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2: EX-4.1 Deed of Amendment and Restatement HTML 1.02M
3: EX-4.2 Deed of Amendment and Restatement Agreement HTML 1.17M
4: EX-31.1 Certification of President and Chief Executive HTML 12K
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5: EX-31.2 Certification of Senior Vice President and HTML 12K
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7: 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 April 26, 2006 was:
Series A common stock, $.01 par value. Authorized
500,000,000 shares; issued 232,420,875 and
232,334,708 shares at March 31, 2006 and
December 31, 2005, respectively
2.3
2.3
Series B common stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding
7,323,570 shares at March 31, 2006 and
December 31, 2005
0.1
0.1
Series C common stock, $.01 par value. Authorized
500,000,000 shares; 239,982,353 and 239,820,997 shares
issued at March 31, 2006 and December 31, 2005,
respectively
2.4
2.4
Additional paid-in capital
10,002.5
9,992.2
Accumulated deficit
(1,458.4
)
(1,732.5
)
Accumulated other comprehensive loss, net of taxes
(188.7
)
(262.9
)
Deferred compensation (note 3)
—
(15.6
)
Treasury stock, at cost
(290.9
)
(169.6
)
Total stockholders’ equity
8,069.3
7,816.4
Total liabilities and stockholders’ equity
$
24,005.3
$
23,378.5
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Operating (other than depreciation) (including $1.0 million
of stock-based compensation for each of 2006 and 2005)
(notes 3 and 9)
695.0
492.7
Selling, general and administrative (SG&A) (including
$15.0 million and $17.7 million of stock-based
compensation for 2006 and 2005, respectively) (notes 3 and
9)
374.6
281.5
Depreciation and amortization
462.7
311.9
Impairment, restructuring and other operating charges
6.4
4.6
1,538.7
1,090.7
Operating income
87.2
88.3
Other income (expense):
Interest expense
(150.7
)
(80.7
)
Interest and dividend income
15.7
20.5
Share of earnings (losses) of affiliates, net
1.4
(21.3
)
Realized and unrealized gains on financial and derivative
instruments, net (note 5)
113.8
85.9
Foreign currency transaction gains (losses), net
38.6
(64.7
)
Losses on extinguishment of debt (note 7)
(8.9
)
(12.0
)
Gains on disposition of non-operating assets, net (note 4)
45.3
69.6
Other income (expense), net
(1.0
)
0.6
54.2
(2.1
)
Earnings before income taxes, minority interests and
discontinued operations
141.4
86.2
Income tax expense
(70.5
)
(63.6
)
Minority interests in earnings of subsidiaries, net
(27.5
)
(5.4
)
Earnings from continuing operations
43.4
17.2
Discontinued operations:
Earnings (loss) from operations, including tax expense of
$0.5 million in 2005 (note 4)
1.7
(0.7
)
Gain from disposal of discontinued operations (note 4)
223.1
—
224.8
(0.7
)
Net earnings
$
268.2
$
16.5
Basic earnings per common share (note 2):
Earnings from continuing operations
$
0.09
$
0.05
Discontinued operations
0.48
—
$
0.57
$
0.05
Diluted earnings per common share (note 2):
Earnings from continuing operations
$
0.07
$
0.05
Discontinued operations
0.45
—
$
0.52
$
0.05
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 in 18 countries (excluding Sweden) outside
of the continental United States at March 31, 2006,
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 12 European countries
(excluding Sweden). 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 business, 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
business, UPC Sverige AB (UPC Sweden). The transaction is
expected to close during the second half of 2006. We have
presented UPC Norway and UPC Sweden 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 March 31, 2006.
Certain prior period amounts have been reclassified to conform
to the current year presentation.
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 and convertible
securities) as if they had been exercised or converted at the
beginning of the periods presented. Set forth below are the
details of our calculation of basic and diluted EPS:
Net earnings applicable to common stockholders (basic EPS
computation)
$
268.2
$
16.5
Effect of conversion of UGC Convertible Notes
(9.8
)
—
Net earning applicable to common stockholders, as adjusted
(diluted EPS computation)
$
258.4
$
16.5
Denominator (shares)
Weighted average common shares outstanding (basic EPS
computation)
468,864,024
345,583,840
Incremental shares attributable to the assumed exercise of
outstanding options (treasury stock method), conversion of UGC
Convertible Notes and other
26,160,215
1,362,328
Weighted average common shares, as adjusted (diluted EPS
computation)
495,024,239
346,946,168
At March 31, 2006, the number of our potential common
shares that could dilute basic EPS in the future was 53,370,659,
of which 11,329,858 shares have been excluded from the
calculation of diluted EPS because their inclusion would be
anti-dilutive. For additional information, see note 3.
(3) Accounting Changes
SFAS 123(R)
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) 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 all 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 March 31, 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
2.1
Deduct stock compensation charges as determined under the fair
value method, net of taxes
(17.3
)
Pro forma earnings from continuing operations
$
2.0
Basic and diluted earnings from continuing operations per share:
As reported
$
0.05
Pro forma
$
0.01
The following table provides certain information regarding LGI
and J:COM awards for the indicated periods. Information
concerning the fair value of awards granted by LGI and J:COM
during the three months ended March 31. 2006 is not
presented as the number of awards granted was not significant.
Total compensation cost related to nonvested awards not yet
recognized
$
56.9
$
3.1
Weighted average period remaining for expense recognition
3.1 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
$14.6 million of compensation costs yet to be recognized
related to restricted shares of LGI and Zone Vision (see
note 4) common stock held by employees of Zone Vision.
Stock-based compensation expense associated with these shares
will be recognized over the next 3.75 years.
(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 4.5 year
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.
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 39,315,695 shares available for grant as
of March 31, 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.
Pursuant to the LGI Incentive Plan, the Compensation
Committee of our Board of Directors approved a grant of stock
awards to our employees on May 2, 2006. The grant included
(i) options to purchase 1.6 million shares of LGI
common stock, (ii) SARs with respect to 1.6 million
shares of LGI common stock, and (iii) 1.1 million
restricted shares of LGI common stock. In each case, the stock
awards were split evenly between LGI Series A common stock
and LGI Series C common stock. The exercise price for the
stock options and SARs was equal to the closing market price on
the grant date and the remaining terms of these stock awards are
consistent with the provisions outlined above for options and
SARs granted after the LGI Combination.
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 9,815,696 shares available
for grant as of March 31, 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.
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 Zone Vision during the three months ended
March 31, 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
March 31, 2006, J:COM has granted the maximum number of
options under existing authorized plans.
At March 31, 2006 and December 31, 2005, 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
March 31, 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 March 31, 2006,
Austar senior management had purchased Class A and
Class B shares that had not been converted into ordinary
shares aggregating 18,309,567 and 54,025,795, respectively. All
of the Class A shares and none of the Class B shares
are vested.
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 Stock Appreciation Rights Plan
In February 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). As
of March 31, 2006, none of the SARs authorized under the
VTR Plan had been granted. Accordingly, no compensation expense
was recorded with respect to the VTR Plan during the three
months ended March 31, 2006. However, on April 12,2006, the VTR Committee granted a total of 945,000 SARs, each
with a vesting commencement date of January 1, 2006. These
grants are subject to execution of an agreement by the grantees
setting forth the terms and conditions applicable to the SARs.
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.
(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 March 31, 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 United Communications Limited
(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
March 31, 2006, we owned 670,018,242 shares or 53.96%
of Austar’s outstanding ordinary shares.
The following unaudited pro forma condensed consolidated
operating results for the three months ended March 31, 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.
