,558 shares and 19,994,748 shares of LGI
Series A common stock and LGI Series C common stock,
respectively, for aggregate cash consideration of
$755.7 million. At June 30, 2006, we were authorized
under the March 8, 2006 stock repurchase plan to acquire an
additional $117.6 million of LGI Series A common and
LGI Series C common stock.
The cash and cash equivalents of our significant subsidiaries
are detailed in the table above. In addition to cash and cash
equivalents, the primary sources of liquidity of our operating
subsidiaries are cash provided by operations and, in the case of
UPC Broadband Holding, Cablecom Luxembourg, J:COM, Austar and
our Puerto Rico subsidiary, borrowing availability under their
respective debt instruments. For the details of the borrowing
availability of such entities at June 30, 2006, see
note 7 to our condensed consolidated financial statements.
Our operating subsidiaries’ liquidity generally is used to
fund capital expenditures and debt service requirements. From
time to time, our operating subsidiaries may also require
funding in connection with acquisitions or other investment
opportunities. For a discussion of our consolidated capital
expenditures and cash provided by operating activities, please
see the discussion under “Condensed Consolidated Cash
Flow Statements”below.
On January 19, 2006, we completed the sale of 100% of UPC
Norway, to an unrelated third party for cash proceeds of
approximately
€444.8 million
($536.7 million at the transaction date). On
January 24, 2006,
€175 million
($214 million at the transaction date) of the proceeds from
the sale of UPC Norway were applied toward the prepayment of
borrowings under Facility I of the UPC Broadband Holding Bank
Facility. The amounts repaid may be reborrowed subject to
covenant compliance. For additional information, see note 4
to the accompanying condensed consolidated financial statements.
On March 2, 2006, a subsidiary of UPC Holding acquired
INODE, an unbundled DSL-provider in Austria, for cash
consideration before direct acquisition costs of approximately
€93 million
($111 million at the transaction date).
On June 19, 2006 we sold UPC Sweden for cash proceeds of
SEK2,984 million ($403.9 million at the transaction
date) and the assumption by the buyer of capital lease
obligations with an aggregate balance of approximately
SEK251 million ($34.0 million at the transaction
date). We were required to use
€150 million
($188.6 million at the transaction date) of the UPC Sweden
sales proceeds to prepay Facility I under the UPC Broadband
Holding Bank Facility (see note 7). The amounts repaid may
be reborrowed subject to covenant compliance.
On July 19, 2006, we sold our 100% interest in UPC France
to a consortium of unrelated third parties for cash proceeds of
€1,253.2 million
($1,578.4 million at the transaction date). Pursuant to the
terms of the UPC Broadband Holding Bank Facility, we are
required to use
€290.0 million
($365.3 at the transaction date) of the cash proceeds from the
UPC France sale to prepay a portion of the amounts outstanding
under the UPC Broadband Holding Bank Facility. As permitted by
the UPC Broadband Holding Bank Facility, we have placed cash
proceeds equal to the
€290.0 million
required prepayment in a restricted account that is reserved for
the prepayment of amounts outstanding under the UPC Broadband
Holding Bank Facility.