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 Broadband France SAS (UPC Broadband
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 Chofu Cable, Inc. (Chofu Cable), a broadband
communications provider in Japan;
(vii) The January 2005 purchase by chellomedia of the
Class A shares of Zone Vision Networks Ltd. (Zone Vision),
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 LGI Combination, Cablecom, Astral, Austar, INODE
and IPS 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 million
($537 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 the UPC Broadband Holding Bank Facility (see
note 7). 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. UPC Norway’s net results for the 2006
period through the date of sale were not significant. In
connection with the disposal of UPC Norway during the first
quarter of 2006, 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 signed
an agreement to sell UPC Sweden to a consortium of unrelated
third parties for cash consideration of SEK3,012 million
($394 million at the agreement date), subject to certain
closing adjustments, and the assumption by the buyer of capital
lease obligations with an aggregate balance of
SEK257 million ($33 million) at March 31, 2006.
The amount of cash to be received at closing is subject to
certain post-closing adjustments. We will be required to apply
an estimated €
165 million ($200 million) of the aggregate
cash proceeds received to repay a portion of the borrowings
outstanding under the UPC Broadband Holding Bank Facility. The
actual amount to be repaid will be based on leverage ratio
calculations to be performed at the time of the closing of the
transaction, as provided by the terms of the UPC Broadband
Holding Bank Facility. Although no assurance can be given,
closing of the transaction is expected to occur during the
second half of 2006, subject to regulatory approval and other
customary closing conditions. As the principal terms of this
agreement were agreed upon as of March 31, 2006, we have
presented UPC Sweden as a discontinued operation in our
March 31, 2006 condensed consolidated financial statements
in accordance with SFAS 144.
UPC Norway and UPC Sweden were included in our Other Western
Europe operating segment.
The major assets and liabilities of UPC Norway and UPC Sweden,
which are classified as discontinued operations in our condensed
consolidated balance sheets, are as follows:
The operating results of UPC Norway for the three months ended
March 31, 2005 and UPC Sweden for the three months ended
March 31, 2006 and 2005, which are included in discontinued
operations in our condensed consolidated statements of
operations, are presented in the following table:
Earnings (loss) before income taxes and minority interests
$
1.7
$
(0.9
)
Net earnings (loss) from discontinued operations
$
1.7
$
(0.7
)
As noted above, we were required to repay
€175 million
($214 million on the transaction date) of the debt
outstanding under the UPC Broadband Holding Bank Facility (see
note 7) from the UPC Norway sales proceeds, and we will be
required to repay an estimated
€
165 million ($200 million) of debt outstanding
under the UPC Broadband Holding Bank Facility from the UPC
Sweden sales proceeds. Interest expense related to such required
debt repayments of $3.2 million and $3.0 million, for
the three months ended March 31, 2006 and 2005,
respectively, is included in discontinued operations in the
accompanying condensed consolidated statements of operations.
UPC France Letter of Intent
On March 23, 2006, we announced that we had entered into a
non-binding letter of intent to sell UPC France, which owns
our broadband communications operations in France, for cash
consideration of €
1.25 billion ($1.52 billion). Among other
things, the transaction is subject to negotiation of definitive
documents, completion of due diligence and financing, all of
which are not expected to be completed until the second quarter
of 2006. In the event definitive documents are executed, closing
will be subject to the receipt of necessary regulatory
approvals. No assurance can be given that this transaction will
be consummated, and if consummated, that the terms of the
definitive agreement will not be different than those
contemplated by the non-binding letter of intent. Due to the
fact that the letter of intent is non-binding and that the
transaction
contemplated thereby is subject to a number of significant
contingencies, we do not currently consider UPC France to be
held-for-sale as that term is defined in SFAS 144.
Financial information with respect to UPC France can be found in
note 11.
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.
(5)
Derivative Instruments
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 March 31, 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.
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 period. See notes 3 and 7.
UPC Broadband Holding B.V. (UPC Broadband Holding), a subsidiary
of UPC Holding:
December 2011(a)
$
525.0
€
393.5
LIBOR + 3.0
%
EURIBOR + 3.10
%
October 2012(b)
1,250.0
944.0
LIBOR + 2.5
%
6.06
%
$
1,775.0
€
1,337.5
September 2012(c)
€
200.0
CZK5,800.0
5.46
%
5.30
%
September 2012(d)
€
50.0
SKK1,900.0
5.46
%
6.04
%
Cablecom GmbH, a subsidiary of Cablecom Luxembourg S.C.A.
(Cablecom Luxembourg)(e):
April 2007
€
193.3
CHF299.8
9.74
%
8.33
%
April 2007
96.7
149.9
9.74
%
8.41
%
€
290.0
CHF449.7
Cablecom Luxembourg,
a subsidiary of
Cablecom and the
parent of Cablecom
GmbH:(f)
September 2012
€
229.1
CHF335.8
EURIBOR + 2.50
%
CHF LIBOR + 2.46
%
(a)
Swap contract effectively converts the indicated 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 indicated 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 indicated principal
amount of UPC Broadband Holding’s EURO-denominated
fixed-rate debt to CZK-denominated (Czech Koruna) fixed rate
debt for the indicated period.
(d)
Swap contract effectively converts the indicated principal
amount of UPC Broadband Holding’s EURO-denominated
fixed-rate debt to SKK-denominated (Slovakian Koruna) fixed rate
debt for the indicated period.
Swap contract effectively converts the indicated principal
amount of Cablecom GmbH’s Euro-denominated fixed-rate debt
to CHF-denominated fixed-rate debt.
(f)
Swap contract effectively converts the indicated 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.
Each contract effectively fixes the EURIBOR on the indicated
principal amount of UPC Broadband Holding’s
Euro-denominated debt.
(b)
At March 31, 2006, this contact effectively fixed the
EURIBOR rate on the indicated principal amount of LG
Switzerland’s Euro-denominated debt. The notional amount of
this contract increases rateably
through January 2007 to a maximum amount of
€
597.8 million ($725.7 million) and remains at
that level through the maturity date of the contract.
(c)
Each contract effectively fixes the CHF LIBOR on the indicated
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
indicated principal amount of Austar’s AUD-denominated debt.
(e)
Each contract effectively fixes the LIBOR on the indicated
principal amount of the U.S. dollar-denominated debt of our
Puerto Rico subsidiary.
(f)
Contract effectively fixes the
90-day Chilean peso
(CLP)-denominated TAB (Tasa Activa Bancaria) on the indicated
principal amount of VTR’s CLP-denominated debt.
(g)
These swap agreements effectively fix the TIBOR (Tokyo Interbank
Offered Rate) component of the variable interest rates on
borrowings pursuant to J:COM’s Credit Facility (see
note 7), and the Japanese yen LIBOR component of the
variable interest rates on new loans obtained by J:COM in
connection with the April 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 indicated principal amount of
Plator Holding’s Euro-denominated debt for the indicated
period.
Interest Rate Caps:
Each contract caps the EURIBOR rate on the indicated principal
amount of UPC Broadband Holding’s Euro-denominated debt, as
detailed below:
Several of our subsidiaries have outstanding foreign currency
forward contracts. A currency forward is an agreement to
exchange cash flows denominated in different currencies at a
specified future date (the maturity date) and at a specified
exchange rate (the forward exchange rate) agreed on the trade
date. 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 March 31, 2006:
Amounts converted
Local currency
Foreign currency
Maturity dates
amounts in millions
J:COM
¥
3,820.5
$
33.0
April 2006 — January 2007
VTR
CLP19,565.1
$
36.5
April 2006 — March 2007
LG Switzerland
CHF925.1
€
606.4
April 2007
Austar
AUD60.2
$
44.3
April 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
March 31, 2006 for all borrowings outstanding pursuant to
each debt instrument. 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 March 31, 2006 without
regard to covenant compliance calculations. At March 31,2006, the full amount of unused borrowing capacity was available
to be borrowed under each of the respective facilities except as
indicated below. At March 31, 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 March 31, 2006 covenant
compliance calculations, the aggregate amount that will be
available for borrowing when the March 31, 2006 bank
reporting requirements have been completed for the UPC Broadband
Holding Bank Facility is
€
231.2 million ($280.7 million). Although the
full amount of the Cablecom GmbH Revolving Facility was
available to be borrowed at March 31, 2006, we anticipate
that the availability under this facility will be significantly
reduced upon the submission of the March 31, 2006 covenant
compliance calculations.