On August 9, 2006, we announced that our indirect
subsidiary, Liberty Global Europe, had signed a total return
swap agreement with each of AIL and Deutsche, to acquire Unite
Holdco, subject to regulatory approvals. Unite Holdco, an
affiliate of AIL and Deutsche, has entered into a share purchase
agreement to acquire for
€322.5 million
($412.3 million), subject to closing adjustments, all
interests in Karneval from ICZ Holding B.V., subject only to the
approval of the Czech Broadcasting Council. Karneval provides
cable television and broadband Internet services to residential
customers and managed network services to corporate customers in
the Czech Republic. As stated above, Liberty Global
Europe’s acquisition of Unite Holdco from Unite
Holdco’s parent companies, AIL and Deutsche, is subject to
receipt of applicable regulatory approvals. Pursuant to the
total return swap agreements, if the relevant regulatory
approvals have been obtained prior to May 7, 2007, Liberty
Global Europe will transfer to each of AIL and Deutsche an
amount equal to AIL’s and Deutsche’s respective
invested capital in Unite Holdco, which initially will be
€163.75 million
($209.3 million), plus interest at a specified
EURIBOR-based rate plus a margin of 0.7%, in exchange for all of
the outstanding share capital of Unite Holdco and
(indirectly) Karneval. Liberty Global Europe’s
obligations under each of the swap agreements are secured by
cash collateral in the amount of
€163.75 million
($209.3 million) provided by Liberty Global Europe on
August 8, 2006 to each of AIL and Deutsche, to be repaid to
Liberty Global Europe upon settlement of the swap agreement. AIL
and Deutsche have agreed to pay Liberty Global Europe interest
on the amount of the cash collateral at agreed upon rates, which
following Unite Holdco’s acquisition of Karneval will be
the specified EURIBOR-based rate. The aggregate amount of the
cash collateral provided by Liberty Global Europe equals the sum
of the
€322.5 million
purchase price payable by Unite Holdco for Karneval plus
€5 million
($6.4 million) of working capital. For additional
information, see note 12 to our condensed consolidated
financial statements.
For additional information concerning our acquisitions and
dispositions, see note 4 to our condensed consolidated
financial statements.
Capitalization
We seek to maintain our debt at levels that provide for
attractive equity returns without assuming undue risk. In this
regard, we strive to cause our operating subsidiaries to
maintain their debt at levels that result in a consolidated debt
balance that is between four and five times of our consolidated
operating cash flow. The ratio of our June 30, 2006
consolidated debt to our annualized consolidated operating cash
flow for the quarter ended June 30, 2006 was 4.8 and the
ratio of our June 30, 2006 consolidated net debt (debt less
cash and cash equivalents) to our annualized consolidated
operating cash flow for the quarter ended June 30, 2006 was
4.0. The foregoing ratios do not give effect to the impact of
the July 2006 disposition of UPC France.
In order to mitigate risk and to obtain the most attractive
borrowing terms, we typically seek to incur debt at the
subsidiary level that is closest to the operations that are
supporting the debt financing. In addition, we generally seek to
match the denomination of the borrowings of our subsidiaries
with the functional currency of the operations that are
supporting the respective subsidiaries’ borrowings. As
further discussed under Quantitative and Qualitative
Disclosures about Market Risk below and in note 5 to
our condensed
consolidated financial statements, we may also use derivative
instruments to mitigate currency and interest rate risk
associated with our debt instruments. Our ability to service or
refinance our debt is dependent primarily on our ability to
maintain or increase our cash provided by operations and to
achieve adequate returns on our capital expenditures and
acquisitions.
At June 30, 2006, all of our $10,790.7 million of
consolidated debt and capital lease obligations had been
borrowed by our subsidiaries. For additional information
concerning our debt balances at June 30, 2006 and
significant developments with respect to our debt instruments
during 2006, see note 7 to our condensed consolidated
financial statements.
Condensed Consolidated Cash Flow Statements
Our cash flows are subject to significant variations based on
foreign currency exchange rates. See related discussion under
Quantitative and Qualitative Disclosures about Market Risk
below. See also our Discussion and Analysis of Reportable
Segments above.
During the six months ended June 30, 2006, we used net cash
provided by our operating activities of $868.2 million, net
cash provided by our investing activities of
$136.3 million, and net cash used by financing activities
of $636.0 million to fund a $368.5 million increase in
our existing cash and cash equivalent balances (excluding an
$84.2 million increase due to changes in foreign exchange
rates).
The net cash provided by our investing activities during the six
months ended June 30, 2006 includes cash proceeds of
$1,070.9 million received upon the disposition of UPC
Sweden, UPC Norway, Sky Mexico and certain less significant
assets, capital expenditures of $697.1 million, and cash
paid to acquire INODE and certain less significant entities of
$144.2 million.
The UPC Broadband Division and VTR accounted for
$359.9 million and $65.9 million, respectively of our
consolidated capital expenditures during the six months ended
June 30, 2006, and $311.6 million and
$44.0 million, respectively, during the six months ended
June 30, 2005. The increase in the capital expenditures of
the UPC Broadband Division and VTR during the six months ended
June 30, 2006, as compared to the corresponding prior year
period, is due primarily to: (i) the effects of
acquisitions, (ii) initiatives such as The
Netherlands’ digital migration program and our efforts to
continue the growth of our VoIP telephony services in Europe and
Chile; (iii) increased costs for the purchase and
installation of customer premise equipment as our operating
segments in Europe and Chile added more customers during the
2006 period than in the 2005 period; (iv) increased
expenditures for new build and upgrade projects to expand
services and improve our competitive position, and to meet
increased traffic and certain franchise commitments; and
(iv) other factors such as information technology upgrades
and expenditures for general support systems. We expect that the
full year 2006 capital expenditures of the UPC Broadband
Division and VTR, as a percentage of local currency revenue,
will fall within a range of 25% to 27% and 26% to 28%,
respectively.
J:COM accounted for $200.0 million and $154.8 million
of our consolidated capital expenditures during the six months
ended June 30, 2006 and 2005, respectively. J:COM uses
capital lease arrangements to finance a significant portion of
its capital expenditures. From a financial reporting
perspective, capital expenditures that are financed by capital
lease arrangements are treated as non-cash activities and
accordingly are not included in the capital expenditure amounts
presented in our condensed consolidated statements of cash
flows. Including $53.7 million and $70.5 million of
expenditures that were financed under capital lease
arrangements, J:COM’s capital expenditures aggregated
$253.7 million and $225.3 million during the six
months ended June 30, 2006 and 2005, respectively. J:COM
management currently expects that, excluding FX, J:COM’s
aggregate full year 2006 capital expenditures (whether financed
with cash or capital lease arrangements) will fall within a
range of 30% to 32% of J:COM’s 2006 revenue.
The actual amount of the 2006 capital expenditures of the UPC
Broadband Division, VTR and J:COM may vary from the expected
amounts disclosed above for a variety of reasons, including
changes in (i) the competitive or regulatory environment,
(ii) business plans, (iii) current or expected future
operating results and (iv) the availability of capital.
Accordingly, no assurance can be given that actual capital
expenditures will not vary from the expected amounts disclosed
above.
During the six months ended June 30, 2006, the cash used by
our financing activities was $636.0 million. Such amount
includes net borrowings of debt and capital lease obligations of
$128.1 million and stock repurchases of $755.7 million.
Off Balance Sheet Arrangements
For a description of our outstanding guarantees and other off
balance sheet arrangements at June 30, 2006, see
note 10 to our condensed consolidated financial statements.
Commitments and Contingencies
For a description of our outstanding commitments and
contingencies at June 30, 2006, see note 10 to our
condensed consolidated financial statements.
Item 3.
Quantitative and Qualitative Disclosures about Market
Risk.
We are exposed to market risk in the normal course of our
business operations due to our investments in various foreign
countries and ongoing investing and financial activities. Market
risk refers to the risk of loss arising from adverse changes in
foreign currency exchange rates, interest rates and stock
prices. The risk of loss can be assessed from the perspective of
adverse changes in fair values, cash flows and future earnings.
We have established policies, procedures and internal processes
governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
Cash and Investments
We invest our cash in liquid instruments that meet high credit
quality standards and generally have maturities at the date of
purchase of less than three months. We are exposed to exchange
rate risk with respect to certain of our cash balances that are
denominated in Japanese yen, Euros and, to a lesser degree,
other currencies. At June 30, 2006, J:COM held cash
balances of $308.8 million, respectively, that were
denominated in Japanese yen and we held cash balances of
$964.9 million that were denominated in Euros. These
Japanese yen and Euro cash balances are available to be used for
future acquisitions and other liquidity requirements that may be
denominated in such currencies.