(c)
Includes unamortized debt discount or premium, if applicable.
UPC Broadband Holding Bank Facility
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 and $1.775 billion, with each
denomination split evenly between Facilities J and K. Borrowings
denominated in euro under Facility J and K will bear interest at
an initial margin of 2.25% above EURIBOR. Borrowings denominated
in U.S. dollars under Facilities J and K will 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 benefit from 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 A and I 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.
J:COM Credit Facility
J:COM has a ¥155 billion ($1,319.1 million)
credit facility agreement with a syndicate of banks led by The
Bank of Tokyo-Mitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd.
and Sumitomo Mitsui Banking Corporation (the J:COM Credit
Facility). Borrowings may be made under the J:COM Credit
Facility on a senior, unsecured basis pursuant to three
facilities: a ¥30 billion ($255.3 million)
five-year revolving credit loan (the Revolving Loan); an
¥85 billion ($723.4 million) five-year amortizing
term loan (the Tranche A Term Loan); and a
¥40 billion ($340.4 million) seven-year
amortizing term loan (the Tranche B Term Loan). 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.
On April 7, 2006 J:COM refinanced ¥38 billion
($323 million at the transaction date) of the
Tranche B Term Loan with fixed-interest rate loans totaling
¥18 billion and with variable-interest rate loans
totaling ¥20 billion. The fixed-interest rate loans
have a weighted average interest rate of 2.06%, while the
variable-interest rate loans have a weighted average interest
rate of Japanese yen LIBOR plus 0.30%, (0.47% as of
April 7, 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.
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.
Cablecom Luxembourg Refinancing
On December 5, 2005, Cablecom Luxembourg and Cablecom GmbH
entered into a 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 ($115.1 million) revolving credit
facility to be available to replace an existing CHF
150 million ($115.1 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 $360.5 million and $365.1 million
at March 31, 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.
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. We
recognized a $1.3 million loss on the extinguishment of
debt during the three months ended March 31, 2006 as a
result of the write-off of a portion of deferred financing fees
that were originally incurred in connection with the refinanced
debt.
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. We
accounted for the aforementioned call option contract as an
equity instrument due to the fact that the related agreement met
the requirements of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock, for
classification as an equity instrument.
Repurchase of LGI Common Stock
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 the three months ended March 31, 2006, we repurchased
2,698,558 shares (including the 500,000 shares
acquired pursuant to the aforementioned call option contract)
and 3,162,845 shares of LGI Series A common stock
and LGI Series C common stock, respectively, for aggregate
cash consideration of $121.3 million. Subsequent to
March 31, 2006, we repurchased an additional
1,543,837 shares of LGI Series C common stock for
aggregate cash consideration of $31.4 million.
Also, subsequent to March 31, 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 (which is subject to
adjustment) of $100.7 million. Pursuant to the transaction,
we will either pay or receive an adjustment to the initial
purchase price depending on the specified volume weighted
average price of the shares over the period from April 10,2006 through a date selected by the financial institution which
shall not be earlier than May 1, 2006 or later than
May 15, 2006. If such price is less than the initial price
per share, then we will receive the difference, subject to a
floor price, and if such price is greater than the initial price
per share, then we will pay the difference, subject to a cap
price.
(9)
Related Party Transactions
Related party revenue of LGI and its consolidated subsidiaries
other than J:COM, which is discussed separately below, was
$5.7 million and $1.8 million during the three months
ended March 31, 2006 and 2005, respectively, which
consisted primarily of management, advisory and programming
license fees, call center charges and fees for uplink services
charged to our equity method affiliates. Related party operating
expenses of LGI and its consolidated subsidiaries other than
J:COM were $9.2 million and $6.2 million during the
three months ended March 31, 2006 and 2005, respectively,
which consisted primarily of programming costs and interconnect
fees charged by equity method affiliates.
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. The revenue
from affiliates for such services provided, the related
materials sold and distribution fees received amounted to
¥1,119.0 million ($9.6 million at the average
exchange rate for the period) and ¥1,509.3 million
($14.4 million at the average exchange rate for the period)
during the three months ended March 31, 2006 and 2005,
respectively.
J:COM purchases certain cable television programming from
Jupiter TV and other affiliates. Such purchases amounted to
¥1,328.9 million ($11.4 million at the average
exchange rate for the period) and ¥1,008.7 million
($9.6 million at the average exchange rate for the period)
during the three months ended March 31, 2006 and 2005,
respectively. These amounts are included in operating costs in
our condensed consolidated statements of operations.
J:COM pays monthly fees to a certain equity method affiliate for
Internet provisioning services based on an agreed-upon
percentage of subscription revenue collected by J:COM from its
customers. Payments made to the affiliate under these
arrangements were nil and ¥804.8 million
($7.7 million at the average exchange rate for the period)
during the three months ended March 31, 2006 and 2005,
respectively. This amount is included in operating costs in our
condensed consolidated statements of operations.
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. The service fees paid to
Sumitomo amounted to ¥222.0 million ($1.9 million
at the average exchange rate for the period) and
¥76.3 million ($0.7 million at the average
exchange rate for the period) during the three months ended
March 31, 2006 and 2005, respectively. These amounts are
included in SG&A expenses in our condensed consolidated
statements of operations.
J:COM leases, primarily in the form of capital leases, customer
premise equipment, various office equipment and vehicles from
two Sumitomo subsidiaries and an affiliate of Sumitomo. The
aggregate amount of new lease obligations entered into amounted
to ¥2,904.0 million ($24.8 million at the average
exchange rate for the period) and ¥3,055.3 million
($29.2 million at the average exchange rate for the period)
during the three months ended March 31, 2006 and 2005,
respectively. Net related party interest expense, primarily
related to assets leased from these Sumitomo entities, was
¥272.1 million ($2.3 million at the average
exchange rate for the period) and ¥251.2 million
($2.4 million at the average exchange rate for the period)
during the three months ended March 31, 2006 and 2005,
respectively. At March 31, 2006, capital lease obligations
of J:COM aggregating ¥35,232.0 million
($299.8 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.
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.
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 March 31, 2006, the accreted value of our preferred
interest in Belgian Cable Investors was $189.3 million.
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.
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. We have reflected the $6.9 million
fair value of this put obligation at March 31, 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 March 31,2006. 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 March 31, 2006, J:COM guaranteed
¥10,852 million ($92.4 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. (LGE) and the indirect parent of UPC
Holding, received a notice that certain former shareholders of
Cignal Global Communications (Cignal) filed a lawsuit against
LGE in the District Court of Amsterdam, The Netherlands,
claiming $200 million on the basis that LGE failed to honor
certain option rights that were granted to those shareholders in
connection with the acquisition of Cignal by Priority Telecom.
LGE 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,
LGE believes that the Cignal shareholders’ claims are
without merit and intends to defend this suit vigorously. In
December 2003, certain members and former members of the
Supervisory Board of Priority Telecom were put on notice that a
tort claim may be filed against them for their cooperation in
the IPO. 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. The
remaining former Cignal shareholders may initiate separate
proceedings prior to the expiration of the statute of
limitations. 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 court.
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.
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
controlling 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. In addition, our
internal decision makers believe our measure of operating cash
flow is important because analysts and investors use it to
compare our performance to other companies in our industry. A
reconciliation of total segment operating cash flow to our
condensed 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:
•
Europe (UPC Broadband Division)
•
The Netherlands
•
Switzerland
•
France
•
Austria
•
Other Western Europe
•
Hungary
•
Other Central and Eastern Europe
•
Japan (J:COM)
•
Chile (VTR)
All of the reportable segments set forth above provide broadband
communications services, including video, voice and Internet
access services. Our operating segments in the UPC Broadband
Division provided services in 12 European countries (excluding
Sweden) at March 31, 2006. 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 represents 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.