We are also exposed to market price fluctuations related to our
investments in equity securities. At June 30, 2006, the
aggregate fair value of our equity method and available-for-sale
investments that was subject to price risk was approximately
$560.2 million.
Foreign Currency Risk
We are exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar (our functional currency)
against the currencies of our operating subsidiaries and
affiliates. Any increase (decrease) in the value of the
U.S. dollar against any foreign currency that is the
functional currency of one of our operating subsidiaries or
affiliates will cause the parent company to experience
unrealized foreign currency translation losses (gains) with
respect to amounts already invested in such foreign currencies.
In addition, we and our operating subsidiaries and affiliates
are exposed to foreign currency risk to the extent that we enter
into transactions denominated in currencies other than our
respective functional currencies, such as investments in debt
and equity securities of foreign subsidiaries, equipment
purchases, programming costs, notes payable and notes receivable
(including intercompany amounts) that are denominated in a
currency other than the applicable functional currency. Changes
in exchange rates with respect to these items will result in
unrealized (based upon period-end exchange rates) or realized
foreign currency transaction gains and losses upon settlement of
the transactions. In addition, we are exposed to foreign
exchange rate fluctuations related to our operating
subsidiaries’ monetary assets and liabilities and the
financial results of foreign subsidiaries and affiliates when
their respective financial statements are translated into
U.S. dollars for inclusion in our consolidated financial
statements. Cumulative translation adjustments are recorded in
accumulated other comprehensive earnings (loss) as a separate
component of equity. As a result of foreign currency risk, we
may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a
result of foreign currency exchange rate fluctuations. The
primary exposure to foreign currency risk for our company is to
the Euro and Japanese yen, as 28.5% and 28.8% of our
U.S. dollar revenue during the three months ended
June 30, 2006, and 28.3% and 29.1% of our U.S. dollar
revenue during the six months ended June 30, 2006, was
derived from subsidiaries whose functional currency is the Euro
and Japanese yen, respectively. In addition, we have significant
exposure to changes in the exchange rates for the Swiss franc,
the Chilean peso, the Hungarian forint, the Australian dollar
and other local currencies in Europe.
The relationship between (i) the Euro, the Swiss franc, the
Japanese yen, the Chilean peso, the Hungarian forint and the
Australian dollar and (ii) the U.S. dollar, which is
our reporting currency, is shown below, per one U.S. dollar:
We are exposed to changes in interest rates primarily as a
result of our borrowing and investment activities, which include
fixed and floating rate investments and borrowings by our
operating subsidiaries that are used to maintain liquidity and
fund their respective business operations. Our primary exposure
to variable-rate debt is through the EURIBOR-indexed and
LIBOR-indexed debt of UPC Broadband Holding, Cablecom Luxembourg
and LG Switzerland, the Japanese yen LIBOR- and TIBOR-indexed
debt of J:COM, the LIBOR-indexed Secured Borrowing on ABC Family
Preferred Stock, the TAB-indexed debt of VTR, the AUD
BBSY-indexed debt of Austar and the variable-rate debt of
certain of our other subsidiaries. These subsidiaries have
entered into various derivative transactions pursuant to their
policies to manage exposure to movements in interest rates. We
use interest rate exchange agreements to exchange, at specified
intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional
principal amount. We also use interest rate cap agreements that
lock in a maximum interest rate should variable rates rise, but
which enable us to otherwise pay lower market rates. We manage
the credit risks associated with our derivative financial
instruments through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the
counterparties may expose our company to losses in the event of
nonperformance, we do not expect such losses, if any, to be
significant.
Weighted Average Variable Interest Rate — At
June 30, 2006, our variable rate indebtedness (exclusive of
the effects of interest rate exchange agreements) aggregated
approximately $8.0 billion, and the weighted-average
interest rate (including margin) on such variable rate
indebtedness was approximately 6.0% (6.7%
exclusive of J:COM). Assuming no change in the amount
outstanding, and without giving effect to any interest rate
exchange agreements, a hypothetical 50 basis point increase
(decrease) in our weighted average variable interest rate would
increase (decrease) our annual consolidated interest expense and
cash outflows by approximately $40.0 million.