Performance Measures of Our Reportable Segments
Our reportable segments have been reclassified for all periods
to present our broadband operations in Norway and Sweden as
discontinued operations. Accordingly, we present only the
reportable segments of our continuing operations in the
following table. The costs allocated to UPC Norway and UPC
Sweden by our UPC Broadband Division have been reclassified to
the corporate and other category for all periods presented and
are separately presented in the following table as corporate
costs of UPC Broadband Division allocated to discontinued
operations. We allocate these costs to the remaining operating
segments of the UPC Broadband Division once the entities are
sold. See note 4.
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 J:COM, VTR and Austar and that Sumitomo
effectively has the ability to prevent our company from
consolidating J:COM after February 2010.
The following table provides a reconciliation of total segment
operating cash flow to earnings before income taxes, minority
interests and discontinued operations:
The revenue of our geographic segments is set forth below:
Three months ended
March 31,
Revenue
2006
2005
amounts in millions
Europe:
Europe (UPC Broadband Division):
The Netherlands
$
196.0
$
204.5
Switzerland
178.9
—
France
130.4
131.9
Austria
87.0
85.0
Ireland
61.8
23.3
Belgium
10.2
10.2
Total Western Europe
664.3
454.9
Hungary
75.0
72.2
Romania
42.3
8.8
Poland
39.0
35.1
Czech Republic
28.2
25.6
Slovak Republic
11.5
10.0
Slovenia
6.8
4.4
Total Central and Eastern Europe
202.8
156.1
Total Europe (UPC Broadband Division)
867.1
611.0
chellomedia(a)
93.7
61.4
Total Europe
960.8
672.4
Japan (J:COM)
437.3
406.1
The Americas:
Chile (VTR)
132.9
84.9
Other(b)
33.8
33.5
Total — The Americas
166.7
118.4
Australia
86.7
—
Intersegment eliminations
(25.6
)
(17.9
)
Total consolidated LGI
$
1,625.9
$
1,179.0
(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.
Item 2. 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
months ended March 31, 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 March 31, 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 statement. 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;
•
our ability to consummate the pending sales of UPC Sweden and
UPC France;
•
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;
•
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 in 18 countries (excluding Sweden) outside
of the continental United States at March 31, 2006,
primarily in Europe, Japan and Chile. Through our UPC Broadband
Division, we provide video, voice and Internet access services
in 12 European countries (excluding Sweden). LG Switzerland
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 March 31, 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 Zone Vision, 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. In Japan, J:COM acquired an
approximate 92% ownership interest in Chofu Cable on
February 25, 2005 and a 100% interest in J:COM Setamachi on
September 30, 2005. Chofu Cable and J:COM Setamachi are
broadband communications providers in Japan. During the fourth
quarter of 2005 and the first quarter of 2006, J:COM also
acquired controlling interests in certain less significant
broadband communications providers 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 our
broadband operations in Norway and Sweden 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
began a bid solicitation process in the fourth quarter of 2005
with respect to our Scandinavian assets which led to the sale of
UPC Norway in January 2006 and an April 2006 agreement to sell
UPC Sweden. In addition, in March 2006, we entered into a
non-binding letter of intent to sell UPC France. 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 March 31, 2006, our consolidated
subsidiaries owned and operated networks that passed
approximately 29.7 million homes and served approximately
19.3 million revenue generating units (RGUs), consisting of
approximately 13.6 million video subscribers,
3.3 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, we added a
total of 0.5 million RGUs during the three months ended
March 31, 2006. Excluding the effects of acquisitions
during 2006, we added total RGUs of 0.4 million during the
same period, including RGUs added by entities that we acquired
during 2006 after their respective acquisition dates. 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 or other
means. We plan to continue increasing revenue and operating cash
flow in 2006 by making acquisitions, selectively extending and
upgrading our existing networks to reach new customers, and
migrating more customers to our digital video offerings, which
include premium programming and enhanced pay-per-view services.
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, France, Austria, Hungary, Poland,
Romania, Japan, Chile and Puerto Rico, and in 2006, we plan to
launch VoIP telephony services in most of our remaining
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.
Material Changes in Results of Operations
The comparability of our operating results during the 2006 and
2005 interim periods is affected by our acquisitions of
Cablecom, NTL Ireland, Astral, IPS, Telemach and
Metrópolis, and J:COM’s acquisition of 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, 34% and
27% of our U.S. dollar revenue during the three months
ended March 31, 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 March 31, 2006, we owned an 80% interest in VTR, a
53.96% 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. Our reportable segments have been reclassified
for all periods to present our broadband operations in Norway
and Sweden as discontinued operations. Our operating segments in
the UPC Broadband Division provided services in 12 European
countries at March 31, 2006. 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 represents the
elimination of intercompany transactions between our UPC
Broadband Division and chellomedia.
Our reportable segments have been reclassified for all periods
to present our broadband operations in Norway and Sweden as
discontinued operations. The costs allocated to UPC Norway and
UPC Sweden by our UPC Broadband Division have been reclassified
to the corporate and other category for all periods presented
and are separately presented in the following tables as
corporate costs of UPC Broadband Division allocated to
discontinued operations. We allocate these costs to the
remaining operating segments of the UPC Broadband Division once
the entities are sold.
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 months ended March 31, 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 decreased
$8.5 million during the three months ended March 31,2006, as compared to the corresponding prior year period.
Excluding the effects of foreign exchange rate fluctuations and
an acquisition, The Netherlands’ revenue increased
$6.3 million or 3.1%. This increase is attributable to
higher average RGUs, as increases in telephony and broadband
Internet RGUs were only partially offset by declines in video
RGUs. The positive impact of higher average RGUs was partially
offset by a decrease in ARPU. The decrease in ARPU reflects the
negative impacts of (i) a decrease 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), and (ii) a decrease in ARPU from broadband
Internet services due to a higher proportion of customers
selecting lower-priced tiers and competitive factors. The
decrease in ARPU from digital video services, together with a
decrease in the average number of video subscribers, resulted in
a 2.6% decrease in revenue from video services during the 2006
period, as compared to the corresponding prior year period. 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 decrease in broadband Internet ARPU
was more than offset by an increase in the average number of
broadband Internet RGUs as The Netherlands’ revenue from
broadband Internet services increased by 4.1% during the 2006
period, as compared to the corresponding prior year period.
In October 2005, we initiated a program to migrate 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 digital video
services for a six-month period following subscriber acceptance
of the digital set-top box. 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. No assurance can be given as
to the percentage of new digital video subscribers that will be
retained after the promotional period has elapsed, and
accordingly, as to the impact of this program on our future
operating results.
Certain rate increases implemented by UPC NL in The Netherlands
had been under investigation by NMA, the Dutch competition
authority. 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 court. 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 the unbundling of
analog video services from 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. 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.
France. France’s revenue decreased $1.5 million
during the three months ended March 31, 2006, as compared
to the corresponding prior year period. Excluding the effects of
foreign exchange rate fluctuations, France’s revenue
increased $10.3 million or 7.8% during the three months
ended March 31, 2006, as compared to the corresponding
prior year period. The majority of the local currency increase
is attributable to increases in the average number of broadband
telephony, broadband Internet, and digital video RGUs during the
2006 period. France’s overall ARPU remained relatively
constant as the impact of an increase in ARPU from video
services was largely offset by the effects of declines in ARPU
from broadband Internet and telephony services. The increase in
ARPU from video services is due primarily to an increase in the
number of digital video
subscribers while the decreases in ARPU from broadband Internet
and telephony services are due primarily to competitive factors.
Austria. Austria’s revenue increased
$2.0 million during the three months ended March 31,2006, as compared to the corresponding prior year period. This
increase includes a $7.6 million increase attributable to
the INODE acquisition. Excluding the effects of the INODE
acquisition and foreign exchange rate fluctuations,
Austria’s revenue increased $2.4 million or 2.8%. This
increase represents the net effect of (i) an increase in
the average number of RGUs and (ii) a slight decrease in
ARPU. The increase in average RGUs is primarily attributable to
a significant increase in the average number of broadband
Internet RGUs that was only partially offset by slight decreases
in the average number of video and telephony RGUs during the
2006 period. The slight decrease in ARPU reflects decreases in
ARPU from broadband Internet and digital video services due
primarily to competitive factors and, in the case of broadband
Internet services, due to an increase in the proportion of
subscribers selecting lower tiered products. The decrease in the
average number of telephony RGUs, together with a slight
decrease in telephony ARPU, led to a 5.5% decrease in telephony
revenue during the 2006 period, as compared to the corresponding
prior year period. The decrease in telephony ARPU is primarily
due to lower call volume resulting from increased customer usage
of off-network calling plans.
Other Western Europe. Other Western Europe’s revenue
increased $38.5 million during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. This increase includes a $43.4 million increase
attributable to the NTL Ireland acquisition. Excluding the
effects of the NTL Ireland acquisition and foreign exchange rate
fluctuations, Other Western Europe’s revenue increased
$1.7 million or 5.2% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. The increase during the 2006 period is due primarily to
an increase in ARPU and, to a somewhat lesser extent, increases
in the average number of RGUs, as increases in broadband
Internet RGUs more than offset a decline in video RGUs.
Hungary. Hungary’s revenue increased
$2.8 million during the three months ended March 31,2006, as compared to the corresponding prior year period.
Excluding the effects of foreign exchange rate fluctuations,
such increase was $12.6 million or 17.4%. Most of this
increase is attributable to increases in the average number of
broadband Internet, DTH and telephony RGUs and, to a lesser
extent, analog video RGUs. A slight increase in ARPU, due in
part to January 2006 rate increases for analog video and DTH
services, also contributed to the increase during the 2006
period. The increase in average telephony RGUs was primarily
driven by VoIP telephony sales. The positive effects of the
increases in average RGUs and ARPU were partially offset by a
$3.3 million decrease in Hungary’s comparatively
low-margin telephony transit service revenue. This decrease is
due primarily to the expiration of a significant telephony
transit service contract during the latter part of 2005.
Other Central and Eastern Europe. Other Central and
Eastern Europe’s revenue increased $43.9 million
during the three months ended March 31, 2006, as compared
to the corresponding prior year period. The effects of the
Astral and Telemach acquisitions and another less significant
acquisition accounted for $36.7 million of such increase.
Excluding the effects of these acquisitions and foreign exchange
rate fluctuations, Other Central and Eastern Europe’s
revenue increased $13.4 million or 16.0% during the three
months ended March 31, 2006, as compared to the
corresponding prior year period. Most of the increase is
attributable to growth in average RGUs. Higher ARPU also
contributed to the increase for the 2006 period, due in part to
rate increases for video services in certain countries during
the first quarter of 2006. The growth in RGUs during the 2006
period is primarily attributable to increases in the average
number of broadband Internet and video RGUs, with most of the
broadband Internet growth occurring in Poland, the Czech
Republic and Romania, and most of the video growth occurring in
the Czech Republic and Romania.
Japan (J:COM). J:COM’s revenue increased
$31.2 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
effect of the Chofu Cable and J:COM Setamachi acquisitions and
other less significant acquisitions accounted for approximately
$29.2 million of such increase. Excluding the increases
associated with these acquisitions and the effects of foreign
exchange rate fluctuations, J:COM’s revenue increased
$53.6 million or 13.2% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. The increase is primarily attributable to increases in
the average number of telephony, broadband Internet and video
RGUs during the 2006 period, as compared to the corresponding
prior year period. Higher ARPU also contributed to the increase
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 more than offset the negative
effect on telephony ARPU from decreases in customer call volumes
and minutes used.
Chile (VTR). VTR’s revenue increased
$48.0 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
estimated effects of the Metrópolis acquisition accounted
for approximately $18.5 million of such increase. Excluding
the effects of the Metrópolis acquisition and foreign
exchange rate fluctuations, VTR’s revenue increased
$17.7 million or 20.8% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. This increase is due primarily to growth in the average
number of VTR’s broadband Internet, telephony and video
RGUs. Higher ARPU, due in part to a January 2006 inflation
adjustment to rates for video services, also contributed to the
increase.
Operating Expenses of our Reportable Segments
Increase
(decrease)
Three months ended
excluding
March 31,
Increase (decrease)
FX
2006
2005
$
%
%
amounts in millions, except % amounts
Europe (UPC Broadband Division)
The Netherlands
$
69.3
$
61.2
$
8.1
13.2
23.6
Switzerland
68.2
—
68.2
N.M.
N.M.
France
65.8
67.5
(1.7
)
(2.5
)
6.4
Austria
32.8
31.7
1.1
3.5
13.0
Other Western Europe
36.2
15.8
20.4
129.1
150.7
Total Western Europe
272.3
176.2
96.1
54.5
65.2
Hungary
30.0
31.4
(1.4
)
(4.5
)
8.0
Other Central and Eastern Europe
50.1
32.4
17.7
54.6
62.2
Total Central and Eastern Europe
80.1
63.8
16.3
25.5
35.5
Corporate costs of UPC Broadband Division allocated to
discontinued operations
1.7
2.4
(0.7
)
(29.2
)
(23.6
)
Total Europe (UPC Broadband Division)
354.1
242.4
111.7
46.1
56.5
Japan (J:COM)
178.2
161.1
17.1
10.6
23.6
Chile (VTR)
55.3
34.1
21.2
62.2
48.0
Corporate and other
131.0
69.4
61.6
88.8
97.7
Intersegment eliminations
(24.6
)
(15.3
)
(9.3
)
(60.8
)
(75.8
)
Total operating expenses excluding stock-based compensation
expense
694.0
491.7
202.3
41.1
50.4
Stock-based compensation expense
1.0
1.0
—
—
Total consolidated LGI
$
695.0
$
492.7
$
202.3
41.1
N.M. — Not Meaningful
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. UPC Broadband Division’s
operating expenses increased $111.7 million during the
three months ended March 31, 2006, as compared to the
corresponding prior year period. The aggregate effects of the
Cablecom, NTL Ireland, Astral, INODE, Telemach and other less
significant acquisitions, accounted for a $112.7 million
increase. Excluding the effects of these acquisitions and
foreign exchange rate fluctuations, UPC Broadband
Division’s operating expenses increased $24.1 million
or 10.0% during the three months ended March 31, 2006, as
compared to the corresponding prior year period, primarily due
to the net effect of the following factors:
•
Increases in interconnect costs of $7.8 million during the
2006 period, primarily due to increased VoIP telephony
subscribers in The Netherlands, France, Hungary, Poland and
Romania, partially offset by a decrease in telephony transit
service activity in Hungary due to the expiration of a
significant telephony transit service contract in Hungary during
the latter part of 2005.
•
Increases in outsourced labor and consultancy fees of
$6.0 million during the 2006 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 UPC
Broadband Division’s initiative to introduce and expand
VoIP telephony services.
•
Increases in salaries and other staff related costs of
$5.3 million during the 2006 period, 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 per subscriber in The Netherlands
and elsewhere that the increased proportion of digital video,
broadband Internet and telephony subscribers give rise to
compared to an analog video subscriber;
•
The Netherlands’ program to migrate subscribers from analog
video to digital video services, which was launched in October
2005 and is expected to continue throughout 2006;
•
increased customer service standard levels; and
•
annual wage increases.
•
Increases in bad debt and collection expenses of
$3.2 million due largely to corresponding increases in
revenue.
•
Increases in network related expenses of $1.6 million
during the 2006 period, primarily driven by higher costs in The
Netherlands and Hungary.
•
Decreases in direct programming and copyright costs of
$1.0 million during the 2006 period, primarily due to lower
costs during the 2006 period due to the termination of an
unfavorable programming contract in May 2005 offset, in part, by
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
consumer price index rate increases.
We estimate that the increase in our UPC Broadband
Division’s operating expenses during the 2006 period, as
detailed above, includes approximately $5.4 million of
incremental customer care and network costs that were incurred
in connection with The Netherlands’ program to migrate
subscribers from analog to digital video services.