Derivative Instruments
Through our subsidiaries, we have entered into various
derivative instruments to manage interest rate and foreign
currency exposure. For information concerning these derivative
instruments, see note 5 to the accompanying condensed
consolidated financial statements. Information concerning the
sensitivity of the fair value of certain of our derivative
instruments to changes in market conditions is set forth below.
UPC Broadband Holding Cross-currency and Interest Rate
Exchange Contracts
Holding all other factors constant, (i) an instantaneous
increase (decrease) of 10% in the value of the U.S. dollar
relative to the Euro at June 30, 2006 would have increased
(decreased) the aggregate value of the UPC Broadband Holding
cross-currency and interest rate exchange contracts by
approximately
€155 million
($198 million), (ii) an instantaneous increase
(decrease) of 10% in the value of the Euro relative to the Czech
Koruna, the Slovakian Koruna, the Hungarian Forint and the
Polish Zloty at June 30, 2006 would have increased
(decreased) the aggregate value of the UPC Broadband Holding
cross-currency and interest rate exchange contracts by
approximately
€104 million
($133 million), (iii) an instantaneous increase in the
relevant base rate of 50 basis points (0.50%) at
June 30, 2006 would have increased the aggregate value of
the UPC Broadband Holding cross-currency and interest rate swaps
and caps by approximately
€41 million
($53 million), and (iv) an instantaneous decrease in
the relevant base rate of 50 basis points (0.50%) at
June 30, 2006 would have decreased the aggregate value of
the UPC Broadband Holding cross-currency and interest rate swaps
and caps by approximately
€42 million
($54 million).
Cablecom GmbH and Cablecom Luxembourg Cross-currency and
Interest Rate Exchange Contracts
Holding all other factors constant, (i) an instantaneous
increase (decrease) of 10% in the value of the Euro relative to
the Swiss franc at June 30, 2006 would have increased
(decreased) the aggregate value of the Cablecom GmbH and
Cablecom Luxembourg cross-currency and interest rate exchange
contracts by approximately CHF90 million
($74 million), (ii) an instantaneous increase in the
relevant base rate of 50 basis points (0.50%) at
June 30, 2006 would have increased the aggregate value of
the Cablecom GmbH cross-currency and interest rate swaps by
approximately CHF32 million ($26 million), and
(iii) an instantaneous decrease in the relevant base rate
of 50 basis points (0.50%) at June 30, 2006 would have
decreased the aggregate value of the Cablecom GmbH
cross-currency and interest rate swaps by approximately
CHF33 million ($27 million).
UGC Convertible Notes
Holding all other factors constant, (i) an instantaneous
increase of 10% in the fair value of the Euro relative to the
U.S. dollar at June 30, 2006 would have decreased the
fair value of the UGC Convertible Notes by approximately
€21.5 million
($27.5 million), (ii) an instantaneous decrease of 10%
in the fair value of the Euro to the U.S. dollar at
June 30, 2006 would have increased the fair value of the
UGC Convertible Notes by approximately
€29.0 million
($37.1 million), (iii) an instantaneous increase
(decrease) in the risk free rate of 50 basis points (0.50%)
at June 30, 2006 would have decreased (increased) the
value of the UGC Convertible Notes by approximately
€4.1 million
($5.2 million), and (iv) an instantaneous increase
(decrease) of 10% in the combined per share market price of LGI
Series A common stock and LGI Series C common stock at
June 30, 2006 would have increased (decreased) the fair
value of the UGC Convertible Notes by approximately
€34.0 million
($43.5 million).