Japan (J:COM). J:COM’s operating expenses increased
$17.1 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
effects of the Chofu Cable and J:COM Setamachi acquisitions and
other less significant acquisitions accounted for approximately
$5.4 million of such increase. Excluding the effects of
these acquisitions and the effects of foreign exchange rate
fluctuations, J:COM’s operating expenses increased
$32.7 million or 20.3% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. This increase primarily is due to increases of
(i) $10.1 million in programming and related costs as
a result of growth in the number of digital video customers,
(ii) $3.4 million in telephony interconnect costs due
primarily to growth in telephony customers, and
(iii) $3.0 million in salaries and other staff related
costs as a result of increased staffing levels. 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
increase.
Chile (VTR). VTR’s operating expenses increased
$21.2 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
estimated effects of the Metrópolis acquisition accounted
for approximately $10.7 million of such increase. Excluding
the effects of the Metrópolis acquisition and foreign
exchange rate fluctuations, VTR’s operating expenses
increased $5.6 million or 16.5% during the three months
ended March 31, 2006, as compared to the corresponding
prior year period. This increase is primarily attributable to
growth in VTR’s subscriber base, as increases in labor and
network related costs accounted for $3.7 million of the
increase. An increase in cellular access charges, due primarily
to an increase in customer traffic, also contributed to the
increase.
SG&A Expenses of our Reportable Segments
Increase
(decrease)
Three months ended
excluding
March 31,
Increase (decrease)
FX
2006
2005
$
%
%
amounts in millions, except % amounts
Europe (UPC Broadband Division)
The Netherlands
$
40.5
$
37.9
$
2.6
6.9
16.8
Switzerland
41.1
—
41.1
N.M.
N.M.
France
41.1
39.3
1.8
4.6
14.1
Austria
16.6
17.1
(0.5
)
(2.9
)
5.5
Other Western Europe
13.8
6.5
7.3
112.3
132.5
Total Western Europe
153.1
100.8
52.3
51.9
62.0
Hungary
12.0
12.3
(0.3
)
(2.4
)
10.8
Other Central and Eastern Europe
21.2
16.0
5.2
32.5
38.7
Total Central and Eastern Europe
33.2
28.3
4.9
17.3
26.6
Corporate costs of UPC Broadband Division allocated to
discontinued operations
0.5
2.1
(1.6
)
(76.2
)
(72.4
)
Total Europe (UPC Broadband Division)
186.8
131.2
55.6
42.4
52.2
Japan (J:COM)
86.9
76.6
10.3
13.4
26.9
Chile (VTR)
31.4
20.1
11.3
56.2
42.0
Corporate and other
55.5
38.5
17.0
44.2
47.4
Inter-segment eliminations
(1.0
)
(2.6
)
1.6
61.5
57.0
Total SG&A expenses excluding stock-based compensation
expense
General. SG&A expenses include human resources,
information technology, general services, management, finance,
legal and marketing costs and other general expenses.
UPC Broadband Division. UPC Broadband Division’s
SG&A expenses increased $55.6 million during the three
months ended March 31, 2006, as compared to the
corresponding prior year period. The aggregate effects of the
Cablecom, NTL Ireland, Astral, INODE, Telemach and other less
significant acquisitions accounted for $57.1 million of
such increase. Excluding the effects of these acquisitions and
foreign exchange rate fluctuations, UPC Broadband
Division’s SG&A expenses increased $11.4 million
or 8.7% during the three months ended March 31, 2006, as
compared to the corresponding prior year period, primarily due
to:
•
Increases in sales and marketing expenses and commissions of
$10.8 million during the 2006 period, reflecting the cost
of marketing campaigns designed to promote RGU growth, support
the growth of VoIP telephony services in The Netherlands, France
and other markets in Europe, and the migration of analog video
customers to digital video services in The Netherlands. An
increase in the number of gross subscriber additions for
broadband Internet and telephony services, particularly in The
Netherlands, also contributed to the increase.
•
Increases in salaries and other staff related costs of
$4.8 million during the 2006 period, reflecting increased
staffing levels, particularly in The Netherlands and France, in
sales and marketing and information technology functions, as
well as annual wage increases.
The increase in UPC Broadband Division’s SG&A expenses
were partially offset by decreases in certain SG&A expenses,
primarily the decrease of audit and legal expenses of
$1.7 million reflecting the conclusion of certain
litigation and lower fees attributable to our internal controls
attestation process.
We estimate that the increase in our UPC Broadband
Division’s SG&A expenses during the 2006 period, as
detailed above, includes approximately $4.2 million of
incremental sales and marketing costs that were incurred in
connection with The Netherlands’ program to migrate
subscribers from analog to digital video services.
Japan (J:COM). J:COM’s SG&A expenses increased
$10.3 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
effects of the Chofu Cable and J:COM Setamachi acquisitions and
other less significant acquisitions accounted for approximately
$12.2 million of such increase. Excluding the effects of
these acquisitions and the effects of foreign exchange rate
fluctuations, J:COM’s SG&A expenses increased
$8.4 million or 11.0% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. This increase is attributable to higher labor and
related overhead costs associated primarily with increases in
sales related employees and associated labor costs and other
individually insignificant items.
Chile (VTR). VTR’s SG&A expenses increased
$11.3 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
estimated effects of the Metrópolis acquisition accounted
for approximately $5.4 million of such increase. Excluding
the effects of the Metrópolis acquisition and foreign
exchange rate fluctuations, VTR’s SG&A expenses
increased $3.1 million or 15.2% during the three
months ended March 31, 2006, as compared to the
corresponding prior year period. This increase is primarily
attributable to the effects of higher professional fees and
sales commissions. The increase in professional fees reflects
amounts incurred in connection with certain litigation matters
and strategic projects during the 2006 period. The effects of
the higher professional fees and commissions were partially
offset by lower labor and related costs, due largely to
non-recurring labor costs that were incurred during the 2005
period in connection with the Metrópolis combination.
Operating Cash Flow of our Reportable Segments
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. In addition, our internal decision makers believe our
measure of operating cash flow is important because analysts and
investors use it to compare our performance to other companies
in our industry. 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.
Operating Cash Flow of our Reportable Segments
Increase
Three months
(decrease)
ended
excluding
March 31,
Increase (decrease)
FX
2006
2005
$
%
%
amounts in millions, except % amounts
Europe (UPC Broadband Division)
The Netherlands
$
86.2
$
105.4
$
(19.2
)
(18.2
)
(10.8
)
Switzerland
69.6
—
69.6
N.M.
N.M.
France
23.5
25.1
(1.6
)
(6.4
)
2.0
Austria
37.6
36.2
1.4
3.9
13.4
Other Western Europe
22.0
11.2
10.8
96.4
114.1
Total Western Europe
238.9
177.9
61.0
34.3
43.0
Hungary
33.0
28.5
4.5
15.8
30.5
Other Central and Eastern Europe
56.5
35.5
21.0
59.2
66.8
Total Central and Eastern Europe
89.5
64.0
25.5
39.8
50.6
Corporate costs of UPC Broadband Division allocated to
discontinued operations
(2.2
)
(4.5
)
2.3
51.1
46.6
Total Europe (UPC Broadband Division)
326.2
237.4
88.8
37.4
46.8
Japan (J:COM)
172.2
168.4
3.8
2.3
14.3
Chile (VTR)
46.2
30.7
15.5
50.5
37.2
Corporate and other
27.7
(13.0
)
40.7
313.1
319.0
Total
$
572.3
$
423.5
$
148.8
35.1
44.5
N.M. — Not Meaningful
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 months ended
March 31, 2006,
as compared to the three months ended March 31, 2005, 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 $446.9 million
during the three months ended March 31, 2006, as compared
to the corresponding prior year period. The effects of
acquisitions accounted for $435.7 million of such increase.
Excluding the effects of these transactions and foreign exchange
rate fluctuations, total consolidated revenue increased
$117.5 million or 10.0% during the 2006 period, as compared
to the corresponding prior year period. 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
$202.3 million during the three months ended March 31,2006, as compared to the corresponding prior year period. The
effects of acquisitions accounted for $193.8 million of
such increase. Excluding the effects of these transactions and
foreign exchange rate fluctuations, total consolidated operating
expense increased $53.8 million or 10.9% during the 2006
period, as compared to the corresponding prior year period. As
discussed in more detail under Discussion and Analysis of
Reportable Segments above, these increases generally reflect
increases in (i) labor costs, (ii) interconnect costs,
(iii) programming 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 of
$1.0 million during each of the three month periods ended
March 31, 2006 and 2005. For additional information, see
discussion under SG&A below.
SG&A expense
Our total consolidated SG&A expense increased
$93.1 million during the three months ended March 31,2006, as compared to the corresponding prior year period. This
increase includes a $103.3 million increase attributable to
acquisitions. Excluding the effects of these acquisitions and
foreign exchange rate fluctuations, total consolidated SG&A
expense increased $14.0 million or 5.3% during the 2006
period, as compared to the corresponding prior year period. As
discussed in more detail under Discussion and Analysis of
Reportable Segments above, these increases generally reflect
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.
Our SG&A expenses include stock-based compensation expense
of $15.0 million and $17.7 million during the three
months ended March 31, 2006 and 2005, respectively. A
summary of the aggregate stock-based compensation expense that
is included in our SG&A and operating expenses is set forth
below:
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 months ended March 31, 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. For additional information concerning our adoption of
SFAS 123(R), see note 3 to our condensed consolidated
financial statements. 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 period, 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. The 2005 amount
includes (i) a $9.2 million charge recorded by J:COM
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 (ii) $3.4 million of
stock-based compensation expense recorded with respect to the
Liberty Jupiter stock plan. 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. Most of the LGI stock incentive awards outstanding during
the three months ended March 31, 2005 were accounted for as
variable-plan awards under the intrinsic value method.
Accordingly, fluctuations in our stock-based compensation
expense for the three months ended March 31, 2005 were
largely a function of changes in the market price of the
underlying common stock.
Depreciation and amortization
Our total consolidated depreciation and amortization expense
increased $150.8 million during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. The effects of acquisitions accounted for
$145.5 million of such increase. Excluding the effect of
acquisitions and foreign exchange rate fluctuations,
depreciation and amortization expense increased
$32.7 million or 10.5% during the three months ended
March 31, 2006, as compared to the corresponding prior year
period. This increase is due to the net effect of
(i) increases associated with capital expenditures related
to the installation of customer premise equipment and the
expansion and upgrade of our networks, and (ii) decreases
associated with certain assets within our Western Europe
broadband operations that became fully depreciated during 2005.
Interest expense
Our total consolidated interest expense increased
$70.0 million during the three months ended March 31,2006, as compared to the corresponding prior year period.
Excluding the effects of foreign currency exchange rate
fluctuations, interest expense increased $83.3 million
during the three months ended March 31, 2006, as compared
to the corresponding prior year period. This increase is
primarily attributable to a $3.8 billion increase in our
outstanding indebtedness at March 31, 2006, as compared to
March 31, 2005. The increase in debt is primarily
attributable to debt incurred or assumed in connection with the
Cablecom and other acquisitions. The increase is partially
offset by a $6.8 million decrease 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.
Our total consolidated interest and dividend income decreased
$4.8 million during the three months ended March 31,2006, as compared to the corresponding prior year period, due
primarily to a significant decrease in our average consolidated
cash and cash equivalent balances.
Share of earnings (losses) 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 three months ended
March 31, 2005 includes a $25.4 million impairment
charge to reflect an other-than-temporary decline in the fair
value of our investment in TyC. We sold our investment in TyC
during the second quarter of 2005.
Realized and unrealized gains on financial and derivative
instruments, net
The details of our realized and unrealized gains (losses) on
derivative instruments, net are as follows for the indicated
interim periods:
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 to our condensed consolidated financial statements,
we changed our method of accounting for the UGC Convertible
Notes effective January 1, 2006.
Represents the change in the fair value of the UGC Convertible
Notes during the 2006 period. 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.
The unrealized gains on the cross currency and interest rate
exchange agreements of $54.3 million during the 2006 period
are attributable to the net effect of (i) gains associated
with increases in market interest rates, (ii) gains
associated with an increase 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
unrealized gains on the cross currency and interest rate
exchange agreements of $20.2 million during the 2005 period
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.
The unrealized gain on call and put options of
$19.6 million during the 2006 period is primarily
attributable to an increase in the value of the call options
that we hold with respect to Telenet ordinary shares.
Foreign currency transaction gains (losses), net
The details of our foreign currency transaction gains (losses)
are as follows for the indicated interim periods:
U.S. dollar debt issued by our European subsidiaries
$
46.5
$
(41.7
)
Euro denominated debt issued by UGC
(14.3
)
18.9
Yen denominated cash held by LGI subsidiary
—
(12.4
)
Euro denominated cash held by UGC
5.7
(14.9
)
Intercompany notes denominated in a currency other than the
entities’ functional currency
6.9
(11.5
)
Other
(6.2
)
(3.1
)
Total
$
38.6
$
(64.7
)
Losses on extinguishment of debt
We recognized losses on extinguishment of debt of
$8.9 million and $12.0 million during the three months
ended March 31, 2006 and 2005, respectively. The 2006 loss
includes a $7.6 million loss associated with the Redemption
of the Cablecom Luxembourg Floating Rate Notes. This 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.
The 2005 loss represents the write-off of deferred financing
costs in connection with the March 2005 refinancing of the UPC
Broadband Holding Bank Facility.
Gains on disposition of non-operating assets, net
We recognized gains on disposition of non-operating assets, net
of $45.3 million and $69.6 million during the three
months ended March 31, 2006 and 2005, respectively. The
2006 amount represents a gain on the February 2006 sale of our
cost investment in Sky Mexico. The 2005 amount includes
(i) 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 (ii) a $28.2 million gain on
the January 2005 sale of UGC’s investment in EWT Holding
GmbH.
We recognized income tax expense of $70.5 million and
$63.6 million during the three months ended March 31,2006 and 2005, respectively. The tax expense for the three
months ended March 31, 2006 differs from the expected tax
expense of $49.5 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) an increase due to the impact of differences in
the statutory and local tax rate in certain jurisdictions in
which we operate. The tax expense for the three months ended
March 31, 2005 differs from the expected tax expense of
$30.2 million (based on the U.S. federal 35% income
tax rate) primarily due to a net increase in our allowance
associated with reserves established against currently arising
tax loss carryforwards that were only partially offset by the
release of valuation allowances in other jurisdictions.
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 March 31, 2006
are set forth in the following table (amounts in millions):
The cash and cash equivalent balances of $1,225.7 million
held by LGI and its non-operating subsidiaries represented
available liquidity at the corporate level at March 31,2006. Our remaining unrestricted cash and cash equivalents of
$697.6 million at March 31, 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
are expected to include corporate general and administrative
expenses. From time to time, LGI and its non-operating
subsidiaries may also require funding in connection with
acquisitions 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. During the three months ended March 31, 2006,
we acquired LGI Series A common stock and LGI Series C
common stock at an aggregate cost of $121.3 million.
Subsequent to March 31, 2006, we acquired
(i) 1,543,837 shares of LGI Series C common stock
in open market purchases at an aggregate cost of
$31.4 million, and (ii) 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 (which is subject to adjustment) of
$100.7 million.