In accordance with Exchange Act
Rule 13a-15, we
carried out an evaluation, under the supervision and with the
participation of management, including our chief executive
officer, principal accounting officer, and principal financial
officer (the Executives), of the effectiveness of our disclosure
controls and procedures as of June 30, 2006. In designing
and evaluating the disclosure controls and procedures, the
Executives recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and
management is necessarily required to apply judgment in
evaluating the cost-benefit relationship of possible controls
and objectives. Based on that evaluation, the Executives
concluded that our disclosure controls and procedures are
effective as of June 30, 2006, in timely making known to
them material information relating to us and our consolidated
subsidiaries required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934. We have
investments in certain unconsolidated entities. As we do not
control these entities, our disclosure controls and procedures
with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.
(c)
Changes in internal control over financial
reporting
There have been no changes in our internal controls over
financial reporting identified in connection with the evaluation
described above that occurred during the fiscal quarter covered
by this Quarterly Report on
Form 10-Q that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Cignal — On April 26, 2002, Liberty Global
Europe N.V., previously known as United Pan Europe
Communications, N.V. (Liberty Global Europe) and the
indirect parent of UPC Holding, received a notice that certain
former shareholders of Cignal Global Communications (Cignal)
filed a lawsuit against Liberty Global Europe in the District
Court of Amsterdam, The Netherlands, claiming $200 million
on the basis that Liberty Global Europe failed to honor certain
option rights that were granted to those shareholders in
connection with the acquisition of Cignal by Priority Telecom.
Liberty Global Europe believes that it has complied in full with
its obligations to these shareholders through the successful
completion of the IPO of Priority Telecom on September 27,2001. Accordingly, Liberty Global Europe believes that the
Cignal shareholders’ claims are without merit and intends
to defend this suit vigorously. On May 4, 2005, the court
rendered its decision, dismissing all claims of the former
Cignal shareholders. On August 2, 2005, an appeal against
the district court decision was filed. Subsequently, when the
grounds of appeal were filed in November 2005, only damages
suffered by nine individual plaintiffs, rather than all former
Cignal shareholders, continued to be claimed. Based on the share
ownership information provided by the plaintiffs, the damage
claims remaining subject to the litigation are approximately
$28 million in the aggregate before statutory interest.
On June 13, 2006, Liberty Global Europe, Priority Telecom,
Euronext NV and Euronext Amsterdam NV were each served with a
summons for a new action purportedly on behalf of all former
Cignal shareholders. The new action claims, among other things,
that the listing of Priority Telecom on Euronext Amsterdam in
September 2001 did not meet the requirements of the applicable
listing rules and, accordingly, the IPO was not valid and did
not satisfy Liberty Global Europe’s obligations to the
Cignal shareholders. Damages of $200 million, plus
statutory interest are claimed in this new action. The nine
individual plaintiffs involved in the appeal proceedings
referred to above, conditionally claim compensation from Liberty
Global Europe in this new action in the event that the court of
appeals determines their claims inadmissible in the appeal
proceedings.
Item 2.
Unregistered Sales of Equity Securities and use of
Proceeds.
(c) Issuer Purchases of Equity Securities
The following table sets forth information concerning our
company’s purchase of its own equity securities during the
three months ended June 30, 2006:
Average price paid per share includes direct acquisition costs
where applicable.
On June 20, 2005, we announced the authorization of a
$200 million stock repurchase program. Under this program,
we effected purchases through the first quarter of 2006 that
resulted in our acquisition of
$200 million in LGI Series A common stock and LGI
Series C common stock. On March 8, 2006, our Board of
Directors approved a new stock repurchase program under which we
may acquire an additional $250 million in LGI Series A
common stock and LGI Series C common stock. This stock
repurchase program may be effected through open market
transactions or privately negotiated transactions, which may
include derivative transactions. The timing of the repurchase of
shares pursuant to this program will depend on a variety of
factors, including market conditions. This program may be
suspended or discontinued at any time.
In May 2006, our board of directors authorized two cash
self-tender offers to purchase up to 10,000,000 shares of
LGI Series A common stock and up to 10,288,066 shares
of LGI Series C common stock at a purchase price of $25.00
and $24.30 per share, respectively, or up to an aggregate
for both tender offers of $500.0 million. The self tender
offers commenced on May 18, 2006 and expired on
June 15, 2006. Based on the final tabulation by the
depositary for the tender offers, 108,878,331 shares of LGI
Series A common stock and 130,225,158 shares of LGI
Series C common stock were properly tendered and not
withdrawn. Accordingly, as each tender offer was oversubscribed,
the number of shares of LGI Series A common stock and the
number of shares of LGI Series C common stock that we
purchased from each tendering stockholder was pro-rated
approximately 9.2% for the LGI Series A common stock tender
offer and approximately 7.9% for the LGI Series C common
stock tender offer. On or about June 21, 2006, LGI, through
its depository agent, purchased 10,000,000 shares of its
LGI Series A common stock and 10,288,066 shares of its
LGI Series C common stock for an aggregate price of
$500.0 million and returned all other shares tendered but
not accepted for purchase. Shares purchased pursuant to the
tender offers did not reduce our previously announced stock
repurchase program.
Including our cash self-tender offer and other repurchase
transactions described in note 8 to our condensed
consolidated financial statements, we repurchased during the six
months ended June 30, 2006 a total of
12,698,558 shares and 19,994,748 shares of LGI
Series A common stock and LGI Series C common stock,
respectively, for aggregate cash consideration of
$755.7 million.
Submission of Matters to a Vote of Security
Holders
On June 22, 2006, we held our annual meeting of
stockholders. At the annual meeting, two matters were considered
and acted upon: (i) the elections of three directors to
serve as Class I members of our Board until the 2009 annual
meeting of stockholders or until their respective successors are
elected; and (ii) the ratification of the selection of KPMG
LLP as our independent auditors for the year ending
December 31, 2006. Each of the proposals was adopted. The
following is a summary of the votes for each proposal:
Instruments Defining the Rights of Security Holders:
4
.1
Deed of Amendment and Restatement, dated May 10, 2006,
among UPC Broadband Holding B.V. (UPC Broadband) and UPC
Financing Partnership (UPC Financing), as Borrowers, the
Guarantors listed therein, and the Senior Hedging Banks listed
therein, with Toronto Dominion (Texas) LLC, as Facility Agent,
and TD Bank Europe Limited, as Existing Security Agent,
including as Schedule 2 thereto the Amended and Restated
Senior Secured Credit Facility Agreement, originally dated
January 16, 2004, among UPC Broadband, as Borrower, the
guarantors listed therein, Toronto Dominion (Texas) LLC, as
Facility Agent, and TD Bank Europe Limited, as Security Agent.
(incorporated by reference to Exhibit 4.1 to the
Registrant’s March 31,2006 Quarterly Report on
Form 10-Q, dated May 10, 2006 (the March 31,
2006 10-Q))
4
.2
Deed of Amendment and Restatement Agreement, dated May 10,2006, among UPC Broadband and UPC Financing, as Borrowers, the
guarantors listed therein, and the Senior Hedging Banks listed
therein, with TD Bank Europe Limited, as Security Agent, and
Toronto Dominion (Texas) LLC, as Facility Agent, including as
Schedule 2 thereto the
€3,500,000,000
and US$347,500,000 and
€95,000,000
Restated Senior Secured Credit Facility, originally dated
October 26, 2000, among UPC Broadband and UPC Financing, as
Borrowers, the Guarantors listed therein, the Lead Arrangers
listed therein, the Original Lenders listed therein, Toronto
Dominion (Texas) LLC, as Facility Agent, and TD Bank Europe
Limited, as Security Agent. (incorporated by reference to