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 March 31, 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 million
($537 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 the UPC Broadband
Holding Bank Facility. 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 April 4, 2006, we signed an agreement to sell UPC Sweden
to a consortium of unrelated third parties for cash
consideration of SEK3,012 million ($394 million at the
agreement date), subject to certain closing adjustments, and the
assumption by the buyer of capital lease obligations with an
aggregate balance of SEK257 million ($33 million) at
March 31, 2006. The amount of cash to be received at
closing is subject to certain post-closing adjustments. We will
be required to apply an estimated
€
165 million ($200 million) of the aggregate
cash proceeds received to repay a portion of the borrowings
outstanding under the UPC Broadband Holding Bank Facility. The
actual amount to be repaid will be based on leverage ratio
calculations to be performed at the time of the closing of the
transaction, as provided by the terms of the UPC Broadband
Credit Facility. Although no assurance can be given, closing of
the transaction is expected to occur during the second half of
2006, subject to regulatory approval and other customary closing
conditions.
On March 23, 2006, we announced that we had entered into a
non-binding letter of intent to sell UPC France, which owns our
broadband communications operations in France, for cash
consideration of €
1.25 billion ($1.52 billion). Among other
things, the transaction is subject to negotiation of definitive
documents, completion of due diligence and financing, all of
which are not expected to be completed until the second
quarter of 2006. In the event definitive documents are executed,
closing will be subject to the receipt of necessary regulatory
approvals. No assurance can be given that this transaction will
be consummated, and if consummated, that the terms of the
definitive agreement will not be different than those
contemplated by the non-binding letter of intent.
Capitalization
As mentioned above, 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. 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 the 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.
At March 31, 2006, all of our $10,427.4 million of
consolidated debt and capital lease obligations had been
borrowed by our subsidiaries. For additional information
concerning our debt balances at March 31, 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 three months ended March 31, 2006, we used net
cash provided by our operating activities of
$471.9 million, net cash provided by our investing
activities of $154.0 million, and net cash provided by
financing activities of $71.0 million to fund a
$721.1 million increase in our existing cash and cash
equivalent balances (excluding a $24.2 million increase due
to changes in foreign exchange rates).
The net cash provided by our investing activities during the
three months ended March 31, 2006 includes (i) cash
proceeds of $629.6 million received upon the disposition of
UPC Norway, Sky Mexico and certain less significant assets,
capital expenditures of $335.1 million, and cash paid to
acquire INODE and certain less significant entities of
$129.4 million.
UPC Broadband Division and VTR accounted for $190.2 million
and $28.5 million, respectively of our consolidated capital
expenditures during the three months ended March 31, 2006,
and $163.8 million and $19.3 million, respectively,
during the three months ended March 31, 2005. The increase
in the capital expenditures of UPC Broadband Division and VTR
during the three months ended March 31, 2006, as compared
to the corresponding prior year period, is due primarily to:
(i) the effects of acquisitions, (ii) initiatives such
as our program to migrate analog video customers to digital
television services in The Netherlands 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.
J:COM accounted for $77.3 million and $73.5 million of
our consolidated capital expenditures during the three months
ended March 31, 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 $24.8 million and
$29.6 million of expenditures that were financed under
capital lease arrangements, J:COM’s capital expenditures
aggregated $102.1 million and $103.1 million during
the three months ended March 31, 2006 and 2005,
respectively.
During the three months ended March 31, 2006, the cash
provided by our financing activities was $71.0 million.
Such amount includes net borrowings of debt and capital lease
obligations of $199.1 million and stock repurchases of
$121.3 million.
Off Balance Sheet Arrangements
For a description of our outstanding guarantees and other off
balance sheet arrangements at March 31, 2006, see
note 10 to the 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 March 31, 2006, we and J:COM held cash
balances of $2.2 million and $319.3 million,
respectively, that were denominated in Japanese yen and we held
cash balances of $10.3 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 March 31, 2006, the
aggregate fair value of our equity method and available-for-sale
investments that was subject to price risk was approximately
$557 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 their own 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 condensed consolidated
financial statements. Cumulative translation adjustments are
recorded in accumulated other compre-
hensive 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 34% and 27% of
our U.S. dollar revenue during the three months ended
March 31, 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. The nature and amount
of our long-term and short-term debt are expected to vary as a
result of future requirements, market conditions and other
factors. 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 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
March 31, 2006, our variable rate indebtedness (exclusive
of the effects of interest rate exchange agreements) aggregated
approximately $7.9 billion, and the weighted-average
interest rate (including margin) on such variable rate
indebtedness was approximately 5.7% (6.5% 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
$39 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 of 10% in the value of the U.S. dollar relative to
the euro at March 31, 2006 would have increased the
aggregate value of the UPC Broadband Holding cross-currency and
interest rate exchange contracts by approximately
€167 million
($203 million), (ii) an instantaneous decrease of 10%
in the value of the U.S. dollar relative to the euro at
March 31, 2006 would have decreased the aggregate value of
the UPC Broadband Holding cross-currency and interest rate
exchange contracts by approximately
€167 million
($203 million), (iii) an instantaneous increase in the
relevant base rate of 50 basis points (0.50%) at
March 31, 2006 would have increased the aggregate value of
the UPC Broadband Holding cross-currency and interest rate swaps
and caps by approximately
€58 million
($70 million), and (iv) an instantaneous decrease in
the relevant base rate of 50 basis points (0.50%) at
March 31, 2006 would have decreased the aggregate value of
the UPC Broadband Holding cross-currency and interest rate swaps
and caps by approximately
€
59 million ($72 million).
Cablecom GmbH and Cablecom Luxembourg Cross-currency and
Interest Rate Exchange Contracts
Holding all other factors constant, (i) an instantaneous
increase of 10% in the value of the euro relative to the Swiss
franc at March 31, 2006 would have increased the aggregate
value of the Cablecom GmbH and Cablecom Luxembourg
cross-currency and interest rate exchange contracts by
approximately CHF92 million ($71 million),
(ii) an instantaneous decrease of 10% in the value of the
euro relative to the Swiss franc at March 31, 2006 would
have decreased the aggregate value of the Cablecom GmbH and
Cablecom Luxembourg cross-currency and interest rate exchange
contracts by approximately CHF92 million
($71 million), (iii) an instantaneous increase in the
relevant base rate (excluding margin) of 50 basis points
(0.50%) at March 31, 2006 would have increased the
aggregate value of the Cablecom GmbH cross-currency and interest
rate swaps by approximately CHF37 million
($28 million), and (iv) an instantaneous decrease in
the relevant base rate (excluding margin) of 50 basis
points (0.50%) at March 31, 2006 would have decreased the
aggregate value of the Cablecom GmbH cross-currency and interest
rate swaps by approximately CHF38 million
($29 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 March 31, 2006 would have decreased the
fair value of the UGC Convertible Notes by approximately
€23.5 million
($28.5 million), (ii) an instantaneous decrease of 10%
in the fair value of the euro to the U.S. dollar at
March 31, 2006 would have increased the fair value of the
UGC Convertible Notes by approximately
€28.5 million
($34.6 million), (iii) an instantaneous increase
(decrease) in the risk free rate of 50 basis points (0.50%)
at March 31, 2006 would have increased (decreased) the
value of the UGC Convertible Notes by approximately
€
4.1 million ($5.0 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 March 31,2006 would have increased (decreased) the fair value of the
UGC Convertible Notes by approximately
€ 34.0 million
($41.3 million).
Item 4.
Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures
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 March 31, 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 March 31, 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 first 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.
Unregistered Sales of Equity Securities and use of
Proceeds
(a) None
(b) None
(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 March 31, 2006:
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. During the year ended December 31, 2005 and
the three months ended March 31, 2006, we acquired LGI
Series A common stock and LGI Series C common stock at
an aggregate cost of $78.9 million and $121.3 million,
respectively. Subsequent to March 31, 2006, we acquired
(i) 1,543,837 shares of LGI Series C common stock
in open market purchases at an aggregate cost of
$31.4 million, and (ii) 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 (which is subject to adjustment) of
$100.7 million.
Listed below are the exhibits filed as part of this Quarterly
Report (according to the number assigned to them in
Item 601 of
Regulation S-K):
4
—
Instruments Defining the Rights of Securities Holders, including
Indentures:
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.*
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.*
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 Securities Holders, including
Indentures:
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.*
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.*
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)*