Exhibit 4.2 to the March 31,2006 10-Q)
4
.3
Additional Facility Accession Agreement, dated July 3,2006, among UPC Broadband Holding B.V., Toronto Dominion (Texas)
LLC, TD Bank Europe Limited and certain Additional Facility L
Lenders (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K, dated
July 3, 2006 (File No. 000-51360))
Agreement for the Sale and Purchase of the Share Capital of UPC
France SA, dated June 6, 2006, among UPC Broadband France
SAS, UPC Broadband Holding B.V., Altice France EST SAS and ENO
France SAS (incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, dated
June 6, 2006 (File No. 000-51360) (the “June
2006 8-K”))
10
.2
Liberty Global, Inc. Compensation Policy for Nonemployee
Directors (As Amended and Effective June 7, 2006)
(incorporated by reference to Exhibit 10.1 to the June
2006 8-K)
31
Rule 13a-14(a)/15d-14(a) Certification:
31
.1
Certification of President and Chief Executive Officer*
31
.2
Certification of Senior Vice President and Co-Chief Financial
Officer (Principal Financial Officer)*
31
.3
Certification of Senior Vice President and Co-Chief Financial
Officer (Principal Accounting Officer)*
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Instruments Defining the Rights of Security Holders:
4
.1
Deed of Amendment and Restatement, dated May 10, 2006,
among UPC Broadband Holding B.V. (UPC Broadband) and UPC
Financing Partnership (UPC Financing), as Borrowers, the
Guarantors listed therein, and the Senior Hedging Banks listed
therein, with Toronto Dominion (Texas) LLC, as Facility Agent,
and TD Bank Europe Limited, as Existing Security Agent,
including as Schedule 2 thereto the Amended and Restated
Senior Secured Credit Facility Agreement, originally dated
January 16, 2004, among UPC Broadband, as Borrower, the
guarantors listed therein, Toronto Dominion (Texas) LLC, as
Facility Agent, and TD Bank Europe Limited, as Security Agent.
(incorporated by reference to Exhibit 4.1 to the
Registrant’s March 31,2006 Quarterly Report on
Form 10-Q, dated May 10, 2006 (the March 31,
2006 10-Q))
4
.2
Deed of Amendment and Restatement Agreement, dated May 10,2006, among UPC Broadband and UPC Financing, as Borrowers, the
guarantors listed therein, and the Senior Hedging Banks listed
therein, with TD Bank Europe Limited, as Security Agent, and
Toronto Dominion (Texas) LLC, as Facility Agent, including as
Schedule 2 thereto the
€3,500,000,000
and US$347,500,000 and
€95,000,000
Restated Senior Secured Credit Facility, originally dated
October 26, 2000, among UPC Broadband and UPC Financing, as
Borrowers, the Guarantors listed therein, the Lead Arrangers
listed therein, the Original Lenders listed therein, Toronto
Dominion (Texas) LLC, as Facility Agent, and TD Bank Europe
Limited, as Security Agent. (incorporated by reference to
Exhibit 4.2 to the March 31,2006 10-Q)
4
.3
Additional Facility Accession Agreement, dated July 3,2006, among UPC Broadband Holding B.V., Toronto Dominion (Texas)
LLC, TD Bank Europe Limited and certain Additional Facility L
Lenders (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K, dated
July 3, 2006 (File No. 000-51360))
Agreement for the Sale and Purchase of the Share Capital of UPC
France SA, dated June 6, 2006, among UPC Broadband France
SAS, UPC Broadband Holding B.V., Altice France EST SAS and ENO
France SAS (incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, dated
June 6, 2006 (File No. 000-51360) (the “June
2006 8-K”))
10
.2
Liberty Global, Inc. Compensation Policy for Nonemployee
Directors (As Amended and Effective June 7, 2006)
(incorporated by reference to Exhibit 10.1 to the June
2006 8-K)
31
Rule 13a-14(a)/15d-14(a) Certification:
31
.1
Certification of President and Chief Executive Officer*
31
.2
Certification of Senior Vice President and Co-Chief Financial
Officer (Principal Financial Officer)*
31
.3
Certification of Senior Vice President and Co-Chief Financial
Officer (Principal Accounting Officer)*
